[Federal Register Volume 83, Number 60 (Wednesday, March 28, 2018)]
[Notices]
[Pages 13316-13322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06140]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82932; File No. SR-Phlx-2018-24]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Section
(a) of Exchange Rule 1001, Position Limits, To Increase the Position
Limits for Options
March 22, 2018.
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 9, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I and II 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 the
Substance of the Proposed Rule Change
The Exchange proposes to amend Section (a) of Exchange Rule 1001,
Position Limits, to increase the position limits for options on the
following exchange traded funds (``ETFs''): iShares China Large-Cap ETF
(``FXI''), iShares MSCI EAFE ETF (``EFA''), iShares MSCI Emerging
Markets ETF (``EEM''), iShares Russell 2000 ETF (``IWM''), iShares MSCI
Brazil Capped ETF (``EWZ''), iShares 20+ Year Treasury Bond Fund ETF
(``TLT''), PowerShares QQQ Trust (``QQQQ''), and iShares MSCI Japan
Index (``EWJ'').
The text of the proposed rule change is available on the Exchange's
website at http://nasdaqphlx.cchwallstreet.com/, at the principal
office of the Exchange, 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 Limit Increase
Position limits for options on ETFs such as those subject to this
proposal are determined pursuant to Exchange Rule 1001, and, with
certain exceptions, vary by tier according to the number of outstanding
shares and the trading volume of the underlying security.\3\ Options in
the highest tier--i.e., options that overlie securities with the
largest numbers of outstanding shares and trading volumes--have a
standard option position limit of 250,000 contracts (with adjustments
for splits, re-capitalizations, etc.) on the same side of the market.
In addition, Rule 1001 currently sets forth separate position limits
for options on certain ETFs, including 500,000 contracts for options on
EEM and IWM, and 900,000 contracts for options on QQQQ.
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\3\ Pursuant to Exchange Rule 1002, which provides that the
exercise limits for ETF options are equivalent to their position
limits, the exercise limits for each of these options would be
increased to the level of the new position limits.
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The Exchange proposes to revise Rule 1001 to increase the position
limits for options on certain ETFs, as described more fully below. The
Exchange believes that increasing the position limits for these options
will lead to a more liquid and competitive market environment for these
options that will benefit customers interested in these products.
First, the Exchange proposes to increase the position limits for
options on FXI, EFA, EWZ, TLT, and EWJ, each of which fall into the
highest standard tier set forth in Exchange Rule 1001(g)(i). Rule
1001(a) would be amended to increase the current
[[Page 13317]]
position limit of 250,000 contracts for options on these securities to
500,000 contracts.
Second, the Exchange proposes to increase the position limits for
options on EEM and IWM from 500,000 contracts to 1,000,000
contracts.\4\
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\4\ The Exchange is also amending Rule 1001(a) to update and
correct the names of IWM and EEM, which are currently referred to in
that rule as the iShares[supreg] Russell 2000[supreg] Index and
iShares MSCI Emerging Markets Index Fund, respectively.
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Finally, the Exchange proposes to increase the position limits on
options on QQQQ from 900,000 contracts to 1,800,000 contracts.
In support of this proposal, the Exchange represents that the above
listed ETFs qualify for either: (i) The initial listing criteria set
forth in Exchange Rule 1009 Commentary .06 for ETFs holding non-U.S.
component securities; or (ii) for ETFs listed pursuant to 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.\5\ FXI
tracks the performance of the FTSE China 50 Index, which is composed of
the 50 largest Chinese stocks.\6\ EEM tracks the performance of the
MSCI Emerging Markets Index, which is composed of approximately 800
component securities.\7\ The MSCI Emerging Markets Index consists of
the following 21 emerging market country indices: Brazil, Chile, China,
Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea,
Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South
Africa, Taiwan, Thailand, and Turkey.\8\ IWM tracks the performance of
the Russell 2000 Index, which is composed of 2,000 small-cap domestic
stocks.\9\ EFA tracks the performance of MSCI EAFE Index, which has
over 900 component securities.\10\ The MSCI EAFE Index is designed to
represent the performance of large and mid-cap securities across 21
developed markets, including countries in Europe, Australasia and the
Far East, excluding the U.S. and Canada.\11\ EWZ tracks the performance
of the MSCI Brazil 25/50 Index, which is composed of shares of large
and mid-size companies in Brazil.\12\ TLT tracks the performance of ICE
U.S. Treasury 20+ Year Bond Index, which is composed of long-term U.S.
