[Federal Register Volume 84, Number 141 (Tuesday, July 23, 2019)]
[Notices]
[Pages 35438-35446]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15561]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86400; File No. SR-CBOE-2019-035]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend Rule 6.49A Concerning Off-
Floor Position Transfers Including RWA Transfers

July 17, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on July 3, 2019, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend Rule 6.49A. 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.

[[Page 35439]]

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

1. Purpose
    The Exchange proposes to amend Rule 6.49A to delete the provisions 
related to amend the permissible reasons for and procedures related to 
off-floor position transfers and make other nonsubstantive changes. 
Rule 6.49A specifies the circumstances under which Trading Permit 
Holders may effect transfers of positions off the trading floor, 
notwithstanding the prohibition in Rule 6.49(a).\3\
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    \3\ Paragraph (a) of Rule 6.49 (Transactions Off the Exchange) 
generally requires transactions of option contracts listed on the 
Exchange for a premium in excess of $1.00 to be effected on the 
floor of the Exchange or on another exchange.
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    Current Rule 6.49A(a) lists the circumstances in which Trading 
Permit Holders may transfer their positions off the floor. The 
circumstances currently listed include: (1) The dissolution of a joint 
account in which the remaining Trading Permit Holder assumes the 
positions of the joint account; (2) the dissolution of a corporation or 
partnership in which a former nominee of the corporation or partnership 
assumes the positions; (3) positions transferred as part of a Trading 
Permit Holder's capital contribution to a new joint account, 
partnership, or corporation; (4) the donation of positions to a not-
for-profit corporation; (5) the transfer of positions to a minor under 
the Uniform Gifts to Minor law; and (6i) a merger or acquisition where 
continuity of ownership or management results.\4\
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    \4\ The Exchange notes that other options exchanges have adopted 
off-floor position transfer procedures based on, and substantially 
similar to, the Exchange's procedure in Rule 6.49A(a)(1). See, e.g., 
Nasdaq OMX PHLX LLC (``Phlx'') Rule 1058; and NYSE Arca, Inc. 
(``Arca'') Rule 6.78-O(d).
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    The Exchange proposes to add clarifying language to the first 
sentence of Rule 6.49A(a) to state that existing positions in options 
listed on the Exchange of a Trading Permit Holder or of a Non-Trading 
Permit Holder that are to be transferred on, from, or to the books of a 
Clearing Trading Permit Holder (``CTPH'') may be transferred off the 
Exchange (an ``off-floor transfer'') if the off-floor transfer involves 
one of the events listed in the Rule.\5\ The proposed rule change 
clarifies that Rule 6.49A does not apply to products other than options 
listed on the Exchange, consistent with the Exchange's other trading 
rules.\6\ It also clarifies that a Trading Permit Holder or CTPH must 
be on at least one side of the transfer. The proposed rule change also 
clarifies that transferred positions must be on, from, or to the books 
of a CTPH. This language is consistent with how off-floor transfers are 
currently effected. The proposed rule change also clarifies that 
existing positions of a Trading Permit Holder or a non-Trading Permit 
Holder may be subject to an off-floor transfer, except under specified 
circumstances in which a transfer may only be effected for positions of 
a Trading Permit Holder may.\7\
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    \5\ It is possible for positions transfers to occur between two 
Non-Trading Permit Holders. For example, one Non-Trading Permit 
Holder may transfer positions on the books of a CTPH to another Non-
Trading Permit Holder pursuant to the proposed rule.
    \6\ Proposed paragraph (h) also clarifies that the off-floor 
transfer procedure only applies to positions in options listed on 
the Exchange, and that transfers of non-Exchange-listed options and 
other financial instruments are not governed by Rule 6.49A.
    \7\ See proposed subparagraphs (a)(5) and (7).
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    The Exchange notes off-floor transfers of positions in Exchange-
listed options may also be subject to applicable laws, rules, and 
regulations, including rules of other self-regulatory organizations.\8\ 
Except as explicitly provided in the proposed rule text, the proposed 
rule change is not intended to exempt off-floor position transfers from 
