Document ID: SEC-2019-1601-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2019-10-25T04:00Z

[Federal Register Volume 84, Number 207 (Friday, October 25, 2019)]
[Notices]
[Pages 57542-57544]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23260]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87374; File No. SR-CBOE-2019-035]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, Regarding 
Off-Floor Position Transfers

October 21, 2019

I. Introduction

    On July 3, 2019, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend its rule relating to off-floor position 
transfers. The proposed rule change was published for comment in the 
Federal Register on July 23, 2019.\3\ On August 6, 2019, the Exchange 
filed Amendment No. 1 to the proposed rule change.\4\ On September 4, 
2019, the Commission extended the time period within which to either 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to approve or disapprove 
the propose rule change, to October 21, 2019.\5\ On October 7, 2019, 
the Exchange filed Amendment No. 2 to the proposed rule change.\6\ The 
Commission received two comment letters on the proposal.\7\ This order 
institutes proceedings under Section 19(b)(2)(B) of the Act \8\ to 
determine whether to approve or disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 86400 (July 17, 
2019), 84 FR 35438 (``Notice'').
    \4\ In Amendment No. 1, the Exchange deleted from the proposed 
rule change the proposal to permit off-floor risk-weighted asset 
(``RWA'') transfers. The exchange subsequently refiled the RWA 
transfer proposal as a separate proposed rule change filing in SR-
CBOE-2019-044. See Securities Exchange Release No. 87107 (September 
25, 2019), 84 FR 52149 (October 1, 2019) (order approving proposed 
rule change to adopt Cboe Rule 6.49B regarding off-floor RWA 
transfers). When the Exchange filed Amendment No. 1 to CBOE-2019-
035, it also submitted the text of the amendment as a comment letter 
to the filing, which the Commission made publicly available at 
https://www.sec.gov/comments/sr-cboe-2019-035/srcboe2019035-5917170-189047.pdf.
    \5\ See Securities Exchange Act Release No. 86861 (September 4, 
2019), 84 FR 47627 (September 10, 2019).
    \6\ In Amendment No. 2, the Exchange updated cross-references to 
Cboe rules throughout the proposed rule change to reflect separate 
amendments it made to its rulebook in connection with the Exchange's 
technology migration, which it subsequently completed on October 7, 
2019. When the Exchange filed Amendment No. 2 to CBOE-2019-035, it 
also submitted the text of the amendment as a comment letter to the 
filing, which the Commission made publicly available at https://www.sec.gov/comments/sr-cboe-2019-035/srcboe2019035-6258833-192955.pdf. The Commission notes that in addition to the cross-
references updated in Amendment No. 2, the Exchange relocated Rule 
6.49A to Rule 6.7 in its post-migration rulebook and made conforming 
changes to its proposed rule change to reflect that new rule number.
    \7\ See Letter to Vanessa Countryman, Secretary, Commission, 
dated September 24, 2019, from John Kinahan, Chief Executive 
Officer, Group One Trading, L.P., available at https://www.sec.gov/comments/sr-cboe-2019-035/srcboe2019035-6193332-192497.pdf (``Group 
One Letter'') and Letter to Brent J. Fields, Secretary, Commission, 
dated August 19, 2019, from Gerald D. O'Connell, Compliance 
Coordinator, Susquehanna International Group, LLP, available at 
https://www.sec.gov/comments/sr-cboe-2019-035/srcboe2019035-5985436-190350.pdf (``SIG Letter'').
    \8\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of Proposed Rule Change, as Modified by Amendment Nos. 
1 and 2

    Cboe generally requires a Trading Permit Holder (``TPH'') to effect 
transactions in listed options on an exchange.\9\ Notwithstanding that 
provision, Cboe permits certain types of transfers involving a TPH's 
positions to be effected off the Exchange (also referred to as ``off-
floor'' transfers).\10\ The Exchange now proposes to delineate in the 
rule additional types of permitted off-floor transfers.
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    \9\ See Cboe Rule 5.12(a) (formerly Rule 6.49(a)).
    \10\ See Cboe Rule 6.7(a) (formerly Rule 6.49A(a)).

