Notice2024-05633
Self-Regulatory Organizations; Cboe Exchange, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Amend the Exchange's Rules Relating to Position and Exercise Limits
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
March 19, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 54 (Tuesday, March 19, 2024)</title>
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[Federal Register Volume 89, Number 54 (Tuesday, March 19, 2024)]
[Notices]
[Pages 19622-19629]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-05633]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99721; File No. SR-CBOE-2023-063]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change To Amend the Exchange's Rules Relating to Position
and Exercise Limits
March 12, 2024.
I. Introduction
On November 29, 2023, Cboe Exchange, Inc. (the ``Exchange'' or
``Cboe'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend its rules relating to position and
exercise limits. The proposed rule change was published for comment in
the Federal Register on December 14, 2023.\3\ The Commission has
received three comment letters regarding the proposed rule change.\4\
On January 23, 2024, pursuant to Section 19(b)(2) of the Act,\5\ the
Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to approve or disapprove the proposed
rule change.\6\ This order institutes proceedings pursuant to Section
19(b)(2)(B) of the Act \7\ to determine whether to approve or
disapprove the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 99119 (Dec. 8,
2023), 88 FR 86701 (``Notice'').
\4\ See letters to Vanessa Countryman, Secretary, Commission,
from: Ellen Greene, Managing Director, Equity and Options Market
Structure, Securities Industry and Financial Management Association
(``SIFMA''), dated January 26, 2024 (``SIFMA Letter''); and
Ji[rcaron][iacute] Kr[oacute]l, Deputy CEO, Global Head of
Government Affairs, Alternative Investment Management Association
(``AIMA''), dated January 14, 2024 (``AIMA Letter''); and letter
from Jennifer W. Han, Executive Vice President, Chief Counsel and
Head of Global Regulatory Affairs, Managed Funds Association
(``MFA''), to Sherry R. Haywood, Assistant Secretary, Commission,
dated January 4, 2024 (``MFA Letter''). Comment letters can be
accessed at <a href="https://www.sec.gov/comments/sr-cboe-2023-063/srcboe2023063.htm">https://www.sec.gov/comments/sr-cboe-2023-063/srcboe2023063.htm</a>.
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 99417 (Jan. 23,
2024), 89 FR 5588 (Jan. 29, 2024). The Commission designated March
13, 2024, as the date by which the Commission shall approve or
disapprove, or institute proceedings to determine whether to approve
or disapprove, the proposed rule change.
\7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal
The Exchange states that 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.\8\ The Exchange states that, because
participation in the options market may be discouraged if the position
limits are too low, position limits must balance concerns regarding
mitigating potential manipulation and the cost of inhibiting potential
hedging activity that could be used for legitimate economic
purposes.\9\
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\8\ See Notice, 88 FR at 86701.
\9\ See id.
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Cboe Rule (``Rule'') 8.30 currently provides that the position
limits for equity options are 25,000 or 50,000 or 75,000 or 200,000 or
250,000 contracts on the same side of the market (with adjustments for
splits and re-capitalizations) or such other number of option contracts
as may be fixed from time to time by the Exchange.\10\ The position
limit applicable to a class depends upon the trading volume and
[[Page 19623]]
outstanding shares of the underlying security.\11\ The 25,000-contract
limit applies to options on an underlying security that does not meet
the requirements for a higher option contract limit.\12\ To be eligible
for the 50,000-contract limit, the most recent six-month trading volume
of the underlying security must have totaled at least 20,000,000
shares; or the most recent six-month trading volume of the underlying
security must have totaled at least 15,000,000 shares and the
underlying security must have at least 40,000,000 shares currently
outstanding.\13\ To be eligible for the 75,000-contract limit, the most
recent six-month trading volume of the underlying security must have
totaled at least 40,000,000 shares; or the most recent six-month
trading volume of the underlying security must have totaled at least
30,000,000 shares and the underlying security must have at least
120,000,000 shares currently outstanding.\14\ To be eligible for the
200,000-contract limit, the most recent six-month trading volume of the
underlying security must have totaled at least 80,000,000 shares; or
the most recent six-month trading volume of the underlying security
must have totaled at least 60,000,000 shares and the underlying
security must have at least 240,000,000 shares currently
outstanding.\15\ To be eligible for the 250,000-contract limit, the
most recent six-month trading volume of the underlying security must
have totaled at least 100,000,000 shares; or the most recent six-month
trading volume of the underlying security must have totaled at least
75,000,000 shares and the underlying security must have at least
300,000,000 shares currently outstanding.\16\ These limits have been in
place since 2005.\17\
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\10\ Rule 8.42 provides that the exercise limit for an equity
option is the same as the position limit established in Rule 8.30
for that equity option. See Notice, 88 FR at 86701, n. 4.
\11\ See Rule 8.30, Interpretation and Policy (``Int.'') .02.
\12\ See Rule 8.30, Int. .02(a).
\13\ See Rule 8.30, Int. .02(b).
