Document ID: SEC-2019-0317-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2019-03-21T04:00Z

[Federal Register Volume 84, Number 55 (Thursday, March 21, 2019)]
[Notices]
[Pages 10558-10561]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05354]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85328; File No. SR-CBOE-2019-014]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Delete 
Rules That Are No Longer Necessary in the Review of Large Positions in 
Broad-Based Index Options

March 15, 2019.
    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 March 4, 2019, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') 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 Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to delete rules that are no longer necessary in the review of large 
positions in broad-based index options. The text of 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://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 purpose of this rule change is to delete rules that are no 
longer necessary in the review of large positions in broad-based index 
options. Specifically, the Exchange proposes to delete Interpretations 
and Policies .03 (Reporting Requirement) and .04 (Margin and Clearing 
Firm Requirements) to Rule 24.4. Currently, Interpretation and Policy 
.03 to Rule 24.4 requires a TPH or TPH organization that maintains a 
broad-based index option position on the same side of the market in 
excess of 100,000 contracts for OEX, XEO, NDX, RUT, VIX, VXN, VXD, 
VXST, S&P 500 Dividend Index, SPX, Cboe S&P 500 a.m./PM Basis, Cboe S&P 
500 Three-Month Realized Variance or Cboe S&P 500 Three-Month Realized 
Volatility and 1 million contracts for BXM (1/10th value) and DJX, for 
its own account or for the account of a customer, to report information 
to the Exchange as to whether and how the positions are hedged. 
Interpretation and Policy .04 to Rule 24.4 currently allows the 
Exchange to determine whether additional margin is warranted in light 
of the risks associated with under-

[[Page 10559]]

hedged options position on the broad-based index products listed in 
Interpretation and Policy .03 to Rule 24.4.
    The Exchange believes that the Large Option Position Reporting 
(``LOPR'') system hosted by the Options Clearing Corporation (``OCC'') 
currently functions as a centralized system and streamlined process for 
all market participants industry-wide to report large options 
positions, including those in broad-based index options. This system 
allows TPHs and TPH organizations to submit their required LOPR files 
in compliance with Rule 4.13(a), which requires all TPHs to report to 
the Exchange aggregate long or short positions on the same side of the 
market of 200 or more contracts of any single class of option 
contracts. Essentially, OCC through the LOPR system acts as a 
centralized service provider for TPH compliance with position reporting 
requirements by collecting data from each TPH or TPH organization, 
consolidating the information, and ultimately providing detailed 
listings of each TPH's or TPH organization's report to the Exchange.\5\ 
Though Rule 24.4(a) (Position Limits for Broad-Based Index Options) 
provides that there shall be no position limits for broad-based index 
option contracts on Cboe S&P 500 a.m./PM Basis, Cboe S&P 500 Three-
Month Realized Variance, Cboe S&P 500 Three-Month Realized Volatility 
and on the BXM (1/10th value), DJX, OEX, XEO, NDX, RUT, VIX, VXN, VXD, 
VXST, S&P 500 Dividend Index, and SPX classes, Rule 4.13(a) still 
requires all TPHs to file a LOPR, which includes reporting on all 
options contracts dealt in on the Exchange. As stated, the Exchange 
currently receives \6\ a TPH's or TPH organization's LOPR submissions 
through OCC and its centralized LOPR submission system. The Exchange 
notes that OCC's administration of the LOPR submissions to the Exchange 
will enable the Exchange to better allocate its surveillance resources, 
focusing on enhanced surveillance of trading to detect potential 
manipulation and larger, risky positions, rather than focusing on 
enforcement of requirements under Interpretation and Policy .03 to Rule 
24.4. The Exchange believes that its enhanced surveillance will allow 
it to effectively assess LOPR submissions received through OCC and 
promptly respond to market concerns at an early stage. Additionally, 
under current Rule 15.1 (Maintenance, Retention and Furnishing of 
Books, Records and Other Information), TPHs are required to make 
available to the Exchange such books, records or other information as 
may be called for under the Rules or as may be requested in connection 
with an investigation by the Exchange.\7\ The Exchange believes the 
aforementioned processes and procedures eliminate the need for the 
Exchange to receive essentially duplicative position and hedge 
documentation for broad-based index options separately from a TPH or 
TPH organization in accordance with the current Interpretation and 
Policy .03 to Rule 24.4. Under the current LOPR information gathering 
and reporting regime and Rule 15.1, such efforts by the Exchange are 
duplicative and unduly burdensome for TPHs, TPH organizations, and the 
Exchange. The Exchange thus believes that the proposed rule change will 
remove duplicative and burdensome procedures.
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    \5\ See Securities Exchange Act Release No. 79930 (February 2, 
2017), 82 FR 9807 (February 8, 2017) (Notice of Filing and Order 
Approving and Declaring Effective an Amendment to the Plan for the 
Allocation of Regulatory Responsibilities Among Participating 
Organizations Concerning Options-Related Market Surveillance) (4-
551) (Approving a multi-party 17d-2 agreement whereby member firms 
are allocated to the Exchange and other SROs for review for 
compliance with LOPR reporting requirements).
    \6\ The Exchange itself, as well as Financial Industry 
Regulatory Authority, Inc. (``FINRA''), acting as its agent pursuant 
to a regulatory services agreement (``RSA''), receive and review 
LOPR submissions.
    \7\ The Exchange notes that ``in connection with an 
investigation'' broadly encompasses any request made by the Exchange 
for information which may lead to the initiation of a formal 
investigation.
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    The Exchange notes that it has found no occasion necessary to 
impose additional margin requirements pursuant to the current 
Interpretation and Policy .04 to Rule 24.4, as a result of the 
reporting and review process in connection with Interpretation and 
Policy .03 to Rule 24.4. The Exchange has found that unhedged or under-
hedged large option positions have generally not been identified. The 
Exchange believes this eliminates the need for the receipt of 
information and documentation from TPHs or TPH organizations as to 
whether and how their broad-based index option positions are hedged 
under Interpretation and Policy .03 to Rule 24.4, and any need for the 
Exchange to raise additional margin in light of under-hedged positions 
under Interpretation and Policy .04 to Rule 24.4. Further, under Rule 
12.10 (Margin Required Is Minimum) the Exchange currently may impose 
higher margin requirements when it deems such higher margin 
requirements to be advisable. As a result, the Exchange believes that 
the proposed rule changes will serve to benefit investors by removing 
duplicative and burdensome procedures.
    Additionally, the Exchange believes that risk review and controls, 
including hedge strategy implementation and assessment of credit and 
margin, are most efficient and effective at the TPH level. Currently, 
the Exchange understands TPHs and TPH organizations generally have 
their own internal risk management processes and procedures in place 
for reviewing, identifying and controlling risk of large option 
positions, including hedges for those positions. Moreover, under Rule 
15.8A (Risk Analysis of Portfolio Margin Accounts), TPH organizations 
that maintain any portfolio margin accounts for customers are currently 
required to establish and maintain a comprehensive written risk 
analysis methodology for assessing and monitoring the potential risk to 
the TPH organization's capital over a specified range of possible 
market movements of positions maintained in such accounts. 
Specifically, Rule 15.8A(c) requires a TPH organization that maintains 
any portfolio margin accounts for customers to incorporate specific and 
thorough procedures and guidelines into its written risk methodology 
for monitoring credit risk exposure to the TPH organization on both an 
intra-day and end of day basis, managing the impact of credit extension 
on the TPH organization's overall risk exposure, the appropriate 
response by management when limits on credit extensions have been 
exceeded, determining the need to collect additional margin, and so on. 
The Exchange believes that the rules described above pursuant to which 
it can receive information from TPHs regarding hedges of their 
positions in broad-based index options are less burdensome and more 
efficient than the process used pursuant to Interpretations and 
Policies .03 and .04 of Rule 24.4, making those rule provisions 
redundant and no longer necessary.
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.\8\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \9\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and

