Document ID: SEC-2020-0952-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe C2 Exchange, Inc.
Posted Date: 2020-06-18T04:00Z

[Federal Register Volume 85, Number 118 (Thursday, June 18, 2020)]
[Notices]
[Pages 36888-36899]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13116]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89056; File No. SR-C2-2020-006]

Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt 
Chapter 6, Section G Regarding Off-Floor Transactions and Transfers

June 12, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 5, 2020, Cboe C2 Exchange, Inc. (the ``Exchange'' or ``C2'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. The Exchange filed the proposal as 
a ``non-controversial'' proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe C2 Exchange, Inc. (the ``Exchange'' or ``C2'') proposes to 
adopt Chapter 6, Section G regarding off-floor transactions and 
transfers. The text of

[[Page 36889]]

the proposed rule change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/options/regulation/rule_filings/ctwo/), 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 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 new Chapter 6, Section G regarding 
off-floor transactions and transfers.
Prohibition on Off-Floor Transactions
    Rules 19c-1 and 19c-3 under the Securities Exchange Act of 1934 
(the ``Act') describe rule provisions that each national securities 
change must include in its Rules regarding the ability of members to 
engage in transactions off an exchange. While the Exchange's rules, 
stated policies, and practices are consistent with these provisions of 
the Act, the Exchange Rules do not currently include these provisions. 
Therefore, the proposed rule change adopts these provisions in new Rule 
6.60 in accordance with Rules 19c-1 and 19c-3 under the Act.\5\
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    \5\ See CFR 240.19c-1 and 240.19c-3; see also Cboe Options, Inc. 
(``Cboe Options'') Rule 5.12(d) and (e).
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Off-Floor Position Transfers
    Today, C2 does not permit off-floor transfers of options positions 
and has no rule that specifically addresses off-floor transfers. The 
Exchange proposes to adopt Rule 6.61 to specify the limited 
circumstances under which a Trading Permit Holder (``TPH'') may effect 
transfers of their options positions without first exposing the 
order.\6\ This rule would permit market participants to move positions 
from one account to another without first exposure of the transaction 
on the Exchange. This Rule would permit transfers upon the occurrence 
of significant, non-recurring events. This Rule states that a TPH must 
be on at least one side of the transfer.
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    \6\ See Securities and Exchange Act Release No. 88424 (March 19, 
2020), 85 FR 16981 (March 25, 2020) (SR-Cboe-2019-035) (Notice of 
Filing of Amendment Nos. 1 and 2 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 
and 2, Regarding Off-Floor Position Transfers); see also Cboe 
Options Rule 6.7.
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    Specifically, proposed Rule 6.61(a) states:

    Notwithstanding Rule 6.60, existing positions in options listed 
on the Exchange of a Trading Permit Holder or of a Non-Trading 
Permit Holder that are to be transferred on, from, or to the books 
of a Clearing Trading Permit Holder may be transferred off the 
Exchange (an ``off-floor transfer'') if the off-floor transfer 
involves one or more of the following events:
    (1) Pursuant to Rule 8.5 or 8.14 of the Cboe Rules (incorporated 
into Chapter 5 of the Rules), an adjustment or transfer in 
connection with the correction of a bona fide error in the recording 
of a transaction or the transferring of a position to another 
account, provided that the original trade documentation confirms the 
error;
    (2) the transfer of positions from one account to another 
account where no change in ownership is involved (i.e., accounts of 
the same person (as defined in Rule 1.1)),\7\ provided the accounts 
are not in separate aggregation units or otherwise subject to 
information barrier or account segregation requirements;
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    \7\ The proposed rule change adds a definition of person to Rule 
1.1, which definition provides that the term ``person'' means an 
individual, partnership (general or limited), joint stock company, 
corporation, limited liability company, trust, or unincorporated 
organization, or any governmental entity or agency or political 
subdivision thereof. This proposed definition codifies the 
Exchange's current definition of person. See also Cboe Options Rule 
1.1 (which includes an identical definition of person).
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    (3) the consolidation of accounts where no change in ownership 
is involved;
    (4) a merger, acquisition, consolidation, or similar non-
recurring transaction for a person;
    (5) the dissolution of a joint account in which the remaining 
Trading Permit Holder assumes the positions of the joint account;
    (6) the dissolution of a corporation or partnership in which a 
former nominee of the corporation or partnership assumes the 
positions;
    (7) positions transferred as part of a Trading Permit Holder's 
capital contribution to a new joint account, partnership, or 
corporation;
    (8) the donation of positions to a not-for-profit corporation;
    (9) the transfer of positions to a minor under the Uniform Gifts 
to Minors Act; or
    (10) the transfer of positions through operation of law from 
death, bankruptcy, or otherwise.\8\
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    \8\ See proposed Rule 6.61(a); see also Cboe Options Rule 
6.7(a).

    The proposed rule change makes clear that the transferred positions 
must be on, from, or to the books of a Clearing TPH. The proposed rule 
change states that existing positions of a TPH or a non-TPH may be 
subject to a transfer, except under specified circumstances in which a 
transfer may only be effected for positions of a TPH.\9\ The Exchange 
notes transfers of positions in Exchange-listed options may also be 
subject to applicable laws, rules, and regulations, including rules of 
other self-regulatory organizations.\10\ Except as explicitly provided 
in the proposed rule text, the proposed rule change is not intended to 
exempt position transfers from any other applicable rules or 
regulations, and proposed paragraph (h) makes this clear in the rule.
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    \9\ See proposed Rule 6.61(a)(5) and (7).
    \10\ See proposed Rule 6.61(h).
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    Proposed Rule 6.61(b) codifies Exchange guidance regarding certain 
restrictions on permissible transfers related to netting of open 
positions and to margin and haircut treatment, unless otherwise 
permitted by proposed paragraph (f). No position may net against 
another position (``netting''), and no position transfer may result in 
preferential margin or haircut treatment.\11\ Netting occurs when long 
positions and short positions in the same series ``offset'' against 
each other, leaving no or a reduced position. For example, if a TPH 
wanted to transfer 100 long calls to another account that contained 
short calls of the same options series as well as other positions, even 
if the transfer is permitted pursuant to one of the 10 permissible 
events listed in the proposed Rule, the TPH could not transfer the 
offsetting series, as they would net against each other and close the 
positions.\12\
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    \11\ For example, positions may not transfer from a customer, 
joint back office, or firm account to a Market-Maker account. 
However, positions may transfer from a Market-Maker account to a 
customer, joint back office, or firm account (assuming no netting of 
positions occurs). See also Cboe Options Rule 6.7(b).
    \12\ See Cboe Options Rule 6.7(b).
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    However, netting is permitted for transfers on behalf of a Market-
Maker account for transactions in multiply listed options series on 
different options exchanges, but only if the Market-Maker nominees are 
trading for the same TPH, and the options transactions on the different 
options exchanges clear into separate exchange-specific accounts 
because they cannot easily clear into the same Market-Maker account at 
the Clearing Corporation. In such instances, all Market-Maker positions 
in the exchange-specific accounts for the multiply listed class would 
be

[[Page 36890]]