any other applicable rules or regulations, and proposed paragraph (h) 
makes this clear in the rule.
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    \8\ See proposed paragraph (h).
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    The proposed rule change adds four events where an off-floor 
transfer would be permitted to occur.
     Proposed subparagraph (a)(1) permits an off-floor transfer 
to occur if it, pursuant to Rule 4.6 or 4.22, is an adjustment or 
transfer in connection with the correction of a bona fide error in the 
recording of a transaction or the transferring of a position to another 
account, provided that the original trade documentation confirms the 
error. This proposed rule change codifies previous, long-standing 
Exchange guidance regarding what off-floor transfers are permissible 
and will permit transactions to be properly recorded in the originally 
intended accounts.\9\
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    \9\ See Cboe Options Regulatory Circular RG03-62 (July 24, 
2003). Note Rule 4.22 was not referenced in that circular, as it did 
not exist at that time. However, it contains similar language 
regarding corrections of errors as Rule 4.6, and therefore the 
Exchange believes it is appropriate to include in the proposed rule 
change. The proposed rule change is also similar to Cboe Futures 
Exchange, LLC (``CFE'') Rule 420(a)(i).
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     Proposed subparagraph (a)(2) permits an off-floor transfer 
if it is a transfer of positions from one account to another account 
where there is no change in ownership involved (i.e., the accounts are 
for the same Person \10\), provided the accounts are not in separate 
aggregation units or otherwise subject to information barrier or 
account segregation requirements.\11\ The proposed rule change provides 
market participants with flexibility to maintain positions in accounts 
used for the same trading purpose in a manner consistent with their 
businesses. Such transfers are not intended to be transactions among 
different market participants, as there would be no change in ownership 
permitted under the provision, and would also not permit transfers 
among different trading units for which accounts are otherwise required 
to be maintained separately.\12\
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    \10\ Rule 1.1 defines ``Person'' as an individual, partnership 
(general or limited), joint stock company, corporation, limited 
liability company, trust or unincorporated organization, or any 
governmental entity or agency or political subdivision thereof.
    \11\ The proposed rule change is similar to CFE Rule 420(a)(ii).
    \12\ Various rules (for example, Regulation SHO in certain 
circumstances) require accounts to be maintained separately, and the 
proposed rule change is consistent with those rules.
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     Proposed subparagraph (a)(3) similarly permits an off-
floor transfer if it is a consolidation of accounts \13\ where no 
change in ownership is involved. This proposed rule change is similar 
to rules of other options exchanges.\14\
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    \13\ This refers to the consolidation of entire accounts (e.g., 
combining two separate accounts (including the positions in each 
account into a single account)).
    \14\ See, e.g., Phlx Rule 1058(a)(7); and Arca Rule 6.78-
O(d)(1)(vii).
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     Proposed subparagraph (a)(10) permits an off-floor 
transfer if it is a transfer of positions through operation of law from 
death, bankruptcy, or otherwise.\15\ This provision is consistent with 
applicable laws, rules, and regulations that legally require transfers 
in certain circumstances. This proposed rule change is consistent with 
the purposes of other circumstances in the current rule, such as the 
transfer of positions to a minor or dissolution of a corporation.
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    \15\ The proposed rule change is similar to CFE Rule 
420(a)(iii).
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    The Exchange believes these proposed events have similar purposes 
as those in the current rule, which is to permit market participants to 
move positions from one account to another and to permit transfers upon 
the occurrence of significant, non-recurring events.\16\ As noted 
above, the proposed rule change is consistent with current Exchange 
guidance or rules of other self-regulatory organizations.
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    \16\ See proposed paragraph (g).
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    The proposed rule change renumbers current subparagraphs (a)(1) 
through (5) to be proposed subparagraphs (a)(5) through (9) and moves 
current subparagraph (a)(6) to proposed

