Notice2021-25994
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Increase Position Limits for Options on Certain Exchange-Traded Funds
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 30, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 227 (Tuesday, November 30, 2021)</title>
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[Federal Register Volume 86, Number 227 (Tuesday, November 30, 2021)]
[Notices]
[Pages 68029-68034]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-25994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93661; File No. SR-Phlx-2021-70]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Increase
Position Limits for Options on Certain Exchange-Traded Funds
November 23, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 19, 2021, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to increase position limits for options on
certain exchange-traded funds (``ETFs'').
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/phlx/rules">https://listingcenter.nasdaq.com/rulebook/phlx/rules</a>, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Phlx proposes to increase certain position and exercise limits
within Options 9, Section 13 and 15, respectively, similar to the Cboe
Options Exchange, Inc. (``Cboe'').\3\
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\3\ See Securities Exchange Act Release No. 93525 (November 4,
2021), 86 FR 62584 (November 10, 2021) (SR-Cboe-2021-029) (Notice of
Filing of Amendment Nos. 2 and 3 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1,
2, and 3, To Increase Position Limits for Options on Two Exchange-
Traded Funds).
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Position limits are designed to address potential manipulative
schemes and adverse market impacts surrounding the use of options, such
as disrupting the market in the security underlying the options. While
position limits should address and discourage the potential for
manipulative schemes and adverse market impact, if such limits are set
too low, participation in the options market may be discouraged. The
Exchange believes that position limits must therefore be balanced
between mitigating concerns of any potential manipulation and the cost
of inhibiting potential hedging activity that could be used for
legitimate economic purposes.
The Exchange has observed an ongoing increase in demand, for both
trading and hedging purposes, in options on the following exchange-
traded funds (``ETFs''): (1) iShares iBoxx $ Investment Grade Corporate
Bond ETF (``LQD''); and (2) VanEck Vectors Gold Miners ETF (``GDX''),
(collectively ``Underlying ETFs''). Though the demand for these options
appears to have increased, position limits for options on the
Underlying ETFs have remained the same. The Exchange believes these
unchanged position limits may have impeded, and may continue to impede,
trading activity and strategies of investors, such as use of effective
hedging vehicles or income generating strategies (e.g., buy-write or
put-write), and the ability of Market Makers to make liquid markets
with tighter spreads in these options resulting in the transfer of
volume to over-the-counter (``OTC'') markets. OTC transactions occur
through bilateral agreements, the terms of which are not publicly
disclosed to the marketplace. As such, OTC transactions do not
[[Page 68030]]
contribute to the price discovery process on a public exchange or other
lit markets. Therefore, the Exchange believes that the proposed
increases in position limits for options on the Underlying ETFs may
enable liquidity providers to provide additional liquidity to the
Exchange and other market participants to transfer their liquidity
demands from OTC markets to the Exchange. As described in further
detail below, the Exchange believes that the continuously increasing
market capitalization of the Underlying ETFs, ETF components, as well
as the highly liquid markets for each, reduces the concerns for
potential market manipulation and/or disruption in the underlying
markets upon increasing position limits, while the rising demand for
trading options on the Underlying ETFs for legitimate economic purposes
compels an increase in position limits.
Proposed Position Limits for Options on the Underlying ETFs
Proposed Position Limits for options on ETFs are determined
pursuant to Options 9, Section 13 and vary according to the number of
outstanding shares and the trading volumes of the underlying equity
security (which includes ETFs) over the past six months. Pursuant to
Options 9, Section 13, the largest in capitalization and the most
frequently traded ETFs have an option position limit of 250,000
contracts (with adjustments for splits, re-capitalizations, etc.) on
the same side of the market; and smaller capitalization stocks and ETFs
have position limits of 200,000, 75,000, 50,000 or 25,000 contracts
(with adjustments for splits, recapitalizations, etc.) on the same side
of the market. Options on LQD and GDX are currently subject to the
standard position limit of 250,000 contracts as set forth in Options 9,
Section 13. Options 9, Section 13(a) sets forth separate, higher
position limits for specific equity options (including options on
specific EFFs [sic]).\4\ The Exchange proposes to amend Options 9,
Section 13(a) to increase the position limits and, as a result,
exercise limits, for options on each of LQD and GDX.\5\ The table below
represents the current, and proposed, position limits for options on
the ETFs subject to this proposal:
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\4\ Adjusted option series, in which one option contract in the
series represents the delivery of other than 100 shares of the
underlying security as a result of a corporate action by the issuer
of the security underlying such option series, do not impact the
notional value of the underlying security represented by those
options. When an underlying security undergoes a corporate action
resulting in adjusted series, the Exchange lists new standard option
series across all appropriate expiration months the day after the
existing series are adjusted. The adjusted series are generally
actively traded for a short period of time following adjustment, but
orders to open options positions in the underlying security are
almost exclusively placed in the new standard option series
contracts.
