[Federal Register Volume 84, Number 250 (Tuesday, December 31, 2019)]
[Notices]
[Pages 72409-72414]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-28215]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87852; File No. SR-CBOE-2019-122]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Order Granting Accelerated Approval of a Proposed Rule
Change To Allow the Exchange To Continue To List Classes of Options on
the MSCI Emerging Markets Index After January 1, 2020
December 23, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on December 12, 2019, Cboe Exchange, Inc. (``Exchange'' or
``Cboe Options'') filed with the Securities and Exchange Commission
(``Commission''), the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons and, for the reasons
discussed below, is issuing this order approving the proposed rule
change on an accelerated basis.
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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. seeks approval from the Securities and Exchange
Commission to continue listing classes of options on the MSCI EM Index.
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 seek approval pursuant to Rule 4.10(i) for
the continued listing of options on the EM Index (``EM Options''). Rule
4.10(i) establishes maintenance listing standards that apply to options
on the EM Index \3\ and also provides that in the event a class of
index options listed on the Exchange fails to satisfy the maintenance
listing standards, the Exchange shall not open for trading any
additional series of options of that class unless the continued listing
of that class of index options has been approved by the Commission
under Section 19(b)(2) of the Exchange Act. Specifically, Rule
4.10(i)(2), requires that the total number of component securities in
the EM Index
[[Page 72410]]
may not increase or decrease by more than 10% over the last six-month
period (the ``component securities threshold''). Due to global market
trends and the overall objectives of the EM Index, as described below,
the Exchange has become aware that the EM Index will not meet this
requirement for the next bi-annual index surveillance review of the EM
Index components as-of January 1, 2020. Thus, the Exchange now seeks
the Commission's approval for the continued listing of options on the
EM Index, specifically, in connection with the component securities
threshold, beginning January 1, 2020, as provided in Rule 4.10(i). The
Commission's approval would allow the Exchange to continue to open for
trading additional series of options on such index without interruption
to the market and investor participation.
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\3\ As well as the MSCI EAFE, FTSE Emerging and FTSE Developed
Europe indexes.
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The EM Index is designed to capture large and mid-cap
representation across emerging market countries. In particular, it is
built to ``be flexible enough to adjust quickly to a constantly
changing opportunity set'', that is, emerging markets.\4\ It seeks ``to
capitalize on the unique attributes of these vibrant economies'', which
includes ``superior growth potential''.\5\ Indeed, EM has experienced a
continuous rise in the number of its component securities. When
initially listed on the Exchange in 2015, the EM Index consisted of the
following 23 emerging market country indexes: Brazil, Chile, China,
Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia,
Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia,
South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. At
that time, the EM Index had 834 constituents which covered
approximately 85% of the free float-adjusted market capitalization in
each country. Since its initial listing, Argentina,\6\ Pakistan,\7\ and
Saudi Arabia \8\ have joined the list of countries represented in the
EM Index. Over recent years, the component securities of the EM Index
have grown to a market capitalization of 5,582,502 (USD Millions) (up
from 3,219,779 in 2016) and average market capitalization per
constituent of 4,644 (USD Millions) (up from 3,847 in 2016). In
addition to this, the components securities have an average daily
volume of over 42 billion, and an average daily volume per constituent
of over 35 million. Additionally, the largest constituent in the EM
Index currently only accounts for 4.5% of the weight of the EM
Index.\9\
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\4\ See MSCI Emerging Markets Index brochure (dated May 2019)
located at: https://www.msci.com/documents/1296102/15035999/USLetter-MIS-EM-May2019-cbr-en.pdf/fb580e1e-d54c-4c68-1314-977bbff69bd7?t=1559125400402.
\5\ Id.
\6\ Added in June 2018.
\7\ Added in June 2017.
\8\ Added in June 2018.
\9\ See MSCI Emerging Markets Index fact sheet (dated October
31, 2019) located at: https://www.msci.com/documents/10199/c0db0a48-01f2-4ba9-ad01-226fd5678111.