[[Page 35440]]

subparagraph (a)(4), with nonsubstantive changes. These permissible 
circumstances for off-floor transfers are consistent with the rules of 
other options exchanges.\17\
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    \17\ See, e.g., Phlx Rule 1058(a)(1) through (6); and Arca Rule 
6.78-O(d)(1)(i) through (vi).
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    Proposed paragraph (b) codifies Exchange guidance regarding certain 
restrictions on permissible off-floor transfers related to netting of 
open positions and to margin and haircut treatment. Proposed paragraph 
(b) states, unless otherwise permitted by Rule 6.49A, when effecting an 
off-floor transfer pursuant to paragraph (a), no position may net 
against another position (``netting''), and no position transfer may 
result in preferential margin or haircut treatment.\18\ Netting occurs 
when long positions and short positions in the same series ``offset'' 
against each other, leaving no or a reduced position. For example, if a 
Trading Permit Holder wanted to transfer 100 long calls to another 
account that contained short calls of the same options series as well 
as other positions, even if the transfer is permitted pursuant to one 
of the 10 permissible events listed in the Rule, the Trading Permit 
Holder could not transfer the offsetting series, as they would net 
against each other and close the positions.
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    \18\ See Cboe Options Regulatory Circular RG03-62 (July 24, 
2003). For example, positions may not transfer from a customer, 
joint back office, or firm account to a Market-Maker account. 
However, positions may transfer from a Market-Maker account to a 
customer, joint back office, or firm account (assuming no netting of 
positions occurs).
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    However, the Exchange notes that a Market Maker's utilization of a 
Clearing Corporation Universal Market-Maker Subaccount would not be 
viewed as netting. A ``Universal Market-Maker Subaccount'' is an 
automated services provided by the Clearing Corporation whereby the 
Clearing Corporation directs transactions into a ``universal'' market 
maker subaccount for a designated market maker or designated group of 
market makers that trade across multiple options exchanges. This 
service was created by the Clearing Corporation to assist market making 
firms that may have employees (or units) that trade across multiple 
exchanges, with each exchange identifying such employees (or units) 
with a different acronym(s). The Clearing Corporation's Universal 
Market Maker Subaccount service ensures that all trades entered into by 
a market-making firm are automatically directed to a specific 
subaccount of its clearing firm at the Clearing Corporation for 
position and margin processing purposes.\19\ Under this process, 
positions cleared into a Universal Market Maker Subaccount would 
automatically net against each other. Universal Market Maker 
Subaccounts are generally used because options exchanges traditionally 
utilized different naming conventions with respect to Market-Maker 
account acronyms (for example, lettering versus numbering and number of 
characters), which are used for accounts at the Clearing Corporation. A 
Market-Maker may have a nominee with an appointment in class XYZ on 
Cboe Options, and have another nominee with an appointment in class XYZ 
on Phlx, but due to account acronym naming conventions, those nominees 
may need to clear their transactions into separate accounts (one for 
Cboe Options transactions and another for Phlx transactions) at the 
Clearing Corporation if it did not utilize a Universal Market Maker 
Subaccount (in which account the positions may net). The proposed rule 
change would not view the use of a Universal Market Maker Subaccount in 
this circumstance as netting that would not be permitted.\20\
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    \19\ See, e.g., Securities Exchange Act Release 73577 (November 
12, 2014) (SR-OCC-2014-20); see also Cboe Options Regulatory 
Circular RG03-62 (July 24, 2003) (which discusses the Clearing 
Corporation's automated process prior to it being formally titled 
the ``Universal Market Maker Subaccount'' program).
    \20\ Additionally, if a Market-Maker makes an internal book-
entry to reflect a ``transfer'' of positions within the same account 
(for example, if a Market-Maker attributes positions within a single 
account to specific individual traders for its own records, and 
makes another internal book-entry to ``transfer'' the positions 
attributed to one individual to another within the same account, but 
does not transfer the positions out of the account), the Exchange 
does not view this as a transfer prohibited by Rule 6.49 or Rule 
6.49A. The Exchange notes that, with these book-entry transfers, 
there can be no netting of positions within the same account.
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    Proposed paragraph (c) states the transfer price, to the extent it 
is consistent with applicable laws, rules, and regulations, including 
rules of other self-regulatory organizations, and tax and accounting 
rules and regulations, at which an off-floor transfer is effected may 
be:
    (1) The original trade prices of the positions that appear on the 
books of the trading CTPH, in which case the records of the transfer 
must indicate the original trade dates for the positions; \21\ 
provided, transfers to correct errors bona fide errors pursuant to 
proposed subparagraph (a)(1) must be transferred at the correct 
original trade prices;
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    \21\ Phlx Rule 1058(c) requires position transfers to occur at 
the same prices that appear on the books of the transferring member.
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    (2) mark-to-market prices of the positions at the close of trading 
on the transfer date;
    (3) mark-to-market prices of the positions at the close of trading 
on the trade date prior to the transfer date; \22\ or
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    \22\ For example, for a transfer that occurs on a Tuesday, the 
transfer price may be based on the closing market price on Monday.
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    (4) the then-current market price of the positions at the time the 
off-floor transfer is effected.\23\
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    \23\ The proposed rule change is similar to CFE Rule 420(c).
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    This proposed rule change provides market participants that effect 
off-floor transactions with flexibility to select a transfer price 
based on the circumstances of the transfer and their business. However, 
for corrections of bona fide errors, because those transfers are 
necessary to correct processing errors that occurred at the time of 
transaction, those transfers would occur at the original transaction 
price, as the purpose of the transfer is to create the originally 
intended result of the transaction.
    Proposed paragraph (d) requires a Trading Permit Holder and its 
CTPH (to the extent that the Trading Permit Holder is not self-
clearing) to submit to the Exchange, in a manner determined by the 
Exchange, written notice prior to effecting an off-floor transfer from 
or to the account of a Trading Permit Holder(s).\24\ The notice must 
indicate:
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    \24\ This notice provision applies only to transfers involving a 
Trading Permit Holder's positions and not to positions of Non-
Trading Permit Holder parties, as they are not subject to the Rules. 
In addition, no notice would be required to effect off-floor 
transfers to correct bona fide errors pursuant to proposed 
subparagraph (a)(1).
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     The Exchange-listed options positions to be transferred;
     the nature of the transaction;
     the enumerated provision(s) under proposed paragraph (a) 
pursuant to which the positions are being transferred;
     the name of the counterparty(ies);
     the anticipated transfer date;
     the method for determined the transfer price; and
     any other information requested by the Exchange.
    The proposed notice will ensure the Exchange is aware of all off-
floor transfers so that it can monitor and review them (including the 
records that must be retained pursuant to proposed paragraph (e)) to 
determine whether they are effected in accordance with the Rules. 
Additionally, requiring notice from the Trading Permit Holder(s) and 
its CTPH(s) will ensure both parties are in agreement with respect to 
the terms of the off-floor transfer. The proposed rule change is 
similar to rules of other

[[Page 35441]]

