Document ID: SEC-2021-0676-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2021-05-10T04:00Z

[Federal Register Volume 86, Number 88 (Monday, May 10, 2021)]
[Notices]
[Pages 25026-25033]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-09774]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91767; File No. SR-CBOE-2021-029]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Increase Position Limits for 
Options on Certain Exchange-Traded Funds and an Exchange-Traded Note

May 4, 2021.
    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 April 21, 2021, Cboe Exchange, Inc. (``Exchange'' or ``Cboe 
Options'') 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

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to increase position limits for options on certain exchange-traded 
funds (``ETFs'') and exchange-traded notes (``ETNs''). 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
    Position limits are designed to address potential manipulative 
schemes and adverse market impacts surrounding the use of options, such 
as disrupting the market in the security underlying the options. While 
position limits should address and discourage the potential for 
manipulative schemes and adverse market impact, if such limits are set 
too low, participation in the options market may be discouraged. The 
Exchange believes that position limits must therefore be balanced 
between mitigating concerns of any potential manipulation and the cost 
of inhibiting potential hedging activity that could be used for 
legitimate economic purposes.
    The Exchange has observed an ongoing increase in demand, for both 
trading and hedging purposes, in options on the following exchange-
traded products (``ETPs''): (1) SPDR Gold Shares (``GLD''), (2) iShares 
Silver Trust (``SLV''), (3) iShares iBoxx $ Investment Grade Corporate 
Bond ETF (``LQD''), (4) VanEck Vectors Gold Miners ETF (``GDX''), (5) 
iPath S&P 500 VIX Short-Term Futures ETN (``VXX''), and (6) ProShares 
Ultra VIX Short-Term Futures ETF (``UVXY'', and collectively, with the 
aforementioned ETFs, the ``Underlying ETPs''). Though the demand for 
these options appears to have increased, position limits for options on 
the Underlying ETPs have remained the same. The Exchange believes these 
unchanged position limits may have impeded, and may continue to impede, 
trading activity and strategies of investors, such as use of effective 
hedging vehicles or income generating strategies (e.g., buy-write or 
put-write), and the ability of Market-Makers to make liquid markets 
with tighter spreads in these options resulting in the transfer of 
volume to over-the-counter (``OTC'') markets. OTC transactions occur 
through bilateral agreements, the terms of which are not publicly 
disclosed to the marketplace. As such, OTC transactions do not 
contribute to the price discovery process on a public exchange or other 
lit markets. Therefore, the Exchange believes that the proposed 
increases in

[[Page 25027]]

position limits for options on the Underlying ETPs may enable liquidity 
providers to provide additional liquidity to the Exchange and other 
market participants to transfer their liquidity demands from OTC 
markets to the Exchange. As described in further detail below, the 
Exchange believes that the continuously increasing market 
capitalization of the Underlying ETPs, ETP component securities, as 
well as the highly liquid markets for those securities, reduces the 
concerns for potential market manipulation and/or disruption in the 
underlying markets upon increasing position limits, while the rising 
demand for trading options on the Underlying ETPs for legitimate 
economic purposes compels an increase in position limits.
Proposed Position Limits for Options on the Underlying ETPs
    Position limits for options on ETPs are determined pursuant to Rule 
8.30 and vary according to the number of outstanding shares and the 
trading volumes of the underlying stocks or ETPs over the past six 
months. Pursuant to Rule 8.30, the largest in capitalization and the 
most frequently traded stocks and ETPs have an option position limit of 
250,000 contracts (with adjustments for splits, re-capitalizations, 
etc.) on the same side of the market; and smaller capitalization stocks 
and ETPs have position limits of 200,000, 75,000, 50,000 or 25,000 
contracts (with adjustments for splits, re-capitalizations, etc.) on 
the same side of the market. Options on GLD, SLV, LQD, GDX, VXX and 
UVXY are currently subject to the standard position limit of 250,000 
contracts as set forth in Rule 8.30. Rule 8.30.07 sets forth separate, 
higher position limits for options on specific ETPs. The Exchange 
proposes to amend Rule 8.30.07 to increase the position limits and, as 
a result, exercise limits, for options on each of GLD, SLV, LQD,GDX, 
VXX and UVXY.\3\ The table below represents the current, and proposed, 
position limits for options on the ETPs subject to this proposal:
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    \3\ By virtue of [sic] 8.42.02, which is not being amended by 
this filing, the exercise limits for GLD, SLV, LQD, GDX, VXX and 
UVXY options would be similarly increased.