\5\ By amending the position limits for LQD and GDX options
within Options 9, Section 13, the exercise limits are also being
amended pursuant to Options 3, Section 15(a). Exercise limits have
been established for the corresponding options at the same levels as
the corresponding security's position limits.
------------------------------------------------------------------------
Current Proposed
Product position limit position limit
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LQD..................................... 250,000 500,000
GDX..................................... 250,000 500,000
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The Exchange notes that the proposed position limit for options on
LDQ [sic] and GDX are consistent with current position limits for
options on the iShares MSCI Brazil Capped ETF (``EWZ''), iShares 20+
Year Treasury Bond Fund ETF (``TLT''), iShares MSCI Japan ETF
(``EWJ''), and iShares iBoxx High Yield Corporate Bond Fund (``HYG'').
The Exchange represents that the Underlying ETFs qualify for either (1)
the initial listing criteria set forth in Options 4, Section 3(h) for
ETFs holding non-U.S. component securities, (2) the generic listing
standards for series of portfolio depository receipts and index fund
shares based on international or global indexes under which a
comprehensive surveillance agreement (``CSA'') is not required, as well
as (3) the continued listing criteria in Options 4, Section 4(b) (for
ETFs).\6\ In compliance with its listing rules, the Exchange also
represents that non-U.S. component securities that are not subject to a
comprehensive surveillance agreement (``CSA'') do not, in the
aggregate, represent more than more than 50% of the weight of any of
the Underlying ETFs.\7\
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\6\ The Exchange notes that the initial listing criteria for
options on ETFs that hold non-U.S. component securities are more
stringent than the maintenance listing criteria for those same ETF
options. See Options 4, Section 3(h); Options 4, Section 4(b).
\7\ See Options 4, Section 3(h).
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Composition and Growth Analysis for Underlying ETPs
As stated above, position (and exercise) limits are intended to
prevent the establishment of options positions that can be used to or
potentially create incentives to manipulate the underlying market so as
to benefit options positions. The Commission has recognized that these
limits are designed to minimize the potential for mini-manipulations
and for corners or squeezes of the underlying market, as well as serve
to reduce the possibility for disruption of the options market itself,
especially in illiquid classes.\8\ The Underlying ETFs, as well as the
ETF components, are highly liquid and are based on a broad set of
highly liquid securities and other reference assets, as demonstrated
through the trading statistics presented in this proposal. To support
the proposed position limit increases, the Exchange considered the
liquidity of the Underlying ETFs, the value of the Underlying ETFs,
their components and the relevant marketplace, the share and option
volume for the Underlying ETFs, and, where applicable, the availability
or comparison of economically equivalent products to options on the
Underlying ETFs.
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\8\ See Securities Exchange Act Release No. 67672 (August 15,
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29).
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Cboe demonstrated the below trading statistics regarding shares of
and options on the Underlying ETFs and the values of the Underlying
ETFs and their components:
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\9\ Average daily volume (ADV) data for ETF shares and option
contracts, as well as for ETF shares and options on the comparative
ETFs presented below, are for all of 2020. Additionally, reference
to ADV in ETF shares and ETF options, and indexes herein this
proposal are for all of calendar year 2020, unless otherwise
indicated.
\10\ Shares Outstanding and Net Asset Values (``NAV''), as well
as for the comparative ETFs presented below, are as of April 5, 2021
for all ETFs.
\11\ Fund Market Capitalization data, as well as for the
comparative ETFs presented below, are as of January 14, 2021.
