[Federal Register Volume 83, Number 164 (Thursday, August 23, 2018)]
[Notices]
[Pages 42725-42732]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18158]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83870; File No. SR-CBOE-2018-056]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Adopt Exchange Rule 6.57, Risk-
Weighted Assets (``RWA'') Transactions

August 17, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on August 8, 2018, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules to adopt Rule 6.57 to 
facilitate the reduction of SPX options positions maintained by Cboe 
Options Market-Makers.
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set

[[Page 42726]]

forth in sections A, B, and C below, of the most significant aspects of 
such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to adopt Rule 6.57 to facilitate the 
reduction of SPX options positions maintained by Cboe Options Market-
Makers. Specifically, the Exchange proposes to allow Trading Permit 
Holders (``TPHs'') to execute a risk-weighted asset package (``RWA 
Package'') on the trading floor provided that the requirements set 
forth in Rule 6.57 are satisfied.
    Market-Makers are the primary source of liquidity for listed 
options; as such, Market-Maker liquidity is critically important to a 
functioning options market. However, bank capital regulations that 
govern bank-affiliated clearing firms are negatively impacting the 
ability of Market-Makers clearing through bank-affiliated clearing 
firms to provide liquidity. The Exchange believes reducing open SPX 
options positions enables Market-Makers to continue to provide the 
liquidity that is critical to the options markets because reducing open 
SPX positions helps to reduce risk-weighted assets (RWA) attributable 
to SPX options positions. The Exchange developed Rule 6.56 (Compression 
Forums) to facilitate the reduction of open options positions in SPX 
(and concomitant RWA). Although the compression forums have seen 
limited success in reducing open SPX positions, the compression forums 
do not provide an adequate mechanism for Market-Makers to reduce open 
SPX positions across numerous options series in one large transaction, 
and the Exchange believes the ability for Market-Makers to efficiently 
and effectively reduce open SPX positions across numerous options 
series in one large transaction will help to reduce the risk of market 
dislocation, especially during periods of increased volume and 
volatility.
    Compression forums are an inadequate, inefficient mechanism to 
close open SPX positions across numerous options series in one 
transaction partly because the files the Exchange generates pursuant to 
Rule 6.56 only identify individual series, call spreads, put spreads, 
and box spreads for which there is offsetting interest. This means that 
the SPX positions identified by the Exchange pursuant to Rule 6.56 
have, at most, four legs (by definition box spreads have four legs and 
put/call spreads have two legs), whereas the proposed RWA Package will, 
by definition, contain at least 50 legs, which alone demonstrates that 
the proposed RWA Package is a more efficient mechanism for closing open 
SPX positions across numerous options series in one large transaction. 
Moreover, the process of executing the offsetting positions identified 
by the Exchange pursuant to Rule 6.56 is much less efficient than the 
instant RWA Package proposal. For example, under Rule 6.56 the Exchange 
identifies offsetting positions for individual firms that submit their 
SPX positions in accordance with Rule 6.56. Depending on the size of 
the SPX portfolio submitted by the firm the Exchange may identify 100s 
of different boxes, call spreads, put spreads, and individual series. 
In addition, there will be multiple different potential counterparties 
for the identified positions. In order to execute just one of the 
identified positions the firm can seek out the potential counterparty 
with offsetting interest (if the firm agrees to let their identities be 
unmasked pursuant to Rule 6.56(a)(5)); represent the individual 
position (whether it be one of the boxes, call spreads, put spreads, or 
individual lines); negotiate a suitable execution price; and execute 
the transaction. This process must then be repeated over and over again 
in order to reduce open positions across a large portfolio of SPX 
options positions. In contrast, as discussed in more detail below, an 
RWA Package will, by definition, represent a large portfolio of SPX 
options positions in one large transaction (at least 50 series, etc.) 
as opposed to, for example, representing an individual box spread in a 
compression forum that contains four legs.
    The Exchange believes that the ability for Market-Makers to 
efficiently and effectively reduce open SPX positions across numerous 
options series in one large transaction will help to reduce the risk of 
market dislocation, especially during periods of increased volume and 
volatility. The Exchange Market-Makers will be able to continue 
providing liquidity during such times (increasing the RWA attributed to 
the Market-Makers) because they will know that they will have the 
opportunity to subsequently reduce their open SPX positions (and 
concomitant RWA) across numerous options series in one large 
transaction. Without such a mechanism a Market-Maker may be forced to 
limit their market-making activity during periods of high volume and 
volatility in order to prevent significant increases in RWA attributed 
to the Market-Maker, which is a scenario that may lead to market 
dislocation. In short, in order to help reduce the risk of market 
dislocation the Exchange proposes to adopt Rule 6.57 to provide a 
mechanism for Market-Makers to reduce open SPX options positions across 
numerous SPX options series in one large transaction.
    The Exchange proposes to define an RWA Package as a set of SPX 
options positions with at least: 50 options series; 10 contracts per 
options series; and 10,000 total contracts.\3\ The Exchange believes 
that in addition to the other requirements of Proposed Rule 6.57 
(described in detail below), requiring an RWA Package to contain at 
least 50 options series; at least 10 contracts per options series; and 
at least 10,000 total contracts will help to ensure that these 
transactions are executed for the purpose of reducing RWA attributable 
to open positions and will result in a significant net reduction of 
RWA. The Exchange believes limiting RWA Packages to SPX options 
positions will similarly help to ensure that these transactions are 
executed for the purpose of reducing RWA because an SPX options 
contract has a large notional value, which exacerbates the negative 
impact of bank capital regulations.
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    \3\ See Proposed Rule 6.57(a).
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    Proposed Rule 6.57(b) provides that Trading Permit Holders 
(``TPHs'') may execute an RWA Package (an ``RWA transaction'') in the 
SPX crowd on the trading floor in accordance with paragraph (c) if: (1) 
The RWA transaction is initiated for the account(s) of a Cboe Options 
Market-Maker, provided that an RWA Package consisting of SPX options 
from multiple Market-Maker accounts may not be in separate aggregation 
units or otherwise subject to information barrier or account 
segregation requirements; \4\ (2) the RWA transaction results in a 
change in beneficial ownership (i.e., an RWA transaction between a Cboe 
Options Market-Maker and an entity unaffiliated with the Cboe Options 
Market-Maker); and (3) the Cboe Options Market-Maker certifies that as 
of the beginning of the extended trading hours session (i.e., 2:00 a.m. 
Chicago time) on the trade date in which the RWA Package is received by 
the Exchange under