options exchanges.\25\ As noted in proposed subparagraph (d)(2), 
receipt of notice of an off-floor transfer does not constitute a 
determination by the Exchange that the off-floor transfer was effected 
or reported in conformity with the requirements of Rule 6.49A. 
Notwithstanding submission of written notice to the Exchange, Trading 
Permit Holders and CTPHs that effect off-floor transfers that do not 
conform to the requirements of Rule 6.49A will be subject to 
appropriate disciplinary action in accordance with the Rules.
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    \25\ See, e.g., Phlx Rule 1058(b) and (c); and Arca Rule 6.78-
O(d)(2).
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    Similarly, proposed paragraph (e) requires each Trading Permit 
Holder and each CTPH that is a party to an off-floor transfer must make 
and retain records of the information provided in the written notice to 
the Exchange pursuant to proposed subparagraph (d)(1), as well as 
information on the actual Exchange-listed options that are ultimately 
transferred, the actual transfer date, and the actual transfer price 
(and the original trade dates, if applicable), and any other 
information the Exchange may request the Trading Permit Holder or CTPH 
provide. The proposed rule change is similar to rules of other options 
exchanges.\26\
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    \26\ See, e.g., Phlx Rule 1058(c); and Arca Rule 6.78-O(c).
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    The proposed rule change moves current paragraph (d) regarding 
other exemptions to proposed paragraph (f). The exemptions permitted by 
this paragraph are those approved by the Exchange's president or a 
designee. The proposed rule change changes the term Transferor to 
Trading Permit Holder or CTPH, as a Trading Permit Holder's or CTPH's 
positions will be involved in any off-floor transfer (as set forth in 
proposed paragraph (a)).
    Proposed paragraph (i) is intended to facilitate the reduction of 
risk-weighted assets attributable to open options positions and make 
other conforming changes. SEC Rule 15c3-1 (Net Capital Requirements for 
Brokers or Dealers) (``Net Capital Rules'') requires registered broker-
dealers, unless otherwise excepted, to maintain certain specified 
minimum levels of capital.\27\ The Net Capital Rules are designed to 
protect securities customers, counterparties, and creditors by 
requiring that broker-dealers have sufficient liquid resources on hand, 
at all times, to meet their financial obligations. Notably, hedged 
positions, including offsetting futures and options contract positions, 
result in certain net capital requirement reductions under the Net 
Capital Rules.\28\
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    \27\ 17 CFR 240.15c3-1.
    \28\ In addition, the Net Capital Rules permit various offsets 
under which a percentage of an option position's gain at any one 
valuation point is allowed to offset another position's loss at the 
same valuation point (e.g., vertical spreads).
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    Subject to certain exceptions, CTPHs \29\ are subject to the Net 
Capital Rules.\30\ However, a subset of CTPHs are subsidiaries of U.S. 
bank holding companies, which, due to their affiliations with their 
parent U.S.-bank holding companies, must comply with additional bank 
regulatory capital requirements pursuant to rulemaking required under 
the Dodd-Frank Wall Street Reform and Consumer Protection Act.\31\ 
Pursuant to this mandate, the Board of Governors of the Federal Reserve 
System, the Office of the Comptroller of the Currency, and the Federal 
Deposit Insurance Corporation have approved a regulatory capital 
framework for subsidiaries of U.S. bank holding company clearing 
firms.\32\ Generally, these rules, among other things, impose higher 
minimum capital and higher asset risk weights than were previously 
mandated for CTPHs that are subsidiaries of U.S. bank holding companies 
under the Net Capital Rules. Furthermore, the new rules do not fully 
permit deductions for hedged securities or offsetting options 
positions.\33\ Rather, capital charges under these standards are, in 
large part, based on the aggregate notional value of short positions 
regardless of offsets. As a result, in general, CTPHs that are 
subsidiaries of U.S. bank holding companies must hold substantially 
more bank regulatory capital than would otherwise be required under the 
Net Capital Rules.
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    \29\ All CTPHs must also be clearing members of The Options 
Clearing Corporation (``OCC'').
    \30\ Assuming the Commission approves the proposed rule change, 
in the event federal regulators modify bank capital requirements in 
the future, the Exchange will reevaluate the proposed rule change at 
that time to determine whether any corresponding changes to the 
proposed rule are appropriate.
    \31\ H.R. 4173 (amending section 3(a) of the Securities Exchange 
Act of 1934 (the ``Act'') (15 U.S.C. 78c(a))).
    \32\ 12 CFR 50; 79 FR 61440 (Liquidity Coverage Ratio: Liquidity 
Risk Measurement Standards).
    \33\ Many options strategies, including relatively simple 
strategies often used by retail customers and more sophisticated 
strategies used by broker-dealers, are risk-limited strategies or 
options spread strategies that employ offsets or hedges to achieve 
certain investment outcomes. Such strategies typically involve the 
purchase and sale of multiple options (and may be coupled with 
purchases or sales of the underlying securities), executed 
simultaneously as part of the same strategy. In many cases, the 
potential market exposure of these strategies is limited and 
defined. While regulatory capital requirements have historically 
reflected the risk-limited nature of carrying offsetting positions, 
these positions may now be subject to higher regulatory capital 
requirements.
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    The Exchange believes these higher regulatory capital requirements 
may impact liquidity in the listed options market by limiting the 
amount of capital CTPHs can allocate to their clients' transactions. 
Specifically, the rules may cause CTPHs to impose stricter position 
limits on their client clearing members. These stricter position limits 
may impact the liquidity market participants may provide, including 
liquidity Market-Makers may provide in their appointed classes. This 
impact may be compounded when a CTPH has multiple client accounts, each 
having largely risk-neutral portfolio holdings.\34\ The Exchange 
believes that permitting market participants to efficiently transfer 
existing options positions through an off-floor transfer process may 
assist CTPHs and TPHs to address bank regulatory capital requirements 
and would likely have a beneficial effect on continued liquidity in the 
options market without adversely affecting market quality.
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    \34\ A number of TPHs, including Market-Makers, have informed 
the Exchange that the heightened bank regulatory requirements could 
impact their ability to provide consistent liquidity in the market 
unless they are able to efficiently transfer their open positions 
out of clearing accounts of U.S.-bank affiliated clearing firms.
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    Liquidity in the listed options market is critically important. 
However, bank capital regulations that govern bank-affiliated clearing 
firms are negatively impacting the ability of Trading Permit Holders, 
including Market-Makers, that clear options transactions through bank-
affiliated clearing firms to provide liquidity. In order to mitigate 
the potential negative effects of these additional bank regulatory 
capital requirements, the proposed rule change provides market 
participants with an efficient mechanism to transfer their open options 
positions from one clearing account to another clearing account. The 
Exchange believes the proposed rule change will increase liquidity in 
the listed options market and promote more efficient capital deployment 
in light of bank regulatory capital requirements.
    The Exchange has previously adopted Rules 6.56 and 6.57 to provide 
Trading Permit Holders with tools to reduce risk-weighted assets 
attributable to their open positions in S&P 500 options (``SPX 
options''). However, the procedures in those rules involve transactions 
that must occur on the Exchange's trading floor to close open 
positions. Therefore, a market participant must find a counterparty and 
be willing to close positions to use