------------------------------------------------------------------------
                                              Current        Proposed
                 Product                     position        position
                                               limit           limit
------------------------------------------------------------------------
GLD.....................................         250,000       1,000,000
SLV.....................................         250,000         500,000
LQD.....................................         250,000         500,000
GDX.....................................         250,000         500,000
VXX.....................................         250,000         500,000
UVXY....................................         250,000         500,000
------------------------------------------------------------------------

    The Exchange notes that the proposed position limit for options on 
GLD is consistent with existing position limits for options on the 
iShares Russell 2000 ETF (``IWM''), the iShares MSCI Emerging Markets 
ETF (``EEM''), iShares China Large-Cap ETF (``FXI'') and iShares MSCI 
EAFE ETF (``EFA''), while the proposed limits for options on LQD, SLV 
and GDX are consistent with current position limits for options on the 
iShares MSCI Brazil Capped ETF (``EWZ''), iShares 20+ Year Treasury 
Bond Fund ETF (``TLT''), iShares MSCI Japan ETF (``EWJ''), iShares 
iBoxx High Yield Corporate Bond Fund (``HYG'') and Financial Select 
Sector SPDR Fund (``XLF''). The Exchange represents that the Underlying 
ETPs qualify for either (1) the initial listing criteria set forth in 
Rule 4.3.06(c) for ETFs holding non-U.S. component securities, (2) 
generic listing standards for series of portfolio depository receipts 
and index fund shares based on international or global indexes under 
which a comprehensive surveillance agreement (``CSA'') is not required, 
or (3) the initial listing criteria set forth in Rule 4.3.13(c) for 
ETNs (or, Index-Linked Securities), as well as the continued listing 
criteria in Rule 4.4 (for ETFs) \4\ and Rule 4.4.14 (for ETNs). In 
compliance with its listing rules, the Exchange also represents that 
non-U.S. component securities that are not subject to a comprehensive 
surveillance agreement (``CSA'') do not, in the aggregate, represent 
more than more than 50% of the weight of any of the Underlying ETPs 
that are ETFs.\5\
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    \4\ The Exchange notes that the initial listing criteria for 
options on ETFs that hold non-U.S. component securities are more 
stringent than the maintenance listing criteria for those same ETF 
options. See Rule 4.3.06(c); Rule 4.4.06.
    \5\ See Rule 4.3.06(c).
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Composition and Growth Analysis for Underlying ETPs
    As stated above, position (and exercise) limits are intended to 
prevent the establishment of options positions that can be used to or 
potentially create incentives to manipulate the underlying market so as 
to benefit options positions. The Securities and Exchange Commission 
(the ``Commission'') has recognized that these limits are designed to 
minimize the potential for mini-manipulations and for corners or 
squeezes of the underlying market, as well as serve to reduce the 
possibility for disruption of the options market itself, especially in 
illiquid classes.\6\ The Underlying ETPs, as well as the ETP 
components, are highly liquid and are based on a broad set of highly 
liquid securities and other reference assets, as demonstrated through 
the trading statistics presented in this proposal. To support the 
proposed position limit increases, the Exchange considered the 
liquidity of the Underlying ETPs, the value of the underlying 
securities or index components and relevant marketplace, the share and 
option volume for the Underlying ETPs, and, where applicable, the 
availability or comparison of economically equivalent products to 
options on the Underlying ETPs.
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    \6\ See Securities Exchange Act Release No. 67672 (August 15, 
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29).

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[[Page 25028]]

    The Exchange has collected the following trading statistics 
regarding shares of and options on the Underlying ETPs and the values 
of the Underlying ETPs and their component securities or index 
components, as applicable:

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                                                 ADV \7\ (ETF                             Shares        Fund  market cap
                   Product                         shares)          ADV (option        outstanding      (USD) (millions)      Share value \10\ (USD)
                                                  (millions)         contracts)       (millions) \8\          \9\
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GLD.........................................               12.3            257,700             354.30           70,195.7  161.71 (NAV).
SLV.........................................               33.1            376,700              619.3           14,228.4  22.57 (NAV).
LQD.........................................               14.1             30,300              308.1           54,113.7  130.13 (NAV).
GDX.........................................               39.4            166,000              419.8           16,170.5  33.80 (NAV).
VXX.........................................               39.3            289,800              110.8             1,023.  10.31 (Closing Indicative
                                                                                                                           Value).
UVXY........................................               29.3            113,500              228.7            1,580.6  4.85 (NAV).
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    The Exchange has collected the same trading statistics, where 
applicable, as above regarding a sample of other ETPs, as well as the 
current position limits for options on such ETPs pursuant to Rule 
8.30.07, to draw comparisons in support of proposed position limit 
increases for options on the Underlying ETPs (see further discussion 
below):
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    \7\ Average daily volume (ADV) data for ETP shares and option 
contracts, as well as for ETF shares and options on the comparative 
ETFs presented below, are for all of 2020. Additionally, reference 
to ADV in ETP shares and ETP options, and indexes herein this 
proposal are for all of calendar year 2020, unless otherwise 
indicated.
    \8\ Shares Outstanding and Net Asset Values (``NAV''), as well 
as for the comparative ETPs presented below, are as of April 5, 2021 
for all ETPs except for VXX and UVXY, which are as of April 14, 
2021.
    \9\ Fund Market Capitalization data, as well as for the 
comparative ETPs presented below, are as of January 14, 2021.
    \10\ See supra note 8.