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Indeed, as a result of the growth of the emerging markets
represented, the index has experienced continued expansion. As of July
1, 2019, the number of constituents in the EM Index had grown to a
total of 1,194, and, as of October 31, 2019, a total of 1,202
constituents. In particular, the most notable expansion has been the
recent (2018) introduction of Saudi Arabian securities (as indicated
above) and mainland China component securities \10\ into the EM Index.
In early 2019, MSCI implemented a two-step inclusion plan for Saudi
Arabian component securities and a three-step inclusion plan for
mainland China component securities.\11\ The plan ``phased-in''
increases in the weight and number of Saudi Arabian component
securities, which was completed in August 2019,\12\ and the weight and
number of mainland China component securities, which was completed in
November 2019.\13\ The Exchange notes that the cumulative average
growth rate of the EM Index component securities since 2015 has
averaged 4.5% every six months. In the six-month window from January
2019 through July 2019 the EM Index experienced approximately a 6.2%
increase in component securities; the majority of this increase was a
direct result of MSCI's first inclusion phase of Saudi Arabian and
mainland China component security. Though this was a departure from the
4.5% average every six months, the January 2019 through July 2019
increase was contained within the 10% threshold pursuant to Rule
4.10(i)(2). However, as a result of the second inclusion phase for
Saudi Arabian and mainland China shares in August 2019, coupled with
the third, and last, inclusion phase for mainland China shares in
November 2019, the EM Index has surpassed a 10% increase from July
2019, and therefore, will be non-compliant with the component
securities threshold for the Exchange's next bi-annual review of the
component securities as-of January 1, 2020. Specifically, as a result
of the August 2019 and November 2019 inclusions, the EM Index has
experienced approximately a 17% increase from July 2019 (1,202
component securities at this time) to November 2019 (a total of 1,410
component securities after the November 2019 inclusion). The Exchange
notes that this significant increase since July 2019 is an isolated
departure from the 4.5% average six-month increases the EM Index has
typically and steadily experienced since 2015. The Exchange further
notes that the component securities threshold was the only threshold
implicated as a result of MSCI's inclusion plan, and that the other
threshold tests applicable to the EM Index under Rule 4.10(h) will be
met as-of January 1, 2019 [sic]. As such, the Exchange respectfully
requests that the Commission approve the continued listing of options
on the EM Index in connection with the component securities threshold
beginning January 1, 2020, as provided in Rule 4.10(i).
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\10\ China ``A-Shares'', which trade on the Shanghai Stock
Exchange and Shenzhen Stock Exchange.
\11\ See MSCI Implementation Q&A: Inclusion of the MSCI
Argentina, the MSCI Saudi Arabia Indexes and China A Shares in the
MSCI Emerging Markets Indexes, at 17, 24 (May 2019) located at:
https://www.msci.com/documents/1296102/af029454-117c-f15c-8d5e-52aa627efa14.
\12\ See MSCI Emerging Markets Press Release, MSCI Equity
Indexes August 2019 Index Review (August 7, 2019) located at:
https://www.msci.com/eqb/pressreleases/archive/MSCI_Aug19_QIRPR.pdf;
and MSCI Emerging Markets Press Release, MSCI Equity Indexes May
2019 Index Review (May 13, 2019) located at: https://app2.msci.com/eqb/pressreleases/archive/MSCI_May19_QIRPR.pdf.
\13\ See MSCI Emerging Markets Press Release, MSCI Equity
Indexes November 2019 Index review (November 7, 2019) located at:
https://www.msci.com/eqb/pressreleases/archive/MSCI_Nov19_QIRPR.pdf.
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The Exchange believes that MSCI's recent inclusion plans are an
exception to the normal course of the MSCI index reviews. The timing of
the inclusion plans for the two, rapidly expanding markets arose around
the same time, due to similar market overhauls separately undertaken by
Saudi Arabia and China. In the recent years, Saudi Arabian markets have
increased privatization and implemented several enhancements that
further opened their markets to international institutional investors,
while the Chinese government has eased previously strict access
controls on the their markets.\14\ As a result of these developments,
MSCI conducted ``extensive global consultation with a large number of
international institutional investors, including asset owners, asset
managers, broker/dealers and other market
[[Page 72411]]
participants worldwide,'' \15\ in order to ultimately implement the
inclusion plans. The Exchange also notes that, although MSCI announced
the inclusion phase-in plan prior to its implementation, the number of
component securities actually added (or removed as part of MSCI's
regular quarterly reviews) in each phase was unknown until the August
2019 and November 2019 review releases.