[[Page 42727]]

paragraph (c) the Cboe Options Market-Maker held the positions 
identified in the RWA Package and that the RWA Package represents a net 
reduction of RWA attributed to the Market-Maker based on the positions 
held prior to the beginning of extended trading hours. The purpose of 
this filing is to facilitate the closing of open positions in order to 
reduce RWA attributed to Market-Maker positions, which is negatively 
impacting liquidity provision by Market-Makers. Thus, the Exchange 
believes it's reasonable to limit the types of accounts for which an 
RWA transaction may be initiated to the account(s) of Market-Makers 
because, as previously noted, Market-Makers are the primary source of 
liquidity in the listed options market. In addition, the requirement 
that the RWA transaction be initiated for the ``account(s)'' of a Cboe 
Options Market-Maker is designed to, for example, allow a Cboe Options 
Market-Maker to represent positions for the market-making firm's 
universal account or represent positions for individual (or multiple) 
Cboe Market-Maker accounts.
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    \4\ This prohibits positions in accounts among different trading 
units for which accounts are otherwise required to be maintained 
separately to be represented as an RWA Package. Various rules (for 
example, Regulation SHO in certain circumstances) require accounts 
to be maintained separately, and the proposed rule change is 
consistent with those rules.
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    In addition, the change in beneficial ownership and certification 
requirements help to ensure that RWA transactions will reduce a Market-
Maker's RWA. With regards to the certification requirement it's 
necessary to identify a point in time at which the Market-Maker holds 
positions that are to be closed. The Exchange proposes that the point 
in time be prior to the opening of extended trading hours (i.e., 2:00 
a.m. Chicago time) on the Exchange because this will enable Cboe 
Options Market-Makers to identify their settled options positions 
(i.e., positions they hold after the close of regular trading hours and 
prior to the open of extended trading hours).
    Provided that paragraph (b) is satisfied the Exchange proposes to 
allow RWA Packages to be executed in accordance with the procedure set 
forth in paragraph (c). Proposed paragraph (c) provides that: (1) After 
the opening of regular trading hours and prior to 10:00 a.m. Chicago 
time, the Cboe Options Market-Maker (or broker) must submit the RWA 
Package to the Exchange in a form and manner prescribed by the 
Exchange. The submission must contain: (i) A list of individual SPX 
options series and the size of each options series; (ii) the contact 
information for the individual that will represent the position on the 
trading floor; and (iii) if prior to submitting an RWA Package to the 
Exchange the Market-Maker (or broker) has received a bid or offer for 
the RWA Package, the proposed net debit or credit price for the RWA 
Package.\5\ The Exchange believes requiring RWA Packages to be received 
by the Exchange after the opening of regular trading hours and prior to 
10:00 a.m. Chicago time will help to ensure that RWA transactions can 
be executed during regular trading hours, given that proposed 
requirement of a two hour request for quotes (``RFQ'') period, which is 
described more fully below. In addition, requiring the RWA Package 
submission to contain a list of individual SPX options series, the size 
of each options series, and the contact information for the individual 
representing the RWA Package will enable market participants to bid/
offer for the RWA Package on the trading floor.
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    \5\ See Proposed Rule 6.57(c)(1).
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    Upon the Exchange's receipt of the RWA Package, the Exchange will 
(i) electronically notify TPHs (electronically and via trading floor 
loudspeaker) as soon as practicable of the identity of the individual 
representing the RWA Package in the SPX trading crowd, which can be 
either a Market-Maker or Floor Broker, provided the individuals are 