[[Page 35442]]

either of these tools. As a result, these procedures are less 
efficient, less flexible, and more burdensome means to reduce risk-
weighted assets attributable to open options positions than an off-
floor transfer of such positions. Additionally, these tools are 
currently limited to SPX options, due to the large notional size of 
those options, which compounds the negative impact of bank capital 
requirements, and Rule 6.57 is limited to Market-Makers (Rule 6.56 is 
available to all Trading Permit Holders). However, bank capital 
requirements apply to positions in all listed options, and may impact 
all client clearing members of clearing firms affiliated with U.S.-bank 
holding companies, and clearing firms may request that Market-Makers 
and non-Market-Makers reduce positions in listed options in addition to 
SPX. There is currently no mechanism firms may use to transfer 
positions between clearing accounts without having to effect a 
transaction with another party and close a position.
    Rule 6.49A(a), currently and as proposed, permits positions to be 
transferred off the floor of the Exchange in specified limited 
circumstances, including a transfer of positions from one account to 
another account where no change in ownership is involved, provided the 
accounts are not in separate aggregation units or otherwise subject to 
information barrier or account segregation requirements.\35\ If a 
Trading Permit Holder wanted to transfer open positions from a clearing 
account it has with one a bank-affiliated clearing firm to a clearing 
account it has with a non-bank-affiliated clearing firm, for example, 
such a transfer would result in no change in ownership. However, 
paragraph (g) restricts transfers pursuant to that provision to non-
routine, non-recurring movements of positions, and does not permit use 
of the off-floor transfer procedure to be used repeatedly or routinely 
in circumvention of the normal auction market process. To comply with 
clearing firms' position limits they may impose on market participants' 
because they need to limit capital they may allocate for those market 
participants' transactions, market participants may need to regularly 
reduce open positions or limit additional positions in their accounts 
with such clearing firms' to accommodate bank capital requirements. 
Rule 6.49A does not permit regular transfers of positions between 
accounts at different clearing firms.
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    \35\ Rule 6.49A(a)(2).
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    Proposed Rule 6.49A(i) is intended to provide market participants 
with an additional tool they may use to address the issues raised by 
bank capital requirements for positions in all listed options in an 
efficient manner that provides market participants with flexibility to 
do so in accordance with their businesses and risk management 
practices. Proposed paragraph (i) provides that notwithstanding 
paragraphs (a), (b) (which prohibits off-floor position transfers to 
result in netting), and (g) (which prohibits recurring, regular 
transfers), existing positions in options listed on the Exchange of a 
Trading Permit Holder or non-Trading Permit Holder (including an 
affiliate of a Trading Permit Holder) may be transferred on, from, or 
to the books of a CTPH off the Exchange if the transfer establishes a 
net reduction of risk-weighted assets attributable to those options 
positions (an ``RWA Transfer'').\36\ The proposed rule adds examples of 
two transfers that would be deemed to establish a net reduction of 
risk-weighted assets, and thus qualify as a permissible RWA Transfer:
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    \36\ The proposed rule change makes conforming changes to 
paragraph (g).
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     A transfer of options positions from Clearing Corporation 
member A to Clearing Corporation member B that net (offset) with 
positions held at Clearing Corporation member B, and thus closes all or 
part of those positions (as demonstrated in the example below); \37\ 
and
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    \37\ This transfer would establish a net reduction of risk-
weighted assets attributable to the transferring Person, because 
there would be fewer open positions and thus fewer assets subject to 
Net Capital Rules.
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     A transfer of options positions from a bank-affiliated 
Clearing Corporation member to a non-bank-affiliated Clearing 
Corporation member.\38\
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    \38\ This transfer would establish a net reduction of risk-
weighted assets attributable to the transferring Person, because the 
non-bank-affiliated Clearing Corporation member would not be subject 
to Net Capital Rules, as described above.
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    These transfers will not result in a change in ownership, as they 
must occur between accounts of the same Person.\39\ Rule 1.1 defines 
``Person'' as an individual, partnership (general or limited), joint 
stock company, corporation, limited liability company, trust or 
unincorporated organization, or any governmental entity or agency or 
political subdivision thereof. In other words, RWA transfers may only 
occur between the same individual or legal entity. These are merely 
transfers from one clearing account to another, both of which are 
attributable to the same individual or legal entity. A market 
participant effecting an RWA Transfer is analogous to an individual 
transferring funds from a checking account to a savings account, or 
from an account at one bank to an account at another bank--the money 
still belongs to the same person, who is just holding it in a different 
account for personal financial reasons.
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    \39\ See proposed Rule 6.49A(b)(3)(D).
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    For example, Market-Maker A clears transactions on the Exchange 
into an account it has with CTPH X, which is affiliated with a U.S-bank 
holding company. Market-Maker A opens a clearing account with CTPH Y, 
which is not affiliated with a U.S.-bank holding company. CTPH X has 
informed Market-Maker A that its open positions may not exceed a 
certain amount at the end of a calendar month, or it will be subject to 
restrictions on new positions it may open the following month. On 
August 28, Market-Maker A reviews the open positions in its CTPH X 
clearing account and determines it must reduce its open positions to 
satisfy CTPH X's requirements by the end of August. It determines that 
transferring out 1000 short calls in class ABC will sufficiently reduce 
the risk-weighted asset capital requirements in the account with CTPH X 
to avoid additional position limits in September. Market-Maker A wants 
to retain the positions in accordance with its risk profile. Pursuant 
to the proposed rule change, on August 31, Market-Maker A transfers 
1000 short calls in class ABC to its clearing account with CTPH Y. As a 
result, Market-Maker A can continue to provide the same level of 
liquidity in class ABC during September as it did in previous months.
    A Trading Permit Holder must give up a CTPH for each transaction it 
effects on the Exchange, which identifies the CTPH through which the 
transaction will clear.\40\ A Trading Permit Holder may change the give 
up for a transaction within a specified period of time.\41\ 
Additionally, a Trading Permit Holder may also change the CMTA \42\ for 
a specific transaction.\43\ The transfer of positions from an account 
with one clearing firm to the account of another clearing firm pursuant 
to the proposed rule change has a similar result as changing a give up 
or CMTA, as it results in a position that resulted from a transaction 
moving from the account of one clearing firm to another, just at

