Document ID: SEC-2017-0047-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2017-01-11T05:00Z

[Federal Register Volume 82, Number 7 (Wednesday, January 11, 2017)]
[Notices]
[Pages 3379-3382]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-00368]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79745; File No. SR-CBOE-2016-094]

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

January 5, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on December 23, 2016, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its Fees Schedule. 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend its Fees Schedule. Specifically, the 
Exchange proposes to waive transaction fees incurred from certain 
transactions executed in compression forums.
    SEC Rule 15c3-1 (Net Capital Requirements for Brokers or Dealers) 
(``Net Capital Rules'') requires every registered broker-dealer [sic] 
maintain certain specified minimum levels of capital.\3\ The Net 
Capital Rules are designed to protect securities customers, 
counterparties, and creditors by requiring broker-dealers to 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.\4\
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    \3\ 17 CFR 240.15c3-1.
    \4\ 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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    All Options Clearing Corporation (``OCC'') clearing members are 
subject to the Net Capital Rules. However, a subset

[[Page 3380]]

of clearing members 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.\5\ 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 approved a comprehensive regulatory capital framework for 
subsidiaries of U.S. bank holding company clearing firms.\6\ Generally, 
these rules impose higher minimum capital requirements, more 
restrictive capital eligibility standards, and higher asset risk 
weights than were previously mandated for clearing members that are 
subsidiaries of U.S. bank holding companies under the Net Capital 
Rules. Furthermore, the rules do not permit deductions for hedged 
securities or offsetting options positions.\7\ Rather, capital charges 
under these standards are based on the aggregate notional value of 
short positions regardless of offsets. As a result, clearing Trading 
Permit Holders (``TPHs'') generally must hold substantially more bank 
regulatory capital than would otherwise be required under the Net 
Capital Rules. The impact of these regulatory capital rules are 
compounded in the SPX options market due to the large notional value of 
SPX contracts.
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    \5\ H.R. 4173 (amending section 3(a) of the Securities Exchange 
Act of 1934 (the ``Act'') (15 U.S.C. 78c(a))).
    \6\ 12 CFR 50; 79 FR 61440 (Liquidity Coverage Ratio: Liquidity 
Risk Measurement Standards).
    \7\ Many options strategies, including relatively simple 
strategies often used by retail customers and more sophisticated 
strategies used by market-makers and institutions, 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 assets), 
executed simultaneously as part of the same strategy. In many cases, 
the potential market exposure of these strategies is limited and 
defined. Whereas regulatory capital requirements have historically 
reflected the risk-limited nature of carrying offsetting positions, 
these positions may now be subject to large regulatory capital 
requirements. Various factors, including administration costs; 
transaction fees; and limited market demand or counterparty 
interest, however, discourage market participants from closing these 
positions even though many market participants likely would prefer 
to close the positions rather than carry them to expiration.
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    The Exchange believes these regulatory capital requirements could 
impede efficient use of capital and undermine the critical liquidity 
role that Market-Makers play in the SPX options market by limiting the 
amount of capital clearing TPHs can allocate to clearing member 
transactions. Specifically, the rules may cause clearing TPHs to impose 
stricter position limits on their clearing members. These stricter 
position limits may impact the liquidity Market-Makers might supply in 
the SPX market, and this impact may be compounded when a clearing TPH 
has multiple Market-Maker client accounts, each having largely risk-
neutral portfolio holdings.\8\
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    \8\ Several TPHs have indicated to the Exchange that these rules 
could hamper their ability to provide consistent liquidity in the 