automatically transferred on their trade date into one central Market-
Maker account (commonly referred to as a ``universal account'') at the 
Clearing Corporation. Positions cleared into a universal account would 
automatically net against each other. Options exchanges permit 
different naming conventions with respect to Market-Maker account 
acronyms (for example, lettering versus numbering and number of 
characters), which are used for accounts at the Clearing Corporation. A 
Market-Maker may have a nominee with an appointment in class XYZ on 
Cboe Options, and have another nominee with an appointment in class XYZ 
on C2, but due to account acronym naming conventions, those nominees 
may need to clear their transactions into separate accounts (one for 
Cboe Options transactions and another for C2 transactions) at the 
Clearing Corporation rather into a universal account (in which account 
the positions may net). The proposed rule change permits transfers from 
these separate exchange-specific accounts into the Market-Maker's 
universal account in this circumstance to achieve this purpose.
    Proposed Rule 6.61(c) states the transfer price, to the extent it 
is consistent with applicable laws, rules, and regulations, including 
rules of other self-regulatory organizations, and tax and accounting 
rules and regulations, at which an transfer is effected may be: (1) The 
original trade prices of the positions that appear on the books of the 
trading Clearing TPH, in which case the records of the transfer must 
indicate the original trade dates for the positions; provided, 
transfers to correct bona fide errors pursuant to proposed subparagraph 
(a)(1) must be transferred at the correct original trade prices; (2) 
mark-to-market prices of the positions at the close of trading the 
transfer date; (3) mark-to-market prices of the positions at the close 
of trading on the trade date prior to the transfer date; \13\ or (4) 
the then-current market price of the positions at the time the transfer 
is effected.\14\
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    \13\ For example, for a transfer that occurs on a Tuesday, the 
transfer price may be based on the closing market price on Monday.
    \14\ See Cboe Options Rule 6.7(c).
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    This proposed rule change provides market participants that effect 
transactions with flexibility to select a transfer price based on 
circumstances of the transfer and their business. However, for 
corrections of bona fide errors, because those transfers are necessary 
to correct processing errors that occurred at the time of transaction, 
those transfers would occur at the original transaction price, as the 
purpose of the transfer is to create the originally intended result of 
the transaction.
    Proposed Rule 6.61(d) requires a TPH and its Clearing TPH (to the 
extent that the TPH is not self-clearing) to submit to the Exchange, in 
a manner determined by the Exchange, written notice prior to effecting 
an transfer from or to the account of a TPH(s).\15\ The notice must 
indicate: The Exchange-listed options positions to be transferred; the 
nature of the transaction; the enumerated provision(s) under proposed 
paragraph (a) pursuant to which the positions are being transferred; 
the name of the counterparty(ies); the anticipated transfer date; the 
method for determining the transfer price; and any other information 
requested by the Exchange.\16\ The proposed notice will ensure the 
Exchange is aware of all transfers so that it can monitor and review 
them (including the records that must be retained pursuant to proposed 
paragraph (e)) to determine whether they are effected in accordance 
with the Rules.
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    \15\ This notice provision applies only to transfers involving a 
TPH's positions and not to positions of non-TPH parties, as they are 
not subject to the Rules. In addition, no notice would be required 
to effect transfers to correct bona fide errors pursuant to proposed 
subparagraph (a)(1).
    \16\ See Cboe Options Rule 6.7(d).
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    Additionally, requiring notice from the TPH(s) and its Clearing 
TPH(s) will ensure both parties are in agreement with respect to the 
terms of the transfer. As noted in proposed subparagraph (d)(2), 
receipt of notice of a transfer does not constitute a determination by 
the Exchange that the transfer was effected or reported in conformity 
with the requirements of proposed Rule 6.61. Notwithstanding submission 
of written notice to the Exchange, TPHs and Clearing TPHs that effect 
transfers that do not conform to the requirements of proposed Rule 6.61 
will be subject to appropriate disciplinary action in accordance with 
the Rules.
    Similarly, proposed Rule 6.61(e) requires each TPH and each 
Clearing TPH that is a party to a transfer must make and retain records 
of the information provided in the written notice to the Exchange 
pursuant to proposed subparagraph (e)(1), as well as information on the 
actual Exchange-listed options that are ultimately transferred, the 
actual transfer date, and the actual transfer price (and the original 
trade dates, if applicable), and any other information the Exchange may 
request the TPH or Clearing TPH provide.\17\
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    \17\ See Cboe Options Rule 6.7(e).
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    Proposed paragraph (f) provides exemptions approved by the 
Exchange's Chief Executive Officer or President (or senior-level 
designee). Specifically, this provision is in addition to the 
exemptions set forth in proposed paragraph (a). The Exchange proposes 
that the Exchange Chief Executive Officer or President (or senior-level 
designee) may grant an exemption from the requirement of this proposed 
Rule, on his or her own motion or upon application of the TPH (with 
respect to the TPH's positions) or a Clearing TPH (with respect to 
positions carried and cleared by the Clearing TPHs). The Chief 
Executive Officer, the President or his or her designee, may permit a 
transfer if necessary or appropriate for the maintenance of a fair and 
orderly market and the protection of investors and is in the public 
interest, including due to unusual or extraordinary circumstances. For 
example, an exemption may be granted if the market value of the 
person's positions would be compromised by having to comply with the 
requirement to trade on the Exchange pursuant to the normal auction 
process or when, in the judgment of the Chief Executive Officer, 
President or his or her designee, market conditions make trading on the 
Exchange impractical.\18\
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    \18\ See Cboe Options Rule 6.7(f).
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    The Exchange proposes within Rule 6.61(g) that the transfer 
procedure set forth in Rule 6.61 is intended to facilitate non-routine, 
nonrecurring movements of positions.\19\ The transfer procedure is not 
to be used repeatedly or routinely in circumvention of the normal 
auction market process.
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    \19\ See Cboe Options Rule 6.7(g).
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    The Exchange proposes within Rule 6.61(h) notes that the transfer 
procedure set forth in Rule 6.61 is only applicable to positions in 
options listed on the Exchange. Transfers of positions in Exchange-
listed options may also be subject to applicable laws, rules, and 
regulations, including rules of other self-regulatory organizations. 
Transfers of non-Exchange listed options and other financial 
instruments are not governed by this Rule.\20\
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    \20\ See Cboe Options Rule 6.7(h).
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Off-Floor RWA Transfers
    The Exchange proposes to adopt Rule 6.62 to facilitate the 
reduction of risk-weighted assets (``RWA'') attributable to open 
options positions.\21\ SEC Rule 15c3-1 (Net Capital Requirements for 
Brokers or Dealers) (``Net Capital

[[Page 36891]]

