Notice2022-07946
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend FINRA Rule 2360 (Options) To Increase the Position and Exercise Limits for Conventional 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
April 14, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 72 (Thursday, April 14, 2022)</title>
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[Federal Register Volume 87, Number 72 (Thursday, April 14, 2022)]
[Notices]
[Pages 22245-22250]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-07946]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94643; File No. SR-FINRA-2022-007]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Amend FINRA Rule 2360 (Options) To Increase the
Position and Exercise Limits for Conventional Options on Certain
Exchange-Traded Funds
April 8, 2022.
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 March 29, 2022, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by FINRA. FINRA has designated
the proposed rule change as constituting a ``non-controversial'' rule
change under paragraph (f)(6) of Rule 19b-4 under the Act,\3\ which
renders the proposal effective upon receipt of this filing by the
Commission. 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.
\3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend Rule 2360 (Options) to increase the
position and exercise limits for conventional options on certain
exchange-traded funds (``ETFs'').
The text of the proposed rule change is available on FINRA's
website at <a href="http://www.finra.org">http://www.finra.org</a>, at the principal office of FINRA 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, FINRA 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. FINRA has prepared summaries, set forth in sections A,
B,
[[Page 22246]]
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
FINRA Rule 2360(b)(3)(A) imposes a position limit on the number of
equity options contracts in each class on the same side of the market
that can be held or written by a member, a person associated with a
member, or a customer or a group of customers acting in concert.
Position limits are intended to prevent the establishment of options
positions that can be used to manipulate or disrupt the underlying
market or might create incentives to manipulate or disrupt the
underlying market so as to benefit the options position. In addition,
position limits serve to reduce the potential for disruption of the
options market itself, especially in illiquid options classes.\4\ This
consideration has been balanced by the concern that the limits ``not be
established at levels that are so low as to discourage participation in
the options market by institutions and other investors with substantial
hedging needs or to prevent specialists and market makers from
adequately meeting their obligations to maintain a fair and orderly
market.'' \5\
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\4\ See Securities Exchange Act Release No. 40969 (January 22,
1999), 64 FR 4911, 4912-13 (February 1, 1999) (Order Approving File
No. SR-CBOE-98-23) (citing H.R. No. IFC-3, 96th Cong., 1st Sess. at
189-91 (Comm. Print 1978)).
\5\ See supra note 4, at 4913.
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Rule 2360(b)(3)(A)(i) does not independently establish a position
limit for standardized equity options. Rather, the position limit
established by the rules of an options exchange for a particular equity
option is the applicable position limit for purposes of Rule 2360.\6\
Rule 2360(b)(3)(A)(iii) provides that conventional equity options \7\
are subject to a basic position limit of 25,000 contracts or a higher
tier for conventional option contracts on securities that underlie
exchange-traded options qualifying for such higher tier as determined
by the rules of the options exchanges. In addition, FINRA lists
position limits for options on securities that have higher position
limits--currently, only the ETFs listed in Rule
2360(b)(3)(A)(iii)a.6.--that also generally mirror the options exchange
position limits. At this time, FINRA proposes to conform its
conventional options position limits to the Cboe Exchange, Inc.'s
(``Cboe'') recent amendments that increased the position limit options
due to an ongoing increase in demand in options on the following ETFs:
(1) iShares iBoxx $ Investment Grade Corporate Bond ETF (``LQD''), and
(2) VanEck Vectors Gold Miners ETF (``GDX'') (together, the
``Underlying ETFs'').\8\
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\6\ See e.g., Cboe Rule 8.30; ISE Options 9 Section 13; Nasdaq
PHLX Options 9 Section 13; NYSE American Rule 904; NYSE Arca Rule
6.8-0; MIAX Rule 307; BOX Rule 3120 and IM-3120-2; Nasdaq Options 9
Section 13; BX Options 9 Section 13; and BZX Rule 18.7.