available to accept bids/offers for the RWA Package; (ii) post in an 
electronic format on a TPH-accessible site the list of individual 
components of the RWA Package, the net Package price, and the contact 
information for the individual representing the RWA Package on the 
floor, which post will not include the identity of the Market-Maker for 
whom the RWA transaction is initiated (unless the Market-Maker is 
representing the RWA Package on the trading floor); and (iii) notify 
TPHs that the RWA Package has been posted and the time at which the 
two-hour request-for-quote (``RFQ'') period concludes.\6\ The Exchange 
believes providing the RWA Package on a TPH accessible website will 
give TPHs sufficient information to price RWA packages. In addition, 
identifying the individual representing the RWA Package on the trading 
floor and providing a two hour RFQ period will enable TPHs to respond 
to RWA Packages. The Exchange believes masking the identity of the 
Market-Maker for whom the RWA transaction is initiated (unless the 
Market-Maker is representing the RWA Package on the trading floor) will 
encourage Market-Makers to initiate RWA transactions.
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    \6\ See Proposed Rule 6.57(c)(2).
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    The Exchange proposes that the two-hour RFQ Period commence upon on 
[sic] the Exchange's notification to the SPX trading crowd of the 
identity of the individual representing the RWA Package on the 
floor.\7\ The Exchange believes the two-hour period is sufficient to 
allow TPHs to review, price, and bid/offer for the RWA Package because 
the RWA Package will be available in an electronic format on a TPH-
accessible website, which enables TPHs to more readily examine and 
price the positions in the RWA Package. Furthermore, the Exchange 
understands that firms have access to electronic systems that will aid 
them in evaluating the SPX positions contained in an RWA Package and to 
make a reasonable assessment of the price at which the firm is will to 
execute the RWA Package. The Exchange also proposes that upon the 
conclusion of the RFQ period, the individual representing the RWA 
Package in the SPX trading crowd may (but is not required to) accept a 
bid or offer for the RWA Package, and the RFQ response that represents 
the best bid or offer on a net debit or credit basis for the RWA 
Package has priority. The Exchange also proposes in the event equal 
bids or offers are received, the first RFQ response at the best bid or 
offer on a net debit or credit basis for the RWA Package has 
priority.\8\ The Exchange notes that the contemplated priority is 
simply price/time priority, which is a common priority mechanism in the 
options industry. For example, Rule 6.45(i)(A) describes price-time 
priority in the context of resting orders and quotes in the electronic 
book. The best bid/offer for the RWA Package during the two hour RFQ 
period has priority over inferior prices, and if two bid/offers are 
made at the same price, the bid/offer that is made first then has 
priority--all of which is consistent with the price-time priority 
described in Rule 6.45(i)(A).\9\ The Exchange notes that an individual 
responding to an RWA Package with a better bid/offer than a previous 
bid/offer is necessarily improving the bid/offer price for at least 
part of the RWA Package (i.e., at least one individual options series 
in the RWA Package) because an improved net debit/credit price 
necessarily means at least one individual options series has received a 
better price.
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    \7\ See Proposed Rule 6.57(c)(3).
    \8\ See id.
    \9\ The Exchange notes that if the RWA Package submission 
contains a bid/offer as contemplated by paragraph (c) to Rule 6.57 
and a matching bid/off is made for the RWA Package in the SPX 
trading crowd, the bid/offer contained in the original submission 
has priority.
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    The Exchange also notes that an RWA Package is similar to a complex 
order in that a market participant cannot seek to trade against only 
certain components of the RWA Package (e.g., respond with a

[[Page 42728]]