Rules'') requires registered broker-dealers, unless otherwise excepted, 
to maintain certain specified minimum levels of capital.\22\ The Net 
Capital Rules are designed to protect securities customers, 
counterparties, and creditors by requiring that broker-dealers have 
sufficient liquid resources on hand, at all times, to meet their 
financial obligations. Notably, hedged positions, including offsetting 
futures and options contract positions, result in certain net capital 
requirement reductions under the Net Capital Rules.\23\
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    \21\ See Cboe Options Rule 6.8; see also Securities Exchange Act 
Release No. 87107 (September 25, 2019), 84 FR 52149 (October 1, 
2019) (SR-CBOE-2019-044).
    \22\ 17 CFR 240.15c3-1.
    \23\ In addition, the Net Capital Rules permit various offsets 
under which a percentage of an option position's gain at any one 
valuation point is allowed to offset another position's loss at the 
same valuation point (e.g., vertical spreads).
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    Subject to certain exceptions, Clearing TPHs are subject to the Net 
Capital Rules.\24\ However, a subset of Clearing TPHs are subsidiaries 
of U.S. bank holding companies, which, due to their affiliations with 
their parent U.S.-bank holding companies, must comply with additional 
bank regulatory capital requirements pursuant to rulemaking required 
under the Dodd-Frank Wall Street Reform and Consumer Protection 
Act.\25\ Pursuant to this mandate, the Board of Governors of the 
Federal Reserve System, the Office of the Comptroller of the Currency, 
and the Federal Deposit Insurance Corporation have approved a 
regulatory capital framework for subsidiaries of U.S. bank holding 
company clearing firms.\26\ Generally, these rules, among other things, 
impose higher minimum capital and higher asset risk weights than were 
previously mandated for Clearing TPHs that are subsidiaries of U.S. 
bank holding companies under the Net Capital Rules. Furthermore, the 
new rules do not fully permit deductions for hedged securities or 
offsetting options positions.\27\ Rather, capital charges under these 
standards are, in large part, based on the aggregate notional value of 
short positions regardless of offsets. As a result, in general, 
Clearing TPHs that are subsidiaries of U.S. bank holding companies must 
hold substantially more bank regulatory capital than would otherwise be 
required under the Net Capital Rules.
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    \24\ In the event federal regulators modify bank capital 
requirements in the future, the Exchange will reevaluate the 
proposed rule change at that time to determine whether any 
corresponding changes to the proposed rule are appropriate.
    \25\ H.R. 4173 (amending section 3(a) of the Securities Exchange 
Act of 1934 (the ``Act'') (15 U.S.C. 78c(a))).
    \26\ 12 CFR 50; 79 FR 61440 (Liquidity Coverage Ratio: Liquidity 
Risk Measurement Standards).
    \27\ Many options strategies, including relatively simple 
strategies often used by retail customers and more sophisticated 
strategies used by broker-dealers, are risk limited strategies or 
options spread strategies that employ offsets or hedges to achieve 
certain investment outcomes. Such strategies typically involve the 
purchase and sale of multiple options (and may be coupled with 
purchases or sales of the underlying securities), executed 
simultaneously as part of the same strategy. In many cases, the 
potential market exposure of these strategies is limited and 
defined.
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    The Exchange is concerned with the ability of Market-Makers to 
provide liquidity in their appointed classes. The Exchange believes 
that permitting market participants to efficiently transfer existing 
options positions through an off-exchange transfer process would likely 
have a beneficial effect on continued liquidity in the options market 
without adversely affecting market quality. Liquidity in the listed 
options market is critically important. The Exchange believes that the 
proposed rule change provides market participants with an efficient 
mechanism to transfer their open options positions from one clearing 
account to another clearing account and thereby increase liquidity in 
the listed options market. The Exchange currently has no mechanism that 
firms may use to transfer positions between clearing accounts without 
having to effect a transaction with another party and close a position.
    The proposed rule provides that existing positions in options 
listed on the Exchange of a TPH or non-TPH (including an affiliate of a 
TPH) may be transferred on, from, or to the books of a Clearing TPH off 
the Exchange if the transfer establishes a net reduction of RWA 
attributable to those options positions (an ``RWA Transfer''). Proposed 
paragraph (a)(1) adds examples of two transfers that would be deemed to 
establish a net reduction of RWA, and thus qualify as a permissible RWA 
Transfer:
     A transfer of options positions from Clearing Corporation 
member A to Clearing Corporation member B that net (offset) with 
positions held at Clearing Corporation member B, and thus closes all or 
part of those positions (as demonstrated in the example below); \28\ 
and
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    \28\ This transfer would establish a net reduction of RWA 
attributable to the transferring person, because there would be 
fewer open positions and thus fewer assets subject to Net Capital 
Rules.
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     A transfer of options positions from a bank-affiliated 
Clearing Corporation member to a non-bank-affiliated Clearing 
Corporation member.\29\
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    \29\ This transfer would establish a net reduction of RWA 
attributable to the transferring Person, because the non-bank-
affiliated Clearing Corporation member would not be subject to Net 
Capital Rules, as described above.
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    These transfers will not result in a change in ownership, as they 
must occur between accounts of the same person.
    ``Person'' is defined in Rule 1.1 as an individual, partnership 
(general or limited), joint stock company, corporation, limited 
liability company, trust or unincorporated organization, or any 
governmental entity or agency or political subdivision thereof. In 
other words, RWA transfers may only occur between the same individual 
or legal entity. RWA transfers are merely transfers from one clearing 
account to another, both of which are attributable to the same 
individual or legal entity. A market participant effecting an RWA 
Transfer is analogous to an individual transferring funds from a 
checking account to a savings account, or from an account at one bank 
to an account at another bank--the money still belongs to the same 
person, who is just holding it in a different account for personal 
financial reasons.
    For example, Market-Maker A clears transactions on the Exchange 
into an account it has with Clearing TPH X, which is affiliated with a 
U.S-bank holding company. Market-Maker A opens a clearing account with 
Clearing TPH Y, which is not affiliated with a U.S.-bank holding 
company. Clearing TPH X has informed Market-Maker A that its open 
positions may not exceed a certain amount at the end of a calendar 
month, or it will be subject to restrictions on new positions it may 
open the following month. On August 28, Market-Maker A reviews the open 
positions in its Clearing TPH X clearing account and determines it must 
reduce its open positions to satisfy Clearing TPH X's requirements by 
the end of August. It determines that transferring out 1000 short calls 
in class ABC will sufficiently reduce the RWA capital requirements in 
the account with Clearing TPH X to avoid additional position limits in 
September. Market-Maker A wants to retain the positions in accordance 
with its risk profile. Pursuant to the proposed rule change, on August 
31, Market-Maker A transfers 1000 short calls in class ABC to its 
clearing account with Clearing TPH Y. As a result, Market-Maker A can 
continue to provide the same level of liquidity in class ABC during 
September as it did in previous months.
    A TPH must give up a Clearing TPH for each transaction it effects 
on the Exchange, which identifies the Clearing TPH through which the 
transaction will clear.\30\ A TPH may change the give up for a 
transaction within a specified

[[Page 36892]]

period of time.\31\ Additionally, a TPH may also change the Clearing 
TPH \32\ for a specific transaction. The transfer of positions from an 
account with one clearing firm to the account of another clearing firm 
pursuant to the proposed rule change has a similar result as changing a 
give up or CMTA, as it results in a position that resulted from a 
transaction moving from the account of one clearing firm to another, 
just at a different time and in a different manner.\33\ In the above 
example, if Market-Maker A had initially given up Clearing TPH Y rather 
than Clearing TPH X on the transactions that resulted in the 1000 long 
calls in class ABC, or had changed the give-up or CMTA to Clearing TPH 
Y pursuant to Rule 6.30 the ultimate result would have been the same. 
There are a variety of reasons why firms give up or CMTA transactions 
to certain clearing firms (and not to non-bank affiliate clearing 
firms) at the time of a transaction, and the proposed rule change 
provides firms with a mechanism to achieve the same result at a later 
time.
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    \30\ See Rule 6.30.
    \31\ See Rule 6.31.
    \32\ The Clearing Member Trade Assignment (``CMTA'') process at 
OCC facilitates the transfer of option trades/positions from one OCC 
clearing member to another in an automated fashion. Changing a CMTA 
for a specific transaction would allocate the trade to a different 
OCC clearing member than the one initially identified on the trade.
    \33\ The transferred positions will continue to be subject to 
OCC rules, as they will continue to be held in an account of an OCC 
member.
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    Proposed paragraph (a)(2) states RWA Transfers may occur on a 
routine, recurring basis. As noted in the example above, clearing firms 
may impose restrictions on the amount of open positions. Permitting 
transfers on a routine, recurring basis will provide market 
participants with the flexibility to comply with these restrictions 
when necessary to avoid position limits on future options activity. 
Additionally, proposed paragraph (a)(6) provides that no prior written 
notice to the Exchange is required for RWA Transfers. Because of the 
potential routine basis on which RWA Transfers may occur, and because 
of the need for flexibility to comply with the restrictions described 
above, the Exchange believes it may interfere with the ability of 
investors firms to comply with any Clearing TPH restrictions describe 
above, and may be burdensome to provide notice for these routine 
transfers.
    Proposed paragraph (a)(3) states RWA Transfers may result in the 
netting of positions. Netting occurs when long positions and short 
positions in the same series ``offset'' against each other, leaving no 
or a reduced position. For example, if there were 100 long calls in one 
account, and 100 short calls of the same option series were added to 
that account, the positions would offset, leaving no open positions. 
Currently, the Exchange permits off-exchange transfers on behalf of a 
Market-Maker account for transactions in multiply listed options series 
on different exchanges, but only if the Market-Maker nominees are 
trading for the same TPH, and the options transactions on the different 
options exchanges clear into separate exchange-specific accounts 
because they cannot easily clear into the same Market-Maker account at 
OCC. In such instances, all Market-Maker positions in the exchange-
specific accounts for the multiply listed class would be automatically 
transferred on their trade date into one central Market-Maker account 
(commonly referred to as a ``universal account'') at the Clearing 
Corporation. Positions cleared into a universal account would 
automatically net against each other.
    While RWA Transfers are not occurring because of limitations 
related to trading on different exchanges, similar reasoning for the 
above exception applies to why netting should be permissible for the 
limited purpose of reducing RWA. Firms may maintain different clearing 
accounts for a variety of reasons, such as the structure of their 
businesses, the manner in which they trade, their risk management 
procedures, and for capital purposes. If a Market-Maker clears all 
transactions into a universal account, offsetting positions would 
automatically net. However, if a Market-Maker has multiple accounts 
into which its transactions cleared, they would not automatically net. 
While there are times when a firm may not want to close out open 
positions to reduce RWA, there are other times when a firm may 
determine it is appropriate to close out positions to accomplish a 
reduction in RWA.
    In the example above, suppose after making the RWA Transfer 
described above, Market-Maker A effects a transaction on September 25 
that results in 1000 long calls in class ABC, which clears into its 
account with Clearing TPH X. If Market-Maker A had not effected its RWA 
Transfer in August, the 1000 long calls would have offset against the 
1000 short calls, eliminating both positions and thus any RWA capital 
requirements associated with them. At the end of August, Market-Maker A 
did not want to close out the 1000 short calls when it made its RWA 
Transfer. However, given changed circumstances in September, Market-
Maker A has determined it no longer wants to hold those positions. The 
proposed rule change would permit Market-Maker A to effect an RWA 
Transfer of the 1000 short calls from its account with Clearing TPH Y 
to its account with Clearing TPH X (or vice versa), which results in 
elimination of those positions (and a reduction in RWA associated with 
them). As noted above, such netting would have occurred if Market-Maker 
A cleared the September transaction directly into its account with 
Clearing TPH Y or had not effected an RWA Transfer in August. Netting 
provides market participants with appropriate flexibility to conduct 
their businesses as they see fit while having the ability to reduce RWA 
capital requirements when necessary.
    RWA Transfers may not result in preferential margin or haircut 
treatment.\34\ Additionally, RWA Transfers may only be effected for 
options listed on the Exchange and will be subject to applicable laws, 
rules, and regulations, including rules of other self-regulatory 
organizations (including OCC).\35\
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    \34\ See proposed paragraph (a)(4).
    \35\ See proposed introductory paragraph and proposed paragraph 
(a)(7). Transfers of non-Exchange listed options and other financial 
instruments are not governed by this proposed rule. All RWA 
transfers will be subject to all applicable recordkeeping 
requirements applicable to TPHs and Clearing TPHs under the Act, 
such as Rules 17a-3 and 17a-4.
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In-Kind Exchange of Options Positions and ETF Shares and UIT Interests
    The Exchange proposes to adopt Rule 6.63 regarding in-kind 
exchanges of options positions and exchange-traded fund (``ETF'') 
shares and unit investment trust (``UIT'') interests.\36\ As discussed 
further below, the ability to effect ``in kind'' transfers is a key 
component of the operational structure of an ETF and a UIT. Currently, 
in general, ETFs and UITs can effect in-kind transfers with respect to 
equity securities and fixed-income securities. The in-kind process is a 
major benefit to ETF shareholders and UIT unit holders, in general, the 
means by which assets may be added to or removed from ETFs and UITs. 
In-kind transfers protect ETF shareholders and UIT unit holders from 
the undesirable tax effects of frequent ``creations and redemptions'' 
(described