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                                             ADV (ETF                           Shares                                                        Current
                 Product                      shares)        ADV (option      outstanding   Fund  market cap       Share value (USD)         position
                                            (millions)       contracts)       (millions)    (USD) (millions)                                  limits
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EEM.....................................            55.9           284,700           581.4          30,262.2  53.79 (NAV)...............       1,000,000
FXI.....................................            24.6           128,900            91.2           4,398.9  47.60 (NAV)...............       1,000,000
EFA.....................................            29.6           130,900           719.4          53,808.1  77.02 (NAV)...............       1,000,000
EWZ.....................................            29.2           139,400           173.8           6,506.8  33.71 (NAV)...............         500,000
TLT.....................................            11.5           111,800           103.7          17,121.3  136.85 (NAV)..............         500,000
EWJ.....................................             8.2            15,500           185.3          13,860.7  69.72 (NAV)...............         500,000
HYG.....................................            30.5           261,600           254.5          24,067.5  86.86 (NAV)...............         500,000
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    The Exchange believes that, overall, the liquidity in the shares of 
the Underlying ETPs and in their overlying options, the larger market 
capitalizations for each of the Underlying ETPs, and the overall market 
landscape relevant to each of the Underlying ETPs support the proposal 
to increase the position limits for each option class. Given the robust 
liquidity in and value of the Underlying ETPs and their component 
securities, the Exchange does not anticipate that the proposed increase 
in position limits would create significant price movements as the 
relevant markets are large enough to adequately absorb potential price 
movements that may be caused by larger trades.
    Specifically, the investment objective of GLD (also known as SPDR 
Gold Trust, or the ``Trust'') is to track the performance of the price 
of gold bullion.\11\ GLD offers investors an innovative, relatively 
cost efficient and secure way to access the gold market, without the 
necessity of taking physical delivery of gold, and to buy and sell that 
interest through the trading of a security on a regulated stock 
exchange. SPDR Gold Shares represent fractional, undivided beneficial 
ownership interests in the Trust, the sole assets of which are gold 
bullion. The spot price for gold is determined by market forces in the 
24-hour global OTC market for gold including spot, forwards, and 
options and other derivatives, together with exchange-traded futures 
and options. The Net Asset Value (``NAV'') of the Trust is calculated 
based on the total ounces of gold owned by the Trust valued at the 
London Bullion Market Association (``LBMA'') Gold Price PM of that day 
(plus any cash held by the Trust less accrued expenses).\12\ The 
Exchange has observed that the ADV in GLD shares has increased from 
approximately 8.7 million shares in 2019 to 12.3 million shares by the 
end of 2020. Similarly, the ADV in options on GLD has increased from 
approximately 153,900 option contracts in 2019 to 257,700 option 
contracts by the end of 2020. The Exchange also notes that in the first 
quarter of 2021, GLD options experienced an ADV of approximately 
395,100 option contracts. Additionally, comparing the statistics shown 
in the tables above for GLD and the sample of other ETFs with a current 
position limit of 1,000,000 contracts, the Exchange notes that the ADV 
for GLD options (257,700 option contracts) are more, or just as, liquid 
as EEM options (284,700 option contracts), FXI options (128,900 option 
contracts) and EFA options (130,900 option contracts). Also, as 
indicated in the table above, GLD's market capitalization 
(approximately $70.2 billion) is higher than all three of these 
comparable ETFs, and, in addition to this, the Exchange notes that the 
NAV of GLD is higher than that of the NAV of EEM, FXI and EFA, which is 
indicative that the total value of its underlying components is 
generally higher. The Exchange believes that GLD's share and option 
volume, its market capitalization, and the comparatively high value of 
its underlying components (as indicated by its NAV) are large enough to 
absorb potential price movements caused by a large trade in GLD.
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    \11\ See SPDR Gold Shares, available at https://www.ssga.com/us/en/intermediary/etfs/funds/spdr-gold-shares-gld (January 11, 2021).
    \12\ See State Street Global Advisors, SPDR Gold Trust GLD, FAQ 
(July 2020), available at https://www.ssga.com/library-content/products/fund-docs/etfs/us/tax-documents/gld-faq.pdf.
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    Like that of GLD and spot gold, SLV seeks to reflect generally the 
performance of the price of silver and represents a cost-efficient 
alternative to investments in physical silver for

