[Federal Register Volume 84, Number 186 (Wednesday, September 25, 2019)]
[Notices]
[Pages 50490-50495]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20708]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87013; File No. SR-CBOE-2019-048]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Adopt Rule 6.49C

September 19, 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 September 6, 2019, Cboe Exchange, Inc. (the ``Exchange'' or 
``Cboe Options'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, 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 adopt Rule 6.49C. The text of the proposed rule change is provided 
below.
(additions are italicized; deletions are [bracketed])
* * * * *
    Rules of Cboe Exchange, Inc.
* * * * *

Rule 6.49C. In-Kind Exchange of Options Positions and ETF Shares

    Notwithstanding the prohibition set forth in Rule 6.49, positions 
in options listed on the Exchange may be transferred off the Exchange 
by a Trading Permit Holder in connection with transactions to purchase 
or redeem creation units of ETF shares between an authorized 
participant and the issuer of such ETF shares, which transfer occurs at 
a price related to the net asset value of such ETF shares. For purposes 
of this Rule:
    (a) an ``authorized participant'' is an entity that has a written 
agreement with the issuer of ETF shares or one of its service 
providers, which allows the authorized participant to place orders for 
the purchase and redemption of creation units (i.e., specified numbers 
of ETF shares); and
    (b) an ``issuer of ETF shares'' is an entity registered with the 
Commission as an open-end management investment company under the 
Investment Company Act of 1940.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The Exchange proposes to adopt Rule 6.49C to add a new exception to 
the Exchange's general requirement that transfers of options contracts 
listed on the Exchange be effected on an exchange, as set forth in Rule 
6.49.\3\ Rule 6.49A specifies the circumstances under which Trading 
Permit Holders may currently effect transfers of positions off the 
trading floor, notwithstanding the prohibition in Rule 6.49.
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    \3\ Rule 6.49(a) (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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Background

    As discussed further below, the ability to effect ``in kind'' 
transfers is a key component of the operational structure of an 
exchange-traded fund

[[Page 50491]]