[[Page 10560]]

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) \10\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ Id.
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    In particular, the Exchange believes that removing the duplicative 
and burdensome processes in connection with Interpretations and 
Policies .03 and .04 to Rule 24.4 will serve 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 benefit 
investors. Specifically, the Exchange believes that the receipt of LOPR 
reports from OCC and other Exchange Rules provide it with a more 
efficient means to receive the same information as it receives, and 
take the same action it may take, pursuant to Rule 24.4, 
Interpretations and Policies .03 and .04. As stated, the Exchange 
believes that its receipt of LOPR submissions through OCC will allow 
for it to allocate enhanced surveillance resources to assessing the 
LOPR submissions and detecting and deterring any concerning market 
behavior or trading abuses at an early stage, thereby protecting 
investors by removing impediments to and perfecting the mechanism of a 
free and open market and national market system. The Exchange further 
believes that removing the reporting requirement under Interpretation 
and Policy .03 to Rule 24.4 will benefit investors by removing a 
duplicative and thus unnecessary reporting and documentation step.
    The Exchange also believes the proposed rule change is consistent 
with Section 6(b)(1) of the Act,\11\ which provides that the Exchange 
be organized and have the capacity to be able to carry out the purposes 
of the Act and to enforce compliance by the Exchange's Trading Permit 
Holders and persons associated with its Trading Permit Holders with the 
Act, the rules and regulations thereunder, and the rules of the 
Exchange.
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    \11\ 15 U.S.C. 78f(b)(1).
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    In particular, the Exchange currently has the capacity under other 
Exchange Rules to be able to enforce compliance by TPH and TPH 
organizations related to submission of appropriate hedge information 
and imposing sufficient margin on large broad-based-index options 
positions. The Exchange believes that removing redundant and 
unnecessary rules will allow for the Exchange to be organized and 
better able to carry out the purposes of the Act and enforce 
compliance.

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. In particular, the proposed 
rule changes are not intended to address competitive issues but rather 
are concerned with facilitating less burdensome and more efficient 
regulatory compliance. The Exchange believes the proposed rule changes 
reduces reporting burdens on all market participants equally.

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 after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \12\ and Rule 19b-4(f)(6) \13\ 
thereunder.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 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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    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 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-CBOE-2019-014 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-2019-014. 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-2019-014 and

[[Page 10561]]

should be submitted on or before April 11, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-05354 Filed 3-20-19; 8:45 am]
BILLING CODE 8011-01-P