[[Page 25029]]

investors not otherwise in a position to participate directly in the 
market for physical silver. The SLV's NAV is derived from its holdings 
in silver valued on the basis of the daily LBMA Silver Price.\13\ SLV, 
too, has experienced a significant increase in AVD [sic] in shares and 
options from 2019 through 2020. It grew from approximately 13.6 million 
shares in 2019 to 33.1 million shares by the end of 2020, and from 
approximately 118,800 option contracts in 2019 to 376,700 option 
contracts by the end of 2020. The Exchange also notes that SLV options 
experienced in ADV of approximately 1.1 million option contracts in the 
first quarter of 2021.\14\ Additionally, SLV generally experiences a 
significantly greater ADV in shares (33.1 million share) and in options 
(376,700 option contracts) than that of the ADV in shares and options 
for EWZ (29.2 million shares and 139,300 option contracts), TLT (11.5 
million shares and 111,800 option contracts), EWJ (8.2 million shares 
and 15,500 option contracts) and HYG (30.5 million shares and 261,600 
option contracts), and also has a comparable, or higher, market 
capitalization (approximately $14.2 billion) than EWZ, TLT and EWJ. As 
per the table above, options on each of these ETFs already have a 
position limit of 500,000 contracts -- the proposed position limit for 
SLV options. The Exchange believes that SLV's share and option volume 
and its market capitalization are large enough to absorb potential 
price movements caused by a large trade in SLV.
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    \13\ See iShares Silver Trust, Fact Sheet as of 9/20/2020, 
available at https://www.ishares.com/us/literature/fact-sheet/slv-ishares-silver-trust-fund-fact-sheet-en-us.pdf.
    \14\ While volume in SLV options in the first quarter of 2021 
experienced significantly high volume as a result of unusual market 
conditions, the Exchange believes that the existing possibility of 
such significant increases supports the proposed position limit 
increase.
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    While the demand for options trading on GLD and SLV has evidently 
increased, and continues to increase, the position limits have remained 
the same, which the Exchange believes may be impacting the ability of 
Trading Permit Holders (``TPHs'') to effectively hedge against exposure 
to physical gold and silver. For example, a single TPH may manage 
groups of mutual funds (i.e., a fund complex), each of which may have 
different growth objectives. If one portfolio manager with a large 
group of funds has a relatively small exposure to spot gold or spot 
silver, they may hedge such exposure using GLD options or SLV options, 
respectively. Though relatively small, this hedge (up to 250,00 [sic] 
option contracts for GLD and for SLV) may utilize the TPH's entire 
capacity against the position limit. As a result, the TPH's other 
portfolio managers must look to use alternative vehicles to hedge gold 
or silver exposure for the funds under their management. The Exchange 
understands that, unlike GLD or SLV options, most of these alternatives 
hedging vehicles are not a perfect hedge, which creates liquidity 
issues and results in increased trading costs. As a result, the 
Exchange believes that the proposed position limit increases for both 
GLD and SLV options will allow TPHs to effectively hedge their total 
gold or silver exposure without having to seek other, less precise 
hedging vehicles.
    LQD tracks the performance of the Markit iBoxx USD Liquid 
Investment Grade (``IBOXIG'') Index, which is an index designed as a 
subset of the broader U.S. dollar-denominated corporate bond market 
which can be used as a basis for tradable products, such as ETFs, and 
is comprised of over 8,000 bonds.\15\ The Exchange notes that from 2019 
through 2020, ADV has grown significantly in shares of LQD and in 