(``ETF''). Currently, in general, ETFs can effect in-kind transfers 
with respect to equity securities and fixed-income securities. The in-
kind process is a major benefit to ETF shareholders and, in general, 
the means by which assets may be added to or removed from ETFs. In-kind 
transfers protect ETF shareholders from the undesirable tax effects of 
frequent ``creations and redemptions'' (described below) and improve 
the overall tax efficiency of the products. However, currently, the 
Exchange Rules do not allow ETFs to effect in-kind transfers of options 
off of the Exchange, resulting in tax inefficiencies for ETFs that hold 
them. As a result, the use of options by ETFs is substantially limited.
    Current Rule 6.49A(a) lists the circumstances under which Trading 
Permit Holders may transfer their positions off of the Exchange. 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 Minors Act; and (6) 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 
rules that provide for off-floor transfers under similar 
circumstances. See, e.g., Nasdaq OMX PHLX LLC Rule 1058(a); and NYSE 
Arca, Inc. Rule 6.78-O(d)(1). The Exchange recently proposed changes 
to Rule 6.49A, which rule filing is currently pending with the 
Securities and Exchange Commission (the ``Commission''). See 
Securities Exchange Act Release No. 86400 (July 17, 2019), 84 FR 
35438 (July 23, 2019) (SR-CBOE-2019-035).
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    The Exchange proposes to add a new circumstance under which off-
floor transfers of options positions would be permitted to occur. 
Specifically, under proposed Rule 6.49C, positions in options listed on 
the Exchange would be permitted to be transferred off the Exchange by a 
Trading Permit Holder in connection with transactions to purchase or 
redeem ``creation units'' of ETF shares between an ``authorized 
participant'' \5\ and the issuer \6\ of such ETF shares,\7\ which 
transfer would occur at the price used to calculate the net asset value 
(``NAV'') of such ETF shares. The NAV for ETF shares is represented by 
the traded price for ETFs holding options positions on days of creation 
or redemption, and an options pricing model on days in which creations 
and redemptions do not occur. This proposed new exception, although 
limited in scope, would have a significant impact in that it would help 
protect ETF shareholders from undesirable tax consequences and 
facilitate tax-efficient operations. The frequency with which ETFs and 
authorized participants would rely on the proposed exception would 
depend upon such factors as the number of ETFs holding options 
positions traded on the Exchange, the market demand for the shares of 
such ETFs, the redemption activity of authorized participants, and the 
investment strategies employed by such ETFs.
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    \5\ The Exchange is proposing that, for purposes of proposed 
Rule 6.49C, the term ``authorized participant'' would be defined as 
an entity that has a written agreement with the issuer of ETF shares 
or one of its service providers, which allows the authorized 
participant to place orders for the purchase and redemption of 
creation units (i.e., specified numbers of ETF shares). While an 
authorized participant may be a Trading Permit Holder and directly 
effect transactions in options on the Exchange, an authorized 
participant that is not a Trading Permit Holder may effect 
transactions in options on the Exchange through a Trading Permit 
Holder on its behalf.
    \6\ The Exchange is proposing that, for purposes of proposed 
6.49C, any issuer of ETF shares would be registered with the 
Commission as an open-end management investment company under the 
Investment Company Act of 1940 (the ``1940 Act'').
    \7\ An ETF share is a share or other security traded on a 
national securities exchange and defined as an NMS stock, as set 
forth in Rule 5.3, Interpretation and Policy .06, which includes 
open-end management investment companies registered with the 
Commission. See Rule 1.1.
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    As described in further detail below, while ETFs do not sell and 
redeem individual shares to and from investors, they do sell large 
blocks of their shares to, and redeem them from, authorized 
participants in conjunction with what is known as the ETF creation and 
redemption process. Although currently prohibited in light of Rule 
6.49, under the proposed exception, ETFs that hold options listed on 
the Exchange would be permitted to effect creation and redemption 
transactions with authorized participants on an ``in-kind'' basis, 
which is the process that may generally be utilized by ETFs for other 
asset types. This ability would allow such ETFs to function as more 
tax-efficient investment vehicles to the benefit of investors that hold 
ETF shares. In addition, it may also result in transaction cost savings 
for the ETFs, which may be passed along to investors.
    While the Exchange recognizes that, in general, the execution of 
options transactions on exchanges provides certain benefits, such as 
price discovery and transparency, based on the circumstances under 
which proposed Rule 6.49C would apply, the Exchange does not believe 
that such benefits would be compromised. In this regard, as discussed 
more fully below, the Exchange notes that in conjunction with the 
creation and redemption process, positions would be transferred at a 
price related to the NAV of ETF shares. In addition, although options 
positions would be transferred off of the Exchange, they would not be 
closed or ``traded.'' Rather, they would reside in a different clearing 
account until closed in a trade on the Exchange or until they expire. 
Further, as discussed below, proposed Rule 6.49C would be clearly 
delineated and limited in scope, given that the proposed exception 
would apply only to transfers of options effected in connection with 
the creation and redemption process.
The ETF Creation and Redemption Process \8\
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    \8\ The following summary of the ETF creation and redemption 
process is based largely on portions of the discussion set forth in 
Investment Company Act Release No. 33140 (June 28, 2018), 83 FR 
37332 (July 31, 2018) (the ``Proposed ETF Rule Release'') in which 
the Commission proposed a new rule under the 1940 Act that would 
permit ETFs registered as open-end management investment companies 
that satisfy certain conditions to operate without the need to 
obtain an exemptive order. The proposed rule is currently pending.
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    Due to their ability to effect in-kind transfers with authorized 
participants in conjunction with the creation and redemption process 
described below, ETFs have the potential to be significantly more tax-
efficient than other pooled investment products, such as mutual funds. 
ETFs issue shares that may be purchased or sold during the day in the 
secondary market at market-determined prices. Similar to other types of 
investment companies, ETFs invest their assets in accordance with their 
investment objectives and investment strategies, and ETF shares 
represent interests in an ETF's underlying assets. ETFs are, in certain 
respects, similar to mutual funds in that they continuously offer their 
shares for sale. In contrast to mutual funds, however, ETFs do not sell 
or redeem individual shares. Rather, through the creation and 
redemption process referenced above, authorized participants that have 
contractual arrangements with an ETF and/or its service provider (e.g., 
its distributor)