bid/offer for half of the options series instead of all of the options 
series in the RWA Package). Complex orders similarly cannot be split up 
into individual options series by an individual responding to a complex 
order. For example, if a complex order has three legs (i.e., three 
separate series), a market participant responding to the complex order 
cannot respond with a bid/offer for leg #1, but not legs #2 or #3. 
Instead, the complex order is bid/offered upon based on a net debit/
credit basis for the complex order as is contemplated for RWA Packages. 
For example, if an RWA Package is for 50 legs, a market participant 
responding to the RWA Package cannot respond with a bid/offer for legs 
#1 through #25, but not legs #26 through #50.
    In addition, like complex orders, market participants may bid/offer 
for an RWA Package in whole or in a permissible ratio if the package 
can be divided into a proportional share. For example, if a complex 
order consisting of one leg for two contracts and another leg for two 
contracts is represented on the floor, a counterparty may bid/offer for 
100% of the order (i.e., two contracts for each leg) or the 
counterparty may bid/offer for a proportional share of the complex 
order in the 1:1 ratio of the order (i.e., one contract for each leg in 
this example). Similarly, if an RWA Package has 50 SPX options series 
and 200 contracts per options series, a market participant may bid/
offer for 100 contracts per leg or some other proportional share of the 
RWA Package in the ratio of the package. However, as with complex 
orders, if the RWA Package cannot be divided into a proportional share, 
market participants must bid/offer for the entire RWA Package. For 
example, if a complex order consists of one leg for one contract and 
another leg for two contracts, the complex order cannot be 
proportionally subdivided to permit a partial trade in the ratio of the 
order (i.e. 1:2); thus, market participants must bid/offer for the full 
size of the complex order (i.e., one contract on leg #1 and two 
contracts on leg #2). With regards to RWA Packages, if, for example, 
one leg is for 11 contracts and 49 other legs are for 200 contracts, 
the leg for 11 contracts cannot be proportionally subdivided to permit 
a partial trade in the ratio of the order (i.e., 11:200); thus, market 
participants would be required to bid/offer for the entire RWA package 
in this example.
    As previously noted, the Exchange believes that providing a two-
hour RFQ period will enable TPHs to respond to RWA Packages. In 
addition, the Exchange believes it's appropriate for the best bid or 
offer made in response to the representation of an RWA Package to have 
priority; however, recognizing that the best bid or offer may not 
satisfy the initiator of the RWA transaction, the Exchange believes its 
appropriate to explicitly provide in subparagraph (3) that individuals 
representing RWA Packages do not have to accept a bid or offer at the 
conclusion of the RFQ period, which simply makes it clear that the 
responses received during an RFQ period are indeed quotes with which 
the individual representing the RWA Package may execute the RWA 
Package. In addition, the Exchange believes it's important not to 
obligate individuals representing RWA Packages to split executions 
among TPHs that bid or offer at the same price; rather, the Exchange 
believes the proposal will incentivize TPHs to provide bids or offers 
that better existing bids or offers because the first in time best bid 
or offer will have priority. As previously noted, this is consistent 
with the price-time priority that is common in the options 
industry.\10\
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    \10\ Cboe Options Rule 6.45 permits price-time priority in 
certain classes.
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    For example, suppose a market participant submits to the Exchange 
an RWA Package to buy for 50 SPX series and 200 contracts on each leg, 