\12\ See note 10 above.
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Shares
ADV \9\ (ETF ADV (options outstanding Fund market
Product shares contracts) (millions) cap (USD Share value \12\ (USD)
millions) \10\ millions) \11\
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LQD......................................... 14.1 30,300 308.1 54,113.7 130.13 (NAV).
GDX......................................... 39.4 166,000 419.8 16,170.5 33.80 (NAV).
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[[Page 68031]]
Cboe collected the same trading statistics as above regarding a
sample of other ETFs, as well as the current position limits for
options on such ETFs pursuant to its Rule 13.07, to draw comparisons in
support of the proposed position limit increases for options on the
Underlying ETFs (see further discussion below).
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ADV (ETF Shares Fund market Current
Product shares ADV (options outstanding cap (USD Share value (USD) position
millions) contract) (millions) millions) limits
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EWZ....................................... 29.2 139,400 173.8 6,506.8 33.71 (NAV)................. 500,000
TLT....................................... 11.5 111,800 103.7 17,121.3 136.85 (NAV)................ 500,000
EWJ....................................... 8.2 15,500 185.3 13,860.7 69.72 (NAV)................. 500,000
HYG....................................... 30.5 261,600 254.5 24,067.5 86.86 (NAV)................. 500,000
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The Exchange believes that, overall, the liquidity in the shares of
the Underlying ETFs and in their overlying options, the larger market
capitalizations for each of the Underlying ETFs, and the overall market
landscape relevant to each of the Underlying ETFs support the proposal
to increase the position limits for each option class. Given the robust
liquidity in and value of the Underlying ETFs and their components, the
Exchange does not anticipate that the proposed increase in position
limits would create significant price movements as the relevant markets
are large enough to adequately absorb potential price movements that
may be caused by larger trades.
LQD tracks the performance of the Markit iBoxx USD Liquid
Investment Grade (``IBOXIG'') Index, which is an index designed as a
subset of the broader U.S. dollar-denominated corporate bond market
which can be used as a basis for tradable products, such as ETFs, and
is comprised of over 8,000 bonds.\13\ Cboe noted that from 2019 through
2020, ADV has grown significantly in shares of LQD and in options on
LQD, from approximately 9.7 million shares in 2019 to 14.1 million
through 2020, and from approximately 8,200 option contracts in 2019 to
30,300 through 2020. LQD also continued to experience significant
growth in ADV in the first quarter of 2021 with an ADV of approximately
140,200 option contracts. Further, LQD generally experiences higher ADV
in shares than both TLT (11.5 million shares) and EWJ (8.2 million
shares) and almost double the ADV in option contracts than EWJ (15,500
option contracts). Options on each EWZ, TLT and EWJ are currently
subject to a position limit of 500,000 contracts--the proposed limit
for options on LQD. The NAV of LQD is also higher than, or comparable
to, that of the NAV of the ETFs underlying the options that are
currently subject to a position limit of 500,000 option contracts (as
presented in the table above), which is indicative that the total value
of its underlying components is generally higher or comparable. Per the
tables above, LQD's total market capitalization of approximately $54.1
billion is also higher than or comparable to the total market
capitalization of the ETFs underlying the options currently subject to
a position limit of 5000,000 [sic] contracts. In addition to this, Cboe
noted that, although there are currently no options listed for trading
on the IBOXIG Index, the components \14\ of the IBOXIG Index, which can
be used in creating a basket of securities that equate to the LQD ETF,
are made up of over 8,000 bonds for which the outstanding face value of
each must be greater than or equal to $2 billion.\15\ The Exchange
believes that the total value of the bonds in the IBOXIG Index, coupled
with LQD's share and option volume, total market capitalization, and
NAV price indicates that the market is large enough to absorb potential
price movements caused by a large trade in LQD. Also, as evidenced
above, trading volume in LQD shares has increased over the past few
years and the Exchange understands that market participants' need for
options have continued to grow alongside the ETF. Particularly, the
Exchange notes that in the last year, market participants have sought
more cost-effective hedging strategies through the use of LQD options
as a result of the borrow on other fixed income ETFs, such as HYG.