\7\ Conventional options are over-the-counter options and are
defined in Rule 2360(a)(9) as ``(A) any option contract not issued,
or subject to issuance, by The Options Clearing Corporation; or (B)
an OCC Cleared OTC Option.''
\8\ See Securities Exchange Act Release No. 93525 (November 4,
2021), 86 FR 62584 (November 10, 2021) (Order Approving File No. SR-
CBOE-2021-029).
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The proposed rule change would add to the table provided in Rule
2360(b)(3)(A)(iii)a.6. as follows, with the effect of each ETF being
increased from the current position limit of 250,000 contracts:
<bullet> The position limit for options on LQD would be increased
to 500,000 contracts.
<bullet> The position limit for options on GDX would be increased
to 500,000 contracts.
FINRA notes the proposed position limits for options on LQD 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'').
In support of the proposed rule change, as noted by Cboe, position
limits are determined by the option exchange's rules.\9\ The ETFs that
underlie options subject to the proposed rule change are highly liquid
and are based on a broad set of highly liquid securities and other
reference assets. The above listed ETFs are listed on various national
securities exchanges and meet their listing standards.
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\9\ See e.g., CBOE Rule 8.30, Interpretation and Policy .02.
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In supporting the proposed position limit increases, FINRA
considered the liquidity of the Underlying ETFs, the value of the
underlying securities or index components and 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.
FINRA notes that Cboe has compiled the following trading statistics
regarding shares of and options on the Underlying ETFs and the values
of the Underlying ETFs and their component securities or index
components, as applicable:
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Fund Market
ADV \10\ (ETF ADV (option Shares Capitalization Share value
Product shares contracts) outstanding \12\ (USD \13\ (USD)
millions) \11\ (millions) millions) (NAV)
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LQD......................... 14.1 30,300 308.1 54,113.7 130.13
GDX......................... 39.4 166,000 419.8 16,170.5 33.80
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FINRA notes Cboe collected the same trading statistics, where
applicable, as above regarding a sample of other ETFs, as well as the
current position limits for options on such ETFs, to draw comparisons
in support of proposed position limit increases for options on the
Underlying ETFs (see further discussion below):
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\10\ 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.
\11\ Shares Outstanding and Net Asset Values (``NAV''), as well
as for the comparative ETFs presented below, are as of April 5,
2021.
\12\ Fund Market Capitalization data, as well as for the
comparative ETFs presented below, are as of January 14, 2021.
\13\ See supra note 11.
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ADV (ETF Shares Fund Market
Product shares ADV (option outstanding Capitalization Share value Current
millions) contracts) (millions) (USD millions) (USD) (NAV) position limit
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EWZ.................................................... 29.2 139,400 173.8 6,506.8 33.71 500,000
[[Page 22247]]
TLT.................................................... 11.5 111,800 103.7 17,121.3 136.85 500,000
EWJ.................................................... 8.2 15,500 185.3 13,860.7 69.72 500,000
HYG.................................................... 30.5 261,600 254.5 24,067.5 86.86 500,000
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FINRA echoes the Cboe's belief 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 component securities, FINRA 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.
The following analyses for the Underlying ETFs, which FINRA agrees
with in support of the proposed rule change, as well as the statistics
presented in support thereof, were presented by Cboe in their rule
filing, which was approved by the Commission.
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.\14\ 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 500,000 contracts. In addition to this, although there are currently
no options listed for trading on the IBOXIG Index, the components \15\
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.\16\ FINRA echoes Cboe's belief 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 market
participants' need for options have continued to grow alongside the
ETF. Particularly, Cboe notes in its filing 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, FINRA agrees with Cboe's belief
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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\14\ See Markit iBoxx USD Liquid Investment Grade Index,
available at <a href="https://cdn.ihsmarkit.com/www/pdf/MKT-iBoxx-USD-Liquid-Investment-Grade-Index-factsheet.pdf">https://cdn.ihsmarkit.com/www/pdf/MKT-iBoxx-USD-Liquid-Investment-Grade-Index-factsheet.pdf</a> (March 3, 2021).