options on LQD, from approximately 9.7 million shares in 2019 to 14.1 
million through 2020, and from approximately 8,200 option contracts in 
2019 to 30,300 through 2020. LQD also continued to experience 
significant growth in ADV in the first quarter of 2021 with an ADV of 
approximately 140,200 option contracts. Further, LQD generally 
experiences higher ADV in shares than both TLT (11.5 million shares) 
and EWJ (8.2 million shares) and almost double the ADV in option 
contracts than EWJ (15,500 option contracts). Options on each EWZ, TLT 
and EWJ are currently subject to a position limit of 500,000 
contracts--the proposed limit for options on LQD. The NAV of LQD is 
also higher than, or comparable to, that of the NAV of the ETFs 
underlying the options that are currently subject to a position limit 
of 500,000 option contracts (as presented in the table above), which is 
indicative that the total value of its underlying components is 
generally higher or comparable. Per the tables above, LQD's total 
market capitalization of approximately $54.1 billion is also higher 
than or comparable to the total market capitalization of the ETFs 
underlying the options currently subject to a position limit of 
5000,000 [sic] contracts. In addition to this, the Exchange notes that, 
although there are currently no options listed for trading on the 
IBOXIG Index, the components \16\ of the IBOXIG Index, which can be 
used in creating a basket of securities that equate to the LQD ETF, are 
made up of over 8,000 bonds for which the outstanding face value of 
each must be greater than or equal to $2 billion.\17\ The Exchange 
believes that the total value of the bonds in the IBOXIG Index, coupled 
with LQD's share and option volume, total market capitalization, and 
NAV price indicates that the market is large enough to absorb potential 
price movements caused by a large trade in LQD. Also, as evidenced 
above, trading volume in LQD shares has increased over the past few 
years and the Exchange understands that market participants' need for 
options have continued to grow alongside the ETF. Particularly, the 
Exchange notes that in the last year, market participants have sought 
more cost-effective hedging strategies through the use of LQD options 
as a result of the borrow on other fixed income ETFs, such as HYG. 
Therefore, the Exchange believes that because LQD options are being 
increasingly utilized as an alternative to similar products, such as 
HYG options, then it is appropriate that options on LQD be subject to 
the same 500,000 contract position limit that currently exists for 
options on HYG.
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    \15\ See Markit iBoxx USD Liquid Investment Grade Index, 
available at https://cdn.ihsmarkit.com/www/pdf/MKT-iBoxx-USD-Liquid-Investment-Grade-Index-factsheet.pdf (January 14, 2021).
    \16\ Investment grade corporate bonds.
    \17\ See supra note 14.
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    GDX seeks to replicate as closely as possible the price and yield 
performance of the NYSE Arca Gold Miners (``GDMNTR'') Index, which is 
intended to track the overall performance of companies involved in the 
gold mining industry.\18\ ADV in GDX options has increased from 2019 
through 2020, with an ADV of approximately 117,400 option contracts in 
2019 to an ADV of approximately 166,000 option contracts in 2020. The 
Exchange notes that ADV in GDX shares did not increase from 2019 to 
2020. GDX options also experienced an ADV of approximately 287,800 
option contracts in the first quarter of 2021. The Exchange notes that 
the ADV in GDX shares (39.4 million) and options on GDX (166,000 option 
contracts) are greater than the ADV in EWZ (29.2 million shares and 
139,300 option contracts), TLT (11.5 million shares and 111,800 option 
contracts), EWJ (8.2 million shares and 15,500 option contracts) and 
HYG (30.5 million shares