Therefore, the Exchange believes that because LQD options are being
increasingly utilized as an alternative to similar products, such as
HYG options, then it is appropriate that options on LQD be subject to
the same 500,000 contract position limit that currently exists for
options on HYG.
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\13\ See Markit iBoxx USD Liquid Investment Grade Index,
available at <a href="https://cdn.ihsmarkit.com/www/pdf/MKT-iBoxx-USD-Liquid-Investment-GradeIndex-factsheet.pdf">https://cdn.ihsmarkit.com/www/pdf/MKT-iBoxx-USD-Liquid-Investment-GradeIndex-factsheet.pdf</a> (January 14, 2021).
\14\ Investment grade corporate bonds.
\15\ See note 13 above.
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GDX seeks to replicate as closely as possible the price and yield
performance of the NYSE Arca Gold Miners (``GDMNTR'') Index, which is
intended to track the overall performance of companies involved in the
gold mining industry.\16\ Cboe noted ADV in GDX options increased from
2019 through 2020, with an ADV of approximately 117,400 option
contracts in 2019 to an ADV of approximately 166,000 option contracts
in 2020. Cboe noted that ADV in GDX shares did not increase from 2019
to 2020. GDX options also experienced an ADV of approximately 287,800
option contracts in the first quarter of 2021. Cboe noted that the ADV
in GDX shares (39.4 million) and options on GDX (166,000 option
contracts) are greater than the ADV in EWZ (29.2 million shares and
139,300 option contracts), TLT (11.5 million shares and 111,800 option
contracts), EWJ (8.2 million shares and 15,500 option contracts) and
HYG (30.5 million shares and 261,600 option contracts), each of which
is currently subject to a position limit of 500,000 option contracts--
the proposed limit for options on GDX. GDX also experiences a
comparable, or higher, market capitalization (approximately $16.2
billion) than EWZ, TLT and EWZ. Cboe noted that many of the Brazil-
based gold mining constituents included in GDX are also included in
EWZ, which tracks the investment results of an index composed of
Brazilian equities, and that Cboe had not identified any issues with
the continued listing and trading of EWZ options or any adverse market
impact on EWZ in connection with the current 500,000 position limit in
place for EWZ options. Additionally, like that of LDQ above, there is
currently no index option analogue for the GDX ETF on the GDMNTR Index
approved for options trading, however, the components of the GDMNTR
Index, which can be used to create the GDX ETF, currently must each
have a market capitalization greater than $750 million, an ADV of at
least 50,000 shares, and an average daily value traded of at least $1
[[Page 68032]]
million in order to be eligible for inclusion in the GDMNTR Index. The
Exchange believes that the GDMNTR Index component inclusion
requirements, as well as GDX's share and option volume and total market
capitalization, indicate that the GDX market is sufficiently large and
liquid enough to absorb price movements as a result of potentially
oversized trades.
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\16\ See VanEck Vectors Gold Miners ETF, available at <a href="https://www.vaneck.com/library/vaneck-vectors-etfs/gdx-fact-sheet-pdf/">https://www.vaneck.com/library/vaneck-vectors-etfs/gdx-fact-sheet-pdf/</a>
(January 14, 2021).
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Creation and Redemption for ETFs
The Exchange believes that the creation and redemption process for
the ETFs subject to this proposal will lessen the potential for
manipulative activity with options on the Underlying ETFs. When an ETF
provider wants to create more shares, it looks to an Authorized
Participant (``AP'') (generally a market maker or other large financial
institution) to acquire the underlying components the ETF is to hold.
For instance, when an ETF is designed to track the performance of an
index, the AP can purchase all the constituent securities in the exact
same weight as the index, then deliver those shares to the ETF
provider. In exchange, the ETF provider gives the AP a block of equally
valued ETF shares, on a one-for-one fair value basis. The price is
based on the NAV, not the market value at which the ETF is trading. The
creation of new ETF units can be conducted during an entire trading day
and is not subject to position limits. This process works in reverse
where the ETF provider seeks to decrease the number of shares that are
available to trade. The creation and redemption processes for the
Underlying ETFs creates a direct link to the underlying components of
the ETF and serves to mitigate potential price impact of the ETF shares
that might otherwise result from increased position limits for the
options on the Underlying ETFs.