\15\ Investment grade corporate bonds.
\16\ See supra note 14.
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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.\17\ ADV in GDX options has 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.
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\17\ 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>
(February 28, 2022).
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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. 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 EWJ.
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 there have
been no identified 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 million in order to be eligible for inclusion in
the GDMNTR Index. FINRA echoes Cboe's belief 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
[[Page 22248]]
movements as a result of potentially oversized trades.
FINRA believes that increasing the position limits for conventional
options subject to the proposed rule change would lead to a more liquid
and competitive market for these options, which will benefit customers
interested in these products.
Creation and Redemption for ETFs
FINRA believes that the creation and redemption process for ETFs
subject to this proposed rule change will lessen the potential for
manipulative activity with options on the Underlying ETFs. Regarding
ETFs, when an ETF provider wants to create more shares, it looks to an
Authorized Participant (generally a market maker or other large
financial institution) to acquire the securities the ETF is to hold.
For instance, when an ETF is designed to track the performance of an
index, the Authorized Participant 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
Authorized Participant a block of equally valued ETF shares, on a one-
for-one fair value basis. The price is based on the net asset value,
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 applicable 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.
FINRA understands that the ETF creation and redemption process
seeks 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, the ETF's
share price might rise above the value of its underlying securities.
When this happens, the Authorized Participant or issuer believes the
ETF may now be overpriced, so it may buy shares of the component
securities and then sell ETF shares in the open market. This may drive
the ETF's share price back toward the underlying net asset value or
indicative index value. Likewise, if the ETF share price starts trading
at a discount to the securities it holds or its index components, the
Authorized Participant or issuer can buy shares of the ETF and redeem
them for the underlying securities or index component instruments.
Buying undervalued ETF shares may drive the share price of the 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 or index
components.
Surveillance and Reporting
FINRA believes that the increased position limits provisions are
appropriate in light of the existing surveillance procedures and
reporting requirements at FINRA,\18\ the options exchanges, and at the
several clearing firms, which are capable of properly identifying
unusual or illegal trading activity. These procedures use daily
monitoring of market movements by automated surveillance techniques to
identify unusual activity in both options and underlying stocks.\19\
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\18\ See Rule 2360(b)(5) for the options reporting requirements.
\19\ These procedures have been effective for the surveillance
of options trading and will continue to be employed.
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In addition, large stock holdings must be disclosed to the
Commission by way of Schedules 13D or 13G.\20\ Options positions are
part of any reportable positions and cannot legally be hidden.
Moreover, the previously noted Rule 2360(b)(5) requirement that members
must file reports with FINRA for any customer that held aggregate large
long or short positions of any single class for the previous day will
continue to serve as an important part of FINRA's surveillance efforts.
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\20\ 17 CFR 240.13d-1.
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Finally, FINRA believes that the current financial requirements
imposed by FINRA and by the Commission adequately address financial
responsibility concerns that a member or its customer will maintain an
inordinately large unhedged position in any option with a higher
position limit. Current margin and risk-based haircut methodologies
serve to limit the size of positions maintained by any one account by
increasing the margin or capital that a member must maintain for a
large position. Under Rule 4210(f)(8)(A), FINRA also may impose a
higher margin requirement upon a member when FINRA determines a higher
requirement is warranted. In addition, the Commission's net capital
rule \21\ imposes a capital charge on members to the extent of any
margin deficiency resulting from the higher margin requirement.
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\21\ 17 CFR 240.15c3-1.
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FINRA has filed the proposed rule change for immediate
effectiveness and has requested that the SEC waive the requirement that
the proposed rule change not become operative for 30 days after the
date of the filing, so FINRA can implement the proposed rule change
immediately.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\22\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. FINRA believes that the proposed rule change promotes
consistent regulation by harmonizing position limits with those of the
other self-regulatory organizations. FINRA further believes that
increasing the position limit on conventional options promotes
consistent regulation by harmonizing the position limit with its
standardized counterpart. In addition, FINRA believes the proposed rule
change will be beneficial to large market makers and institutions
(which generally have the greatest ability to provide liquidity and
depth in products that may be subject to higher position limits as has
been the case with recently approved increased position limits),\23\ as
well as retail traders and public customers, by providing them with a
more effective trading and hedging vehicle.