which the Exchange announces to the trading floor and posts to the 
website. During the RFQ Period, which lasts from 1:00 p.m. to 3:00 
p.m., the following offers to buy the RWA Package are represented on 
the floor:

    <bullet> 1:10 p.m.: Floor Broker A offers to sell 100 contracts on 
each leg for a total of $50,000.
    <bullet> 1:15 p.m.: Floor Broker B offers to sell 100 contracts on 
each leg for a total of $49,000.
    <bullet> 2:00 p.m.: Floor Broker C offers to sell 100 contracts on 
each leg for a total of $50,000.
    Pursuant to price-time priority, Floor Broker B made the best 
offer, and will trade 100 contracts on each leg with the RWA Package 
for $49,000, leaving 100 contracts on each leg remaining in the RWA 
Package. Floor Brokers A and C offered the same price for the same 
amount. Pursuant to price-time priority Floor Broker A made its offer 
first, and thus will trade 100 contracts on each leg with the remaining 
portion of the RWA Package for $50,000. Floor Broker C will not 
participate in the trade.
    Furthermore, the RWA Package is considered executed (and a contract 
formed) upon the acceptance of a bid or offer by the individual 
representing the RWA Package following the conclusion of the RFQ 
Period. The Exchange proposes that if the individual representing the 
RWA Package accepts a bid or offer for the RWA Package, the individual 
representing the RWA Package on the trading floor must, prior to the 
close of regular trading hours, cause a report to be submitted to the 
Exchange in a form and manner prescribed by the Exchange which sets 
forth the time of the execution of the RWA Package, the net execution 
price for the RWA Package, and the execution prices for the individual 
components of the RWA Package.\11\ The Exchange believes the reporting 
requirements will enable the Exchange to maintain an adequate audit 
trail and, if necessary, review individual RWA transactions.
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    \11\ See Proposed Rule 6.57(c)(4).
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    Additionally, the Exchange proposes to adopt Interpretation and 
Policy .01 to provide that to the extent applicable, all other Rules of 
the Exchange, including Rule 6.9(e), apply to the procedure set forth 
in proposed Rule 6.57. The Exchange also proposes to provide in 
Interpretation and Policy .01 that the following Rules are either 
superseded by proposed Rule 6.57 or do not apply to the above 
procedures: 6.9(a) through(d) and (f), 6.41, 6.44, 6.45, 6.47, and 
6.74) [sic] and that there may be other rules of the Exchange that do 
not, by their terms, apply to the transfer procedure set forth in this 
Rule 6.57. As previously noted, proposed Rule 6.57 is a special 
procedure designed to provide a mechanism which allows Cboe Market-
Makers to reduce open SPX options positions across numerous options 
series in one large transaction, and in order to give the effect to the 
procedures set forth in Rule 6.57 it is necessary for Rule 6.57 to 
supersede rules that provide for potentially conflicting procedures 
(e.g., Rules 6.9(a) through (d) and (f), 6.41, 6.44, 6.45, 6.47, and 
6.74). The Exchange notes that this is patterned from Rule 6.49A, which 
also provided that Rule 6.49A supersede Rules 6.41, 6.44, 6.45, 6.47, 
and 6.74.
    Specifically, the Exchange proposes to explicitly provide that Rule 
6.9(e) applies to the procedures set forth in Rule 6.57. This reference 
to Rule 6.9 is patterned from Rule 6.49A, which explicitly referenced 
Rule 6.9 in its entirety as applying to Rule 6.49A. Contrary to Rule 
6.49A, however, the Exchange proposes that only paragraph (e) of Rule 
6.9 apply to Rule 6.57 instead of Rule 6.9 in its entirety. Rule 6.9(e) 
governs trading based on knowledge of imminent undisclosed solicited 
transactions, and the Exchange believes it's important for such rules 
to apply to Rule 6.57. The Exchange believes Rule