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\14\ See MSCI Press Release, MSCI Will Increase the Weight of
China A Shares in MSCI Indexes (February 28, 2019) located at:
https://www.msci.com/documents/10199/238444/China_A_Further_Weight_Increase_PR_Eng.pdf/43f3ee8b-5182-68d4-a758-2968b4206e54; see also MSCI Press Release, Results of the MSCI 2018
Market Classification Review (June 20, 2018) located at: https://www.msci.com/documents/10199/95fa3628-ff2e-e9cd-53b9-8912329ec40c
(discussing the decision to include Saudi Arabia).
\15\ See id.
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The Exchange notes that the 10% threshold is designed to prevent
significant adjustments to the number of EM Index constituents,
particularly decreases that could: (i) Reduce component securities in
the EM Index to a point that would raise manipulation concerns; or (ii)
change the general character of the EM Index over which index options
are issued. The 10% threshold is designed to allow for the more rapid,
shorter-term changes (e.g., an average 4.5% increase in constituents
every six-months, and occasional increases from this, like the 6.2%
increase from January 2019 through July 2019 as a result of the one
inclusion phase) experienced by emerging markets that the EM Index is
designed to capture. The current threshold is aligned with the way the
EM Index has grown over the past four years and is expected to continue
growing.\16\
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\16\ The Exchange also notes that the generic listing standards
applicable to ETPs listed on other national securities exchanges
(e.g., Cboe BZX Exchange Rule 14.11(c)(3)(A)(ii)) do not include any
requirements based on the increase or decrease in component
securities, and instead only require that an ETP based on an index
that includes non-U.S. component stocks includes at least 20
component securities, among other diversification, liquidity, and
market cap requirements. As such, an ETP based on the EM Index would
not be delisted based on a percentage increase or decrease in
component securities as long as it continued to have at least 20
component securities. Therefore, the Exchange believes that the
proposed threshold is more restrictive than the current standard for
listing products on the EM Index.
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As noted above, the 10% threshold is designed to prevent material
increases that could change the character of the index over which
broad-based index options are issued. The Exchange does not believe
that the increase described herein changes the character of the EM
Index. Unlike an index that is meant to represent a relatively fixed
constituent count reflection of large-cap stocks, such as the S&P 500
Index, the EM Index contains mid-cap components and is designed to be
flexible to change over time as the represented markets change. Given
the increasingly high number of constituents and capitalization of the
EM Index, the deep and liquid markets for the securities underlying the
index, and the low percentage each constituent comprises of the total
EM Index weight, and normally steady recent growth patterns, the
concerns that a further increase, even such a significant 17% increase,
in component securities would change the character of the index or
allow for potential market manipulation and/or disruption in the
underlying markets are greatly reduced. As stated above, the 17%
increase is an outlying departure from the incremental increases the EM
Index typically experiences.
The Exchange notes that significant decreases, as opposed to
increases like those described herein, are more likely to raise
concerns related to manipulation and/or disruption in the underlying
markets, although the Exchange does not believe that a decrease in the
number of constituents in any index, even by an amount greater than
10%, necessarily gives rise to manipulation concerns. Further, the
Exchange currently maintains ``watch lists'' made up of countries and
indexes with large constituent count changes which it reviews at least
quarterly. The Exchange also conducts intermediate reviews on at least
a quarterly basis to identify potential compliance concerns in
connection with the continued listing standards in advance of its
formal semi-annual index maintenance reviews. If the Exchange
determines from its reviews that a change in the EM Index's composition
would affect the protection of investors, it may cease listing series
on the EM Index pursuant to Rule 4.4, notwithstanding Commission
approval to continue listing options or if an index is still compliant
with the component security threshold. The Exchange believes the
frequency of these reviews will continue to successfully identify and
address continued listing compliance concerns that the component
securities threshold is also designed to address for the EM Index.