The Exchange understands that the ETF creation and redemption
processes seek to keep an ETF's share price trading in line with the
product's underlying net asset value. Because an ETF trades like a
stock, its share price will fluctuate during the trading day, due to
simple supply and demand. If demand to buy an ETF is high, for
instance, an ETF's share price might rise above the value of its
underlying components. When this happens, the AP or issuer believes the
ETF may now be overpriced, so it may buy shares of the component
securities or assets and then sell ETF shares in the open market. This
may drive the ETF's share price back toward the underlying net asset
value. Likewise, if an ETF share price starts trading at a discount to
the component securities or assets it holds, the AP or issuer can buy
shares of the ETF and redeem them for the underlying components. Buying
undervalued ETF shares may drive the share price of an ETF back toward
fair value. This arbitrage process helps to keep an ETF's share price
in line with the value of its underlying portfolio.
Surveillance and Reporting Requirements
The Exchange believes that increasing the position limits (and
exercise limits) for the options on the Underlying ETFs would lead to a
more liquid and competitive market environment for these options, which
will benefit customers interested in trading these products. The
reporting requirement for the options on the Underlying ETFs would
remain unchanged. Thus, the Exchange would still require that each
member organization that maintains positions in the options on the same
side of the market, for its own account or for the account of a
customer, report certain information to the Exchange. This information
would include, but would not be limited to, the options' positions,
whether such positions are hedged and, if so, a description of the
hedge(s). Market Makers \17\ would continue to be exempt from this
reporting requirement, however, the Exchange may access Market Maker
position information.\18\ Moreover, the Exchange's requirement that
member organizations file reports with the Exchange for any customer
who held aggregate large long or short positions on the same side of
the market of 200 or more option contracts of any single class for the
previous day will remain at this level for the options subject to this
proposal and will continue to serve as an important part of the
Exchange's surveillance efforts.\19\
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\17\ A ``Market Maker'' means a Streaming Quote Trader or a
Remote Streaming Quote Trader who enters quotations for his own
account electronically into the System. See Options 1, Section
1(b)(28). A ``Streaming Quote Trader'' or ``SQT'' means a Market
Maker who has received permission from the Exchange to generate and
submit option quotations electronically in options to which such SQT
is assigned. An SQT may only submit such quotations while such SQT
is physically present on the trading floor of the Exchange. An SQT
may only submit quotes in classes of options in which the SQT is
assigned. See Options 1, Section 1(b)(54). A ``Remote Streaming
Quote Trader'' or ``RSQT'' means a Market Maker that is a member
affiliated with an Remote Streaming Quote Trader Organization with
no physical trading floor presence who has received permission from
the Exchange to generate and submit option quotations electronically
in options to which such RSQT has been assigned. A qualified RSQT
may function as a Remote Lead Market Maker upon Exchange approval.
An RSQT is also known as a Remote Market Maker (``RMM'') pursuant to
Options 2, Section 11. A Remote Streaming Quote Organization
(``RSQTO'') or Remote Market Maker Organization (``RMO'') are
Exchange member organizations that have qualified pursuant to
Options 2, Section 1. See Options 1, Section 1(b)(49). A ``Lead
Market Maker'' means a member who is registered as an options Lead
Market Maker pursuant to Options 2, Section 12(a). A Lead Market
Maker includes a Remote Lead Market Maker which is defined as a Lead
Market Maker in one or more classes that does not have a physical
presence on an Exchange's trading floor and is approved by the
Exchange pursuant to Options 2, Section 11. See Options 1, Section
1(b)(27).
\18\ The Options Clearing Corporation (``OCC'') through the
Large Option Position Reporting (``LOPR'') system acts as a
centralized service provider for compliance with position reporting
requirements by collecting data from each Member, consolidating the
information, and ultimately providing detailed listings of each
Member's report to the Exchange, as well as Financial Industry
Regulatory Authority, Inc. (``FINRA''), acting as its agent pursuant
to a regulatory services agreement (``RSA'') with the Exchange.
\19\ See Options 9, Section 13(f).
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The Exchange believes that the existing surveillance procedures and
reporting requirements at the Exchange and other SROs are capable of
properly identifying disruptive and/or manipulative trading activity.