[[Page 36893]]

below) and improve the overall tax efficiency of the products. However, 
currently, the Rules do not provide for ETFs and UITs to effect in-kind 
transfers of options off of the Exchange, resulting in tax 
inefficiencies for ETFs and UITs that hold them. As a result, the use 
of options by ETFs and UITs is substantially limited.
---------------------------------------------------------------------------

    \36\ See Cboe Options Rule 6.9; see also Securities Exchange Act 
Release Nos. 87340 (October 17, 2019) (SR-CBOE-2019-048) (Order 
Approving on an Accelerated Basis a Proposed Rule Change, as 
Modified by Amendment Nos. 2 and 3, to Adopt Rule 6.9 (In-Kind 
Exchange of Options Positions and ETF Shares)); and 88786 (April 30, 
2020), 85 FR 26998 (May 6, 2020) (SR-CBOE-2020-042) (Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend Rule 6.9 To Permit In-Kind Transfers of Positions Off of the 
Exchange in Connection With Unit Investment Trusts (``UITs'')).
---------------------------------------------------------------------------

    Proposed Rule 6.63 would add a circumstance under which off-
Exchange transfers of options positions would be permitted to occur, in 
addition to the circumstances in proposed Rules 6.61 and 6.62. 
Specifically, under proposed Rule 6.63, positions in options listed on 
the Exchange would be permitted to be transferred off the Exchange by a 
TPH in connection with transactions (a) to purchase or redeem 
``creation units'' of ETF shares between an ``authorized participant'' 
\37\ and the issuer \38\ of such ETF shares \39\ or (b) to create or 
redeem units of a UIT between a broker-dealer and the issuer \40\ of 
such UIT units, which transfers would occur at the price used to 
calculate the net asset value (``NAV'') of such ETF shares or UIT 
units, respectively. This proposed new exception, although limited in 
scope, would have a significant impact in that it would help protect 
ETF shareholders and UIT holders from undesirable tax consequences and 
facilitate tax-efficient operations. The frequency with which ETFs and 
authorized participants, and UITs and sponsors, would rely on the 
proposed exception would depend upon such factors as the number of ETFs 
and UITs, respectively, holding options positions traded on the 
Exchange, the market demand for the shares of such ETFs and units of 
such UITs, the redemption activity of authorized participants and 
sponsors, respectively, and the investment strategies employed by such 
ETFs and UITs.
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    \37\ The Exchange is proposing that, for purposes of proposed 
Rule 6.63, the term ``authorized participant'' would be defined as 
an entity that has a written agreement with the issuer of ETF shares 
or one of its service providers, which allows the authorized 
participant to place orders for the purchase and redemption of 
creation units (i.e., specified numbers of ETF shares). While an 
authorized participant may be a TPH and directly effect transactions 
in options on the Exchange, an authorized participant that is not a 
TPH may effect transactions in options on the Exchange through a TPH 
on its behalf.
    \38\ The Exchange proposes that, for purposes of proposed Rule 
6.63, any issuer of ETF shares would be registered with the 
Commission as an open-end management investment company under the 
Investment Company Act of 1940 (the ``1940 Act'').
    \39\ An ETF share is a share or other security traded on a 
national securities exchange and defined as an NMS stock, which 
includes interest in open-end management investment companies. See 
Rule 1.1 and Cboe Options Rule 4.3 (incorporated by reference into 
C2 Rules pursuant to Chapter 4).
    \40\ The Exchange proposes that, for purposes of proposed Rule 
6.63, any issuer of UIT units would be a trust registered with the 
Commission as a unit investment trust under the 1940 Act.
---------------------------------------------------------------------------

    While the Exchange recognizes that, in general, the execution of 
options transactions on exchanges provides certain benefits, such as 
price discovery and transparency, based on the circumstances under 
which proposed Rule 6.63 would apply, the Exchange does not believe 
that such benefits would be compromised. In this regard, as discussed 
more fully below, the Exchange notes that in conjunction with the 
creation and redemption process, positions would be transferred at a 
price(s) used to calculate the NAV of such ETF shares and UIT units. In 
addition, although options positions would be transferred off of the 
Exchange, they would not be closed or ``traded.'' Rather, they would 
reside in a different clearing account until closed in a trade on the 
Exchange or until they expire. Further, as discussed below, proposed 
Rule 6.63 would be clearly delineated and limited in scope, given that 
the proposed exception would only apply to transfers of options 
effected in connection with the creation and redemption process.
ETFs
    As described in further detail below, while ETFs do not sell and 
redeem individual shares to and from investors, they do sell large 
blocks of their shares to, and redeem them from, authorized 
participants in conjunction with what is known as the ETF creation and 
redemption process. Under the proposed exception, ETFs that hold 
options listed on the Exchange would be permitted to effect creation 
and redemption transactions with authorized participants on an ``in-
kind'' basis, which is the process that may generally be utilized by 
ETFs for other asset types. This ability would allow such ETFs to 
function as more tax-efficient investment vehicles to be benefit of 
investors that hold ETF shares. In addition, it may also result in 
transaction cost savings for the ETFs, which may be passed along to 
investors.
    Due to their ability to effect in-kind transfers with authorized 
participants in conjunction with the creation and redemption process 
described below, ETFs have the potential to be significantly more tax-
efficient than other pooled investment products, such as mutual 
funds.\41\ ETFs issue shares that may be purchased or sold during the 
day in the secondary market at market-determined prices. Similar to 
other types of investment companies, ETFs invest their assets in 
accordance with their investment objectives and investment strategies, 
and ETF shares represent interests in an ETF's underlying assets. ETFs 
are, in certain respects, similar to mutual funds in that they 
continuously offer their shares for sale. In contrast to mutual funds, 
however, ETFs do not sell or redeem individual shares. Rather, through 
the creation and redemption process referenced above, authorized 
participants have contractual arrangements with an ETF and/or its 
service provider (e.g., its distributor) purchase and redeem shares 
directly from that ETF in large aggregations known as ``creation 
units.'' In general terms, to purchase a creation unit of ETF shares 
from an ETF, in return for depositing a ``basket'' of securities and/or 
other assets identified by the ETF on a particular day, the authorized 
participant will receive a creation unit of ETF shares. The basket 
deposited by the authorized participant is generally expected to be 
representative of the ETF's portfolio \42\ and, when combined with a 
cash balancing amount (i.e., generally an amount of cash intended to 
account for any difference between the value of the basket and the NAV 
of a creation unit), if any, will be equal in value to the aggregate 
NAV of the shares of the ETF comprising the creation unit. The NAV for 
ETF shares is represented by the traded price for ETFs holding options 
positions on days of creation or redemption, and an options pricing 
model on days in which creations and redemptions do not occur. After 
purchasing a creation unit, an authorized participant may then hold 
individual shares of the ETF and/or sell them in the secondary market. 
In connection with effecting redemptions, the creation process 
described above is reversed. More specifically, the authorized 
participant will redeem a creation unit of ETF shares to the ETF in 
return for a basket of securities and/