\14\ See Rule 8.30, Int. .02(c).
\15\ See Rule 8.30, Int. .02(d).
\16\ See Rule 8.30, Int. .02(e).
\17\ See Notice, 88 FR at 86701.
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The Exchange proposes to amend Rule 8.30 to adopt three additional
equity option position limits of 500,000 option contracts, 1,000,000
option contracts, and 2,000,000 option contracts.\18\ To be eligible
for the 500,000-contract limit, the most recent six-month trading
volume of the underlying security must have totaled at least
500,000,000 shares; or the most recent six-month trading volume of the
underlying security must have totaled at least 375,000,000 shares and
the underlying security must have at least 1,500,000,000 shares
currently outstanding.\19\ To be eligible for the 1,000,000-contract
limit, the most recent six-month trading volume of the underlying
security must have totaled at least 1,000,000,000 shares; or the most
recent six-month trading volume of the underlying security must have
totaled at least 750,000,000 shares and the underlying security must
have at least 3,000,000,000 shares currently outstanding.\20\ To be
eligible for the 2,000,000-contract limit, the most recent six-month
trading volume of the underlying security must have totaled at least
5,000,000,000 shares; or the most recent six-month trading volume of
the underlying security must have totaled at least 3,750,000,000 shares
and the underlying security must have at least 15,000,000,000 shares
currently outstanding.\21\
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\18\ See id.
\19\ See proposed Rule 8.30, Int. .02(f).
\20\ See proposed Rule 8.30, Int. .02(g).
\21\ See proposed Rule 8.30, Int. .02(h).
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The Exchange states that since the last position limit increase in
2005, there has been a significant increase in the overall volume of
exchange traded equity options and a steady increase in the number of
accounts that approach the current highest position limit of 250,000
option contracts.\22\ As described in greater detail in the Notice, the
Exchange states that annual equity options trading volume in recent
years is nearly seven times the volume amount when the current position
limits were adopted in 2005, and has more than doubled since 2017.\23\
The Exchange further states that, as of October 12, 2023, over 300
equity options classes that currently are limited to the maximum
position limit of 250,000 contracts would qualify for one of the three
proposed position limits: 182 equity options classes would be eligible
for the 500,000-contract limit; 110 equity options classes would be
eligible for the 1,000,000-contract limit; and 13 equity options
classes would be eligible for the 2,000,000-contract limit.\24\
According to the Exchange, the increase in options volume and lack of
evidence of market manipulation over the past 20 years justifies the
proposed increases in the position and exercise limits.\25\
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\22\ See Notice, 88 FR at 86702.
\23\ See id.
\24\ See id.
\25\ See id.
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The Exchange also points to Apple Inc. (``AAPL'') options as an
example supporting the proposal. Prior to an AAPL stock split in August
2020, AAPL had approximately 4,000,000,000 shares outstanding and the
option position limit of 250,000 contracts represented control of
25,000,000 AAPL shares, or 0.625% of the shares outstanding.\26\ After
the stock split, AAPL had approximately 16,000,000,000 shares
outstanding, and the immediate adjustment of the AAPL option position
limit to 1,000,000 contracts following the split reflected control of
100,000,000 shares, or 0.625% of the shares outstanding, which retained
the pre-stock split ratio.\27\ When the last AAPL option listed at the
time of the stock split in 2020 expired in September 2022, The Options
Clearing Corporation (``OCC'') reverted back to the original position
limit for AAPL of 250,000 contracts, the maximum stock option position
limit permitted under the Exchange's rules.\28\ The Exchange states
that this position limit is more restrictive than the original position
limit because readjusting the position limit back to 250,000 contracts
when there are 16,000,000,000 shares outstanding reduces the position
limit to 0.156% of the shares outstanding, making the post-stock split
position limit more restrictive than the pre-stock split position
limit, and, in the Exchange's view, arguably no longer meaningfully
related to the current shares outstanding.\29\
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\26\ See id.
\27\ See id.
\28\ See id.
\29\ See id.
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The Exchange further states that the current 250,000-contract limit
for AAPL options forces market participants to reduce trading activity
because the maximum position limit represents only 0.156% of the total
shares outstanding.\30\ The Exchange states that this reduction in
trading volume also represents a reduction in available liquidity and
negatively impacts liquidity, trading volume, and possibly execution
prices.\31\ The Exchange states that, under the proposal, AAPL options
would qualify for the 2,000,000-contract limit, which is over 12%
higher than the current maximum position limit.\32\ The adjustment of
the position limit from 250,000 contracts to 2,000,000 contracts
reflects control of 200,000,000 shares or 1.25% of the shares
outstanding, which the Exchange states is well within ratios provided
by the prior methodology.\33\ The Exchange states that the proposed
increase would lead to a more liquid and competitive market for AAPL
options, as well as all qualifying equity
[[Page 19624]]
options, which would benefit customers that trade the options.\34\ The
Exchange also states that, given the total increased volume in options
trading, it is reasonable to conclude that in addition to AAPL options,
position limits for many classes are currently more restrictive than
they were when adopted in 2005.\35\ The Exchange further states that it
has no reason to believe that the growth in trading volume in equity
options will not continue, and that it expects continued options volume
growth as opportunities for investors to participate in the options
markets increase and evolve.\36\
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\30\ See id.
