Document ID: SEC-2020-1940-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2020-12-08T05:00Z

[Federal Register Volume 85, Number 236 (Tuesday, December 8, 2020)]
[Notices]
[Pages 79049-79051]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26896]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90552; File No. SR-NYSEArca-2020-102]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Adopt New Rule 
6.78A-O Regarding In-Kind Exchanges of Options Positions in Connection 
With Exchange-Traded Fund Shares and Unit Investment Trust Interests

December 2, 2020.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that on November 24, 2020, NYSE Arca, Inc. (``NYSE Arca'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the self-regulatory 
organization. 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\ 15 U.S.C. 78a.
    \3\ 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 adopt new Rule 6.78A-O regarding in-kind 
exchanges of options positions and exchange-traded fund shares and unit 
investment trust interests. The proposed rule change is available on 
the Exchange's website at www.nyse.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the self-regulatory organization 
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 those 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 parts of such statements.

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

1. Purpose
    The Exchange proposes to adopt Rule 6.78A-O regarding in-kind 
exchanges of options positions and exchange-traded fund (``Fund'') 
shares and unit investment trust (``UIT'') interests. This is a 
competitive filing that is substantively identical to rules in place on 
Cboe and its affiliated exchange Cboe BZX, except the Exchange proposes 
to add a provision allowing it to request information from OTP Holders 
and OTP Firms that utilize the new rule.\4\ Currently, in general, 
Funds and UITs can effect in-kind transfers with respect to equity 
securities and fixed-income securities. The in-kind process is the 
means by which assets may be added to or removed from Funds and UITs.
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    \4\ See Cboe Options Rule 6.9 (the ``Cboe Rule''); see also 
Securities Exchange Act Release Nos. 87340 (October 17, 2019), 84 FR 
56877 (October 23, 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'')). See also CboeBZX Rule 
20.12; Securities Exchange Act Release No. 89313 (July 14, 2020), 85 
FR 43907 (July 20, 2020) (SR-CboeBZX-2020-054) (immediately 
effective filing for, among other things, in-kind transfers of Funds 
and UITs). See also Nasdaq PHLX Rule 1059; Securities Exchange Act 
Release Nos. 87768 (December 17, 2019), 84 FR 70605 (December 23, 
2019) (SR-Phlx-2019-53) (immediately effective filing to adopt new 
Rule 1059 to allow in-kind transfers of Funds). The new Phlx rule 
does not extend to allowing for in-kind transfers of UITs, thus the 
Exchange focuses on Cboe and its affiliates in this filing.
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    Proposed Rule 6.78A-O, like the Cboe Rule, would allow positions in 
options listed on the Exchange to be transferred off the Exchange by an 
OTP Holder or OTP Firm (collectively, ``OTP Holders'') in connection 
with transactions (1) to

[[Page 79050]]