[[Page 36894]]

or other assets (along with any cash balancing account).
---------------------------------------------------------------------------

    \41\ This summary of the ETF creation and redemption process is 
based largely on portions of the discussion set forth in Investment 
Company Act Release No. 33140 (June 28, 2018), 83 FR 37332 (July 31, 
2018) (the ``Proposed ETF Rule Release'') in which the Commission 
proposed a new rule under the 1940 Act that would permit ETFs 
registered as open-end management investment companies that satisfy 
certain conditions to operate without the need to obtain an 
exemptive order. The proposed rule was adopted on September 25, 
2019. See Investment Company Act Release No. 33646 (September 25, 
2019).
    \42\ Under certain circumstances, however, and subject to the 
provisions of its exemptive relief from various provisions of the 
1940 Act obtained from the Commission, an ETF may substitute cash 
and/or other instruments in lieu of some or all of the ETF's 
portfolio holdings. For example, today, positions in options traded 
on the Exchange would be generally substituted with cash.
---------------------------------------------------------------------------

    The ETF creation and redemption process, coupled with the secondary 
market trading of ETF shares, facilitates arbitrage opportunities that 
are intended to help keep the market price of ETF shares at or close to 
the NAV per share of the ETF. Authorized participants play an important 
role because of their ability, in general terms, to add ETF shares to, 
or remove them from, the market. In this regard, if shares of an ETF 
are trading at a discount (i.e., below NAV per share), an authorized 
participant may purchase ETF shares in the secondary market, accumulate 
enough shares for a creation unit and then redeem them from the ETF in 
exchange for the ETF's more valuable redemption basket. Accordingly, 
the authorized participant will profit because it paid less for the ETF 
shares than it received for the underlying assets. The reduction in the 
supply of ETF shares available on the secondary market, together with 
the sale of the ETF's basket assets, may cause the price of ETF shares 
to increase, the price of the basket assets to decrease, or both, 
thereby causing the market price of the ETF shares and the value of the 
ETF's holdings to move closer together. In contrast, if the ETF shares 
are trading at a premium (i.e., above NAV per share), the transactions 
are reversed (and the authorized participant would deliver the creation 
basket in exchange for ETF shares), resulting in an increase in the 
supply of ETF shares which may also help to keep the price of the 
shares of an ETF close to the value of its holdings.
    In comparison to other pooled investment vehicles, one of the 
significant benefits associated with an ETF's in-kind redemption 
feature is tax efficiency. In this regard, by effecting redemptions on 
an in-kind basis (i.e., delivering certain assets from the ETF's 
portfolio instead of cash), there is no need for the ETF to sell assets 
and potentially realize capital gains that would be distributed to 
shareholders. As indicated above, however, because the Rules currently 
do not allow ETFs to effect in-kind transfers of options off of the 
Exchange, ETFs that invest in options traded on the Exchange are 
generally required to substitute cash in lieu of such options when 
effecting redemption transactions with authorized participants. Because 
they must sell the options to obtain the requisite cash, such ETFs (and 
therefore, investors that hold shares of those ETFs) are not able to 
benefit from the tax efficiencies afforded by in-kind transactions.
    An additional benefit associated with the in-kind feature is the 
potential for transaction cost savings. In this regard, by transacting 
on an in-kind basis, ETFs may avoid certain transaction costs they 
would otherwise incur in connection with purchases and sales of 
securities and other assets. Again, however, this benefit is not 
available today to ETFs with respect to their options holdings.
UITs
    Although UITs operate differently than ETFs in certain respects, as 
described below, the anticipated potential benefits to UIT investors 
(i.e., greater tax efficiencies and transaction cost savings) from the 
proposed exemption would be similar as discussed below. Specifically, 
under the 1940 Act,\43\ a UIT is an investment company organized under 
a trust indenture or similar instrument that issues redeemable 
securities, each of which represents an undivided interest in a unit of 
specified securities.\44\ A UIT's investment portfolio is relatively 
fixed, and, unlike an ETF, a UIT has a fixed life (a termination date 
for the trust is established when the trust is created). Similar to 
other types of investment companies (including ETFs), UITs invest their 
assets in accordance with their investment objectives and investment 
strategies, and UIT units represent interests in a UIT's underlying 
assets. Like ETFs, UITs do not sell or redeem individual shares, but 
instead, through the creation and redemption process, a UIT's sponsor 
(a broker-dealer) may purchase and redeem shares directly from the 
UIT's trustee in aggregations known as ``units.'' A broker-dealer 
purchases a unit of UIT shares from the UIT's trustee by depositing a 
basket of securities and/or other assets identified by the UIT. These 
transactions are largely effected by ``in-kind'' transfers, or the 
exchange of securities, non-cash assets, and/or other non-cash 
positions. The basket deposited by the broker-dealer is generally 
expected to be representative of the UIT's units and will be equal in 
value to the aggregate NAV of the shares of the UIT comprising a 
unit.\45\ The UIT then issues units that are publicly offered and sold. 
Unlike ETFs, UITs typically do not continuously offer their shares for 
sale, but rather, make a one-time or limited public offering of only a 
specific, fixed number of units like a closed-end fund (i.e., the 
primary period, which may range from a single day to a few months). 
Similar to the process for ETFs, UITs allow investor-owners of units to 
redeem their units back to the UIT's trustee on a daily basis and, upon 
redemption, such investor-owners are entitled to receive the redemption 
price at the UIT's NAV. While UITs provide for daily redemptions 
directly with the UIT's trustee, UIT sponsors frequently maintain a 
secondary market for units, also like that of ETFs, and will buy back 
units at the applicable redemption price per unit. To satisfy 
redemptions, a UIT typically sells securities and/or other assets, 
which results in negative tax implications and an incurrence of trading 
costs borne by remaining unit holders.
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 80a-4(2).
    \44\ The Exchange also notes that, though a majority of ETFs are 
structured as open-ended funds, some ETFs are structured as UITs, 
and currently represent a significant amount of assets within the 
ETF industry. These include, for example, SPDR S&P 500 ETF Trust 
(``SPY'') and PowerShares QQQ Trust, Series 1 (``QQQ'').
    \45\ The NAV is an investment company's total assets minus its 
total liabilities. UITs must calculate their NAV at least once every 
business day, typically after market close. See Sec.  270.2a-4(c), 
which provides that any interim determination of current net asset 
value between calculations made as of the close of the New York 
Stock Exchange on the preceding business day and the current 
business day may be estimated so as to reflect any change in current 
net asset value since the closing calculation on the preceding 
business day. This, however, is notwithstanding the requirements of 
Sec.  270.2a-4(a), which provides for other events that would 
trigger computation of a UIT's NAV.
---------------------------------------------------------------------------

Proposed Rule
    The Exchange believes that it is appropriate to permit off-Exchange 
transfers of options positions in connection with the creation and 
redemption process and recognizes that the prevalence and popularity of 
ETFs have increased greatly. Currently, ETFs serve both as popular 
investment vehicles and trading tools \46\ and, as discussed above, the 
creation and redemption process, along with the arbitrage opportunities 
that accompany it, are key ETF features. Although ETFs and UITs operate 
differently in certain respects, the ability to effect in-kind 
transfers is also significant for UITs. As described above, UITs and 
ETFs are situated in substantially the same manner; the key differences 
being a UIT's fixed duration, and that a UIT generally makes a one-time 
public offering of only a specific, fixed number of units. Negative tax 
implication and trading costs for remaining unit holders

[[Page 36895]]

would be mitigated by allowing a UIT sponsor or another broker-dealer 
to receive an in-kind distribution of options upon redemption. 
Accordingly, the Exchange believes that providing for an additional, 
narrow circumstance to make it possible for ETFs and UITs that invest 
in options to effect creations and redemptions on an in-kind basis is 
justified.
---------------------------------------------------------------------------