\31\ See id.
\32\ See id.
\33\ See id.
\34\ See Notice, 88 FR at 86702-03.
\35\ See Notice, 88 FR at 86702.
\36\ See Notice, 88 FR at 86703.
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The Exchange states that the current position and exercise limits
are restrictive, and that not adopting increased position and exercise
limits will hamper the listed options markets from being able to
compete fairly and effectively with the over-the-counter (``OTC'')
markets.\37\ The Exchange states that OTC transactions occur through
bilateral agreements, the terms of which are not publicly disclosed to
the marketplace, and, as a result, OTC transactions do not contribute
to the price discovery process on a public exchange or other lit
markets.\38\ The Exchange states that without the proposed changes to
position and exercise limits, market participants will find the
standard equity position limits an impediment to their business and
investment objectives.\39\ The Exchange states that market participants
therefore may find the less transparent OTC markets a more attractive
alternative to achieve their investment and hedging objectives, leading
to a retreat from the listed options markets, where trades are subject
to reporting requirements and daily surveillance.\40\ The Exchange
further states that the Commission previously highlighted competition
with the OTC markets as a reason for increasing the standard position
and exercise limits.\41\
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\37\ See id.
\38\ See id.
\39\ See id.
\40\ See id.
\41\ See id. at n.16 (citing Securities Exchange Act Release No.
40875 (Dec. 31, 1998), 64 FR 1842 (Jan. 12, 1999) (SR-CBOE-1998-
25)).
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The Exchange states that the proposal will allow market
participants to more effectively execute their trading and hedging
activities and allow market makers to maintain their liquidity in these
options in amounts commensurate with the continued high consumer demand
in the market for the underlying securities.\42\ The Exchange states
that the proposed higher position limits also may encourage other
liquidity providers to continue to trade on the Exchange rather than
shift their volume to OTC markets, which will enhance the process of
price discovery conducted on the Exchange through increased order
flow.\43\
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\42\ See Notice, 88 FR at 86704.
\43\ See id.
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In addition, the Exchange believes that the current liquidity in
shares of and options on the underlying securities will mitigate
concerns regarding potential manipulation of the products and/or
disruption of the underlying markets upon increasing the relevant
position limits.\44\ The Exchange states that, as a general principle,
increases in active trading volume and deep liquidity of the underlying
securities do not lead to manipulation and/or disruption.\45\ The
Exchange further states that this general principle applies to the
recently observed increased levels of trading volume and liquidity in
shares of and options on the underlying securities, 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 higher position limit categories.\46\ In
addition, the Exchange expects continued options volume growth as
opportunities for investors to participate in the options markets
continue to increase and evolve.\47\ The Exchange states that it
continues to maintain a process in which, every six months, the status
of the underlying securities are reviewed to determine what limit
should apply.\48\ The Exchange states that, accordingly, if the stock
trading volume and/or outstanding shares for particular securities
significantly decline in the future, the overlying options classes will
be moved to a lower corresponding position limit under the rules at the
next regularly scheduled review.\49\ The Exchange states that the
proposed rule change to adopt increased position limits for actively
traded options is not novel, and that 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.\50\
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\44\ See id.
\45\ See id.
\46\ See id.
\47\ See id.
\48\ See id.
\49\ See id.
\50\ See id. at n. 22 (citing Securities Exchange Act Release
No. 40969 (Jan. 22, 1999), 64 FR 4911, 4913 (Feb. 1, 1999) (SR-CBOE-
98-23)).