Treasury bonds.\13\ QQQQ tracks the performance of the Nasdaq-100
Index, which is composed of 100 of the largest domestic and
international nonfinancial companies listed on the Nasdaq Stock Market
LLC (``Nasdaq'').\14\ EWJ tracks the MSCI Japan Index, which tracks the
performance of large and mid-sized companies in Japan.\15\
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\5\ 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 Exchange Rule 1009 Commentary .06; Exchange Rule 1010,
Commentary .08.
\6\ See https://www.ishares.com/us/products/239536/ishares-china-largecap-etf.
\7\ See http://us.ishares.com/product_info/fund/overview/EEM.htm.
\8\ See http://www.msci.com/products/indices/tools/index.html#EM.
\9\ See https://www.ishares.com/us/products/239710/ishares-russell-2000-etf.
\10\ See https://www.ishares.com/us/products/239623/.
\11\ See https://www.msci.com/eafe.
\12\ See https://www.ishares.com/us/products/239612/ishares-msci-brazil-capped-etf.
\13\ See https://www.ishares.com/us/products/239454/.
\14\ See https://www.invesco.com/portal/site/us/financial-professional/etfs/productdetail?productId=QQQ&ticker=QQQ&title=powershares-qqq.
\15\ See https://www.ishares.com/us/products/239665/EWJ.
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The Exchange represents that more than 50% of the weight of the
securities held by the options subject to this proposal are also
subject to a CSA.\16\ Additionally, the component securities of the
MSCI Emerging Markets Index on which EEM is based for which the primary
market is in any one country that is not subject to a CSA do not
represent 20% or more of the weight of the MSCI Emerging Markets
Index.\17\ Finally, the component securities of the MSCI Emerging
Markets Index on which EEM is based, for which the primary market is in
any two countries that are not subject to CSAs do not represent 33% o2
[sic] more of the weight of the MSCI Emerging Markets Index.\18\
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\16\ See Exchange Rule 1009 Commentary .06.
\17\ See Exchange Rule 1009 Commentary .06(b)(ii)(B).
\18\ See Exchange Rule 1009 Commentary .06(b)(ii)(C).
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Market participants have increased their demand for options on FXI,
EFA, EWZ, TLT, and EWJ for hedging and trading purposes and the
Exchange believes the current position limits are too low and may be a
deterrent to successful trading of options on these securities.
The CBOE Analysis
The Commission has recently approved a proposed rule change of the
Chicago Board Options Exchange (``CBOE'') to increase position limits
for these same options.\19\ The discussion that follows is based upon
the CBOE's analysis presented in that proposal.
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\19\ See Securities Exchange Act Release No. 82770 (February 23,
2018) (approving SR-CBOE-2017-057).
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In its proposal, CBOE stated that it had collected the following
trading statistics on the ETFs that are subject to this proposal:
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Shares
ETF 2017 ADV (Mil. 2017 ADV (option outstanding Fund market cap
Shares) contracts) (Mil.) ($Mil.)
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FXI..................................... 15.08 71,944 78.6 $3,343.6
EEM..................................... 52.12 287,357 797.4 34,926.1
IWM..................................... 27.46 490,070 253.1 35,809.1
EFA..................................... 19.42 98,844 1178.4 78,870.3
EWZ..................................... 17.08 95,152 159.4 6,023.4
TLT..................................... 8.53 80,476 60.0 7,442
QQQQ.................................... 26.25 579,404 351.6 50,359.7
EWJ..................................... 6.06 4,715 303.6 16,625.1
SPY..................................... 64.63 2,575,153 976.23 240,540.0
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SGPO Galley
End:?>
In support of its proposal to increase the position limits for QQQQ
to 1,800,000 contracts, CBOE compared the trading characteristics of
QQQQ to that of the SPDR S&P 500 ETF (``SPY''), which has no position
limits. As shown in the above table, the average daily trading volume
through August 14, 2017 for QQQQ was 26.25 million shares compared to
64.63 million shares for SPY. The total shares outstanding for QQQQ are
351.6 million compared to 976.23 million for SPY. The fund market cap
for QQQQ is $50,359.7 million compared to $240,540 million
[[Page 13318]]
for SPY. SPY is one of the most actively trading ETFs and is,
therefore, subject to no position limits. QQQQ is also very actively
traded, and while not to the level of SPY, should be subject to the
proposed higher position limits based on its trading characteristics
when compared to SPY. The proposed position limit coupled with QQQQ's
trading behavior would continue to address potential manipulative
schemes and adverse market impact surrounding the use of options and
trading in its [sic] underlying the options.