    \46\ As noted in the Proposed ETF Rule Release, during the first 
quarter of 2018, trading in U.S.-listed ETFs comprised approximately 
18.75% of U.S. equity trading by share volume and 28.2% of U.S. 
equity trading by dollar volume (based on trade and quote data from 
the New York Stock Exchange and Trade Reporting Facility data from 
the Financial Industry Regulatory Authority, Inc. (FINRA)). See 
Proposed ETF Rule Release at 83 FR 37334.
---------------------------------------------------------------------------

    The Exchange submits that its proposal is clearly delineated and 
limited in scope and not intended to facilitate ``trading'' options off 
of the Exchange. In this regard, the proposed circumstance would be 
available solely in the context of transfers of options positions 
effected in connection with transactions to purchase or redeem creation 
units of ETF shares between ETFs and authorized participants,\47\ and 
units of UITs between UITs and sponsors. As a result of this process, 
such transfers would occur at the price(s) used to calculate the NAV of 
such ETF shares and UIT units (as discussed above), which removes the 
need for price discovery on an Exchange for pricing these transfers. 
Moreover, as described above, ETFs and authorized participants, and 
UITs and sponsors, are not seeking to effect the opening or closing of 
new options positions in connection with the creation and redemption 
process. Rather, the options positions would reside in a different 
clearing account until closed in a trade on the Exchange or until they 
expire.
---------------------------------------------------------------------------

    \47\ See supra note 37. The term ``authorized participant'' is 
specific and narrowly defined. As noted in the Proposed ETF Rule 
Release, the requirement that only authorized participants of an ETF 
may purchase creation units from (or sell creation units to) an ETF 
``is designed to preserve an orderly creation unit issuance and 
redemption process between ETFs and authorized participants.'' 
Furthermore, an ``orderly creation unit issuance and redemption 
process is of central importance to the arbitrage mechanism.'' See 
Proposed ETF Rule Release at 83 FR 37348.
---------------------------------------------------------------------------

    The proposed transfers, while occurring between two different 
parties, will occur off the Exchange and will not be considered 
transactions (as is the case for current off-Exchange transfers 
permitted by proposed Rule 6.61(a)). While the prices of options 
transactions effected on the Exchange are disseminated to OPRA, back-
office transfers of options positions in clearing accounts held at OCC 
(in accordance with OCC Rules) \48\ are not disseminated to OPRA or 
otherwise publicly available, as they are considered position 
transfers, rather than executions.\49\ The Exchange believes that price 
transparency is important in the options markets. However, the Exchange 
expects any transfers pursuant to the proposed rule will constitute a 
minimal percentage of the total average daily volume of options. Today, 
the trading of ETFs and UITs that invest in options is substantially 
limited on the Exchange, primarily because the current rules do not 
permit ETFs or UITs to effect in-kind transfers of options off the 
Exchange. The Exchange continues to expect that any impact this 
proposal could have on price transparency in the options market is 
minimal because proposed Rule 6.63 is limited in scope and is intended 
to provide market participants with an efficient and effective means to 
transfer options positions under clearly delineated, specified 
circumstances. Additionally, as noted above, the NAV for ETF and UIT 
transfers will generally be based on the disseminated closing price for 
an options series on the day of a creation or redemption, and thus the 
price (although not the time or quantity of the transfer) at which 
these transfers will generally be effected will be publicly 
available.\50\ Further, the Exchange generally expects creations or 
redemptions to include corresponding transactions by the authorized 
participant that will occur on an exchange and be reported to OPRA.\51\ 
Therefore, the Exchange expects that any impact the proposed rule 
change could have on price transparency in the options market would be 
de minimis.
---------------------------------------------------------------------------

    \48\ OCC has informed the Exchange that it has the operational 
capabilities to effect the proposed position transfers. All 
transfers pursuant to proposed Rule 6.63 would be required to comply 
with OCC rules
    \49\ For example, any transfers that would be effected pursuant 
to proposed Rule 6.61(a) are not disseminated to OPRA.
    \50\ If there is no disseminated closing price, the ETF or UIT 
would price according to a pricing model or procedure as described 
in the fund's prospectus.
    \51\ The Exchange notes that for in-kind creations, an 
authorized participant will acquire the necessary options positions 
in an on-exchange transaction that will be reported to OPRA. For in-
kind redemptions, the Exchange generally expects that an authorized 
participant will acquire both the shares necessary to effect the 
redemption and an options position to offset the position that it 
will receive as proceeds for the redemption. Such an options 
position would likely be acquired in an on-exchange transaction that 
would be reported to OPRA. Such transactions are generally identical 
to the way that creations and redemptions work for equities and 
fixed income transactions--while the transfer between the authorized 
participant and the fund is not necessarily reported, there are 
generally corresponding transactions that would be reported, 
providing transparency into the transactions.
---------------------------------------------------------------------------

    Other than the transfers covered by the proposed rule, transactions 
involving options, whether held by an ETF or an authorized participant, 
or a UIT or a sponsor would be fully subject to all applicable trading 
Rules.\52\ Accordingly, the Exchange does not believe that the proposed 
new exception would compromise price discovery or transparency.
---------------------------------------------------------------------------

    \52\ As indicated above, the operation of the arbitrage 
mechanism accompanying the creation and redemption process generally 
contemplates ongoing interactions between authorized participants 
and the market in transactions involving both ETF shares and the 
assets comprising an ETF's creation/redemption basket.
---------------------------------------------------------------------------

    Further, the Exchange believes that providing an additional 
exception to make it possible for ETFs and UITs that invest in options 
to effect creations and redemptions on an in-kind basis is justified 
because, while the proposed exception would be limited in scope, the 
benefits that may flow to ETFs that hold options and their investors 
may be significant. Specifically, the Exchange expects such ETFs and 
UITs and their investors would benefit from increased tax efficiencies 
and potential transaction cost savings. By making such ETFs and UITs 
more attractive to both current and prospective investors, the proposed 
rule change would enable them to compete more effectively with other 
ETFs and UITs that, due to their particular portfolio holdings, may 
effect in-kind creations and redemptions without restriction.
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.\53\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \54\ 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) \55\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78f(b).
    \54\ 15 U.S.C. 78f(b)(5).
    \55\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes proposed Rule 6.60 is 
consistent with the Act, because it adopts provisions in the Rules 
specifically required by Rules

[[Page 36896]]

19c-1 and 19c-3 under the Act. The Exchange's rules, stated policies, 
and procedures currently comply with these provisions of the Rules 
under the Act, and the proposed rule will change will add transparency 
to the Rules, which will benefit investors.
    The Exchange believes proposed Rule 6.61 regarding off-floor 
position transfers is consistent with the Section 6(b)(5) \56\ 
requirements that the rules of an exchange be 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) \57\ requirement that the rules of an exchange not be designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers.
---------------------------------------------------------------------------

    \56\ Id.
    \57\ Id.
---------------------------------------------------------------------------