[[Page 35443]]

a different time and in a different manner.\44\ In the above example, 
if Market-Maker A had initially given up CTPH Y rather than CTPH X on 
the transactions that resulted in the 1000 long calls in class ABC, or 
had changed the give-up or CMTA to CTPH Y pursuant to Rules 6.21 or 
6.67, the ultimate result would have been the same. There are a variety 
of reasons why firms give up or CMTA transactions to certain clearing 
firms (and not to non-bank affiliate clearing firms) at the time of a 
transaction, and the proposed rule change provides firms with a 
mechanism to achieve the same result at a later time.
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    \40\ See Rule 6.21.
    \41\ See Rule 6.21(f).
    \42\ The Clearing Member Trade Assignment (``CMTA'') process at 
the Options Clearing Corporation (``OCC'') facilitates the transfer 
of option trades/positions from one OCC clearing member to another 
in an automated fashion. Changing a CMTA for a specific transaction 
would allocate the trade to a different OCC clearing member than the 
one initially identified on the trade.
    \43\ See Rule 6.67(a).
    \44\ The transferred positions will continue to be subject to 
OCC rules, as they will continue to be held in an account of an OCC 
member.
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    The proposed rule change states RWA Transfers may occur on a 
routine, recurring basis.\45\ As noted in the example above, clearing 
firms may impose restrictions on the amount of open positions. 
Permitting transfers on a routine, recurring basis will provide market 
participants with the flexibility to comply with these restrictions 
when necessary to avoid position limits on future options activity.\46\ 
Additionally, the proposed rule change provides no prior written notice 
pursuant to paragraph (d) is required for RWA Transfers. Because of the 
potential routine basis on which RWA Transfers may occur, and because 
of the need for flexibility to comply with the restrictions described 
above, the Exchange believes it may interfere with the ability of 
investors firms to comply with any CTPH restrictions describe above, 
and may be burdensome to provide notice for these routine 
transfers.\47\
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    \45\ See proposed Rule 6.49A(b)(3)(A).
    \46\ The proposed rule change adds to proposed paragraph (g) 
that proposed paragraph (i) is an exception to the prohibition on 
regular, recurring off-floor transfers.
    \47\ The proposed rule change adds to proposed paragraph (d) 
that proposed paragraph (i) is an exception to the requirement to 
provide prior written notice.
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    The proposed rule change states RWA Transfers may result in the 
netting of positions.\48\ Netting is generally prohibited for off-floor 
transfers.\49\ Netting occurs when long positions and short positions 
in the same series ``offset'' against each other, leaving no or a 
reduced position. For example, if there were 100 long calls in one 
account, and 100 short calls of the same option series were added to 
that account, the positions would offset, leaving no open positions. As 
discussed above, the proposed rule change adds another exception to 
this prohibition in Rule 6.49A, which permits off-floor transfers on 
behalf of a Market-Maker account for transactions in multiply listed 
options series on different exchanges, but only if the Market-Maker 
nominees are trading for the same Trading Permit Holder organization, 
and the options transactions on the different options exchanges clear 
into separate exchange-specific accounts because they cannot easily 
clear into the same Market-Maker account at OCC. In such instances, all 
Market-Maker positions in the exchange-specific accounts for the 
multiply listed class would be automatically transferred on their trade 
date into one central Market-Maker account (commonly referred to as a 
``universal account'') at the Clearing Corporation.\50\ Positions 
cleared into a universal account would automatically net against each 
other.
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    \48\ See proposed Rule 6.49A(b)(3)(B).
    \49\ See proposed Rule 6.49A(b)(1).
    \50\ Id.
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    While RWA Transfers are not occurring because of limitations 
related to trading on different exchanges, similar reasoning for the 
above exception applies to why netting should be permissible for the 
limited purpose of reducing risk-weighted assets. Firms may maintain 
different clearing accounts for a variety of reasons, such as the 
structure of their businesses, the manner in which they trade, their 
risk management procedures, and for capital purposes. If a Market-Maker 
clears all transactions into a universal account, offsetting positions 
would automatically net. However, if a Market-Maker has multiple 
accounts into which its transactions cleared, they would not 
automatically net. While there are times when a firm may not want to 
close out open positions to reduce risk-weighted assets, there are 
other times when a firm may determine it is appropriate to close out 
positions to accomplish a reduction in risk-weighted assets.
    In the example above, suppose after making the RWA Transfer 
described above, Market-Maker A effects a transaction on September 25 
that results in 1000 long calls in class ABC, which clears into its 
account with CTPH X. If Market-Maker A had not effected its RWA 
Transfer in August, the 1000 long calls would have offset against the 
1000 short calls, eliminating both positions and thus any risk-weighted 
asset capital requirements associated with them. At the end of August, 
Market-Maker A did not want to close out the 1000 short calls when it 
made its RWA Transfer. However, given changed circumstances in 
September, Market-Maker A has determined it no longer wants to hold 
those positions. The proposed rule change would permit Market-Maker A 
to effect an RWA Transfer of the 1000 short calls from its account with 
CTPH Y to its account with CTPH X (or vice versa), which results in 
elimination of those positions (and a reduction in risk-weighted assets 
associated with them). As noted above, such netting would have occurred 
if Market-Maker A cleared the September transaction directly into its 
account with CTPH Y, or had not effected an RWA Transfer in August. 
Netting provides market participants with appropriate flexibility to 
conduct their businesses as they see fit while having the ability to 
reduce risk-weighted asset capital requirements when necessary.\51\
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    \51\ The proposed rule change adds to paragraph (b) that 
proposed (i) is an exception to the prohibition on netting. Proposed 
(i) makes clear that RWA Transfers, like all other permissible off-
floor position transfers, may not result in preferential margin or 
haircut treatment.
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    As is true for all other off-floor transfers that are or will be 
permitted under proposed Rule 6.49A, RWA Transfers may not result in 
preferential margin or haircut treatment.\52\ Additionally, RWA 
Transfers may only be effected for options listed on the Exchange and 
will be subject to applicable laws, rules, and regulations, including 
rules of other self-regulatory organizations (including OCC).\53\ RWA 
Transfers will also be subject to the other requirements in Rule 6.49A, 
including the permitted transfer prices in proposed paragraph (c), and 
the notice and record requirements in proposed paragraphs (d) and (e).
---------------------------------------------------------------------------