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The Exchange states that the Commission has approved similar
Exchange proposals to increase position limits for options on highly
liquid and actively traded exchanged-traded products (``ETP(s)'')
(e.g., iShares Russell 2000 ETF (``IWM''), iShares MSCI Emerging
Markets ETF (``EEM''), iShares China Large-Cap ETF (``FXI''), iShares
MSCI EAFE ETF (``EFA''), VanEck Vectors Gold Miners ETF (``GDX''), and
iShares iBoxx $ Investment Grade Corporate Bond ETF (``LQD'')).\51\ The
Exchange states that although those proposals related to options on
ETPs and the current proposal applies to equity options,\52\ pursuant
to Rule 8.30, the position limits for options on stock and ETPs are
generally calculated in the same manner and based in part on trading
volume of the underlying.\53\ The Exchange states that, by way of
comparison, the amount of outstanding shares of AAPL stock is
significantly higher than that of IWM, EEM, FXI and EFA, which have an
overlying options position limit of 1,000,000 contracts (as compared to
the 250,000-contract limit for AAPL options).\54\ The Exchange states
that AAPL currently has nearly 16 billion shares outstanding, and the
outstanding shares of IWM, EEM, FXI and EFA range between approximately
187 million and 673 million.\55\ The Exchange also states that the
criteria under the proposed new position limits of 1,000,000 and
2,000,000 for equity options require the most recent six-month trading
volume of the underlying security to have totaled at least 1 billion or
5 billion shares, respectively, or have at least 3 billion or 15
billion shares, respectively, of the underlying security
outstanding.\56\ The Exchange further states that the proposed criteria
under the 500,000-contract limit category
[[Page 19625]]
requires the most recent six-month trading volume of the underlying
security to have totaled at least 500 million shares or have at least
1.5 billion shares of the underlying security outstanding.\57\ The
Exchange states that, in comparison, LQD and GDX have approximately 275
million shares and 395 million shares outstanding, and have an
overlying options position limit of 500,000 contracts.\58\ The Exchange
states that it is therefore reasonable and appropriate to increase the
position limit of options, as proposed, to similar position limits that
apply for certain ETPs.\59\
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\51\ See Notice, 88 FR at 86704, n. 23 (citing Securities
Exchange Act Release Nos. 93525 (Nov. 4, 2021), 86 FR 62584 (Nov.
10, 2021) (SR-CBOE-2021-029); 88768 (Apr. 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 (Oct. 23, 2012), 77 FR
65600 (Oct. 29, 2012) (SR-CBOE-2012-066)).
\52\ The Commission notes that the equity options encompassed by
the proposal include both stock options and ETP options.
\53\ See Notice, 88 FR at 86704.
\54\ See id.
\55\ See id.
\56\ See id. The Exchange states that there is also a
corresponding recent six-month volume of the underlying security
requirement that must be satisfied in addition to the requirement
relating to total outstanding shares. See id. at n. 25.
\57\ See Notice, 88 FR at 86704. The Exchange states that there
is also a corresponding recent six-month volume of the underlying
security requirement that must be satisfied in addition to the
requirement relating to total outstanding shares. See id. at n. 26.
\58\ See Notice, 88 FR at 86704.
\59\ See id.
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The Exchange states that existing surveillance and reporting
safeguards are designed to deter and detect possible disruptive or
manipulative trading behavior that might arise from increasing position
and exercise limits in certain classes.\60\ The Exchange represents
that it has adequate surveillances in place to detect potential
manipulation, as well as reviews in place to identify continued
compliance with the Exchange's listing standards.\61\ The Exchange
states that daily monitoring of market activity is performed via
automated surveillance techniques to identify unusual activity in both
options and the underlying securities, as applicable.\62\
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\60\ See Notice, 88 FR at 86703.
\61\ See id.
\62\ See id.
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The Exchange also states that the reporting requirement for equity
options would remain unchanged, and, accordingly, that the Exchange
would continue to require that each trading permit holder (``TPH'') or
TPH organization that maintains positions in impacted 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.\63\ The Exchange
states that this information includes the options positions, whether
the positions are hedged, and a description of any hedge(s).\64\ The
Exchange states that although market makers (including the Exchange's
designated primary market makers) would continue to be exempt from this
reporting requirement, the Exchange may access market maker position
information.\65\ The Exchange further states that the Exchange's
requirement that TPHs file reports with the Exchange for any customer
who held aggregate 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 (referred to as large option position reporting or
``LOPR'') will remain at this level and continue to serve as an
important part of the Exchange's surveillance efforts.\66\ The Exchange
also states that large stock holdings must be disclosed to the
Commission by way of Schedules 13D or 13G, 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.\67\
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\63\ See id.
\64\ See id.
\65\ See id.
\66\ See id. and Rule 8.43.
\67\ See Notice, 88 FR at 86703.
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The Exchange also believes that the current financial requirements
imposed by the Exchange and by the Commission adequately address
concerns regarding potentially large, unhedged positions in equity
options.\68\ In this vein, the Exchange states that 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 TPH must maintain for a large position held by itself or by its
customer.\69\ In addition, Rule 15c3-1 \70\ imposes a capital charge on
TPHs to the extent of any margin deficiency resulting from the higher
margin requirement.\71\
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\68\ See id.
\69\ See id. and Rule 10.3.
\70\ 17 CFR 240.15c3-1.
\71\ See Notice, 88 FR at 86703.
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III. Summary of Comments Received
The Commission has received three comment letters regarding the
proposal.\72\ All three commenters expressed support for the proposal.