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\22\ 15 U.S.C. 78o-3(b)(6).
\23\ See supra note 8.
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In addition, FINRA believes that the structure of the Underlying
ETFs, the considerable market capitalization of the funds, underlying
component securities and indexed component securities, and the
liquidity of the markets for the applicable options and underlying
component securities will mitigate concerns regarding potential
manipulation of the products 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 securities tend to deter manipulation or disruption. This
general principle applies to the recently observed increased levels of
market capitalization, trading volume, and liquidity in shares of and
options on the Underlying ETFs (as described above). FINRA does not
believe that the options
[[Page 22249]]
markets or underlying markets would become susceptible to manipulation
or disruption as a result of the proposed position limit increases.
Increased position limits for select actively traded options, such
as those proposed herein, are not novel and have been previously
approved by the Commission.\24\ Furthermore, FINRA notes that the
proposed position limits for options on LQD and GDX are consistent with
existing position limits for options on comparable ETFs in Rule
2360(b)(3)(A)(iii)a.6.
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\24\ See supra note 8. See also Securities Exchange Act Release
Nos. 88768 (April 29, 2020), 85 FR 26736 (May 5, 2020) (Order
Approving File No. SR-CBOE-2020-015); 83415 (June 12, 2018), 83 FR
28274 (June 18, 2018) (Notice of Filing and Immediate Effectiveness
of File No. SR-CBOE-2018-042); and 68086 (October 23, 2012), 77 FR
65600 (October 29, 2012) (Order Approving File No. SR-CBOE-2012-
066).
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FINRA's existing surveillance and reporting safeguards are designed
to deter and detect possible manipulative behavior that might arise
from changing position and exercise limits.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
Economic Impact Analysis
FINRA has undertaken an economic impact assessment, as set forth
below, to analyze the potential economic impacts, including anticipated
costs, benefits, and distributional and competitive effects, transfers
of wealth, relative to the current baseline, and the alternatives FINRA
considered in assessing how to best meet its regulatory objectives.
Regulatory Objective
FINRA is proposing to amend Rule 2360 to harmonize FINRA's position
limits for conventional options with the position limit for
standardized options.\25\
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\25\ See supra note 8.
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Economic Baseline
Per FINRA Rule 2360(b)(3)(A)(iii) conventional equity options are
subject to a basic position limit of 25,000 contracts or higher for
conventional option contracts on securities that underlie exchange-
traded options qualifying for a higher tier as determined by option
exchange rules. The existing position limits for conventional options
on LQD and GDX are 250,000 contracts. Cboe has recently increased
position limits for options on these ETFs.
Economic Impact
Benefits
As noted above, the proposed rule change would amend Rule 2360 to
harmonize FINRA's position limits for conventional options with the
position limits for standardized options.\26\ If the existing position
limits for conventional equity options on select ETFs constrains
trading in these ETFs, then investors may be able to better manage risk
and trade on information when the position limit is relaxed. In
general, the improvement in risk management and informational
efficiency may increase more when position limits are increased. We
acknowledge, however, that the conventional options on these ETFs, the
ETFs themselves, and the securities underlying these ETFs are liquid,
so improvements in informational efficiency may be relatively small.
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\26\ See supra note 8.
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For investors that trade conventional equity options, there is
likely to be a natural size for an executed order that minimizes fixed
and variable transaction costs, including but not limited to, the bid-
ask spread, price impact, and transaction fees. If the existing
position limits for conventional equity options on select ETFs
constrains the order size such that fixed and variable transaction
costs are higher than optimal, then investors may benefit if the new
position limit is no less than the natural size. In such an event, the
cost to hedge an ETF would decline, thereby making it less costly to
manage downside risk.