    \52\ See proposed Rule 6.49A(i)(C) and current Rule 6.49A(b)(1). 
For example, positions may not transfer from a customer, joint back 
office, or firm account to a Market-Maker account. However, 
positions may transfer from a Market-Maker account to a customer, 
joint back office, or firm account.
    \53\ See Rule 6.49A(h). Transfers of non-Exchange listed options 
and other financial instruments are not governed by Rule 6.49A 
currently or as proposed to be amended.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\54\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \55\ 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,

[[Page 35444]]

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) \56\ requirement that the rules 
of an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78f(b).
    \55\ 15 U.S.C. 78f(b)(5).
    \56\ Id.
---------------------------------------------------------------------------

    The Exchange believes that permitting the off-floor transfers in 
very limited circumstances such as where there is no change in 
beneficial ownership, to contribute to a non-profit corporation, to 
transfer to a minor or a transfer by operation of law is reasonable to 
allow a TPH to accomplish certain goals efficiently. The rule permits 
off-floor transfers in situations involving dissolutions of entities or 
accounts, for purposes of donations, mergers or by operation of law. 
For example, a TPH that is undergoing a structural change and a one-
time movement of positions may require a transfer of positions or a TPH 
that is leaving a firm that will no longer be in business may require a 
transfer of positions to another firm. Also, a TPH may require a 
transfer of positions to make a capital contribution. The above-
referenced circumstances are non-recurring situations where the 
transferor continues to maintain some ownership interest or manage the 
positions transferred. By contrast, repeated or routine off-floor 
transfers between entities or accounts--even if there is no change in 
beneficial ownership as a result of the transfer--is inconsistent with 
the purposes for which Rule 6.49A was adopted. Accordingly, the 
Exchange believes that such activity should not be permitted under the 
rules and thus, seeks to adopt language in proposed paragraph (e) to 
Rule 6.49A that the transfer of positions procedures set forth in Rule 
6.49A are intended to facilitate non-recurring movements of positions.
    The Exchange believes the proposed rule change to permit RWA 
Transfers will remove impediments to and perfect the mechanism of a 
free and open market and a national market system by potentially 
mitigating the effects bank capital requirements may have on liquidity 
in the listed options market. As described above, bank capital 
requirements may impact capital available for options market liquidity 
providers, for example due to CTPHs' imposition of stricter position 
limits on firms that clear options transactions with them. The Exchange 
believes providing market participants with an efficient process to 
reduce risk-weighted asset capital requirements attributable to open 
positions in clearing accounts with U.S. bank-affiliated clearing firms 
may contribute to additional liquidity in the listed options market, 
which, in general, protects investors and the public interest.
    The proposed rule change, in particular the proposed changes to 
permit RWA transfers to occur on a routine, recurring basis and result 
in netting, also provides market participants with sufficient 
flexibility to reduce risk-weighted asset capital requirements at times 
necessary to comply with requirements imposed on them by clearing 
firms. This will permit market participants respond to then-current 
market conditions, including volatility and increased volume, by 
reducing the risk-weighted asset capital requirements associated with 
any new positions they may open while those conditions exist. Given the 
additional capital that may become available to market participants as 
a result of the RWA Transfers, market participants will be able to 
continue to provide liquidity to the market, even during periods of 
increased volume and volatility, which liquidity ultimately benefits 
investors. It is not possible for market participants to predict what 
market conditions will exist at a specific time, and when volatility 
will occur. The proposed rule change to permit routine, recurring RWA 
Transfers (and to not provide prior written notice) will provide market 
participants with the ability to respond to these conditions whenever 
they occur. Additionally, since firms may be subject to restrictions on 
positions imposed by their clearing firms, permitting transfers on a 
routine, recurring basis will provide market participants with the 
flexibility to comply with these restrictions when necessary to avoid 
position limits on future options activity. In addition, with respect 
to netting, as discussed above, firms may maintain different clearing 
accounts for a variety of reasons, such as the structure of their 
businesses, the manner in which they trade, their risk management 
procedures, and for capital purposes. Netting may otherwise occur with 
respect to a firm's positions if it structured its clearing accounts 
differently, such as by using a universal account. Therefore, the 
proposed rule change will permit netting while allowing firms to 
continue to maintain different clearing accounts in a manner consistent 
with their businesses.
    The Exchange recognizes the numerous benefits of executing options 
transactions occur on an exchanges, including price transparency, 
potential price improvement, and a clearing guarantee. However, the 
Exchange believes it is appropriate to permit RWA Transfers to occur 
off the exchange, as these benefits are inapplicable to RWA Transfers. 
RWA Transfers have a narrow scope and are intended to achieve a 
limited, benefit purpose. RWA Transfers are not intended to be a 
competitive trading tool. There is no need for price discovery or 
improvement, as the purpose of the transfer is to reduce risk-weighted 
asset capital requirements attributable to a market participants' 
positions. Unlike trades on an exchange, the price at which an RWA 
Transfers occurs is immaterial--the resulting reduction in risk-
weighted assets is the critical part of the transfer. RWA Transfers 
will result in no change in ownership, and thus they do not constitute 
trades with a counterparty (and thus eliminating the need for a 
counterparty guarantee). The transactions that resulted in the open 
positions to be transferred as an RWA Transfer were already guaranteed 
by an OCC clearing member, and the positions will continue to be 
subject to OCC rules, as they will continue to be held in an account 
with an OCC clearing member. The narrow scope of the proposed rule 
change and the limited, beneficial purpose of RWA Transfers make 
allowing RWA Transfers to occur off the floor appropriate and important 
to support the provision of liquidity in the listed options market.
    The proposed rule change does not unfairly discriminate against 
market participants, as all Trading Permit Holders and non-Trading 
Permit Holders with open positions in options listed on the Exchange 
may use the proposed off-floor transfer process to reduce the risk-
weighted asset capital requirements of CTPHs.
    The Exchange believes the proposed rule change benefits investors, 
as it adds transparency to the Rules by codifying certain long-standing 
guidance regarding what types of off-floor transfers are permissible. 
The purpose of the additional circumstances in which market 
participants may conduct off-floor transfers is consistent with the 
purpose of the circumstances currently permitted in Rule 6.49A. 
Therefore, the proposed rule change will provide market participants 
that experience these limited, non-recurring events with an efficient 
and effective means to transfer positions in these situations. It also 
permits presidential exemptions when they are necessary or appropriate 
for the maintenance of a fair and orderly market and the protection of 
investors and are in the public interest. The