Two commenters stated that the current position limits have remained
unchanged for 18 years, despite significant increases in options
trading volume,\73\ and one stated that the position limits should be
modernized.\74\ One commenter stated that position limits that are too
low impede trading activity and the ability of market participants to
implement investment strategies in names with large market
capitalizations.\75\ Another commenter stated that the current position
limits could limit hedging in accounts that are treated as acting in
concert but have different trading strategies.\76\ The commenter
further stated that there has been a steady increase in the number of
accounts that approach the current highest position limit of 250,000
contracts.\77\ Another commenter stated that the current position
limits have limited the trading volume for some equity options and
suggested that the current limits have negatively impacted liquidity
and execution prices in some cases.\78\ Commenters stated that the
proposal would lead to a more liquid and competitive market for equity
options,\79\ and would help to address concerns associated with the
temporary increase in option position limits following a stock split
and the subsequent reversion to pre-split position limits.\80\ In
addition, one commenter stated that existing surveillance procedures
and reporting requirements would remain in place and help the Exchange
and other self-regulatory organizations identify disruptive and/or
manipulative trading activity.\81\ Another commenter stated that
Commission and Exchange financial requirements limit a member firm's
ability to establish a large unhedged position in equity options, and
that the OCC and prime brokers review accounts for concentration risk
in single securities like equity options.\82\
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\72\ See supra note 4.
\73\ See AIMA Letter at 1-2; and SIFMA Letter at 1.
\74\ See AIMA Letter at 1.
\75\ MFA Letter at 1.
\76\ See SIFMA Letter at 2.
\77\ See id.
\78\ See AIMA Letter at 2.
\79\ See AIMA Letter at 2; SIFMA Letter at 2.
\80\ See MFA Letter at 2; SIFMA Letter at 2.
\81\ See AIMA Letter at 2; see also SIFMA Letter at 3.
\82\ See SIFMA Letter at 3.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2023-063 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \83\ to determine whether the proposed rule
change should be approved or disapproved. Institution of proceedings is
appropriate at this time in view of the legal and policy issues raised
by the proposed rule change, as discussed below. Institution of
proceedings does not indicate that the Commission has reached any
conclusions with respect to any of the issues involved. Rather, as
described below, the Commission seeks and encourages interested persons
to provide comments on the proposed rule change.
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\83\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\84\ the Commission is
providing
[[Page 19626]]
notice of the grounds for disapproval under consideration. The
Commission is instituting proceedings to allow for additional analysis
of the proposed rule change's consistency with Section 6(b)(5) of the
Act,\85\ which requires, among other things, that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, 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.
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\84\ 15 U.S.C. 78s(b)(2)(B).
\85\ 15 U.S.C. 78f(b)(5).
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Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the [Act]
and the rules and regulations issued thereunder . . . is on the self-
regulatory organization that proposed the rule change.'' \86\ The
description of a proposed rule change, its purpose and operation, its
effect, and a legal analysis of its consistency with applicable
requirements must all be sufficiently detailed and specific to support
an affirmative Commission finding,\87\ and any failure of a self-
regulatory organization to provide this information may result in the
Commission not having a sufficient basis to make an affirmative finding
that a proposed rule change is consistent with the Act and the
applicable rules and regulations.\88\
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\86\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\87\ See id.
\88\ See id.
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As discussed above, the Exchange has proposed to increase the
position and exercise limits for equity options by establishing new,
additional position limits of 500,000 contracts, 1,000,000 contracts,
and 2,000,000 contracts. The proposed position and exercise limits
would be available for options with underlying securities that meet
specified requirements with respect to six-month trading volume or six-
month trading volume and number of shares outstanding.\89\ The Exchange
states that since the current position limits were last updated, there
has been an almost seven-fold increase in the overall volume of
exchange-traded equity options and a steady increase in the number of
accounts that approach the current highest position limit of 250,000
contracts.\90\ Commenters reiterated the Exchange's statements,
asserting that current option volumes justify a position limit increase
and that the number of accounts approaching the current limits has
steadily increased.\91\
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\89\ See supra notes 19-21 and accompanying text.
\90\ See Notice, 88 FR at 86702. The Commission notes that
certain ETP options have positions limits that are higher than
250,000 contracts, which limits are set forth in Int. .07 to Rule
8.30. 250,000 contracts is the current maximum position limit set
forth in Int. .02 to Rule 8.30 for stock options and ETP options not
identified in Int. .07.
\91\ See AIMA Letter at 1-2; SIFMA Letter at 1-2.
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Position and exercise limits serve as a regulatory tool designed to
address the potential for manipulative schemes and adverse market
impact surrounding the use of options.\92\ The proposal would establish
new equity option position limits that are substantially larger than
the existing maximum limit and would affect a significant number of
option classes. The proposed new maximum equity option position and
exercise limit of 2,000,000 contracts represents an eightfold increase
over the current maximum equity option position and exercise limit of
250,000 contracts. In contrast, when the current maximum limit of
250,000 contracts was approved, it represented a three and one-third
fold increase over the then-existing maximum equity option position and
exercise limit of 75,000 contracts.\93\ The additional proposed equity
option position and exercise limits of 1,000,000 contracts and 500,000
contracts represent, respectively, a fourfold increase over and a
doubling of the current maximum limit. These proposed increases--
particularly the proposed increase to 2,000,000 contracts--represent a
significant increase in the size of equity options positions that
market participants would be able to establish on a given side of the
market, and raise the potential for adverse impacts in the markets for
the underlying equity securities and for manipulative schemes.