[[Page 50492]]

purchase and redeem shares directly from that ETF in large aggregations 
known as ``creation units.'' In general terms, to purchase a creation 
unit of ETF shares from an ETF, in return for depositing a ``basket'' 
of securities and/or other assets identified by the ETF on a particular 
day, the authorized participant will receive a creation unit of ETF 
shares. The basket deposited by the authorized participant is generally 
expected to be representative of the ETF's portfolio \9\ and, when 
combined with a cash balancing amount (i.e., generally an amount of 
cash intended to account for any difference between the value of the 
basket and the NAV of a creation unit), if any, will be equal in value 
to the aggregate NAV of the shares of the ETF comprising the creation 
unit. After purchasing a creation unit, an authorized participant may 
then hold individual shares of the ETF and/or sell them in secondary 
market transactions. Investors may purchase individual ETF shares in 
the secondary market. In connection with effecting redemptions, the 
creation process described above is reversed. More specifically, the 
authorized participant will redeem a creation unit of ETF shares to the 
ETF in return for a basket of securities and/or other assets (along 
with any cash balancing amount).
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    \9\ Under certain circumstances, however, and subject to the 
provisions of its exemptive relief from various provisions of the 
1940 Act obtained from the Commission, an ETF may substitute cash 
and/or other instruments in lieu of some or all of the ETF's 
portfolio holdings. For example, currently, because there is no 
applicable exception from Rule 6.49(a), positions in options traded 
on the Exchange would be generally substituted with cash.
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    The ETF creation and redemption process, coupled with the secondary 
market trading of ETF shares, facilitates arbitrage opportunities that 
are intended to help keep the market price of ETF shares at or close to 
the NAV per share of the ETF. Authorized participants play an important 
role because of their ability, in general terms, to add ETF shares to, 
or remove them from, the market. In this regard, if shares of an ETF 
are trading at a discount (i.e., below NAV per share), an authorized 
participant may purchase ETF shares in the secondary market, accumulate 
enough shares for a creation unit and then redeem them from the ETF in 
exchange for the ETF's more valuable redemption basket. Accordingly, 
the authorized participant will profit because it paid less for the ETF 
shares than it received for the underlying assets. The reduction in the 
supply of ETF shares available on the secondary market, together with 
the sale of the ETF's basket assets, may cause the price of ETF shares 
to increase, the price of the basket assets to decrease, or both, 
thereby causing the market price of the ETF shares and the value of the 
ETF's holdings to move closer together. In contrast, if the ETF shares 
are trading at a premium (i.e., above NAV per share), the transactions 
are reversed (and the authorized participant would deliver the creation 
basket in exchange for ETF shares), resulting in an increase in the 
supply of ETF shares which may also help to keep the price of the 
shares of an ETF close to the value of its holdings.
    In comparison to other pooled investment vehicles, one of the 
significant benefits associated with an ETF's in-kind redemption 
feature is tax efficiency. In this regard, by effecting redemptions on 
an in-kind basis (i.e., delivering certain assets from the ETF's 
portfolio instead of cash), there is no need for the ETF to sell assets 
and potentially realize capital gains that would be distributed to 
shareholders. As indicated above, however, because there is currently 
no applicable exception from Rule 6.49(a), ETFs that invest in options 
traded on the Exchange are generally required to substitute cash in 
lieu of such options when effecting redemption transactions with 
authorized participants. Because they must sell the options to obtain 
the requisite cash, such ETFs (and, therefore, investors that hold 
shares of those ETFs) are not able to benefit from the tax efficiencies 