[[Page 25030]]

and 261,600 option contracts), each of which is currently subject to a 
position limit of 500,000 option contracts--the proposed limit for 
options on GDX. GDX also experiences a comparable, or higher, market 
capitalization (approximately $16.2 billion) than EWZ, TLT and EWZ. 
Additionally, like that of LDQ above, there is currently no index 
option analogue for the GDX ETF on the GDMNTR Index approved for 
options trading, however, the components of the GDMNTR Index, which can 
be used to create the GDX ETF, currently must each have a market 
capitalization greater than $750 million, an ADV of at least 50,000 
shares, and an average daily value traded of at least $1 million in 
order to be eligible for inclusion in the GDMNTR Index. The Exchange 
believes that the GDMNTR Index component inclusion requirements, as 
well as GDX's share and option volume and total market capitalization, 
indicate that the GDX market is sufficiently large and liquid enough to 
absorb price movements as a result of potentially oversized trades.
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    \18\ See VanEck Vectors Gold Miners ETF, available at https://www.vaneck.com/library/vaneck-vectors-etfs/gdx-fact-sheet-pdf/ 
(January 14, 2021).
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    VXX ETNs (which are unsecured debt obligations of the issuer) \19\ 
are designed to provide exposure to the S&P 500 VIX Short-Term Futures 
Index Total Return (``SPVXSTR''). The SPVXSTR Index is designed to 
provide access to equity market volatility through Cboe Volatility 
(``VIX'') Index futures by offering exposure to a daily rolling long 
position in the first and second month VIX futures contracts. The 
SPVXSTR Index generally reflects market participants' views of the 
future direction of the VIX Index at the time of expiration of the VIX 
futures contracts comprising the index.\20\ VXX volume has increased 
over the last years, growing from an ADV of approximately 28.6 million 
shares and 179,200 option contracts in 2019 to an ADV of approximately 
39.3 million shares and 289,800 option contracts in 2020.
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    \19\ Barclays Bank PLC.
    \20\ See iPath Series B S&P 500 VIX Short-Term Futures ETN, 
Product Summary (April 13, 2021), available at: https://www.ipathetn.com/US/16/en/details.app?instrumentId=341408.
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    Similarly, the UVXY ETF provides leveraged exposure to the S&P 500 
VIX Short-Term Futures (``SPVXSPID'') Index. Like the SPVXSTR Index, 
the SPVXSPID Index measures the returns of a portfolio of monthly VIX 
futures contracts that rolls positions from first-month contracts into 
second-month contracts on a daily basis and maintains a weighted 
average of one month to expiration. UVXY volume has increased 
significantly from 2019 through 2020--from an ADV of approximately 12 
million shares and 73,700 option contracts in 2019 to an ADV of 
approximately 29.3 million shares and 113,500 option contracts in 2020.
    Both VXX and UVXY experience an ADV in shares and option contracts 
that is greater than, or comparable to, ADV in shares and/or option 
contracts for EWZ (29.2 million shares and 139,400 option contracts), 
TLT (11.5 million shares and 111,800 option contracts), EWJ (8.2 
million shares and 15,500 option contracts), and HYG (30.5 million 
shares). As stated, options on EWZ, TLT, EWJ and HYG are all currently 
subject to the same position limit (500,000 option contracts) proposed 
for VXX and UVXY options. The Exchange also notes that, while VIX 
options share similar trading characteristics with options on VXX and 
UVXY, VIX options are not currently subject to position limits.\21\ 
Moreover, the 2020 ADV for trading in VIX futures was approximately 
192,000 contracts and VIX futures currently have a value of 
approximately $7.6 billion in open interest. The Exchange believes that 
the ADV in shares of and options on VXX and UXVY, along with the robust 
market that exists for the underlying index components (VIX futures) in 
connection with both ETPs, indicates that the market for these ETPs is 
sufficiently large and liquid enough to absorb price movements and 
large- sized trades. In addition to this, both the VXX and UVXY are 
used as key indicators of the health of the global volatility market. 
The VIX futures that comprise each product are a perfect hedge to the 
underlying delta risk; however, such futures are not recognized as 
hedges for options contract equivalent of the net delta (``OCEND'') 
purposes. A TPH that is not delta neutral must be hedged to the extent 
that the OCEND stays within the applicable position limit. The Exchange 
understands that due to the OCEND limitations and current position 
limits for options on VXX and UVXY, TPHs must hedge with options and 
buy or create shares of the underlying ETPs despite already having a 
hedge on their position via the component futures. As a result, TPHs 
may be unable to provide the most concise pricing to customers 
participating in these ETPs due to the increased costs associated with 
transacting in additional or alternative hedging vehicles in order to 
comply with the position limits currently in place. The Exchange also 
believes that the approximate value of open interest in VIX futures 
($7.6 billion) potentially necessitates substantial hedging capacity as 
both ETPs provide exposure to volatility trading based on VIX futures.
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    \21\ See Rule 8.31.
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Creation and Redemption for ETPs
    The Exchange believes that the creation and redemption process for 
the ETFs and ETN subject to this proposal (VXX) will lessen the 
potential for manipulative activity with options on the Underlying 
ETPs. Regarding ETFs, when an ETF provider wants to create more shares, 
it looks to an Authorized Participant (generally a market maker or 
other large financial institution) to acquire the securities the ETF is 
to hold. For instance, when an ETF is designed to track the performance 
of an index, the Authorized Participant can purchase all the 
constituent securities in the exact same weight as the index, then 
deliver those shares to the ETF provider. In exchange, the ETF provider 
gives the Authorized Participant a block of equally valued ETF shares, 
on a one-for-one fair value basis. The price is based on the NAV, not 
the market value at which the ETF is trading. The creation of new ETF 
units can be conducted during an entire trading day and is not subject 
to position limits. This process works in reverse where the ETF 
provider seeks to decrease the number of shares that are available to 
trade. Regarding the process for the ETN subject to this proposal, VXX, 
investors may redeem VXX shares on any redemption date,\22\ provided 
that the minimum amount of VXX shares redeemed is at least 25,000 
shares. Investors redeeming VXX shares receive a cash payment equal to 
the applicable closing indicative value on the applicable valuation 
date (less the redemption fee). While there is no direct analogue to an 
ETF ``creation'' for an ETN, the ETN issuer may sell additional VXX 
shares from its inventory.\23\ In order to redeem existing VXX shares 
or issue new VXX shares, the issuer may transact in VIX futures 
(selling VIX futures in the case of a VXX redemption, and purchasing 
VIX futures in the case of issuing new VXX shares) in order to hedge 
its exposure. The applicable creation and redemption processes for

[[Page 25031]]