In addition, if the existing position limits serve as a constraint,
then an increase in the position limits for conventional options on
select ETFs could permit investors to more easily find a counterparty.
If the number of counterparties increases, then the cost of hedging
should decline as the half-spread narrows, thereby making it less
expensive to manage downside risk.
The extent of the constraint imposed by the current limit on
conventional options is related to the ability of an investor to
achieve similar economic exposure through other means. If there are
other securities, such as an option on a closely related index, that
exist and provide similar economic exposure less expensively, then the
value of lessening the position limits on conventional options on ETFs
is lower.
Members may rely on information and data feeds from the Options
Clearing Corporation to assist in their monitoring position limits.
Because position limits on the standardized and conventional side have
traditionally been consistent, members have relied on this feed for
both standardized and conventional options. If the position limits
between standardized and conventional options are conformed, then the
cost from monitoring position limits should decline for member firms.
Having the same position limits on standardized and conventional
options, reduces the potential for excess loss that may be incurred
when different limits are applied to the standardized versus
conventional options on the same ETF. The economic loss may arise from
building and maintaining trading and compliance systems to support the
different regimes. Furthermore, the harmonization of position limits on
standardized and conventional options eliminates the potential risk and
cost arising from regulatory arbitrage.
Costs
The proposed rule change may impose limited operational cost on
member firms that trade conventional options on ETFs, as these same
firms would need to revise position limits that are used in trading
systems. However, the proposed rule change should not impose additional
costs, because it is difficult to disrupt or manipulate the underlying
market, create an incentive to disrupt or manipulate the underlying
market for the purpose of profiting from the options position, or
disrupt or manipulate the options market for conventional options on
ETFs affected by this proposed rule. ETFs that underlie options subject
to the proposed rule change are highly liquid and are based on a broad
set of highly liquid securities, which makes the market difficult to
manipulate or disrupt. In fact, options on certain broad-based security
indexes have no position limits. Furthermore, the applicable creation
and redemption process for these ETFs reduces the potential for
disruptive or manipulative activity. New ETF units may be created at
any time during the trading day and are not subject to position limits.
Consequently, there is a direct link between the underlying components
of the ETF, which keeps ETF's share prices trading in line with the
ETF's underlying net asset value.
Alternatives
No further alternatives are under consideration.
[[Page 22250]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor 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 after the date of the filing, or such
shorter time as the Commission may designate if consistent with the
protection of investors and the public interest, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \27\ and Rule 19b-
4(f)(6) \28\ thereunder.
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\27\ 15 U.S.C. 78s(b)(3)(A).
\28\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
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.
FINRA has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) \29\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\30\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. FINRA has asked the
Commission to waive the 30-day operative delay so that the proposed
rule change may become operative upon filing. FINRA states that waiver
of the operative delay would be consistent with the protection of
investors and the public interest because it would enable FINRA to
immediately harmonize position limits with those of other self-
regulatory organizations to ensure consistent regulation. For this
reason, the Commission believes that waiving 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 operative upon filing.\31\
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\29\ 17 CFR 240.19b-4(f)(6).
\30\ 17 CFR 240.19b-4(f)(6)(iii).
\31\ For purposes only of waiving the 30-day operative delay,
the Commission 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 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#0a787f666f27696567676f647e794a796f69246d657c"><span class="__cf_email__" data-cfemail="f88a8d949dd59b9795959d968c8bb88b9d9bd69f978e">[email protected]</span></a>. Please include
File Number SR-FINRA-2022-007 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-FINRA-2022-007. 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 a.m. and 3
p.m. Copies of such filing also will be available for inspection and
copying at the principal office of FINRA. 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-
FINRA-2022-007 and should be submitted on or before May 5, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2022-07946 Filed 4-13-22; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on April 14, 2022.
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.