afforded by in-kind transactions.
    An additional benefit associated with the in-kind feature is the 
potential for transaction cost savings. In this regard, by transacting 
on an in-kind basis, ETFs may avoid certain transaction costs they 
would otherwise incur in connection with purchases and sales of 
securities and other assets. Again, however, without an exception to 
Rule 6.49(a), this benefit is not available to ETFs with respect to 
their options holdings.
Discussion
    The Exchange notes that the Commission approved Rule 6.49A in 1995 
because the Exchange recognized, and the Commission agreed, that under 
certain circumstances, off-floor transfers were justified.\10\ The 
Exchange believes that it is appropriate to permit off-floor transfers 
of options positions in connection with the creation and redemption 
process and recognizes that the prevalence and popularity of ETFs have 
increased greatly since the adoption of Rule 6.49A. Currently, ETFs 
serve both as popular investment vehicles and trading tools \11\ and, 
as discussed above, the creation and redemption process, along with the 
arbitrage opportunities that accompany it, are key ETF features. 
Accordingly, the Exchange believes that providing an additional, narrow 
exception to the prohibition of off-exchange transfers of option 
positions to make it possible for ETFs that invest in options to effect 
creations and redemptions on an in-kind basis is justified.
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    \10\ See Exchange Act Release No. 36647 (December 28, 1995), 61 
FR 566 (January 8, 1996) (Order Approving and Notice of Filing and 
Order Granting Accelerated Approval of Amendments No. 1 and 2 to a 
Proposed Rule Change Relating to the Transfer of Positions on the 
Floor of the Exchange in Cases of Dissolution and other Situations) 
(File No. SR-CBOE-95-36).
    \11\ As noted in the Proposed ETF Rule Release, during the first 
quarter of 2018, trading in U.S.-listed ETFs comprised approximately 
18.75% of U.S. equity trading by share volume and 28.2% of U.S. 
equity trading by dollar volume (based on trade and quote data from 
the New York Stock Exchange and Trade Reporting Facility data from 
the Financial Industry Regulatory Authority, Inc. (FINRA)). See the 
Proposed ETF Rule Release at 83 FR 37334.
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    The Exchange submits that the proposed exception is clearly 
delineated and limited in scope and not intended to facilitate 
``trading'' options off of the Exchange in order to circumvent the 
current prohibition of Rule 6.49. In this regard, the proposed 
exception would be available solely in the context of transfers of 
options positions effected in connection with transactions to purchase 
or redeem creation units of ETF shares between ETFs and authorized 
participants.\12\ As a result of this process, such transfers would 
occur at a price related to the NAV of the applicable ETF shares (as 
discussed above), which removes the need for price discovery on an 
Exchange for pricing these transfers. Moreover, as described above, 
ETFs and authorized participants are not seeking to effect the opening 
or closing of new options positions in connection with the creation and 
redemption process. Rather, the options positions would reside in a 
different clearing account until closed in a trade on the Exchange or 
until they expire.
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    \12\ See supra note 3. The term ``authorized participant'' is 
specific and narrowly defined. As noted in the Proposed ETF Rule 
Release, the requirement that only authorized participants of an ETF 
may purchase creation units from (or sell creation units to) an ETF 
``is designed to preserve an orderly creation unit issuance and 
redemption process between ETFs and authorized participants.'' 
Furthermore, an ``orderly creation unit issuance and redemption 
process is of central importance to the arbitrage mechanism.'' See 
Proposed ETF Rule Release at 83 FR 37348.
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    The proposed transfers, while occurring between two different 
parties, will occur off the Exchange and will not be considered 
transactions (as is the case for current off-floor transfers