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\92\ See, e.g., Securities Exchange Act Release No. 68086 (Oct.
23, 2012), 77 FR 65600 (Oct. 29, 2012) (SR-CBOE-2012-066).
\93\ See, e.g., Securities Exchange Act Release No. 51244 (Feb.
23, 2005), 70 FR 10010 (Mar.1, 2005) (File No. SR-CBOE-2003-30)
(order approving two option position and exercise limit programs on
a pilot basis) (``Pilot Approval''); and Securities Exchange Act
Release No. 57352 (Feb.19, 2007), 73 FR 10076 (Feb. 25, 2008) (File
No. SR-CBOE-2008-007) (order granting permanent approval of two
option position and exercise limit pilot programs) (``Pilot
Permanent Approval,'' and together with the ``Pilot Approval,'' the
``Pilot Programs''). In addition to increasing the maximum equity
option position limit from 75,000 to 250,000 contracts, the Pilot
Programs increased other equity option position and exercise limits
as follows: the 13,500-contact limit was increased to 25,000
contracts; the 22,500-contract limit was increased to 50,000
contracts; the 31,500-contract limit was increased to 75,000
contracts; and the 60,000-contract limit was increased to 200,000
contracts.
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The Exchange states that the overall increase in options volumes
since the equity option position limits were last updated justifies the
Exchange's proposal. But options volume is not part of the eligibility
criteria for any equity option position limit. The Exchange does not
explain how overall option volume establishes that the proposed
position limits are consistent with the Act. The Exchange sets forth no
data or analysis as to why each proposed position limit is appropriate
or as to why each proposed limit's underlying security share trading
volume or share trading volume plus shares outstanding thresholds
appropriately correspond to the particular limit. The Commission
therefore has no basis to conclude, for example, that a 2,000,000-
contract limit is appropriate for equity options where the most recent
six-month trading volume of the underlying security totaled at least
5,000,000,000 shares or where the most recent six-month trading volume
of the underlying security totaled at least 3,750,000,000 shares and
the underlying security had at least 15,000,000,000 shares currently
outstanding. Likewise, while the Exchange and commenters assert that
the number of accounts approaching the current maximum position limit
has increased, the Exchange provides no data or detail to support these
assertions, such as, for example, the number of accounts that have
approached the current maximum limit.\94\
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\94\ See, e.g., Pilot Permanent Approval, supra note 93 (setting
forth data showing, among other things, the number of accounts
approaching the pilot position limits).
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The Exchange puts forth AAPL as an example of an equity option for
which a position limit increase is warranted, stating that, as a result
of the AAPL stock split in August 2020, the 250,000-contract limit that
applies to AAPL options represents 0.156% of the post-split shares
outstanding, a level that the Exchange characterizes as not
meaningfully related to the current shares outstanding.\95\ The
Exchange also states that, under the proposal, by contrast, a
2,000,000-contract limit for AAPL options would result in maximum
ownership of 1.25% of outstanding shares, which the Exchange states is
well within ratios provided by the prior methodology. But an equity
option's underlying security share trading volume is a necessary metric
in the determination of the appropriate position limit, aside from
consideration of the number of outstanding shares of the underlying
security or what proportion of those shares would be represented by an
option position that is at the maximum limit. As noted above, the
Exchange does not explain how it
[[Page 19627]]
determined that the proposed underlying security share trading volume
eligibility criteria for each proposed position limit justifies the
corresponding limit, nor has the Exchange done so in the particular
case of AAPL options.
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\95\ See Notice, 88 FR at 86702.
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The Exchange further states that the current 250,000-contract limit
for AAPL options forces market participants to reduce trading activity,
and that ``[t]his reduction in trading volume also represents a
reduction in available liquidity and negatively impacts liquidity,
trading volume, and possibly execution prices.'' \96\ Commenters also
stated that the current position limits impede trading and hedging
activity, and suggested that the current limits have negatively
impacted liquidity and execution prices.\97\ But the Exchange provides
no analysis or data to support these assertions, such as the types of
trading activity that may be limited by the current position limit
levels or data showing, for example, wider quote spreads or reduced
quote sizes in AAPL or other equity options.
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\96\ Id.
\97\ See MFA Letter at 1; SIFMA Letter at 2; AIMA Letter at 2.
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In addition, as discussed above, the Exchange states that, as of
October 12, 2023, over 300 equity options classes that currently are
limited to the maximum position limit of 250,000 contracts would
qualify for one of the three proposed new position limits, with 182
equity options classes eligible for the 500,000-contract limit, 110
equity options classes eligible for the 1,000,000-contract limit, and
13 equity options classes eligible for the 2,000,000-contract
limit.\98\ The proposed position limits would apply not only to options
on stock, but also to options on ETPs. Indeed, the Commission
understands that the proposal encompasses equity options with a variety
of underlying exposures including, for example, commodity-based ETPs,
volatility-based ETPs, leveraged and inverse leveraged ETPs, and
American Depository Receipts (``ADRs''). The proposal gives no
consideration to the heterogeneity among the securities underlying the
options covered by the proposal or whether differences in underlying
exposures present different levels of risk of adverse market impact.