In support of its proposal to increase the position limits for EEM
and IWM from 500,000 contracts to 1,000,000 contracts, CBOE also
compared the trading characteristics of EEM and IWM to that of QQQQ,
which currently has a position limit of 900,000 contracts. As shown in
the above table, the average daily trading volume through July 31, 2017
for EEM was 52.12 million shares and IWM was 27.46 million shares
compared to 26.25 million shares for QQQQ. The total shares outstanding
for EEM are 797.4 million and for IWM are 253.1 million compared to
351.6 million for QQQQ. The fund market cap for EEM is $34,926.1
million and IWM is $35,809 million compared to $50,359.7 million for
QQQQ. EEM, IWM and QQQQ have similar trading characteristics and
subjecting EEM and IWM to the proposed higher position limit would
continue be designed to address potential manipulate [sic] schemes that
may arise from trading in the options and their underlying securities.
These above trading characteristics for QQQQ when compared to EEM and
IWM also justify increasing the position limit for QQQQ. QQQQ has a
higher options ADV than EEM and IWM, a higher numbers [sic] of shares
outstanding than IWM and a much higher market cap than EEM and IWM
which justify doubling the position limit for QQQQ. CBOE concluded
that, based on these statistics, and as stated above, the proposed
position limit coupled with QQQQ's trading behavior would continue to
address potential manipulative schemes and adverse market impact
surrounding the use of options and trading in the securities underlying
the options.
In support of its proposal to increase the position limits for FXI,
EFA, EWZ, TLT, and EWJ from 250,000 contracts to 500,000 contracts,
CBOE compared the trading characteristics of FXI, EFA, EWZ, TLT, and
EWJ to that of EEM and IWM, both of which currently have a position
limit of 500,000 contracts. As shown in the above table, the average
daily trading volume through July 31, 2017 for FXI is 15.08 million
shares, EFA is 19.42 million shares, EWZ is 17.08 million shares, TLT
is 8.53 million shares, and EWJ is 6.06 million shares compared to
52.12 million shares for EEM and 27.46 million shares for IWM. The
total shares outstanding for FXI is 78.6 million, EFA is 1178.4
million, EWZ is 159.4 million, TLT is 60 million, and EWJ is 303.6
million compared to 797.4 million for EEM and 253.1 million for IWM.
The fund market cap for FXI is $3,343.6 million, EFA is $78,870.3
million, EWZ is $6,023.4 million, TLT is $7,442.4 million, and EWJ is
$16,625.1 million compared to $34,926.1 million for EEM and $35,809.1
million for IWM.
In Partial Amendment No. 1 to its proposed rule change, CBOE
provided additional analysis and support for its proposed rule
change.\20\ According to CBOE, market participants' trading activity
has been adversely impacted by the current position limits as such
limits have caused options trading in the symbols subject to the
proposed rule change to move from exchanges to the over-the-counter
market. CBOE stated it had submitted the proposed rule change at the
request of market participants whose on-exchange activity has been
hindered by the existing position limits causing them to be unable to
provide additional liquidity not just on CBOE, but also on other
options exchanges on which they participate.
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\20\ See SR-CBOE-2017-057, Partial Amendment No. 1 (November 22,
2017).
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CBOE stated it understood that certain market participants wishing
to make trades involving a large number of options contracts in the
symbols subject to the proposed rule change are opting to execute those
trades in the over-the-counter market, that the over-the counter
transactions occur via bi-lateral agreements the terms of which are not
publicly disclosed to other market participants, and that therefore,
these large trades do not contribute to the price discovery process
performed on a lit market. It stated that position limits are designed
to address potential manipulative schemes and adverse market impact
surrounding the use of options, such as disrupting the market in the
security underlying the options, and that the potential manipulative
schemes and adverse market impact are balanced against the potential of
setting the limits so low as to discourage participation in the options
market. It stated that the level of those position limits must be
balanced between curtailing potential manipulation and the cost of
preventing potential hedging activity that could be used for legitimate
economic purposes.