    The Exchange believes that permitting transfers under new Rule 6.61 
in very limited circumstances is reasonable to allow a TPH to 
accomplish certain goals efficiently. The proposed rule permits 
transfers in situations involving dissolutions of entities or accounts, 
for purposes of donations, mergers or by operation of law. For example, 
a TPH that is undergoing a structural change and a one-time movement of 
positions may require a transfer of positions or a TPH that is leaving 
a firm that will no longer be in business may require a transfer of 
positions to another firm. Also, a TPH may require a transfer of 
positions to make a capital contribution. The above-referenced 
circumstances are non-recurring situations where the transferor 
continues to maintain some ownership interest or manage the positions 
transferred. By contrast, repeated or routine transfers between 
entities or accounts--even if there is no change in beneficial 
ownership as a result of the transfer--is inconsistent with the 
purposes for which the proposed rule was adopted. Accordingly, the 
Exchange believes that such activity should not be permitted under the 
rules and thus, seeks to adopt language in proposed Rule 6.61(f) that 
the transfer of positions procedures set forth the proposed rule are 
intended to facilitate non-recurring movements of positions.
    The proposed rule change will provide market participants that 
experience these limited, non-recurring events with an efficient and 
effective means to transfer positions in these situations. The Exchange 
believes the proposed rule change regarding permissible transfer prices 
provides market participants with flexibility to determine the price 
appropriate for their business, which maintain cost bases in accordance 
with normal accounting practices and removes impediments to a free and 
open market.
    The proposed rule change which requires notice and maintenance of 
records will enable the Exchange to review transfers for compliance 
with the Rules, which prevents fraudulent and manipulative acts and 
practices. The requirement to retain records is consistent with the 
requirements of Rule 17a-3 and 17a-4 under the Act.
    Similar to Cboe Options Rule 6.7, the Exchange would permit a 
presidential exemption. The Exchange believes that this exemption is 
consistent with the Act because the Exchange's Chief Executive Officer 
or President (or senior-level designee) would consider an exemption in 
very limited circumstances. The transfer process is intended to 
facilitate non-routine, nonrecurring movements of positions and, 
therefore, is not to be used repeatedly or routinely in circumvention 
of the normal auction market process.
    Proposed Rule 6.61(f) specifically provides within the rule text 
that the Exchange's Chief Executive Officer or President (or senior-
level designee) may in his or her judgment allow a transfer if it is 
necessary or appropriate for the maintenance of a fair and orderly 
market and the protection of investors and is in the public interest, 
including due to unusual or extraordinary circumstances such as the 
market value of the person's positions will be comprised by having to 
comply with the requirement to trade on the Exchange pursuant to the 
normal auction process or, when in the judgment of President or his or 
her designee, market conditions make trading on the Exchange 
impractical. These standards within proposed Rule 6.61(f) are intended 
to provide guidance concerning the use of this exemption which is 
intended to provide the Exchange with the ability to utilize the 
exemption for the maintenance of a fair and orderly market and the 
protection of investors and is in the public interest. The Exchange 
believes that the exemption is consistent with the Act because it would 
allow the Exchange's Chief Executive Officer or President (or senior-
level designee) to act in certain situations which comply with the 
guidance within Rule 6.61(f) which are intended to protect investors 
and the general public. While Cboe Options grants an exemption to the 
President (or senior-level designee),\58\ the Exchange has elected to 
grant an exemption to Exchange's Chief Executive Officer or President 
(or senior-level designee), who are similarly situated with the 
organization as senior-level individuals.
---------------------------------------------------------------------------

    \58\ See Cboe Options Rule 6.7(f).
---------------------------------------------------------------------------

    The Exchange believes proposed Rule 6.62 regarding RWA Transfers 
will remove impediments to and perfect the mechanism of a free and open 
market and a national market system by providing liquidity in the 
listed options market. The Exchange believes providing market 
participants with an efficient process to reduce RWA capital 
requirements attributable to open positions in clearing accounts with 
U.S. bank-affiliated clearing firms may contribute to additional 
liquidity in the listed options market, which, in general, protects 
investors and the public interest.
    The proposed rule change, in particular the proposed changes to 
permit RWA transfers to occur on a routine, recurring basis and result 
in netting, also provides market participants with sufficient 
flexibility to reduce RWA capital requirements at times necessary to 
comply with requirements imposed on them by clearing firms. This will 
permit market participants to respond to then-current market 
conditions, including volatility and increased volume, by reducing the 
RWA capital requirements associated with any new positions they may 
open while those conditions exist. Given the additional capital that 
may become available to market participants as a result of the RWA 
Transfers, market participants will be able to continue to provide 
liquidity to the market, even during periods of increased volume and 
volatility, which liquidity ultimately benefits investors. It is not 
possible for market participants to predict what market conditions will 
exist at a specific time, and when volatility will occur. The proposed 
rule change to permit routine, recurring RWA Transfers (and to not 
provide prior written notice) will provide market participants with the 
ability to respond to these conditions whenever they occur. Permitting 
transfers on a routine, recurring basis will provide market 
participants with the flexibility to comply with these restrictions 
when necessary to avoid position limits on future options activity. In 
addition, with respect to

[[Page 36897]]

netting, as discussed above, firms may maintain different clearing 
accounts for a variety of reasons, such as the structure of their 
businesses, the manner in which they trade, their risk management 
procedures, and for capital purposes. Netting may otherwise occur with 
respect to a firm's positions if it structured its clearing accounts 
differently, such as by using a universal account. Therefore, the 
proposed rule change will permit netting while allowing firms to 
continue to maintain different clearing accounts in a manner consistent 
with their businesses.
    The Exchange recognizes the numerous benefits of executing options 
transactions occur on an exchange, including price transparency, 
potential price improvement, and a clearing guarantee. However, the 
Exchange believes it is appropriate to permit RWA Transfers to occur 
off the exchange, as these benefits are inapplicable to RWA Transfers. 
RWA Transfers have a narrow scope and are intended to achieve a 
limited, benefit purpose. RWA Transfers are not intended to be a 
competitive trading tool. There is no need for price discovery or 
improvement, as the purpose of the transfer is to reduce RWA asset 
capital requirements attributable to a market participants' positions. 
Unlike trades on an exchange, the price at which an RWA Transfers 
occurs is immaterial--the resulting reduction in RWA is the critical 
part of the transfer. RWA Transfers will result in no change in 
ownership, and thus they do not constitute trades with a counterparty 
(and thus eliminating the need for a counterparty guarantee). The 
transactions that resulted in the open positions to be transferred as 
an RWA Transfer were already guaranteed by an OCC clearing member, and 
the positions will continue to be subject to OCC rules, as they will 
continue to be held in an account with an OCC clearing member. The 
narrow scope of the proposed rule change and the limited, beneficial 
purpose of RWA Transfers make allowing RWA Transfers to occur off the 
floor appropriate and important to support the provision of liquidity 
in the listed options market.
    Proposed Rule 6.62 does not unfairly discriminate against market 
participants, as all TPHs and non-TPHs with open positions in options 
listed on the Exchange may use the proposed off-exchange transfer 
process to reduce the RWA capital requirements of Clearing TPHs.
    The Exchange believes proposed Rule 6.63 to permit off-Exchange 
transfers in connection with the in-kind ETF and UIT creation and 
redemption process will promote just and equitable principles of trade 
and help remove impediments to and perfect the mechanism of a free and 
open market and a national market system, as it would permit ETFs and 
UITs that invest in options traded on the Exchange to utilize the in-
kind creation and redemption process that is available for ETFs and 
UITs that invest in equities and fixed-income securities. This process 
represents a significant feature of the ETF and UIT structure 
generally, with advantages that distinguish ETFs and UITs from other 
types of pooled investment vehicles. In light of the associated tax 
efficiencies and potential transaction cost savings, the Exchange 
believes the ability to utilize an in-kind process would make such ETFs 
and UITs more attractive to both current and prospective investors and 
enable them to compete more effectively with other ETFs and UITs that, 
based on their portfolio holdings, may effect in-kind creations and 
redemptions without restriction. In addition, the Exchange believes 
that because it would permit ETFs and UITs that invest in options 
traded on the Exchange to benefit from tax efficiencies and potential 
transaction cost savings afforded by the in-kind creation and 
redemption process, which benefits the Exchange expects would generally 
be passed along to investors that hold ETF shares and UIT units, the 
proposed rule change would protect investors and the public interest.
    Moreover, the Exchange submits that the proposed exception is 
clearly delineated and limited in scope and not intended to facilitate 
``trading'' options off the Exchange. Other than the transfers covered 
by the proposed exception, transactions involving options, whether held 
by an ETF or an authorized participant, or a UIT or a sponsor, would be 
fully subject to the applicable trading Rules. Additionally, the 
transfers covered by the proposed exception would occur at a price(s) 
used to calculate the NAV of the applicable ETF shares or UIT units, 
which removes the need for price discovery on the Exchange. 
Accordingly, the Exchange does not believe that the proposed rule 
change would compromise price discovery or transparency.
    When Congress charged the Commission with supervising the 
development of a ``national market system'' for securities, Congress 
stated its intent that the ``national market system evolve through the 
interplay of competitive forces as unnecessary regulatory restrictions 
are removed.'' \59\ Consistent with this purpose, Congress and the 
Commission have repeatedly stated their preference for competition, 
rather than regulatory intervention to determine products and services 
in the securities markets.\60\ This consistent and considered judgment 
of Congress and the Commission is correct, particularly in light of 
evidence of robust competition among exchanges. The fact that an 
exchange proposed something new is a reason to be receptive, not 
skeptical--innovation is the lifeblood of a vibrant competitive 
market--and that is particularly so given the continued internalization 
of the securities markets, as exchanges continue to implement new 
products and services to compete not only in the United States but 
throughout the world. Exchanges continuously adopt new and different 
products and trading services in response to industry demands in order 
to attract order flow and liquidity to increase their trading volume. 
This competition has led to a growth in investment choices, which 
ultimately benefits the marketplace and the public.
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    \59\ See H.R. Rep. 94-229, at 92 (1975) (Conf. Rep.).
    \60\ See S. Rep. No. 94-75, 94th Cong., 1st Sess. 8 (1975) 
(``The objective [in enacting the 1975 amendments to the Exchange 
Act] would be to enhance competition and to allow economic forces, 
interacting within a fair regulatory field, to arrive at appropriate 
variations in practices and services.''); Order Approving Proposed 
Rule Change Relating to NYSE Arca Data, Securities Exchange Act 
Release No. 59039 (December 2, 2008), 73 FR 74770 (December 9, 2008) 
(``The Exchange Act and its legislative history strongly support the 
Commission's reliance on competition, whenever possible, in meeting 
its regulatory responsibilities for overseeing the [self-regulatory 
organizations] and the national market system. Indeed, competition 
among multiple markets and market participants trading the same 
products is the hallmark of the national market system.''); and 
Regulation NMS, 70 FR at 37499 (observing that NMS regulation ``has 
been remarkably successful in promoting market competition in [the] 
forms that are most important to investors and listed companies'').
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    Currently, the Exchange Rules do not allow ETFs or UITs to effect 
in-kind transfers of options off of the Exchange, resulting in tax 
inefficiencies for ETFs and UITs that hold them. As a result, the use 
of options by ETFs and UITs is substantially limited. While the 
proposed exception would be limited in scope, the Exchange believes the 
benefits that may flow to ETFs and UITs that hold options and their 
investors may be significant. Specifically, the Exchange expects that 
such ETFs and UITs and their investors could benefit from increased tax 
efficiencies and potential transaction cost savings. By making such 
ETFs and UITs more attractive to both current and prospective 
investors, the proposed rule change would enable them to compete more 
effectively with other ETFs and UITs, and other investment vehicles, 
that, due to their particular portfolio

