Document ID: SEC-2016-2009-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2016-11-17T05:00Z

[Federal Register Volume 81, Number 222 (Thursday, November 17, 2016)]
[Notices]
[Pages 81200-81202]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27590]

[[Page 81200]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79279; File No. SR-CBOE-2016-074]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend the Fees Schedule

November 10, 2016.
    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 October 27, 2016, Chicago Board Options Exchange, Incorporated 
(``CBOE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The text of the proposed rule change is available on the Exchange's 
Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), 
at the Exchange's Office of the Secretary, and at the Commission's 
Public Reference Room.

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

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

1. Purpose
    The Exchange proposes to amend its Fees Schedule. Specifically, the 
Exchange proposes to amend its Fees Schedule with respect to waiving 
transaction fees incurred as a result of transactions that compress or 
reduce certain Clearing Trading Permit Holder (``TPH'') open positions.
    By way of background, SEC Rule 15c3-1, Net Capital Requirements for 
Brokers or Dealers (``Net Capital Rules''), requires that every 
registered broker-dealer maintain certain specified minimum levels of 
capital. The primary purpose of these rules is to regulate the ability 
of broker-dealers to meet their financial obligations to customers and 
other creditors. All of the broker-dealers that are clearing members of 
the Options Clearing Corporation (``OCC'') are subject to the Net 
Capital Rules. However, a subset of OCC's clearing members are 
subsidiaries of U.S. bank holding companies and these broker-dealers, 
through their affiliation with their parent U.S. bank holding 
companies, must also comply with bank regulatory capital requirements 
pursuant to rule-making required under the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``Dodd-Frank''). Recent rule-making 
enacted under Dodd-Frank now requires U.S. bank holding companies to 
hold substantially more bank regulatory capital than would otherwise be 
required under the Net Capital Rules. Additionally, due to the large 
contract size of S&P 500 Index (``SPX'') options, open interest in 
certain SPX series can result in extremely large bank regulatory 
capital requirements, even though the positions incur minimal 
requirements under the Net Capital Rules. As such, transactions that 
would result in the closing of this open interest have a beneficial 
impact on the bank regulatory capital requirements of the Clearing 
TPH's parent company with a minimal impact on regulatory capital 
required under the capital rules. The Exchange notes that most of these 
open positions are in out-of-the-money options and certain spread 
positions that are essentially riskless strategies because they have 
little or no market exposure. Particularly, the Exchange notes that 
given the nature of these options, there is minimal chance for large 
losses to occur, yet these positions are still subject to large bank 
regulatory capital requirements. Exchange transaction fees, however, if 
not waived, could discourage market participants from closing these 
positions out even though those market participants may also prefer to 
close them rather than carry them to expiration.\3\ Accordingly, in 
order to encourage the compression of certain out-of-the-money and 
riskless option positions, the Exchange previously adopted a rebate of 
all transactions fees for transactions that close these positions, 
provided they meet certain criteria, as described more fully below.\4\
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    \3\ For example, an out-of-the-money SPX option market-maker 
transaction may be worth only a few pennies per contract, but would 
cost approximately $0.33 per contract ($0.20 transaction fee plus 
$0.13 SPX Index License Surcharge) to close out.
    \4\ See Securities Exchange Act Release No. 76842 (January 6, 
2016) 81 FR 1455 (January 12, 2016) (SR-CBOE-2015-117).
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    The rebate of transaction fees \5\ is currently limited to those 
transactions that the Exchange believes would have the greatest impact 
on bank regulatory capital requirements but are also constrained to 
those positions that have little economic risk associated with them. 
Specifically, to be eligible for a rebate, a transaction must be: (i) 
For a complex order with at least five (5) different series in S&P 500 
Index (SPX) options, SPX Weeklys (SPXW) options or p.m.-settled SPX 
options (SPXPM), (ii) a closing-only transaction or, if the transaction 
involves a Firm order (origin code ``F''), an opening transaction 
executed to facilitate a compression of option positions for a market-
maker or joint-back office (``JBO'') account; (iii) for a position with 
a required capital charge equal to the minimum capital charge under OCC 
rules RBH Calculator or a position comprised of option series with a 
delta of ten (10) or less and (iv) entered between the first business 
day following a quarterly expiration through the last business day of 
that quarter.\6\ To receive a rebate, a rebate request with supporting 
documentation must also be submitted to the Exchange within 3 business 
days of the transactions. The Exchange proposes to amend the last 
criteria (i.e., the time period for which a Trading Permit Holder can 
enter these transactions and be eligible for the rebate). Specifically, 
the Exchange proposes to provide that in addition to meeting the first 
three criteria described above, the transaction would be eligible for a 
rebate if entered on any of the final three (3) trading days of any 
calendar month. The proposed rule change allows TPHs to mitigate their 
regulatory capital requirements on a monthly basis, instead of 
quarterly.
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    \5\ Rebate of transaction fees would include the transaction fee 
assessed along with any other surcharges assessed per contract 
(e.g., the Index License Surcharge).
    \6\ For example, the third quarter of 2016 standard-Friday 
expiration occurred on September 16, 2016. For that quarter, 
qualifying transactions needed to be entered no earlier than 
September 19, 2016 and no later than September 30, 2016.