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[[Page 57543]]

    Specifically, the proposed rule change would specify several 
additional types of permitted off-floor transfers, including (1) 
transfers to correct a bona fide error in the recording of a 
transaction or the transferring of a position to another account, (2) 
transfers between accounts where there is no change in ownership 
provided the accounts are not in separate aggregation units or 
otherwise subject to information barrier or account segregation 
requirements, (3) consolidation of accounts where no change in 
ownership is involved, and (4) transfers through operation of law from 
death, bankruptcy, or otherwise.\11\
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    \11\ See proposed Cboe Rule 6.7(a).
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    Proposed paragraph (b) purports to codify Exchange guidance 
regarding certain restrictions on permissible off-floor transfers 
related to netting of open positions and to margin and haircut 
treatment, including a prohibition against netting and transfers that 
result in preferential margin or haircut treatment.\12\ Proposed 
paragraph (c) would provide guidance as to the permitted transfer price 
at which an off-floor transfer may be effected.\13\
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    \12\ See proposed Cboe Rule 6.7(b). See also Cboe Options 
Regulatory Circular RG03-62 (July 24, 2003).
    \13\ See proposed Cboe Rule 6.7(c).
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    Proposed paragraph (d) would specify when written notice would be 
required prior to effecting an off-floor transfer.\14\ Similarly, 
proposed paragraph (e) would provide certain recordkeeping and 
information requirements.\15\
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    \14\ See proposed Cboe Rule 6.7(d).
    \15\ See proposed Cboe Rule 6.7(e).
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III. Summary of the Comments

    To date, the Commission has received two comment letters on the 
proposal.\16\ One commenter criticized the proposal as ``overly 
restrictive'' in how it applies ``to transfers involving no material 
change of beneficial ownership,'' which it referred to as `` `no 
change' transfers.'' \17\ The commenter expressed particular concern to 
the extent the proposal would restrict ``transfers between no change 
[market maker] accounts using broadly defined separate account 
delineations, and coupling that with strict prohibitions on routine-use 
and netting,'' which the commenter argued would ``unnecessarily and 
unreasonably restrict the ability of affiliated options market makers . 
. . to perform risk-reducing no change transfers.'' \18\ The commenter 
also believed that the proposal would ``undercut the Exchange's 
longstanding policy,'' which the commenter characterized as having 
``historically provided broad abilities for no change off-floor 
transfers by [market makers] without the frequency, netting or separate 
account restrictions contained in the proposal.'' \19\ Similarly, the 
commenter believed that the impact of the proposed ``separate account 
delineations'' concept could ``perhaps be worsened by a degree of 
ambiguity'' and accordingly ``needs more clarity'' in the proposal.\20\ 
The commenter argued that there exists certain impracticalities or 
impediments to accomplish no change transfers through exchange trading, 
and therefore market makers are presented with ``choices that are often 
costly and inefficient'' and that may ultimately harm investors if 
``added expenses translate into wider quotes . . . .'' \21\ The 
commenter further expressed concern that ``prohibiting transfers of 
such no change positions, and allowing the off-setting positions to co-
exist without an economic purpose, can serve to misleadingly inflate 
the economic realities of overall open interest.'' \22\ Finally, the 
commenter argued that the proposal ``fails to provide justification for 
imposing'' what it considers to be ``substantial restrictions'' on 
transfers involving no material change in beneficial ownership, and it 
``lacks the required statutory bases for so broadly restricting'' such 
transfers.\23\
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    \16\ See supra note 7.
    \17\ See SIG Letter, supra note 7, at 1.
    \18\ See id.
    \19\ See id. at 7.
    \20\ See id. at 3.
    \21\ See id. at 4.
    \22\ See id. at 8.
    \23\ See id. at 9.
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    Another commenter expressed similar concerns, in particular that 
the proposal ``does not permit the use of the off-floor transfer 
procedure repeatedly or routinely in circumvention of the normal 
auction market process.'' \24\ The commenter argued that ``a no change 
transfer is inherently different than a trade that occurs in the normal 
auction market process, and further noted that it is ``unaware of any 
normal auction market process that would allow for a single market 
participant to transact with itself in order to move a position across 
two accounts maintained by that same market participant.'' \25\ Rather, 
commenter noted that ``[i]n a no change transfer, there is no buyer and 
there is no seller. These positions are already owned by the market 
participant after being acquired through the normal auction market 
process.'' \26\ The commenter believed that ``[m]ore clarity needs to 
be provided to the breadth of the current language prohibiting the 
`non-routine, non-recurring' use of no change transfers.'' \27\
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    \24\ See Group One Letter, supra note 7, at 1.
    \25\ See id.
    \26\ See id. at 2.
    \27\ See id.
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IV. Proceedings To Determine Whether To Disapprove SR-CBOE-2019-035 and 
Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act to determine whether the proposed rule change, 
as modified by Amendment Nos. 1 and 2, should be approved or 
disapproved. Institution of such proceedings is appropriate at this 
time in view of the legal and policy issues raised by the proposed rule 
change, as discussed below, and the comments on the proposal. 
Institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved.
    Pursuant to Section 19(b)(2)(B) of the Act, the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis and input concerning the proposed rule change's consistency 
with the Act, in particular with Section 6(b)(5) of the Act,\28\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
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    \28\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that proceedings are appropriate to solicit 
additional input from the public, as well as the Exchange, to consider 
further the substantive concerns with the proposal that were raised by 
the commenters, including the applicability of the proposal to 
transfers involving no material change in beneficial ownership, its 
impact in particular on market makers and liquidity, and the scope and 
applicability of the proposed restrictions on non-routine, non-
recurring movements of positions ``in circumvention of the normal 
auction market process'' as well as the proposed prohibition on 
netting.
    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the Exchange 
Act and the rules and regulations issued thereunder . . . is on the 
self-regulatory