CBOE observed that the ETFs that underlie options subject to the
proposed rule change are highly liquid, and are based on a broad set of
highly liquid securities and other reference assets, and noted that the
Commission has generally looked through to the liquidity of securities
comprising an index in establishing position limits for cash-settled
index options. It further noted that options on certain broad-based
security indexes have no position limits. CBOE observed that the
Commission has recognized the liquidity of the securities comprising
the underlying interest of the SPDR S&P 500 ETF (``SPY'') in permitting
no position limits on SPY options since 2012,\21\ and expanded position
limits for options on EEM, IWM and QQQQ.
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\21\ See Securities Exchange Act Release No. 67937 (September
27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012-091).
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CBOE stated that the creation and redemption process for these ETFs
also lessen the potential for manipulative activity, explaining that
when an ETF company wants to create more ETF shares, it looks to an
Authorized Participant, which is a market maker or other large
financial institution, to acquire the securities the ETF is to hold.
For instance, IWM is designed to track the performance of the Russell
2000 Index, the Authorized Participant will purchase all the Russell
2000 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 net asset
value, not the market value at which the ETF is trading. The creation
of new ETF units can be conducted all trading day and is not subject to
position limits. This process can also work in reverse where the ETF
company seeks to decrease the number of shares that are available to
trade. The creation and redemption process, therefore, creates a direct
link to the underlying components of the ETF, and serves to mitigate
potential price impact of the ETF shares that might otherwise result
from increased position limits. The ETF creation and redemption seeks
to keep ETF share prices trading in line with the ETF's underlying net
asset value. Because an ETF trades like a stock, its price will
fluctuate during the trading day, due to simple supply and demand. If
demand to buy an ETF is high, for instance, the ETF's share price might
rise above the value of its underlying
[[Page 13319]]
securities. When this happens, the Authorized Participant believes the
ETF may now be overpriced, and can buy the underlying shares that
compose the ETF and then sell ETF shares on the open market. This
should help drive the ETF's share price back toward fair value.
Likewise, if the ETF starts trading at a discount to the securities it
holds, the Authorized Participant can buy shares of the ETF and redeem
them for the underlying securities. Buying undervalued ETF shares
should drive the price of the ETF back toward fair value. This
arbitrage process helps to keep an ETF's price in line with the value
of its underlying portfolio.
CBOE stated that in proposing the increased position limits, the
Exchange considered the availability of economically equivalent
products and their respective position limits. For instance, some of
the ETFs underlying options subject to the proposed rule change are
based on broad-based indices that underlie cash settled options that
are economically equivalent to the ETF options that are the subject of
the proposed rule change and have no position limits. Other ETFs are
based on broad-based indexes that underlie cash-settled options with
position limits reflecting notional values that are larger than the
current position limits for ETF analogues (EEM, EFA). Where there was
no approved index analogue, CBOE stated its belief, based on the
liquidity, breadth and depth of the underlying market, that the index
referenced by the ETF would be considered a broad-based index.\22\ CBOE
argued that if certain position limits are appropriate for the options
overlying the same index or is an analogue to the basket of securities
that the ETF tracks, then those same economically equivalent position
limits should be appropriate for the option overlying the ETF. In
addition, CBOE observed, the market capitalization of the underlying
index or reference asset is large enough to absorb any price movements
that may be caused by an oversized trade. Also, the Authorized
Participant or issuer may look to the stocks comprising the analogous
underlying index or reference asset when seeking to create additional
ETF shares are part of the creation/redemption process to address
supply and demand or to mitigate the price movement the price of the
ETF. CBOE offered the following specific examples to illustrate:
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\22\ CBOE Rule 24.4 and Exchange Rule 1001A(a) set forth the
CBOE and the Phlx position limits for broad-based index options.
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QQQQ
For example, the PowerShares QQQ Trust or QQQQ is an ETF that
tracks the Nasdaq 100 Index or NDX, which is an index composed of 100
of the largest non-financial securities listed on Nasdaq. Options on
NDX are currently subject to no position limits but share similar
trading characteristics as QQQQ. Based on QQQQ's share price of $154.54
\23\ and NDX's index level of 6,339.14, approximately 40 contracts of
QQQQ equals one contract of NDX. Assume that NDX was subject to the
standard position limit of 25,000 contracts for broad-based index
options. Based on the above comparison of notional values, this would
result in a positon [sic] limit equivalent to 1,000,000 contracts for
QQQQ as NDX's analogue. However, NDX is not subject to position limits
and has an average daily trading volume of 15,300 contracts. QQQQ is
currently subject to a position limit of 900,000 contracts but has a
much higher average daily trading volume of 579,404 contracts.