[[Page 50493]]

permitted by Rule 6.49A).\13\ While the prices of options transactions 
effected on the Exchange are disseminated to OPRA, back-office 
transfers of options positions in clearing accounts held at The Options 
Clearing Corporation (``OCC'') (in accordance with OCC Rules) \14\ are 
not disseminated to OPRA or otherwise publicly available, as they are 
considered position transfers, rather than executions.\15\ The Exchange 
believes that price transparency is important in the options market. 
However, the Exchange expects any transfers pursuant to the proposed 
rule will constitute a minimal percentage of average daily volume of 
options. Additionally, as noted above, the NAV for the transfers will 
generally be based on the disseminated closing price for an option 
series on the day of a creation or redemption, and thus the price 
(although not the time or quantity of the transfer) at which these 
transfers will generally be effected will be publicly available. 
Further, the Exchange generally expects creations or redemptions to 
include corresponding transactions by the authorized participant that 
will occur on an exchange and be reported to OPRA.\16\ Therefore, the 
Exchange expects that any impact the proposed rule change could have on 
price transparency in the options market would be de minimis.
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    \13\ For this reason, the Exchange notes that Rule 6.51(c) does 
not require reporting of off-floor transfers effected pursuant to 
Rule 6.49A, or that would be effected pursuant to proposed Rule 
6.49C.
    \14\ OCC has informed the Exchange that it has the operational 
capabilities to effect the proposed position transfers. All 
transfers pursuant to proposed Rule 6.49C would be required to 
comply with OCC rules. See Rule 4.2 (which requires all TPHs that 
are members of OCC to comply with OCC's Rules).
    \15\ For example, any transfers effected pursuant to the current 
exemptions to Rule 6.49 contained in Rule 6.49A are not disseminated 
to OPRA.
    \16\ The Exchange notes that for in-kind creations, an 
authorized participant will acquire the necessary options positions 
in an on-exchange transaction that will be reported to OPRA. For in-
kind redemptions, the Exchange generally expects that an authorized 
participant will acquire both the shares necessary to effect the 
redemption and an options position to offset the position that it 
will receive as proceeds for the redemption. Such an options 
position would likely be acquired in an on-exchange transaction that 
would be reported to OPRA. Such transactions are generally identical 
to the way that creations and redemptions work for equities and 
fixed income transactions--while the transfer between the authorized 
participant and the fund is not necessarily reported, there are 
generally corresponding transactions that would be reported, 
providing transparency into the transactions.
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    Other than the transfers covered by the proposed exception, 
transactions involving options, whether held by an ETF or an authorized 
participant, would be fully subject to Rule 6.49 (except as provided by 
any other applicable exceptions) and all other applicable trading 
Rules.\17\ Accordingly, the Exchange does not believe that the proposed 
new exception would compromise price discovery or transparency.
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    \17\ As indicated above, the operation of the arbitrage 
mechanism accompanying the creation and redemption process generally 
contemplates ongoing interactions between authorized participants 
and the market in transactions involving both ETF shares and the 
assets comprising an ETF's creation/redemption basket.
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    Further, the Exchange believes that providing an additional 
exception to make it possible for ETFs that invest in options to effect 
creations and redemptions on an in-kind basis is justified because, 
while the proposed exception would be limited in scope, the benefits 
that may flow to ETFs that hold options and their investors may be 
significant. Specifically, the Exchange expects such ETFs and their 
investors would benefit from increased tax efficiencies and potential 
transaction cost savings. By making such ETFs more attractive to both 
current and prospective investors, the proposed rule change would 
enable them to compete more effectively with other ETFs that, due to 
their particular portfolio holdings, may effect in-kind creations and 
redemptions without restriction.
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.\18\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \19\ requirements that the rules 
of an exchange be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that permitting off-floor transfers in 
connection with the in-kind ETF creation and redemption process 
promotes just and equitable principles of trade and helps remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, as it would permit ETFs that invest in 
options traded on the Exchange to utilize the in-kind creation and 
redemption process that is available for ETFs that invest in equities 
and fixed-income securities. This process represents a significant 
feature of the ETF structure generally, with advantages that 
distinguish ETFs from other types of pooled investment vehicles. In 
light of the associated tax efficiencies and potential transaction cost 
savings, the Exchange believes the ability to utilize an in-kind 
process would make such ETFs more attractive to both current and 
prospective investors and enable them to compete more effectively with 
other ETFs that, based on their portfolio holdings, may effect in-kind 
creations and redemptions without restriction. In addition, the 
Exchange believes that because it would permit ETFs that invest in 
options traded on the Exchange to benefit from tax efficiencies and 
potential transaction cost savings afforded by the in-kind creation and 
redemption process, which benefits the Exchange expects would generally 
be passed along to investors that hold ETF shares, the proposed rule 
change would protect investors and the public interest.
    Moreover, the Exchange submits that the proposed exception is 
clearly delineated and limited in scope and not intended to facilitate 
``trading'' options off the Exchange in order to circumvent the current 
prohibition of Rule 6.49. Other than the transfers covered by the 
proposed exception, transactions involving options, whether held by an 
ETF or an authorized participant, would be fully subject to Rule 6.49 
(except as provided by any other applicable exceptions) and all other 
applicable trading Rules. Additionally, the transfers covered by the 
proposed exception would occur at a price related to the NAV of the 
applicable ETF shares, which removes the need for price discovery on an 
Exchange. Accordingly, the Exchange does not believe that the proposed 
rule change would compromise price discovery or transparency.
    When Congress charged the Commission with supervising the 
development of a ``national market system'' for securities, Congress 
stated its intent that the ``national market system evolve through the 
interplay of competitive forces as unnecessary regulatory restrictions 
are removed.\20\ Consistent with this purpose, Congress and the 
Commission have repeatedly stated their preference for competition, 
rather than regulatory intervention to determine products and services 
in the