---------------------------------------------------------------------------
\98\ See Notice, 88 FR at 86702. The Commission understands
that, based on more recent statistics, over 400 equity option
classes would qualify for a position limit increase under the
proposal.
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The Exchange also seeks to justify the proposal in part by
providing a comparative analysis of options on certain broad-based
index exchange-traded funds (``ETFs'') that currently have position
limits of 500,000 or 1,000,000 contracts.\99\ But the proposal does not
provide sufficient information to explain why the underlying markets
for the broad-based index ETFs are sufficiently comparable to the
market for stock, or sufficient information to independently support a
finding that the proposed position limits would not have an adverse
market impact. Unlike an ETF, a stock is not subject to the creation
and redemption processes that apply to ETFs, nor to the issuer
arbitrage mechanisms that help to keep an ETF's price in line with the
value of its underlying portfolio when overpriced or trading at a
discount to the securities on which it is based. The Commission
previously has considered how these processes and mechanisms may serve
to mitigate the potential price impact that might otherwise result from
increased position limits for an ETF option.\100\
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\99\ See Notice, 88 FR at 86704; see also Rule 8.30, Int. 07.
\100\ See Securities Exchange Act Release No. 93525 (Nov. 4,
2021), 86 FR 62584, 62587 (Nov. 10, 2021) (order approving File No.
SR-Cboe-2021-029).
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Further, Rule 8.30, Int. .07 provides bespoke position limits for
certain ETF options that are higher than the current maximum position
limit of 250,000 contracts set forth in Rule 8.30, Int. .02, including
a 1,800,000-contract limit for options on the PowerShares QQQ Trust
(``QQQ''), and a 500,000-contract limit for options on each of the
following ETFs: LQD, GDX, the iShares MSCI Brazil Capped ETF (``EWZ''),
the iShares iBoxx High Yield Corporate Bond Fund (``HYG''), the iShares
20+ Year Treasury Bond Fund ETF (``TLT''), and the Financial Select
Sector SPDR Fund (``XLF''). The Commission understands that, under the
proposal, these ETF options could qualify for position limits higher
than those set forth in Rule 8.30, Int. .07 by satisfying proposed Rule
8.30, Int. .02's share volume or share volume plus shares outstanding
thresholds for the proposed 2,000,000-contract limit in the case of QQQ
options and the proposed 1,000,000-contract limit in the cases of the
other aforementioned ETF options. But the proposal does not set forth
corresponding revisions to Rule 8.30, Int. .07 to account for this or
otherwise address what these ETF options' position limits would be
under the proposal. As a result, the position limits set forth in Rule
8.30, Int .07 for certain ETF options could be lower than the proposed
position limits that these ETF options could qualify for in proposed
Rule 8.30, Int. .02, rendering it unclear what position limit would
apply to these options under the proposal.
Accordingly, the Exchange has not provided an adequate basis for
the Commission to conclude that the proposal would be consistent with
Section 6(b)(5) of the Act.
V. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their data, views, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposed rule change
is consistent with Section 6(b)(5), or any other provision of the Act,
or the rules and regulations thereunder. Although there do not appear
to be any issues relevant to approval or disapproval which would be
facilitated by an oral presentation of data, views, and arguments, the
Commission will consider, pursuant to Rule 19b-4 under the Act,\101\
any request for an opportunity to make an oral presentation.\102\
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\101\ 17 CFR 240.19b-4.
\102\ Section 19(b)(2) of the Act, as amended by the Securities
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants to
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is
appropriate for consideration of a particular proposal by a self-
regulatory organization. See Securities Acts Amendments of 1975,
Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75,
94th Cong., 1st Sess. 30 (1975).
---------------------------------------------------------------------------
Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change should be approved
or disapproved by April 9, 2024. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
April 23, 2024. The Commission asks that commenters address the
sufficiency of the Exchange's statements in support of the proposal,
which are set forth in the Notice,\103\ in addition to any other
comments they may wish to submit about the proposed rule change. In
particular, the Commission seeks comment on the following questions and
asks commenters to submit data where appropriate to support their
views:
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\103\ See supra note 3.
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1. Has the Exchange demonstrated that the proposed position limit
increases are appropriate based on the share trading volumes and shares
outstanding of the securities underlying the equity options that would
be
[[Page 19628]]
covered by the proposal? Has the Exchange adequately explained the need
for the proposed 2,000,000-contract limit? Would a more measured,
incremental approach, beginning with an increase in the maximum
position limit to a level less than 2,000,000 contracts, be more
appropriate as a means of implementing an equity option position limit
increase? If so, what would be an appropriate maximum limit? If not,
why?