[[Page 57544]]

organization [`SRO'] that proposed the rule change.'' \29\ The 
description of a proposed rule change, its purpose and operation, its 
effect, and a legal analysis of its consistency with applicable 
requirements must all be sufficiently detailed and specific to support 
an affirmative Commission finding,\30\ and any failure of an SRO to 
provide this information may result in the Commission not having a 
sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\31\
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    \29\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \30\ See id.
    \31\ See id.
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    For the reasons discussed above, the Commission believes it is 
appropriate to institute proceedings pursuant to Section 19(b)(2)(B) of 
the Act to determine whether the proposal should be approved or 
disapproved.

V. Procedures: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data and arguments with respect to the 
concerns identified above, as well as any other concerns they may have 
with the proposed rule change. In particular, the Commission invites 
the written views of interested persons concerning whether the 
proposal, as modified by Amendment Nos. 1 and 2, is inconsistent with 
Sections 6(b)(5) \32\ and 6(b)(8) \33\ or any other provision of the 
Act, or the rules and regulations thereunder. Although there do not 
appear to be any issues relevant to approval or disapproval which would 
be facilitated by an oral presentation of views, data, and arguments, 
the Commission will consider, pursuant to Rule 19b-4 under the Act,\34\ 
any request for an opportunity to make an oral presentation.\35\
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    \32\ 15 U.S.C. 78f(b)(5).
    \33\ 15 U.S.C. 78f(b)(8).
    \34\ 17 CFR 240.19b-4.
    \35\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants to 
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is 
appropriate for consideration of a particular proposal by a self-
regulatory organization. See Securities Act Amendments of 1975, 
Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 
94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal, as modified by Amendment Nos. 
1 and 2, should be approved or disapproved by November 15, 2019. Any 
person who wishes to file a rebuttal to any other person's submission 
must file that rebuttal by November 29, 2019. 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-CBOE-2019-035 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-CBOE-2019-035. 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-CBOE-2019-035 and should be submitted on 
or before November 15, 2019. Rebuttal comments should be submitted by 
November 29, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-23260 Filed 10-24-19; 8:45 am]
 BILLING CODE 8011-01-P