[[Page 42729]]

6.9(a) through (d) and (f) are sufficiently superseded by the 
procedures set forth in Rule 6.57(c). Specifically, Rule 6.9(a) through 
(d) sets forth the priority for several different scenarios in which an 
order and solicited order on the opposite side of that order may be 
represented on the floor, and the priority that will apply in each 
scenario. Rule 6.9(a) governs solicited transactions involving a 
disclosed original order and matching solicited order that improves the 
market; Rule 6.9(b) governs solicited transactions involving a 
disclosed original order that is later modified to meet a solicited 
order improving the market; Rule 6.9(c) governs solicited transactions 
involving disclosed original order that is later modified to meet a 
solicited order not improving the market; and Rule 6.9(d) involves 
solicited transactions involving an undisclosed original order. 
Additionally, Rule 6.9(f), which requires solicited orders to be 
marked, would not be necessary, as it would be known that an order was 
solicited for an RWA Package at the time they were provided to the 
Exchange in accordance with proposed Rule 6.57.
    Pursuant to proposed Rule 6.57, an RWA Package, including any 
solicited orders to trade against the RWA Package, must be represented 
in a single way (by notification to the Exchange, which then announces 
the package to the trading floor). As a result, an RWA Package and 
corresponding solicited order could never be undisclosed. Additionally, 
pursuant to the proposed process, if the Market-Maker receives a bid or 
offer for the RWA Package prior to submitting it to the Exchange (as it 
would if it had a solicited order), the proposed price must be 
disclosed. As a result, for every RWA Package with a solicited order, 
the Exchange will announce them and the proposed price to the crowd at 
the same time, and thus the solicitation would have occurred before the 
RWA Package was disclosed to the crowd. Therefore, Rule 6.9(a) would 
not apply, as that paragraph covers a situation in which an order is 
disclosed prior to solicitation. There is also no method in the 
proposed process for modifying the RWA Package or any solicited order. 
Rule 6.9(b) and (c) address situations in which a represented order is 
later modified to meet a solicited order, and thus would not apply to 
RWA Packages. Lastly, Rule 6.9(f) is inapplicable to Rule 6.57 because 
following the procedures set forth in Rule 6.57 will provide all 
necessary information for Exchange purposes.
    Proposed Rule 6.57(c) also sets forth the specific priority of RWA 
Transactions, and thus no other priority rules would apply. The 
Exchange believes it is consistent with Exchange Act and helps to 
remove impediments to and perfect the mechanism of a free and open 
market and, in general, helps protect investors and the public interest 
to explicitly identify the priority applicable to RWA Packages in Rule 
6.57(c) because it will help to avoid confusion as to the priority 
applicable to RWA Packages. More importantly, the priority set forth in 
Rule 6.57(c) is consistent with Exchange Act because the proposed 
priority is simply price-time priority, which is common in the options 
industry.
    With regards to the instant proposal Rule 6.41--Meaning of Premium 
Bids and Offers--is inapplicable because Rule 6.41 is already 
inapplicable to index options such as SPX options. Thus, an RWA 
Package, which by definition can only contain SPX options, will not be 
subject to Rule 6.41. The Exchange believes it is consistent with 
Exchange Act and helps to remove impediments to and perfect the 
mechanism of a free and open market and, in general, helps protect 
investors and the public interest to explicitly provide that Rule 6.57 
supersedes Rule 6.41 to avoid any possible confusion regarding the 
applicability of Rule 6.41 to RWA Package execution.\12\
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    \12\ The Exchange notes that Rule 24.8--Meaning of Premium Bids 
and Offers--applies to index options.
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    In addition, Rule 6.44--Bids and Offers in Relation to Units of 
Trading--is inapplicable to the instant proposal. Rule 6.44 sets forth 
the meaning of bids and offers for one contract where RWA Packages must 
be for more than one contract. The Exchange believes it is consistent 
with Exchange Act and helps to remove impediments to and perfect the 
mechanism of a free and open market and, in general, helps protect 
investors and the public interest to explicitly provide that Rule 6.57 
supersedes Rule 6.44 to avoid any possible confusion regarding the 
applicability of Rule 6.44 to RWA Package execution.
    Furthermore, Rule 6.45--Order and Quote Priority and Allocation; 
Rule 6.47--Priority on Split-Price Transactions Occurring in Open 
Outcry; and Rule 6.74--Crossing Orders--are superseded by Rule 6.57. 
Rules 6.45, 6.47, and 6.74 set forth priority in various scenarios, 
which is superseded by Rule 6.57 because the priority of bids and 
offers for RWA Packages is set forth in Rule 6.57(c)(3). In the same 
manner that Rule 6.47 describes the priority for a particular scenario 
(i.e., split-price) instead of describing that priority in Rule 6.45, 
the Exchange believes it best to describe priority for this particular 
scenario (i.e., RWA Packages) in a separate rule. Additionally, as 
previously noted, the priority set forth in Rule 6.57 is based on 
price-time priority, which is a longstanding priority method in the 
options industry. Moreover, the Exchange believes it is consistent with 
Exchange Act for the priority of bids/offers in the context of RWA 
Packages to be based on price-time priority as price-time priority is a 
common standard in the options industry.
    Importantly, it is critical that RWA Packages be executed without 
regard to the specific priority set forth in Rule 6.45, 6.47, or 6.74. 
RWA Packages are, by design, very large and very complicated orders 
that are specifically intended to help SPX Market-Makers reduce the RWA 
associated with open SPX positions. Rules 6.45, 6.47, and 6.74, 
including provisions in those rules that require orders to cede 
priority to individual legs in the electronic book, are not designed to 
accommodate the execution of such large, complicated, uniquely purposed 
orders. Thus, the Exchange believes the significantly large size and 
complexity of RWA packages make it necessary to deviate from Rules 
6.45, 6.47, 6.74.
    Additionally, the limited purpose of RWA Packages and the temporary 
nature of the proposed rule further support the need to permit 
executions of RWA Packages without regard to the priority in current 
rules. As discussed above, the purpose of RWA Packages is to reduce the 
risk-weighted assets attributable to Market-Makers' SPX options 
positions. Requiring trades against the leg markets may interfere with 
the desired reduction in RWA associated with the package, and may cause 
execution of the package to be less efficient. Efficient reductions in 
RWA pursuant to the proposed rule change may free up capital, which 
will to enable Market-Makers to continue to provide liquidity to the 
SPX market, which liquidity benefits all market participants. The 
Exchange believes the narrow scope of the proposed rule change and the 
limited, beneficial purpose of RWA Packages make allowing RWA Packages 
to execute without interacting with pre-existing interest on the 
electronic book appropriate and important to support the provision of 
liquidity in the SPX market.\13\
---------------------------------------------------------------------------

    \13\ S&P 500 Option Variance Basket Trades, a particular basket 
of SPX options with a limited purpose, may execute without 
interacting with pre-existing interest on the electronic book. See 
Rule 6.53B(c).

---------------------------------------------------------------------------

[[Page 42730]]