the Underlying ETPs creates a direct link to the underlying components 
of the ETF or ETN and serves to mitigate potential price impact of the 
ETF and ETN shares that might otherwise result from increased position 
limits for the options on the Underlying ETPs.
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    \22\ A redemption date for each series of VXX is the third 
business day following each valuation date (other than the final 
valuation date). The final redemption date will be the third 
business day following the valuation date that is immediately prior 
to the final valuation date. If notice is provided prior to noon 
E.T., the applicable valuation date is the date on which notice is 
provided; otherwise, the applicable valuation date is the business 
day following the date on which notice is provided. See VXX 
Prospectus, available at https://www.ipathetn.com/US/16/en/documentation.app?instrumentId=341408&contentId=7549819.
    \23\ There is currently no minimum number of additional ETNs 
that an issuer may sell.
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    The Exchange understands that the ETF and ETN creation and 
redemption processes seek to keep an ETF's or ETN's share price trading 
in line with the product's underlying net asset value (ETFs) or 
indicative value (ETNs). Because an ETF trades like a stock, its share 
price will fluctuate during the trading day, due to simple supply and 
demand. If demand to buy an ETF or ETN is high, for instance, an ETF's 
share price might rise above the value of its underlying securities or 
an ETN's share price above the value of the index components. When this 
happens, the Authorized Participant or issuer believes the ETF or ETN 
may now be overpriced, so it may buy shares of the component securities 
(ETF) or buy same the index component instruments (ETN) and then sell 
ETF or ETN shares in the open market. This may drive the ETF's or ETN's 
share price back toward the underlying net asset value or indicative 
index value. Likewise, if an ETF or ETN share price starts trading at a 
discount to the securities it holds or its index components, the 
Authorized Participant or issuer can buy shares of the ETF or ETN and 
redeem them for the underlying securities or index component 
instruments. Buying undervalued ETF or ETN shares may drive the share 
price of an ETF or ETN back toward fair value. This arbitrage process 
helps to keep an ETF's and ETN's share price in line with the value of 
its underlying portfolio or index components.
Surveillance and Reporting Requirements
    The Exchange believes that increasing the position limits for the 
options on the Underlying ETPs would lead to a more liquid and 
competitive market environment for these options, which will benefit 
customers interested in trading these products. The reporting 
requirement for the options on the Underlying ETPs would remain 
unchanged. Thus, the Exchange would still require that each TPH or TPH 
organization that maintains positions in the options on the same side 
of the market, for its own account or for the account of a customer, 
report certain information to the Exchange. This information would 
include, but would not be limited to, the options' positions, whether 
such positions are hedged and, if so, a description of the hedge(s). 
Market-Makers \24\ (including Designated Primary Market-Makers 
(``DPMs'')) \25\ would continue to be exempt from this reporting 
requirement, however, the Exchange may access Market-Maker position 
information.\26\ Moreover, the Exchange's requirement that TPHs file 
reports with the Exchange for any customer who held aggregate large 
long or short positions on the same side of the market of 200 or more 
option contracts of any single class for the previous day will remain 
at this level for the options subject to this proposal and will 
continue to serve as an important part of the Exchange's surveillance 
efforts.\27\
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    \24\ A Market-Maker [sic] ``Trading Permit Holder registered 
with the Exchange pursuant to Rule 3.52 for the purpose of making 
markets in option contracts traded on the Exchange and that has the 
rights and responsibilities set forth in Chapter 5, Section D of the 
Rules.'' See Rule 1.1.
    \25\ A Designated Primary Market-Maker ``is TPH organization 
that is approved by the Exchange to function in allocated securities 
as a Market-Maker (as defined in Rule 8.1) and is subject to the 
obligations under Rule 5.54 or as otherwise provided under the rules 
of the Exchange.'' See Rule 1.1.
    \26\ The Options Clearing Corporation (``OCC'') through the 
Large option Position Reporting (``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 report to the Exchange, as 
well as Financial Industry Regulatory Authority, Inc. (``FINRA''), 
acting as its agent pursuant to a regulatory services agreement 
(``RSA'').
    \27\ See Rule 8.43 for reporting requirements.
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    The Exchange believes that the existing surveillance procedures and 
reporting requirements at the Exchange and other SROs are capable of 
properly identifying disruptive and/or manipulative trading activity. 
The Exchange also represents that it has adequate surveillances in 
place to detect potential manipulation, as well as reviews in place to 
identify potential changes in composition of the Underlying ETPs and 
continued compliance with the Exchange's listing standards. These 
procedures utilize daily monitoring of market activity via automated 
surveillance techniques to identify unusual activity in both options 
and the underlyings, as applicable.\28\ The Exchange also notes that 
large stock holdings must be disclosed to the Commission by way of 
Schedules 13D or 13G,\29\ which are used to report ownership of stock 
which exceeds 5% of a company's total stock issue and may assist in 
providing information in monitoring for any potential manipulative 
schemes.
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    \28\ The Exchange believes these procedures have been effective 
for the surveillance of trading the options subject to this proposal 
and will continue to employ them.
    \29\ 17 CFR 240.13d-1.
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    The Exchange believes that the current financial requirements 
imposed by the Exchange and by the Commission adequately address 
concerns regarding potentially large, unhedged positions in the options 
on the Underlying ETPs. Current margin and risk-based haircut 
methodologies serve to limit the size of positions maintained by any 
one account by increasing the margin and/or capital that a TPH must 
maintain for a large position held by itself or by its customer.\30\ In 
addition, Rule 15c3-1 \31\ imposes a capital charge on TPHs to the 
extent of any margin deficiency resulting from the higher margin 
requirement.
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    \30\ See Rule 10.3 for a description of margin requirements.
    \31\ 17 CFR 240.15c3-1.
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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.\32\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \33\ 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 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) \34\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \32\ 15 U.S.C. 78f(b).
    \33\ 15 U.S.C. 78f(b)(5).
    \34\ Id.
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    The Exchange believes that the proposed increase in position limits 
for options on the Underlying ETPs will remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, protect investors and the public interest, 
because it will provide market participants with the ability to more 
effectively execute their trading and hedging activities. The proposed 
increases will allow market participants