The Exchange also represents that it has adequate surveillances in
place to detect potential manipulation, as well as reviews in place to
identify potential changes in composition of the Underlying ETFs and
continued compliance with the Exchange's listing standards. These
procedures utilize daily monitoring of market activity via automated
surveillance techniques to identify unusual activity in both options
and the underlyings, as applicable.\20\ The Exchange also notes that
large stock holdings must be disclosed to the Commission by way of
Schedules 13D or 13G,\21\ which are used to report ownership of stock
which exceeds 5% of a company's total stock issue and may assist in
providing information in monitoring for any potential manipulative
schemes.
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\20\ The Exchange believes these procedures have been effective
for the surveillance of trading the options subject to this proposal
and will continue to employ them.
\21\ 17 CFR 240.13d-1.
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The Exchange believes that the current financial requirements
imposed by the Exchange and by the Commission adequately address
concerns regarding potentially large, unhedged positions in the options
on the Underlying ETFs. Current margin and risk-based haircut
methodologies serve to limit the size of positions maintained by any
one account by increasing the margin and/or capital that a member
organization must maintain for a large position held by itself or by
its customer.\22\ In addition, Rule 15c3-1 \23\ imposes a capital
charge on member organizations
[[Page 68033]]
to the extent of any margin deficiency resulting from the higher margin
requirement.
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\22\ See Options 6C, Section 3, Margin Requirements.
\23\ 17 CFR 240.15c3-1.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) \24\ of the Act,\25\ in general, and furthers the objectives of
Section 6(b)(5) of the Act. Specifically, the Exchange believes the
proposed rule change is consistent with the Section 6(b)(5) \26\
requirements that the rules of an exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest. Additionally, the Exchange
believes the proposed rule change is consistent with the Section
6(b)(5) \27\ requirement that the rules of an exchange not be designed
to permit unfair discrimination between customers, issuers, brokers, or
dealers.
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\24\ 15 U.S.C. 78f(b)(5).
\25\ 15 U.S.C. 78f(b).
\26\ 15 U.S.C. 78f(b)(5).
\27\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed increase in position limits
for options on the Underlying ETFs will remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, protect investors and the public interest,
because it will provide market participants with the ability to more
effectively execute their trading and hedging activities. The proposed
increases will allow market participants to more fully implement
hedging strategies in related derivative products and to further use
options to achieve investment strategies (e.g., there are other
exchange-traded products (``ETPs'') that use options on the ETFs
subject to this proposal as part of their investment strategy, and the
applicable position limits as they stand today may inhibit these other
ETPs in achieving their investment objectives, to the detriment of
investors). Also, increasing the applicable position limits may allow
Market Makers to provide the markets for these options with more
liquidity in amounts commensurate with increased consumer demand in
such markets. The proposed position limit increases may also encourage
other liquidity providers to shift liquidity, as well as encourage
consumers to shift demand, from OTC markets onto the Exchange, which
will enhance the process of price discovery conducted on the Exchange
through increased order flow.
In addition, the Exchange believes that the structure of the
Underlying ETFs, the considerable market capitalization of the funds
and underlying components, and the liquidity of the markets for the
applicable options and underlying components will mitigate concerns
regarding potential manipulation of the products and/or disruption of
the underlying markets upon increasing the relevant position limits. As
a general principle, increases in market capitalizations, active
trading volume, and deep liquidity of the underlying components do not
lead to manipulation and/or disruption. This general principle applies
to the recently observed increased levels of market capitalization and
trading volume and liquidity in shares of and options on the Underlying
ETFs (as described above), and, as a result, the Exchange does not
believe that the options markets or underlying markets would become
susceptible to manipulation and/or disruption as a result of the
proposed position limit increases. Indeed, the Commission has
previously expressed the belief that not just increasing, but removing,
position and exercise limits may bring additional depth and liquidity
to the options markets without increasing concerns regarding
intermarket manipulation or disruption of the options or the underlying
securities.\28\
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\28\ See Securities Exchange Act Release No. 62147 (October 28,
2005) (SR-CBOE-2005-41), at 62149.