    Moreover, the Exchange expects many potential counterparties to be 
solicited prior to the RWA Package being sent to the Exchange or 
announced in the SPX trading crowd. These solicitations will likely 
result in a net package price at which the counterparty is willing to 
execute the RWA Package. If parties representing RWA Packages were 
required to cede priority to individual legs in the electronic order 
book many RWA Packages would likely go unexecuted as the execution of 
one leg of an RWA Package would disrupt the net execution price and the 
weighting/risk profile of the RWA package. Additionally, the size and 
complexity of RWA Packages make it functionally difficult for RWA 
Packages to interact with the electronic book under normal 
circumstances. To the extent one leg of an RWA Package could execute 
with an order in the electronic book, the remaining orders on the 
electronic book (complex order book or simple order book) are unlikely 
to have the necessary size and depth across a large portfolio of 
options to satisfy the terms of an RWA Package. Thus, requiring RWA 
Packages to follow the priority in Rule 6.45, 6.47, or 6.74 would 
effectively prevent RWA Packages from being executed.
    The Exchange believes it is consistent with Exchange Act and helps 
to remove impediments to and perfect the mechanism of a free and open 
market and, in general, helps protect investors and the public interest 
to deviate from existing priority rules because doing so will allow RWA 
Packages to be executed, which, in turn, will help reduce the RWA 
associated with a Market-Maker's SPX Position, and, in turn, will 
reduce the risk of market dislocation, especially during periods of 
increased volume and volatility [sic].
    In addition, the Exchange proposes to adopt Interpretation and 
Policy .02 to provide that nothing in paragraph (a) of Rule 6.57 
prevents a Market-Maker from executing transactions (opening or 
closing) during the RFQ period in the normal operation of the Market-
Maker's business. Market-Makers have affirmative obligations, and the 
Exchange believes the adoption of Interpretation and Policy .02 helps 
ensure that Rule 6.57 does not prevent Cboe Options Market-Makers from 
satisfying their affirmative obligations by, for example, buying and 
selling options series during the RFQ period in the normal course of 
their operations.
    Finally, the Exchange proposes to adopt Interpretation and Policy 
.03 to implement Rule 6.57 for a limited term ending two years from the 
approval date of this rule filing.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\14\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \15\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \16\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes the proposed rule will help 
facilitate the reduction of open SPX options positions (and concomitant 
RWA), which helps to protect investors and the public interest by 
enabling Market-Makers to continue to provide liquidity that is 
critical to the SPX options markets. Although the Exchange is seeking 
to limit RWA transactions to those initiated by Cboe Options Market-
Makers, the proposal is not designed to permit discrimination between 
customers, issuers, brokers, or dealers; rather, the proposal seeks to 
alleviate the negative impact of bank capital requirements on the 
primary liquidity providers in the listed options market (i.e., Market-
Makers), who are disproportionately impacted by bank capital 
requirements governing bank-affiliated clearing firms. The Exchange 
believes the ability for Market-Makers to efficiently and effectively 
reduce open positions across numerous options series in one large 
transaction will help to reduce the risk of market dislocation, 
especially during periods of increased volume and volatility. Market-
Makers will be able to continue providing liquidity during such times 
(increasing the RWA attributed to the Market-Makers) because they will 
know that they can subsequently reduce their open positions (and 
concomitant RWA) across numerous options series in one large 
transaction.
    Furthermore, the Rule 6.57 is patterned on Rule 6.49A, which sets 
forth similar procedures for on-floor transfers. In addition, 
generally, Rule 6.57 is an exception to various Exchange trading rules 
because RWA Packages are designed to carry out the important purpose of 
reducing RWA, and the construction and procedures set forth in Rule 
6.57 are necessary to carry out that purpose. RWA Packages are large in 
size (at least 10,000 options) and broad in construction (at least 50 
separate options series) and must be closing transactions because the 
purpose of RWA Packages is to significantly reduce RWA associated with 
Market-Maker positions to enable Market-Makers to continue to provide 
critical liquidity to SPX options. In order to functionally execute 
such a large portfolio of SPX options the Exchange believes it is 
necessary for the procedures to deviate from certain current exchange 
trading rules. The Exchange believes the narrow scope of the proposed 
rule change and the limited, beneficial purpose of RWA Packages make 
allowing RWA Packages to execute without interacting with pre-existing 
interest on the electronic book appropriate and important to support 
the provision of liquidity in the SPX market.\17\ Specifically, the 
Exchange believes it is necessary and proper for interpretation and 
policy .01 to specify that Rules 6.9(a) through (d) and (f), 6.41, 
6.44, 6.45, 6.47, and 6.74 are either supersede [sic] by, or do not 
apply to, Rule 6.57.
---------------------------------------------------------------------------

    \17\ S&P 500 Option Variance Basket Trades, a particular basket 
of SPX options with a limited purpose, may execute without 
interacting with pre-existing interest on the electronic book. See 
Rule 6.53B(c).
---------------------------------------------------------------------------

    As previously noted above, the proposed procedure for RWA Packages 
sets forth the specific manner in which RWA Packages and any solicited 
orders must be represented, and thus the situations described in Rule 
6.9(a) through (d) and (f) would never occur. The proposed rule makes 
clear that these provisions are superseded by the proposed rule.
    In addition, Rule 6.41 is inapplicable to RWA Packages because Rule 
6.41 is inapplicable to index options such as SPX options. Thus, an RWA 
Package, which by definition can only contain SPX options, will not be 
subject to Rule 6.41. Furthermore, Rule 6.44 sets forth the meaning of 
bids and offers for one contract where RWA Packages must be for more 
than one contract; thus, Rule