[[Page 25032]]

to more fully implement hedging strategies in related derivative 
products and to further use options to achieve investment strategies 
(e.g., there are other ETPs that use options on the ETFs or the ETN 
subject to this proposal as part of their investment strategy, and the 
applicable position limits as they stand today may inhibit these other 
ETPs in achieving their investment objectives, to the detriment of 
investors). Also, increasing the applicable position limits may allow 
Market-Makers to provide the markets for these options with more 
liquidity in amounts commensurate with increased consumer demand in 
such markets. The proposed position limit increases may also encourage 
other liquidity providers to shift liquidity, as well as encourage 
consumers to shift demand, from over the counter markets onto the 
Exchange, which will enhance the process of price discovery conducted 
on the Exchange through increased order flow.
    In addition, the Exchange believes that the structure of the 
Underlying ETPs, the considerable market capitalization of the funds, 
underlying component securities, and/or indexed component securities, 
and the liquidity of the markets for the applicable options and 
underlying component securities will mitigate concerns regarding 
potential manipulation of the products and/or disruption of the 
underlying markets upon increasing the relevant position limits. As a 
general principle, increases in market capitalizations, active trading 
volume, and deep liquidity of securities do not lead to manipulation 
and/or disruption. This general principle applies to the recently 
observed increased levels of market capitalization and trading volume 
and liquidity in shares of and options on the Underlying ETPs (as 
described above), and, as a result, the Exchange does not believe that 
the options markets or underlying markets would become susceptible to 
manipulation and/or disruption as a result of the proposed position 
limit increases. Indeed, the Commission has previously expressed the 
belief that not just increasing, but removing, position and exercise 
limits may bring additional depth and liquidity to the options markets 
without increasing concerns regarding intermarket manipulation or 
disruption of the options or the underlying securities.\35\
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    \35\ See Securities Exchange Act Release No. 62147 [sic] 
(October 28 [sic], 2005) (SR-CBOE-2005-41), at 62149.
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    Further, the Exchange notes that the proposed rule change to 
increase position limits for select actively traded options is not 
novel and the Commission has approved similar proposed rule changes by 
the Exchange to increase position limits for options on similar, highly 
liquid and actively traded ETPs.\36\ Furthermore, the Exchange again 
notes that that the proposed position limits for options on GLD, SLV, 
LQD, GDX, VXX and UVXY are consistent with existing position limits for 
options on comparable ETPs in Rule 8.30.07.
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    \36\ See Securities Exchange Act Release Nos. 88768 (April 29, 
2020), 85 FR 26736 (May 5, 2020) (SR-CBOE-2020-015); 83415 (June 12, 
2018), 83 FR 28274 (June 18, 2018) (SR-CBOE-2018-042); and 68086 
(October 23, 2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-
066).
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    The Exchange's surveillance and reporting safeguards continue to be 
designed to deter and detect possible manipulative behavior that might 
arise from increasing or eliminating position and exercise limits in 
certain classes. The Exchange believes that the current financial 
requirements imposed by the Exchange and by the Commission adequately 
address concerns regarding potentially large, unhedged position in the 
options on the Underlying ETPs, further promoting just and equitable 
principles of trading, the maintenance of a fair and orderly market, 
and the protection of investors.

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 because the increased position limits (and exercise 
limits) will be available to all market participants and apply to each 
in the same manner. The Exchange believes that the proposed rule change 
will provide additional opportunities for market participants to more 
efficiently achieve their investment and trading objectives of market 
participants.
    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 Act. On the contrary, the Exchange 
believes the proposal promotes competition because it may attract 
additional order flow from the OTC market to exchanges, which would in 
turn compete amongst each other for those orders.\37\ The Exchange 
believes market participants would benefit from being able to trade 
options with increased position limits in an exchange environment in 
several ways, including but not limited to the following: (1) Enhanced 
efficiency in initiating and closing out position; (2) increased market 
transparency; and (3) heightened contra-party creditworthiness due to 
the role of OCC as issuer and guarantor. The Exchange notes that other 
options exchanges may choose to file similar proposals with the 
Commission to increase position limits on options on the Underlying 
ETPs.
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    \37\ Additionally, several other options exchanges have the same 
position limits as the Exchange, as they incorporate by reference to 
the Exchange's position limits, and as a result the position limits 
for options on the Underlying ETPs will increase at those exchanges. 
For example, Nasdaq Options position limits are determined by the 
position limits established by the Exchange. See Nasdaq Stock Market 
LLC Rules, Options 9, Sec. 13 (Position Limits).
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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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be 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-2021-029 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange

[[Page 25033]]

Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2021-029. 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-2021-029, and should be submitted 
on or before June 1, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-09774 Filed 5-7-21; 8:45 am]
BILLING CODE 8011-01-P