2. Has the Exchange provided sufficient data and analysis to
support a conclusion that the proposed position limit increases should
not result in attempted manipulations of the underlying securities or
in adverse market impacts, such as disruptions in the markets for the
underlying securities? As discussed above, the proposal would
significantly increase the position limits for options on a large
number of underlying securities. The proposal discusses trading in AAPL
but provides no discussion or analysis of the trading volume and other
characteristics of the many other underlying securities that also would
be subject to options position limit increases under the proposal. Are
the proposed position limit increases also appropriate for the many
equity options on underlying securities with lower share trading
volumes and numbers of shares outstanding than AAPL that would qualify
for higher limits under the proposal?
3. Are the proposed position limits appropriate for all of the
equity options covered by the proposal in light of the heterogeneity in
their underlying instruments? For example, should options on commodity-
based ETPs be subject to the same position limits as options on stock?
Should position limits for options on commodity-based ETPs consider the
available supply in the markets for the commodity on which the ETP is
based? As other examples, the proposal would encompass options on
volatility-based ETPs, leveraged or inverse leveraged ETPs, and ADRs
that provide non-U.S. market exposure. What are commenters views as to
the appropriateness of increasing position limits for these equity
options or any other type of equity option that is not based on U.S.
company stock exposure?
4. Should the proposed position limit increases be implemented on a
pilot basis to allow the Exchange to assess the impact of the proposed
position limit increases on the markets for the underlying securities?
If so, what pilot data should be collected?
5. The Exchange states that existing surveillance procedures as
well as, among other things, TPH option position and hedge reporting
requirements and LOPR for customer positions are adequate to identify
violative and/or disruptive trading activity. Do commenters agree that
existing surveillance and reporting mechanisms will be adequate if
equity option position limits are increased as the Exchange has
proposed? Are current intra-day surveillance procedures capable of
monitoring the intra-day trading in underlying securities by large
option position holders that could have a strong incentive to
manipulate an options settlement price, a practice known as ``marking
the close'' or ``marking the open?'' To what extent are such
surveillance procedures conducted on a manual or automated basis?
6. The Exchange and commenters suggest that the existing position
limits unnecessarily restrict market participants' trading or hedging
strategies. The Commission understands that multi-strategy funds that
employ relative value trading strategies may be one example where this
is the case. Can commenters provide other examples of trading or
hedging strategies that are impeded by the current position limits?
Would higher position limits facilitate the execution of relative value
strategies or other trading strategies on exchanges?
7. The Exchange states that listed option position limits that are
too restrictive may cause market participants to find the OTC market
for conventional options a more attractive alternative to achieve their
investment and hedging objectives, leading to a retreat from the listed
options markets.\104\ Can commenters provide data or analysis to
support the notion that the existing equity option position limits
cause trades to occur in the OTC market that otherwise would occur in
listed options on exchanges if the position limits were higher? Can
commenters provide data or analysis to support the notion that equity
option position limit increases would result in the migration of equity
option trading interest from the OTC market to exchanges? Customizable
FLEX equity options generally are not subject to position limits with
the exceptions of FLEX equity options with third-Friday-of-the-month
expirations and certain FLEX equity options that are cash-settled.\105\
Do FLEX equity options serve market participants' needs for an
alternative to standardized, listed equity options? In contrast to FLEX
equity options, OTC equity options are subject to position limits. If
the listed, standardized option position limits restrict market
participants' ability to implement their trading strategies, why would
market participants seek to utilize OTC equity options instead of FLEX
equity options given that OTC equity options are subject to position
limits whereas FLEX equity options generally are not? Historically, a
justification for not imposing position limits on FLEX equity options
has been that this would encourage exchange trading of listed options
instead of OTC option trading.\106\ Are commenters able to provide
evidence that the general lack of FLEX equity option position limits
has had this effect?
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\104\ See Notice, 88 FR at 86703.
\105\ See, e.g., Rule 8.35(c).
\106\ See, e.g., Securities Exchange Act Release No. 42223 (Dec.
10, 1999), 64 FR 71158 (Dec. 20, 1999).
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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#0775726b622a64686a6a626973744774626429606871"><span class="__cf_email__" data-cfemail="b4c6c1d8d199d7dbd9d9d1dac0c7f4c7d1d79ad3dbc2">[email protected]</span></a>. Please include
File No. SR-CBOE-2023-063 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-CBOE-2023-063. 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="https://www.sec.gov/rules/sro.shtml">https://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 the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or
[[Page 19629]]
withhold entirely from publication submitted material that is obscene
or subject to copyright protection. All submissions should refer to
file number SR-CBOE-2023-063 and should be submitted by April 9, 2024.
Rebuttal comments should be submitted by April 23, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\107\
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\107\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-05633 Filed 3-18-24; 8:45 am]
BILLING CODE 8011-01-P
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