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Further, the Exchange notes that the proposed rule change to
increase position limits for select actively traded options is not
novel and the Commission has approved similar proposed rule changes by
the Exchange to increase position limits for options on similar, highly
liquid and actively traded ETPs.\29\ Furthermore, the Exchange again
notes that that the proposed position limits for options on LQD and GDX
are consistent with existing position limits for options on comparable
ETFs in Options 9, Section 13.
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\29\ See Securities Exchange Act Release Nos. 88768 (April 29,
2020), 85 FR 26736 (May 5, 2020) (SR-CBOE-2020-015); 83415 (June 12,
2018), 83 FR 28274 (June 18, 2018) (SR-CBOE-2018-042); and 68086
(October 23, 2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-
066).
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The Exchange's surveillance and reporting safeguards continue to be
designed to deter and detect possible manipulative behavior that might
arise from increasing or eliminating position and exercise limits in
certain classes. The Exchange believes that the current financial
requirements imposed by the Exchange and by the Commission adequately
address concerns regarding potentially large, unhedged position in the
options on the Underlying ETFs, further promoting just and equitable
principles of trading, the maintenance of a fair and orderly market,
and the protection of investors.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule changes will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange does not believe
the proposed rule change will impose any burden on intra-market
competition that is not necessary or appropriate in furtherance of the
purposes of the Act because the increased position limits (and exercise
limits) will be available to all market participants and apply to each
in the same manner. The Exchange believes that the proposed rule change
will provide additional opportunities for market participants to more
efficiently achieve their investment and trading objectives of market
participants.
The Exchange does not believe that the proposed rule change will
impose any burden on inter-market competition that is not necessary or
appropriate in furtherance of the Act. On the contrary, the Exchange
believes the proposal promotes competition because it may attract
additional order flow from the OTC market to exchanges, which would in
turn compete amongst each other for those orders.\30\ The Exchange
believes market participants would benefit from being able to trade
options with increased position limits in an exchange environment in
several ways, including but not limited to the following: (1) Enhanced
efficiency in initiating and closing out position; (2) increased market
transparency; and (3) heightened contra-party creditworthiness due to
the role of OCC as issuer and guarantor. The Exchange notes that other
options exchanges may choose to file similar proposals with the
Commission to
[[Page 68034]]
increase position limits on options on the Underlying ETFs.
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\30\ Additionally, several other options exchanges have the same
position limits as the Exchange, as they incorporate by reference to
the Exchange's position limits, and as a result the position limits
for options on the Underlying ETFs will increase at those exchanges.
For example, The Nasdaq Options Market LLC (``NOM'') and Nasdaq BX,
Inc. (``BX'') position limits are determined by the position limits
established by Cboe. See NOM and BX Options 9, Section 13, Position
Limits.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \31\ and Rule 19b-
4(f)(6) thereunder.\32\
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\31\ 15 U.S.C. 78s(b)(3)(A).
\32\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \33\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \34\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay so that
the proposed rule change may become operative upon filing. The Exchange
states that waiver of the operative delay would be consistent with the
protection of investors and the public interest because it will ensure
fair competition among the exchanges by allowing the Exchange to
immediately increase the position limits for the products subject to
this proposal, which the Exchange believes will provide consistency for
Phlx members and member organizations that are also members at Cboe
where these increased position limits are currently in place. For this
reason, the Commission believes that waiver of the 30-day operative
delay is consistent with the protection of investors and the public
interest. Therefore, the Commission hereby waives the operative delay
and designates the proposal as operative upon filing.\35\
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\33\ 17 CFR 240.19b-4(f)(6).
\34\ 17 CFR 240.19b-4(f)(6)(iii).
\35\ For purposes only of waiving the 30-day operative delay,
the Commission also has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#0b797e676e26686466666e657f784b786e68256c647d"><span class="__cf_email__" data-cfemail="fb898e979ed6989496969e958f88bb889e98d59c948d">[email protected]</span></a>. Please include
File Number SR-Phlx-2021-70 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2021-70. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-Phlx-2021-70, and should be submitted on
or before December 21, 2021.
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\36\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-25994 Filed 11-29-21; 8:45 am]
BILLING CODE 8011-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.