Furthermore, NDX currently has a market capitalization of $17.2
trillion and QQQQ has a market capitalization of $50,359.7 million, and
the component securities of NDX, in aggregate, have traded an average
of 440 million shares per day in 2017, both large enough to absorb any
price movement cause by a large trade in the QQQQ. The Commission has
also approved no position limit for NDX, although it has a much lower
average daily trading volume than its analogue, the QQQQ. Therefore,
CBOE concluded and the Exchange agrees it was reasonable to increase
the positon [sic] limit for options on the QQQQ from 900,000 to
1,800,000 contracts.
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\23\ CBOE stated that all share prices used in its analysis were
based on the closing price of the security on November 16, 2017 and
cited Yahoo Finance as the source.
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IWM
The iShares Russell 2000 ETF or IWM, is an ETF that also tracks the
Russell 2000 Index or RUT, which is an index that is composed of 2,000
small-cap domestic companies in the Russell 3000 index. Options on RUT
are currently subject to no position limits but share similar trading
characteristics as IWM. Based on IWM's share price of $144.77 and RUT's
index level of 1,486.88, approximately 10 contracts of IWM equals one
contract of RUT. Assume that RUT was subject to the standard position
limit of 25,000 contracts for broad-based index options under Exchange
Rule 24.4(a). Based on the above comparison of notional values, this
would result in a positon [sic] limit equivalent to 250,000 contracts
for IWM as RUT's analogue. However, RUT is not subject to position
limits and has an average daily trading volume of 66,200 contracts. IWM
is currently subject to a position limit of 500,000 contracts but has a
much higher average daily trading volume of 490,070 contracts. The
Commission has approved no position limit for RUT, although it has a
much lower average daily trading volume than its analogue, the IWM.
Furthermore, RUT currently has a market capitalization of $2.4 trillion
and IWM has a market capitalization of $35,809.1 million, and the
component securities of RUT, in aggregate, have traded an average of
270 million shares per day in 2017, both large enough to absorb any
price movement cause by a large trade in the IWM. Therefore, CBOE
concluded and the Exchange agrees it is reasonable to increase the
positon [sic] limit for options on the IWM from 500,000 to 1,000,000
contracts.
EEM
EEM tracks the performance of the MSCI Emerging Markets Index or
MXEF, which is composed of approximately 800 component securities
following 21 emerging market country indices: Brazil, Chile, China,
Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea,
Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South
Africa, Taiwan, Thailand, and Turkey. Based on EEM's share price of
$47.06 and MXEF's index level of 1,136.45, approximately 24 contracts
of EEM equals one contract of MXEF. MXEF is currently subject to the
standard position limit of 25,000 contracts for broad-based index
options. Based on the above comparison of notional values, this would
result in a position limit economically equivalent to 604,000 contracts
for EEM as MXEF's analogue. However, MXEF has an average daily trading
volume of 180 contracts. EEM is currently subject to a position limit
of 500,000 contracts but has a much higher average daily trading volume
of 287,357 contracts. Furthermore, MXEF currently has a market
capitalization of $5.18 trillion and EEM has a market capitalization of
$34,926.1 million, and the component securities of MXEF, in aggregate,
have traded an average of 33.6 billion shares per day in 2017, both
large enough to absorb any price movement cause by a large trade in the
EEM. Therefore, based on the comparison of average daily trading
volume, CBOE believed and the Exchange agrees that it is reasonable to
increase the positon [sic] limit for
[[Page 13320]]
options on the IWM from 500,000 to 1,000,000 contracts.
EFA
EFA tracks the performance of MSCI EAFE Index or MXEA, which has
over 900 component securities designed to represent the performance of
large and mid-cap securities across 21 developed markets, including
countries in Europe, Australasia and the Far East, excluding the U.S.
and Canada. Based on EFA's share price of $69.16 and MXEA's index level
of 1,986.15, approximately 29 contracts of EFA equals one contract of
MXEA. MXEA is currently subject to the standard position limit of
25,000 contracts for broad-based index options. Based on the above
comparison of notional values, this would result in a positon [sic]
limit economically equivalent to 721,000 contracts for EFA as MXEA's
analogue. Furthermore, MXEA currently has a market capitalization of
$18.7 trillion and EFA has a market capitalization of $78,870.3
million, and the component securities of MXEA, in aggregate, have
traded an average of 4.6 billion shares per day in 2017, both large
enough to absorb any price movement cause by a large trade in the EEM.