SPX options market unless they reduce their positions in SPX by the 
end of the year.
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    Currently, TPHs may reduce open interest in SPX options for 
regulatory capital purposes by simply trading out of positions at the 
end of each month as they would trade any open position. The Exchange 
currently waives transaction fees incurred as a result of transactions 
that compress or reduce certain open positions.\9\ However, the 
Exchange believes wide-scale reduction of open interest in SPX options 
in such a manner is burdensome and inefficient. Accordingly, the 
Exchange recently adopted a procedure to facilitate these types of 
transactions on the Exchange to allow TPHs seeking to close positions 
in SPX options to more easily identify counterparty interest and 
efficiently conduct closing transactions in SPX options on the Exchange 
in ``compression forums'' without interfering with normal SPX 
trading.\10\ In general, under this new process, each month, TPHs may 
submit to the Exchange lists of open SPX positions (these positions are 
referred to in Rule 6.56 as ``compression-list positions'') they wish 
to close against opposing (long/short) positions of other TPHs. The 
Exchange would then aggregate these positions into a single list to 
allow TPHs to more easily identify those positions with counterparty 
interest on the Exchange. The Exchange will then provide a forum on the 
Exchange's trading floor during which TPHs could conduct closing-only 
transactions in series of SPX options. The Exchange will hold 
compression forums on the last three trading days of each calendar 
month.
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    \9\ See CBOE Fees Schedule, Footnote 41 (The Exchange rebates 
transaction fees if a transaction (i) involves 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) 
is a closing-only transaction or, if the transaction involves a Firm 
order (origin code ``F''), is an opening transaction executed to 
facilitate a compression of option positions for a market-maker or 
joint-back office (JBO) account executed as a cross pursuant to and 
in accordance with CBOE Rule 6.74(b) or (d); (iii) is a position 
with a required capital charge equal to the minimum capital charge 
under OCC rules RBH calculator or is a position comprised of option 
series with a delta of ten or less; and (iv) is entered on any of 
the final three (3) trading days of any calendar month. To receive 
this rebate, a rebate request with supporting documentation must be 
submitted to the Exchange within three business days of the 
transactions.); see also Securities Exchange Act Release Nos. 79279 
(November 10, 2016), 81 FR 81200 (November 17, 2016) (SR-CBOE-2016-
074) and 76842 (January 6, 2016), 81 FR 1455 (January 12, 2016) (SR-
CBOE-2015-117).
    \10\ See Rule 6.56; see also Securities Exchange Act Release No. 
79610 (December 20, 2016) (SR-CBOE-2016-090).
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    To encourage TPHs to submit compression-list positions in advance 
of monthly compression forums and compress these positions during 
compression forums, the Exchange proposes to rebate all transaction 
fees for closing transactions involving SPX and SPXW compression-list 
positions executed in a compression forum (pursuant to Rule 6.56).\11\ 
The Exchange believes compression of these positions would improve 
market liquidity by freeing capital currently tied up in positions for 
which there is a minimal chance that a significant loss would occur. 
The Exchange further believes advanced submission of compression-list 
positions to the Exchange will allow TPHs to more easily identify 
counterparty interest and efficiently conduct closing transactions of 
these positions during compression forums. The Exchange notes the 
submission of compression-list positions is completely voluntary, open 
to all TPHs with open positions in SPX, and does not require a TPH to 
trade any compression-list position or participate in a compression 
forum. To receive a rebate, a TPH must submit to the Exchange a rebate 
request with supporting documentation within three business days of the 
transactions.
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    \11\ A rebate of transaction fees would include the transaction 
fee assessed along with any other surcharges assessed per contract 
(e.g., the Index License Surcharge).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\12\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \13\ 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

[[Page 3381]]