purchase or redeem ``creation units'' of Fund Shares between an 
``authorized participant'' \5\ and the issuer \6\ of such Fund Shares 
\7\ or (2) to create or redeem units of a UIT between a broker-dealer 
and the issuer \8\ of such UIT units, which transfers would occur at 
the price used to calculate the net asset value (``NAV'') of such Fund 
Shares or UIT units, respectively. Allowing the Exchange to permit off-
Exchange transfers of options positions in connection with the creation 
and redemption process would enable the Exchange to compete with other 
options exchanges that allow such transfers.\9\
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    \5\ The Exchange is proposing that, for purposes of proposed 
Rule 6.78A-O, the term ``authorized participant'' would be defined 
as an entity that has a written agreement with the issuer of Fund 
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 Fund Shares). While an 
authorized participant may be an OTP Holder and directly effect 
transactions in options on the Exchange, an authorized participant 
that is not an OTP Holder may effect transactions in options on the 
Exchange through an OTP Holder on its behalf.
    \6\ The Exchange proposes that, for purposes of proposed Rule 
6.78A-O, any issuer of Fund Shares would be registered with the 
Commission as an open-end management investment company under the 
Investment Company Act of 1940 (the ``1940 Act'').
    \7\ A Fund Share is a share or other security traded on a 
national securities exchange and defined as an NMS stock, as set 
forth in in Rule 600(b)(47) of Regulation NMS, which includes open-
end management investment companies registered with the Commission. 
See Rule 5.3-O(g).
    \8\ The Exchange proposes that, for purposes of proposed Rule 
6.78A, any issuer of UIT units would be a trust registered with the 
Commission as a unit investment trust under the 1940 Act.
    \9\ See supra note 4. See proposed Rule 6.78A-O(a) (providing 
that positions in options listed on the Exchange may be transferred 
off the Exchange by a OTP Holder or OTP Firm to effect creations and 
redemptions in Funds or UITs on an in-kind basis; ``provided, 
however, that such OTP Holder or OTP Firm comply with the 
requirements of paragraph (b) of this Rule'').
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    However, the Exchange believes it is appropriate to include in 
proposed Rule 6.78A-O the requirement that OTP Holders that engage in 
such transfers ``must, upon request of the Exchange, provide to the 
Exchange information relating to the transfers in a form and manner 
prescribed by the Exchange.'' \10\ The Exchange believes that this 
proposed provision, which is not in the Cboe Rule (nor is it in Phlx 
Rule 1059), would help ensure that OTP Holders keep accurate books and 
records relating to such transfers for review by the Exchange, which is 
to the benefit of all market participants.\11\
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    \10\ See proposed Rule 6.78A-O(b). The Exchange anticipates 
informing OTP Holders of the notice requirements via Trader Update.
    \11\ See supra note 4 (regarding Cboe and Phlx rules).
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    The Exchange's proposal mirrors the Cboe Rule in that it applies 
solely in the context of transfers of options positions effected in 
connection with transactions to purchase or redeem creation units of 
Fund Shares between Funds and authorized participants,\12\ and units of 
UITs between UITs and sponsors.
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    \12\ See supra note 5. The term ``authorized participant'' is 
specific and narrowly defined. As noted in the Investment Company 
Act Release No. 33140 (June 28, 2018), 83 FR 37332 (July 31, 2018) 
(the ``Proposed ETF Rule Release''), the requirement that only 
authorized participants of a Fund may purchase creation units from 
(or sell creation units to) a Fund ``is designed to preserve an 
orderly creation unit issuance and redemption process between 
[Funds] 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.
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    Other than the transfers covered by the proposed rule, transactions 
involving options, whether held by a Fund or an authorized participant, 
or a UIT or a sponsor would be fully subject to all applicable trading 
Rules.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\13\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\14\ in particular, in that it is 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.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes proposed Rule 6.78A-O to permit off-Exchange 
transfers in connection with the in-kind Fund and UIT creation and 
redemption process would promote just and equitable principles of trade 
as it would permit Funds and UITs that invest in options traded on the 
Exchange to utilize the in-kind creation and redemption process that is 
available for Funds and UITs that invest in equities and fixed-income 
securities.
    The Exchange believes it is appropriate to require OTP Holders that 
engage in off-floor transfers as provided in proposed Rule 6.78A-O(a) 
to keep records of such transactions such that this information could 
be shared with the Exchange upon request. The Exchange believes this 
provision, which is not in the Cboe Rule, would prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade because the provision would help ensure that OTP 
Holders keep accurate books and records relating to such transfers for 
review by the Exchange, which is to the benefit of all market 
participants.
    Finally, this proposed rule change would align Exchange rules with 
that of other options exchanges, including Cboe and its affiliates, 
thereby allowing the Exchange to compete on equal footing.\15\
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    \15\ See supra note 4.
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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 Exchange does not 
believe the proposed rule change 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. Proposed Rule 6.78A-O would provide market participants with 
a means to transfer positions as part of the creation and redemption 
process for Funds and UITs only under the circumstances specified. The 
proposed exception would enable all Funds and UITs that hold options to 
enjoy the benefits of in-kind creations and redemptions already 
available to other Funds and UITs (and to pass these benefits along to 
investors). Use of the in-kind, off-exchange transfer process in 
connection with creating and redeeming ETFs or UITs would be voluntary 
and would apply in the same manner to all entities that meet the 
definition of ``authorized participant'' or to all broker-dealers, 
respectively, that opt to invoke such 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, the proposed rule change is intended to provide a limited 
circumstance in which options positions can be transferred off an 
exchange. The Exchange believes the requirement that OTP Holders have 
the ability to produce to the Exchange, upon request, documentation 
relating to off-floor transfers would benefit market participants as it 
would add transparency to such transfers and would not pose an undue 
burden on intermarket competition.
    Lastly, the Exchange notes that the proposed rule change is based 
on rules already in place on Cboe and its affiliate exchanges.\16\ As 
such, the Exchange

[[Page 79051]]

believes that its proposal enhances fair competition between markets by 
providing for additional listing venues for Funds and UITs that hold 
options to utilize the in-kind transfers proposed herein.
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    \16\ See supra note 4.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to 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) of the Act \17\ and Rule 19b-
4(f)(6) thereunder.\18\
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \19\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \20\ 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 requested that the Commission waive the 30-day operative delay so 
that the proposed rule change may become operative upon filing. The 
Exchange states that waiver of the operative delay is consistent with 
the protection of investors and the public interest because it will 
ensure fair competition among the options exchanges by allowing the 
Exchange implement without delay proposed Rule 6.78A-O, which is 
substantially identical to Cboe Options Rule 6.9 and Cboe BZX Rule 
21.12, except that the Exchange's proposed Rule 6.78A-O(b) is more 
restrictive in that it requires OTP Holders to provide to the Exchange 
information related to the transfers. For this reason, and because the 
proposal does not raise any novel regulatory issues, the Commission 
believes that waiver of the 30-day operative delay is consistent with 
the protection of investors and the public interest. Accordingly, the 
Commission hereby waives the operative delay and designates the 
proposed rule change operative upon filing.\21\
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    \19\ 17 CFR 240.19b-4(f)(6).
    \20\ 17 CFR 240.19b-4(f)(6)(iii).
    \21\ For purposes only of waiving the 30-day operative delay, 
the Commission also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     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-NYSEArca-2020-102 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-NYSEArca-2020-102. 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-NYSEArca-2020-102 and should be 
submitted on or before December 29, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-26896 Filed 12-7-20; 8:45 am]
BILLING CODE 8011-01-P