However, MXEA has an average daily trading volume of 270 contracts. EFA
is currently subject to a position limit of 250,000 contracts but has a
much higher average daily trading volume of 98,844 contracts. Based on
the above comparisons, CBOE believed and the Exchange agrees that it is
reasonable to increase the positon [sic] limit for options on the EFA
from 250,000 to 500,000 contracts.
FXI
FXI tracks the performance of the FTSE China 50 Index, which is
composed of the 50 largest Chinese stocks. There is currently no index
analogue for FXI approved for options trading. However, the FTSE China
50 Index currently has a market capitalization of $1.7 trillion and FXI
has a market capitalization of $2,623.18 million, both large enough to
absorb any price movement cause by a large trade in FXI. The components
of the FTSE China 50 Index, in aggregate, have an average daily trading
volume of 2.3 billion shares. FXI is currently subject to a position
limit of 250,000 contracts but has a much higher average daily trading
volume of 15.08 million shares. Based on the above comparisons, CBOE
believed, and that Exchange agrees, that it is reasonable to increase
the positon [sic] limit for options on the FXI from 250,000 to 500,000
contracts.
EWZ
EWZ tracks the performance of the MSCI Brazil 25/50 Index, which is
composed of shares of large and mid-size companies in Brazil. There is
currently no index analogue for EWZ approved for options trading.
However, the MSCI Brazil 25/50 Index currently has a market
capitalization of $700 billion and EWZ has a market capitalization of
$6,023.4 million, both large enough to absorb any price movement cause
by a large trade in EWZ. The components of the MSCI Brazil 25/50 Index,
in aggregate, have an average daily trading volume of 285 million
shares. EWZ is currently subject to a position limit of 250,000
contracts but has a much higher average daily trading volume of 17.08
million shares. Based on the above comparisons, CBOE believed and the
Exchange agrees that it is reasonable to increase the positon [sic]
limit for options on the EWZ from 250,000 to 500,000 contracts.
TLT
TLT tracks the performance of ICE U.S. Treasury 20+ Year Bond
Index, which is composed of long-term U.S. Treasury bonds. There is
currently no index analogue for TLT approved for options trading.
However, the U.S. Treasury market is one of the largest and most liquid
markets in the world, with over $14 trillion outstanding and turnover
of approximately $500 billion per day. TLT currently has a market
capitalization of $7,442.4 million, both large enough to absorb any
price movement cause by a large trade in TLT. Therefore, the potential
for manipulation will not increase solely due the increase in position
limits as set forth in the proposed rule change. Based on the above
comparisons, CBOE believed and the Exchange agrees it is reasonable to
increase the positon [sic] limit for options on the TLT from 250,000 to
500,000 contracts.
EWJ
EWJ tracks the MSCI Japan Index, which tracks the performance of
large and mid-sized companies in Japan. There is currently no index
analogue for EWJ approved for options trading. However, the MSCI Japan
Index has a market capitalization of $3.5 trillion and EWJ has a market
capitalization of $16,625.1 million, and the component securities of
the MSCI Japan Index, in aggregate, have traded an average of 1.1
billion shares per day in 2017, both large enough to absorb any price
movement cause by a large trade in EWJ. EWJ is currently subject to a
position limit of 250,000 contracts and has an average daily trading
volume of 6.6 million shares. Based on the above comparisons, CBOE
believed and the Exchange agrees that it is reasonable to increase the
positon [sic] limit for options on EWJ from 250,000 to 500,000
contracts.
Phlx Analysis and Conclusions
Phlx has reviewed the CBOE analysis set forth above. On the basis
of that analysis Phlx believes that market participants' trading
activity could be adversely impacted by the current position limits for
FXI, EFA, EWZ, TLT and EWJ and such limits may cause options trading in
these symbols to move from exchanges to the over-the-counter market.
The above trading characteristics of FXI, EFA, EWZ, TLT and EWJ are
either similar to those of EEM and IWM or sufficiently active so that
the proposed limit would continue to address potential manipulation
that may arise. Specifically, EFA has far more shares outstanding and a
larger fund market cap than EEM, IWM, and QQQQ. EWJ has more shares
outstanding than IWM and only slightly fewer shares outstanding than
QQQQ.
On the other hand, while FXI, EWZ and TLT do not exceed EEM, IWM or
QQQQ in any of the specified areas, they are all actively trading so
that market participants' trading activity has been impacted by them
being restricted by the current position limits. The Exchange believes
that the trading activity and these securities being based on a broad
basket of underlying securities alleviates concerns as to any potential
manipulative activity that may arise. In addition, as discussed in more
detail below, the Exchange's existing surveillance procedures and
reporting requirements at the Exchange, at other options exchanges, and
at the several clearing firms are capable of properly identifying
unusual and/or illegal trading activity.