[[Page 35445]]

Exchange believes the proposed rule change regarding permissible 
transfer prices provides market participants with flexibility to 
determine the price appropriate for their business, which maintain cost 
bases in accordance with normal accounting practices and removes 
impediments to a free and open market.
    The proposed rule change requiring notice and maintenance of 
records will ensure the Exchange is able to review off-floor transfers 
for compliance with the Rules, which prevents fraudulent and 
manipulative acts and practices. The requirement to retain records is 
consistent with the requirements of Rule 17a-3 and 17a-4 under the Act.
    As discussed above, the proposed rule change is similar to rules of 
other options exchanges, and thus further removes impediments to and 
perfects the mechanism of a free and open market.

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, as the amended off-floor transfer procedure will apply to 
all Trading Permit Holders in the same manner. Use of the off-floor 
transfer procedure is voluntary, and all Trading Permit Holders may use 
the procedure to transfer position off the floor as long as the 
criteria in the proposed rule are satisfied. Market participants will 
still be able to effect transactions on the Exchange pursuant to the 
normal auction process if an off-floor transfer is not permissible.
    The proposed rule change also provides market participants that 
experience the limited permissible, non-recurring events with an 
efficient and effective means to transfer positions in these 
situations. The Exchange believes the proposed rule change regarding 
permissible transfer prices provides market participants with 
flexibility to determine the price appropriate for their business, 
which determine prices in accordance with normal accounting practices 
and removes impediments to a free and open market. The Exchange does 
not believe the proposed notice and record requirements are unduly 
burdensome to market participants, as they are similar to requirements 
in the rules of other options exchanges, as discussed above. The 
Exchange believes these are reasonable requirements that will ensure 
the Exchange is aware of all off-floor transfers so that it can monitor 
and review them to determine whether they are effected in accordance 
with the Rules.
    The Exchange does not believe the proposed rule change will impose 
any burden on intermarket competition. The proposed off-floor position 
transfer procedure is not intended to be a competitive trading tool. 
The Exchange does not believe the proposed changes to the off-floor 
position transfer procedure are material, as they codify certain 
longstanding guidance and clarify the procedure. This procedure is of 
limited application during unique circumstances. Additionally, as 
discussed above, the proposed rule change in part is similar to rules 
of other options exchanges. The Exchange believes having similar rules 
related to off-floor transfer positions to those of other options 
exchanges will reduce the administrative burden on market participants 
of determining whether their off-floor transfers comply with multiple 
sets of rules.
    The purpose of the proposed rule change to permit RWA Transfers is 
to alleviate the negative impact of bank capital requirements on 
options market liquidity providers. This process is not intended to be 
a competitive trading tool. Use of the proposed process is voluntary, 
and all Trading Permit Holders and non-Trading Permit Holders with open 
positions in options listed on the Exchange may use the proposed off-
floor transfer process to reduce the risk-weighted asset capital 
requirements attributable to those positions. RWA Transfers have a 
limited purpose, which is to reduce risk-weighted assets attributable 
to open positions in listed options in order to free up capital. Cboe 
Options believes the proposed rule change may relieve the burden on 
liquidity providers in the options market by reducing the risk-weighted 
assets attributable to their open positions. As a result, market 
participants may be able to increase liquidity they provide to the 
market, which liquidity benefits all market participants.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received written 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 [email protected]. Please include 
File Number SR-CBOE-2019-035 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2019-035. 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

[[Page 35446]]

comment submissions. You should submit only information that you wish 
to make available publicly. All submissions should refer to File Number 
SR-CBOE-2019-035 and should be submitted on or before August 13, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\57\
---------------------------------------------------------------------------

    \57\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-15561 Filed 7-22-19; 8:45 am]
 BILLING CODE 8011-01-P