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[[Page 81201]]

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.\7\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \8\ 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 facilitation 
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 
Section 6(b)(4) of the Act,\9\ which requires that Exchange rules 
provide for the equitable allocation of reasonable dues, fees, and 
other charges among its Trading Permit Holders and other persons using 
its facilities.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes providing a rebate of fees for transactions 
that compress certain out-of-the-money and riskless options positions 
is reasonable, equitable and not unfairly discriminatory because these 
positions would result in extremely large bank regulatory capital 
requirements for Clearing TPHs even though there is minimal chance for 
large losses to occur. Additionally, these positions have little or no 
economic benefit to the TPHs that hold the positions, who would likely 
prefer to close them but for the associated transaction fees. The fee 
rebate therefore allows TPHs to close out of these positions that are 
needlessly burdensome on themselves and Clearing TPHs.
    The Exchange believes the proposed rule change is reasonable, 
equitable and not unfairly discriminatory because TPHs can now mitigate 
their regulatory capital requirements on a monthly basis, instead of 
quarterly. The proposed change would encourage the closing of positions 
at the end of each month that needlessly result in burdensome capital 
requirements that, once closed, would alleviate the capital requirement 
constraints on TPHs and improve overall market liquidity by freeing 
capital currently tied up in certain out-of-the-money and riskless 
positions. The Exchange also notes that the proposed amended 
requirement would apply to all TPHs seeking a rebate for these 
transactions.

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

    The Exchange does not believe that the proposed rule changes will 
impose any burden on competition that are not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe that the proposed rule change will impose any burden on 
intramarket competition that is not necessary or appropriate in 
furtherance of the Act because it applies to all market participants in 
the same manner with positions that meet the eligible criteria. The 
proposed change would encourage the closing of positions, on a monthly 
basis, that needlessly result in burdensome capital requirements that, 
once closed, would alleviate the capital requirement constraints on 
TPHs and improve overall market liquidity by freeing capital currently 
tied up in certain out-of-the-money and riskless 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 because the proposed rule 
change applies only to CBOE. To the extent that the proposed change 
makes CBOE a more attractive marketplace for market participants at 
other exchanges, such market participants are welcome to become CBOE 
market participants.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \10\ and paragraph (f) of Rule 19b-4 \11\ 
thereunder. 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 will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f).
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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-CBOE-2016-074 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2016-074. 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 Web site (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 Web site 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 such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2016-074, and should be 
submitted on or before December 8, 2016.

[[Page 81202]]

For the Commission, by the Division of Trading and Markets, pursuant to 
delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).

Brent J. Fields,
Secretary.
[FR Doc. 2016-27590 Filed 11-16-16; 8:45 am]
BILLING CODE 8011-01-P