On the basis of CBOE's analysis Phlx also believes that market
participants' trading activity could be adversely impacted by the
current position limits for EEM, IWM and QQQQ. As discussed above, EEM,
IWM and QQQQ have similar trading characteristics. Subjecting EEM and
IWM to the proposed higher position limit would continue be designed to
address potential manipulate [sic] schemes that may arise from trading
in the options and their underlying securities. The trading
characteristics for QQQQ described above, when compared to EEM and IWM,
also justify increasing the position limit for QQQQ. QQQQ has a higher
options ADV than EEM and IWM, a higher numbers [sic] of shares
[[Page 13321]]
outstanding than IWM and a much higher market cap than EEM and IWM
which justify doubling the positon [sic] limit for QQQQ. Based on these
statistics, the proposed position limit coupled with QQQQ's trading
behavior would continue to address potential manipulative schemes and
adverse market impact surrounding the use of options and trading in its
[sic] underlying the options.
The Exchange believes that increasing the position limits for the
options subject to this proposal would lead to a more liquid and
competitive market environment for these options, which will benefit
customers interested in this product. Under the proposal, the reporting
requirement for the above options would be unchanged. Thus, the
Exchange would still require that each member and member organization
that maintains a position 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' position, whether such
position is hedged and, if so, a description of the hedge, and the
collateral used to carry the position, if applicable. Registered option
traders (``ROTs'') and specialists would continue to be exempt from
this reporting requirement, as ROT and specialist information can be
accessed through the Exchange's market surveillance systems. In
addition, the general reporting requirement for customer accounts that
maintain an aggregate position of 200 or more options contracts would
remain at this level for the options subject to this proposal.\24\
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\24\ See Exchange Rule 1003 for reporting requirements.
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The Exchange believes that the existing surveillance procedures and
reporting requirements at the Exchange, other options exchanges, and at
the several clearing firms are capable of properly identifying unusual
and/or illegal trading activity. In addition, routine oversight
inspections of the Exchange's regulatory programs by the Commission
have not uncovered any material inconsistencies or shortcomings in the
manner in which the Exchange's market surveillance is conducted. These
procedures utilize daily monitoring of market movements via automated
surveillance techniques to identify unusual activity in both options
and underlying stocks.\25\
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\25\ These procedures have been effective for the surveillance
of trading the options subject to this proposal and will continue to
be employed.
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Furthermore, large stock holdings must be disclosed to the
Commission by way of Schedules 13D or 13G.\26\ The positions for
options subject to this proposal are part of any reportable positions
and, thus, cannot be legally hidden. Moreover, the Exchange's
requirement that members and member organizations file reports with the
Exchange for any customer who held aggregate large long or short
positions of any single class for the previous day will continue to
serve as an important part of the Exchange's surveillance efforts.
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\26\ 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 that a member organization or its customer may try to maintain
an inordinately large un-hedged position in the options subject to this
proposal. 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 member organization must maintain for
a large position held by itself or by its customer.\27\ In addition,
Rule 15c3-1 \28\ imposes a capital charge on member organizations to
the extent of any margin deficiency resulting from the higher margin
requirement.
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\27\ See Exchange Rule 721 for a description of margin
requirements.
\28\ 17 CFR 240.15c3-1.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\29\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\30\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest. As noted above, the Commission has recently approved
increasing position limits to the levels proposed herein on the same
ETF options on the CBOE. The Exchange believes that the proposed
position limits would continue to address potential manipulative
activity while allowing for potential hedging activity for appropriate
economic purposes.
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\29\ 15 U.S.C. 78f(b).
\30\ 15 U.S.C. 78f(b)(5).
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The current position limits for the options subject to this
proposal have inhibited the ability of ROTs and specialists to make
markets on the Exchange. Specifically, the proposal is designed to
encourage ROTs and specialists to shift liquidity from over the counter
markets onto the Exchange, which will enhance the process of price
discovery conducted on the Exchange through increased order flow. The
proposal will also benefit institutional investors as well as retail
traders, and public customers, by providing them with a more effective
trading and hedging vehicle. In addition, the Exchange believes that
the structure of the ETFs subject to this proposal and the considerable
liquidity of the market for options on those ETFs diminishes the
opportunity to manipulate this product and disrupt the underlying
market that a lower position limit may protect against.