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,\14\ which requires Exchange rules to 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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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78f(b)(4).
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    In particular, the Exchange believes rebating transaction fees to 
TPHs that submit compression-list positions to the Exchange in advance 
is reasonable and not unfairly discriminatory because it encourages 
TPHs to submit to the Exchange these positions in advance of 
compression forums. The Exchange may then aggregate these positions, 
which will allow TPHs to more easily identify counterparty interest and 
increase opportunities for TPHs to ultimately close these positions 
during a compression forum. The Exchange believes compression of these 
positions would improve market liquidity by freeing capital currently 
tied up in positions for which there is a minimal chance that a 
significant loss would occur. All TPHs may submit compression-list 
positions, are subject to the same submission deadline, and may 
participate in compression forums.
    The Exchange believes rebating transaction fees for transactions 
closing compression-list positions during compression forums is 
reasonable, equitable and not unfairly discriminatory because 
compression forums will provide an opportunity for TPHs to efficiently 
conduct closing transactions of these positions. These positions would 
result in extremely large bank capital requirements for Clearing TPHs 
even though there is minimal change [sic] for large losses to occur. 
Additionally, these positions have little or no economic benefit to the 
TPHs that hold these 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 it is reasonable and not unfairly 
discriminatory to limit the rebate to transactions that close 
compression-list positions, which must either have a required capital 
charge equal to the minimum capital charge pursuant to the RBH 
calculator in OCC's rules or a delta of ten or less, because these 
criteria identify option positions that are truly out-of-the-money or 
spread positions that are essentially riskless strategies. 
Particularly, the Exchange notes theoretically riskless positions can 
be identified when the required capital charge equals the minimum 
capital charge under OCC's RBH calculator. Transactions comprised of 
option series with a delta of no greater than 10 would indicate an 
option position that is, by definition, out-of-the-money.
    The Exchange believes it is reasonable, equitable and not unfairly 
discriminatory to limit the rebate to SPX options (including SPXW) 
because only SPX options may be traded in compression forums. SPX has a 
substantially higher notional value than other options classes. As 
such, open interest in SPX has a much greater effect on a bank's 
regulatory capital requirements. Compressing riskless SPX option 
positions therefore has a greater impact on reducing a bank regulatory 
capital requirement.
    The Exchange believes it is reasonable to limit the rebate of 
transactions fees to closing-only transactions, [sic] only closing 
transactions are permitted during compression forums. If a transaction 
were to open interest, it would defeat the purpose of the proposed 
rebate, which is to encourage the closing of positions creating high 
bank regulatory capital requirements for positions that are of low 
economic benefit and risk and could otherwise be offset. The Exchange 
notes it already waives transaction fees for compression of certain 
eligible SPX positions.\15\
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    \15\ See supra note 9.
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    The Exchange believes requiring TPHs to submit a request for a 
rebate within three business days of the transactions clarifies the 
manner in which the rebate can be accomplished in a timely manner and 
will eliminate any confusion and provide a clear procedure for 
applicants to get a rebate for their compression transactions, removing 
impediments to and perfecting the mechanism of a free and open market. 
Additionally, the Exchange notes such requirement will apply to all 
TPHs and is similar to the current requirement for requesting a rebate 
of transaction fees for compression of certain eligible SPX 
positions.\16\
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    \16\ Id.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE 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 not necessary or appropriate in furtherance of the Act 
because it applies to all TPHs in the same manner with positions that 
meet the eligible criteria. The proposed rule change would encourage 
closing of positions that needlessly result in burdensome capital 
requirements. Closing of the positions 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 SPX positions. The proposed rule change also encourages TPHs 
to submit to the Exchange in advance a list of these positions, which 
will allow TPHs to more easily identify counterparty interest and 
increase opportunities for to efficiently conduct closing transactions 
of these positions during compression forums.
    The Exchange does not believe the proposed rule change will impose 
any burden on intermarket competition not necessary or appropriate in 
furtherance of the purposes of the Act because the proposed rule change 
applies only to the trading of SPX options, which are exclusively-
listed on CBOE. To the extent the proposed rule change makes the 
Exchange a more attractive marketplace for market participants at other 
exchanges, such market participants are welcome to become CBOE market 
participants.
    Furthermore, as stated above, submission of lists of positions for 
compression is completely voluntary, open to all TPHs, and non-binding, 
in that submission of a list does not require a TPH to trade any 
position or even represent any position in a trading crowd. Lists of 
positions will be made available to all TPHs and contain very limited 
information regarding open interest in positions in SPX. The list will 
simply alert TPHs to certain SPX positions that other TPHs are 
interested in closing at the end of each calendar month.

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)

[[Page 3382]]

of the Act \17\ and paragraph (f) of Rule 19b-4 \18\ 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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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 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-2016-094 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-2016-094. 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-2016-094 and should be 
submitted on or before February 1, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-00368 Filed 1-10-17; 8:45 am]
 BILLING CODE 8011-01-P