[[Page 50494]]

securities markets.\21\ This consistent and considered judgment of 
Congress and the Commission is correct, particularly in light of 
evidence of robust competition among exchanges. The fact that an 
exchange proposed something new is a reason to be receptive, not 
skeptical -- innovation is the life-blood of a vibrant competitive 
market -- and that is particularly so given the continued 
internalization of the securities markets, as exchanges continue to 
implement new products and services to compete not only in the United 
States but throughout the world. Exchanges continuously adopt new and 
different products and trading services in response to industry demands 
in order to attract order flow and liquidity to increase their trading 
volume. This competition has led to a growth in investment choices, 
which ultimately benefits the marketplace and the public.
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    \20\ See H.R. Rep. No. 94-229, at 92 (1975) (Conf. Rep.).
    \21\ See S. Rep. No. 94-75, 94th Cong., 1st Sess. 8 (1975) 
(``The objective [in enacting the 1975 amendments to the Exchange 
Act] would be to enhance competition and to allow economic forces, 
interacting within a fair regulatory field, to arrive at appropriate 
variations in practices and services.''); Order Approving Proposed 
Rule Change Relating to NYSE Arca Data, Securities Exchange Act 
Release No. 59039 (December 2, 2008), 73 FR 74770 (December 9, 2008) 
(``The Exchange Act and its legislative history strongly support the 
Commission's reliance on competition, whenever possible, in meeting 
its regulatory responsibilities for overseeing the [self-regulatory 
organizations] and the national market system. Indeed, competition 
among multiple markets and market participants trading the same 
products is the hallmark of the national market system.''); and 
Regulation NMS, 70 FR at 37499 (observing that NMS regulation ``has 
been remarkably successful in promoting market competition in [the] 
forms that are most important to investors and listed companies'').
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    Currently, the Exchange Rules do not allow ETFs to effect in-kind 
transfers of options off of the Exchange, resulting in tax 
inefficiencies for ETFs that hold them. As a result, the use of options 
by ETFs is substantially limited. While the proposed exception would be 
limited in scope, the Exchange believes the benefits that may flow to 
ETFs that hold options and their investors may be significant. 
Specifically, the Exchange expects that such ETFs and their investors 
could benefit from increased tax efficiencies and potential transaction 
cost savings. By making such ETFs more attractive to both current and 
prospective investors, the proposed rule change would enable them to 
compete more effectively with other ETFs that, due to their particular 
portfolio holdings, may effect in-kind creations and redemptions 
without restriction. This may lead to further development of ETFs that 
invest in options, thereby fostering competition and resulting in 
additional choices for investors, which ultimately benefits the 
marketplace and the public.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe the proposed rule change will impose any burden on intramarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. Utilizing the proposed exception would be 
voluntary, and the exception is not intended as a competitive trading 
tool. As an alternative to the normal auction process, the proposed 
rule change would provide market participants with an efficient and 
effective means to transfer positions under the specified 
circumstances. The proposed exception would enable all ETFs that hold 
options to enjoy the benefits of in-kind creations and redemptions 
already available to other ETFs (and to pass these benefits along to 
investors). The proposed rule change would apply in the same manner to 
all entities that meet the definition of ``authorized participant.''
    The Exchange does not believe the proposed rule change will impose 
any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. As indicated 
above, it is intended to provide an additional clearly delineated and 
limited exception to the requirement that options positions be 
transferred on the floor of an exchange. Further, the Exchange believes 
the proposed rule change will eliminate a significant competitive 
disadvantage for ETFs that invest in options. Finally, as indicated 
above, in light of the significant benefits provided (e.g., tax 
efficiencies and potential transaction cost savings), the proposed 
exception may lead to further development of ETFs that invest in 
options, thereby fostering competition and resulting in additional 
choices for investors, which ultimately benefits the marketplace and 
the public. Other options exchanges in their discretion may pursue the 
adoption of similar exceptions.

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-2019-048 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-2019-048. 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

[[Page 50495]]

inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change. Persons submitting 
comments are cautioned that we do not redact or edit personal 
identifying information from comment submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2019-048, and should be 
submitted on or before October 16, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-20708 Filed 9-24-19; 8:45 am]
 BILLING CODE 8011-01-P