Increased position limits for select actively traded options, such
as that proposed herein, is not novel and has been previously approved
by the Commission. For example, the Commission has previously approved,
on a pilot basis, eliminating position limits for certain options.\31\
Additionally, the Commission has approved similar proposed rule changes
to increase position limits for options on highly liquid, actively-
traded ETFs,\32\ including a proposal to permanently eliminate the
position and exercise limits for options overlaying the S&P 500 Index,
S&P 100 Index, Dow Jones Industrial Average, Nasdaq 100 Index, and the
Russell 2000(R) Index (``RUT'').\33\ In approving the permanent
elimination of position and exercise limits for these index options,
the Commission relied heavily upon the Exchange's surveillance
capabilities, and the Commission expressed trust in the enhanced
surveillance and reporting safeguards that the Exchange took in order
to detect and deter possible manipulative behavior which might
[[Page 13322]]
arise from eliminating position and exercise limits.\34\ Furthermore,
as described more fully above, options on other ETFs have the position
limits proposed herein and those ETFs have trading characteristics and
trading volumes that are similar to those of the ETFs subject to this
proposed rule change.
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\31\ See Securities Exchange Act Release Nos. 67672 (August 15,
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29); 67937
(September 27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012-
091).
\32\ See Securities Exchange Act Release Nos. 68086 (October 23,
2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-066); 64928
(July 20, 2011), 76 FR 44633 (July 26, 2011) (SR-CBOE-2011-065);
64695 (June 17, 2011), 76 FR 36942 (June 23, 2011) (SR-PHLX-2011-
58); and 55176 (January 25, 2007), 72 FR 4741 (February 1, 2017)
(SR-CBOE- 2007-008.).
\33\ See Securities Exchange Act Release Nos. 44994 (October 26,
2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-2001-22) (elimination
of position and exercise limits on SPX, OEX, and DJX options)
(``SPX, OEX, and DJX Position Limit Elimination Approval Order'');
52650 (October 21, 2005), 70 FR 62147 (October 28, 2005) (SR-CBOE-
2005-41) (elimination of position and exercise limits on NDX
options) (``NDX Position Limit Elimination Approval Order''); 56651
(October 12, 2007), 72 FR 59130 (October 18, 2007) (SR-Phlx-2007-71)
(``RUT Position Limit Elimination Approval Order'').
\34\ Id.
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Last, the Commission has expressed the belief that removing
position and exercise limits may bring additional depth and liquidity
without increasing concerns regarding intermarket manipulation or
disruption of the options or the underlying securities.\35\ The
Exchange's enhanced surveillance and reporting safeguards continue to
be designed to deter and detect possible manipulative behavior which
might arise from eliminating position and exercise limits.
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\35\ Id.
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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 not necessary or appropriate in
furtherance of the purposes of the Act. On the contrary, the Exchange
believes that the proposed rule change will result in additional
opportunities to achieve the investment and trading objectives of
market participants seeking efficient trading and hedging vehicles, to
the benefit of investors, market participants, and the marketplace in
general.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the 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 from the date on which it was filed, or such shorter time as the
Commission may designate, it has become effective pursuant to Section
19(b)(3)(A) of the Act \36\ and Rule 19b-4(f)(6) thereunder.\37\
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\36\ 15 U.S.C. 78s(b)(3)(A).
\37\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change, along with a
brief description and the text of 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.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \38\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \39\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay so that
the proposed rule change may become effective and operative upon
filing. The Exchange states that waiver of the operative delay would
permit the Exchange to immediately implement the proposed rule change
to increase the position limits as proposed herein and thereby
seamlessly continue to offer traders and the investing public the
ability to use these products as effective hedging and trading
vehicles. The Exchange further states that waiver would allow the
Exchange to remain competitive with other exchanges. The Commission
believes that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest. Therefore, the
Commission hereby waives the operative delay and designates the
proposal as operative upon filing.\40\
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\38\ 17 CFR 240.19b-4(f)(6).
\39\ 17 CFR 240.19b-4(f)(6)(iii).
\40\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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 [email protected]. Please include
File Number SR-Phlx-2018-24 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-Phlx-2018-24. 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 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. 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-Phlx-2018-24, and should be submitted on
or before April 18, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
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\41\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-06140 Filed 3-27-18; 8:45 am]
BILLING CODE 8011-01-P