[[Page 42731]]

6.44 is similarly inapplicable to RWA Packages. The Exchange believes 
it is consistent with Exchange Act and helps to remove impediments to 
and perfect the mechanism of a free and open market and, in general, 
helps protect investors and the public interest to explicitly provide 
that Rule 6.57 supersedes Ruls [sic] 6.41 and 6.44 to avoid any 
possible confusion regarding the applicability of Rules 6.41 and 6.44 
to RWA Package execution.
    In particular, the Exchange believes it is critical that RWA 
Packages be executed without regard to the specific priority set forth 
in Rule 6.45, 6.47, or 6.74 because the size of the RWA Packages (at 
least 50 SPX options series, 10 options per series, and at least 10,000 
options) makes it functionally impossible for RWA Packages to interact 
with the electronic book as orders on the electronic book (complex 
order book or simple order book) do not have the necessary size and 
depth across a large portfolio of options to satisfy the terms of an 
RWA Package. Thus, requiring RWA Packages to follow the priority in 
Rule 6.45, 6.47, or 6.74 would prevent RWA Packages from being 
executed. Given the limited purpose and significant size and complexity 
of RWA Packages, the Exchange believes it is consistent with Exchange 
Act and helps remove impediments to and perfect the mechanism of a free 
and open market and, in general, helps protect investors and the public 
interest to permit RWA transactions to deviate from existing priority 
rules. This will permit [sic] because doing so will allow RWA Packages 
to be executed in an efficient manner, which, in turn, will help reduce 
the RWA associated with a Market-Maker's SPX positions, and, in turn, 
will reduce the risk of market dislocation, especially during periods 
of increased volume and volatility.
    To the extent Cboe Market-Makers cannot reduce options positions in 
an efficient and effective manner their ability to continue to provide 
liquidity may be impaired. As noted, the procedures set forth in Rule 
6.57 are similar to the procedures set forth in Rule 6.49A. The 
Exchange believes the procedures set forth in Rule 6.57 improve on the 
procedures set forth in Rule 6.49A as Rule 6.57, among other things, 
provides for the publication of RWA Packages in an electronic format, 
which allows for a fair process by which TPHs may review, price, and 
bid/offer for an RWA Package.
    In addition, the Exchange believes proposed Interpretation and 
Policy .02, which provides that nothing in paragraph (a) of Rule 6.57 
prevents a Market-Maker from executing transactions (opening or 
closing) during the RFQ period in the normal operation of the Market-
Maker's business, is consistent with Exchange Act and helps to remove 
impediments to and perfect the mechanism of a free and open market and, 
in general, helps protect investors and the public interest by helping 
to ensure Market-Makers continue to perform their affirmative 
obligations during the trading day.
    Finally, the Exchange believes proposed Interpretation and Policy 
.03, which indicates that Rule 6.57 is to be adopted for a limited term 
ending two years from the approval date of this rule filing, is 
consistent with Exchange Act and helps to remove impediments to and 
perfect the mechanism of a free and open market and, in general, helps 
protect investors and the public interest by allowing the Exchange to 
evaluate at the end of the two-year period whether Rule 6.57 continues 
to be a useful tool to reduce RWA associated with SPX options 
positions.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Cboe Options does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. Although the Exchange is 
seeking to limit RWA transactions to those initiated by Cboe Options 
Market-Makers, the Exchange does not believe the proposed rule change 
will impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act because the 
proposal seeks to alleviate the negative impact of bank capital 
requirements on the primary liquidity providers in the listed options 
market (i.e., Market-Makers), who are disproportionately impacted by 
bank capital requirements governing bank-affiliated clearing firms. Use 
of the proposed process is voluntary, and all Market-Makers with SPX 
positions may engage in RWA transactions. The proposed rule change 
proposes a process that may be carried out only [sic] the Exchange's 
trading floor in a product that trades solely on the Exchange. RWA 
Transactions have a limited purpose, which is to reduce RWA 
attributable to Market-Makers' SPX open positions in order to free up 
capital and enable Market-Makers to continue to provide the liquidity 
to the SPX market, which liquidity benefits all market participants. 
This is not intended to be a competitive trading tool.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be 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 (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#1b696e777e36787476767e756f685b687e78357c746d"><span class="__cf_email__" data-cfemail="6f1d1a030a420c0002020a011b1c2f1c0a0c41080019">[email protected]</span></a>. Please include 
File Number SR-CBOE-2018-056 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-2018-056. 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 (http://www.sec.gov/rules/sro.shtml). 
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

[[Page 42732]]

provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change. Persons submitting 
comments are cautioned that we do not redact or edit personal 
identifying information from comment submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2018-056 and should be 
submitted on or before September 7, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18158 Filed 8-22-18; 8:45 am]
 BILLING CODE 8011-01-P


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