[[Page 36898]]

holdings, may effect in-kind creations and redemptions without 
restriction. This may lead to further development of ETFs and UITs that 
invest in options, thereby fostering competition and resulting in 
additional choices for investors, which ultimately benefits the 
marketplace and the public.

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

    The Exchange 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. The proposed rule change is 
not intended to be a competitive trading tool.
    The Exchange does not believe the proposed rule change regarding 
off-floor position transfers will impose an undue burden on intramarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act as the transfer procedure may be utilized by any 
TPH and the rule will apply uniformly to all TPHs. Use of the transfer 
procedure is voluntary, and all TPHs may use the procedure to transfer 
positions as long as the criteria in the proposed rule are satisfied. 
With this change, a TPH that experiences limited permissible, non-
recurring events would have an efficient and effective means to 
transfer positions in these situations. The Exchange believes the 
proposed rule change regarding permissible transfer prices provides 
market participants with flexibility to determine the price appropriate 
for their business, which determine prices in accordance with normal 
accounting practices and removes impediments to a free and open market. 
The Exchange does not believe the proposed notice and record 
requirements are unduly burdensome to market participants. The Exchange 
believes the proposed requirements are reasonable and will enable the 
Exchange to be aware of transfers and monitor and review the transfers 
for compliance with the proposed rule.
    Adopting an exemption, similar to Cboe Options Rule 6.7, to permit 
the Exchange's Chief Executive Officer or President (or senior-level 
designee) to grant an exemption to proposed Rule 6.60 prohibition if, 
in his or her judgment, does not impose an undue burden on competition. 
Circumstances where, due to unusual or extraordinary circumstances such 
as the market value of the person's positions would be comprised by 
having to comply with the requirement to trade on the Exchange pursuant 
to the normal auction process or, would be taken into consideration in 
each case where, in the judgment of the Exchange's Chief Executive 
Officer or President (or senior-level designee), market conditions make 
trading on the Exchange impractical.
    The Exchange does not believe the proposed rule change regarding 
off-floor position transfers will impose an undue burden on inter-
market competition that is not necessary or appropriate in furtherance 
of the purposes of the Act. The proposed position transfer procedure is 
not intended to be a competitive trading tool. The proposed rule change 
permits, in limited circumstances, a transfer to facilitate non-
routine, nonrecurring movements of positions. As provided for in 
proposed Rule 6.61(g), it would not be used repeatedly or routinely in 
circumvention of the normal auction market process. Proposed Rule 
6.61(g) specifically provides within the rule text that the Exchange's 
Chief Executive Officer or President (or senior-level designee) may in 
his or her judgment allow a transfer for the maintenance of a fair and 
orderly market and the protection of investors and is in the public 
interest. The Exchange believes that the exemption does not impose an 
undue burden on competition as the Exchange's Chief Executive Officer 
or President (or senior-level designee) would apply the exemption 
consistent with the guidance within Options 6, Section 5(f). 
Additionally, as discussed above, the proposed rule change is similar 
to Cboe Options Rule 6.7. The Exchange believes having similar rules 
related to transfer positions to those of other options exchanges will 
reduce the administrative burden on market participants of determining 
whether their transfers comply with multiple sets of rules.
    The Exchange does not believe the proposed rule change regarding 
off-floor RWA Transfers will impose an undue burden on intramarket 
competition that is not necessary or appropriate in furtherance of the 
Act, as use of the proposed process is voluntary. All TPHs and non-TPHs 
with open positions in options listed on the Exchange may use the 
proposed off-exchange transfer process to reduce the RWA capital 
requirements attributable to those positions. The Exchange does not 
believe that the proposed rule change will impose any burden on 
intermarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. RWA Transfers have a limited 
purpose, which is to reduce RWA attributable to open positions in 
listed options in order to free up capital. The Exchange believes the 
proposed rule change may relieve the burden on liquidity providers in 
the options market by reducing the RWA attributable to their open 
positions. As a result, market participants may be able to increase 
liquidity they provide to the market, which liquidity benefits all 
market participants.
    The Exchange does not believe the proposed rule change regarding 
off-floor in-kind transfers will impose any burden on intramarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. Utilizing the proposed exception would be 
voluntary. As an alternative to the normal auction process, proposed 
Rule 6.63 would provide market participants with an efficient and 
effective means to transfer positions as part of the creation and 
redemption process for ETFs and UITs under specified circumstances. The 
proposed exception would enable all ETFs and UITs that hold options to 
enjoy the benefits of in-kind creations and redemptions already 
available to other ETFs and UITs (and to pass these benefits along to 
investors). The proposed rule change would apply in the same manner to 
all authorized participants and sponsor broker-dealers that choose to 
use the proposed process.
    The Exchange does not believe the proposed rule change will impose 
any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. As indicated 
above, it is intended to provide an additional clearly delineated and 
limited circumstance in which options positions can be transferred off 
an exchange. Further, the Exchange believes the proposed rule change 
will eliminate a significant competitive disadvantage for ETFs and UITs 
that invest in options. Furthermore, as indicated above, in light of 
the significant benefits provided (e.g., tax efficiencies and potential 
transaction cost savings), the proposed exception may lead to further 
development of ETFs and UITs that invest in options, thereby fostering 
competition and resulting in additional choices for investors, which 
ultimately benefits the marketplace and the public. Lastly, the 
Exchange notes that the proposed rule change is based on Cboe Rule 6.9. 
As such, the Exchange believes that its proposal enhances fair 
competition between markets by providing for additional listing venues 
for ETFs that hold options to utilize the in-kind transfers proposed 
herein.

[[Page 36899]]

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \61\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\62\
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    \61\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \62\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \63\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \64\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposal may become operative immediately upon filing. The Exchange 
states that the requested waiver will provide for fair competition 
among options exchanges, given that the proposed rules are 
``substantively the same'' as those of at least one other national 
securities exchange. The Commission believes that waiving the 30-day 
operative delay is consistent with the protection of investors and the 
public interest because the proposed rule change does not present any 
unique or novel regulatory issues and is substantively identical to the 
rules of Cboe. Accordingly, the Commission hereby waives the operative 
delay and designates the proposal operative upon filing.\65\
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    \63\ 17 CFR 240.19b-4(f)(6).
    \64\ 17 CFR 240.19b-4(f)(6)(iii).
    \65\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-C2-2020-006 on the subject line.

Paper Comments

     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-C2-2020-006. 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 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-C2-2020-006 and should be submitted on 
or before July 9, 2020.
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    \66\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\66\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-13116 Filed 6-17-20; 8:45 am]
BILLING CODE 8011-01-P