The Exchange further notes that EM Options are currently listed for
trading on the Exchange and that the Exchange generally adds new series
after an expiration, which allows trading to commence in the new series
on the first trading day after the expiration date. The Exchange
currently lists EM options that expire monthly, as well as Friday-
expiring weekly options. In addition to this, the Exchange offers FLEX
options on this index, which may only be listed if the standard options
on an index are authorized to be listed. Specifically, without the
Commission's approval, additional series of weekly EM options may no
longer be scheduled to be added, nor will additional monthly series
after expiration on January 17, 2020, which would allow trading to
commence in the additional series on the next trading day of January
20, 2020.
In light of MSCI's November 2019 inclusion, market participants
have already begun to express concern to the Exchange regarding
interruption in their trading of series on the EM Index come January
2020 as a result of non-compliance with the Exchange's component
securities threshold. Indeed, market participants that intend to write
optionality with weekly expiration dates in the first weeks of January
2020 will, instead, have to take their volume OTC. This poses counter
party risks to which a market participant would not otherwise have
exposure if series were available on the EM Index. The inability to add
the EM options would be a detriment to market participants seeking to
hedge portfolios indexed to the EM Index, positions in ETPs based on
the EM Index (e.g., EEM), options on EEM and futures on the EM Index,
and European-traded derivatives on the EM Index. Further, there are
ETPs that use options on the EM Index as part of their investment
strategy. Without the ability to add the EM options, these ETPs could
be unable to achieve their investment objective, to the detriment of
investors. Additionally, to the extent market participants want to roll
a position in EM options that expire in January to series at a later
expiration date and at a favorable or comparable price, they will be
prevented from doing so without the Commission's approval for continued
listing. Furthermore, in the time in which the Exchange may not list
additional series on the EM Index, FLEX trades which may result in the
creation of new FLEX series will be nullified, which may cause
confusion and prove burdensome to market participants.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\17\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \18\ 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
[[Page 72412]]
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) \19\ requirement that the rules
of an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(5).
\19\ Id.
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The Exchange believes that the Commission's approval to continue
listing options on the EM Index will remove impediments to and perfect
the mechanism of a free and open market and a national market system,
and, in general, protect investors and the public interest, because it
will allow the Exchange to continue to list EM Options in light of the
recent inclusion plan exceptions to MSCI's normal course of reviews. As
stated above, the 10% threshold is intended to prevent significant
changes over shorter periods of time in the EM Index that might
potentially change the character of the index or make it more
susceptible to manipulation. Given that the EM Index itself is designed
to capture and allow for continuous emerging market growth and trends
and that the 17% constituent increase appears to be only a temporary
departure from the normal incremental growth experienced by the EM
Index, the Exchange does not believe that the recent increase changes
the character of the EM Index or otherwise raises concerns of market
manipulation and/or disruption in the underlying markets. As a general
principle, increases in the elements that make up an index, such as
market capitalization and the weight and number component securities,
do not in and of themselves do not lead to manipulation and/or
disruption. This general principle applies to the recent inclusions,
therefore, the Exchange does not believe the index has become
susceptible to manipulation and/or disruption as a result. Although
significant decreases, not increases, would be more likely to raise
concerns related to manipulation and/or disruption in the underlying
markets, the Exchange notes that it does not believe that a decrease in
the number of constituents in any index, even by an amount greater than
10%, necessarily creates manipulation concerns. The Exchange also does
not believe that the EM Index is otherwise easily susceptible to
manipulation, as it is a broad-based index, its component securities
have a high market capitalization, it has an average daily volume of
over 42 billion, and no single component comprises more than 4.5% of
the index. The Exchange also notes that a total component securities
standard, as provided in Rule 4.10(i)(2), is not essential to the
continued listing standards for EM Index-based products, and, instead,
is an additional protection against potential manipulation and/or
disruption in the underlying securities. Because the EM Index has
continued to experience incremental increases in component securities
(notwithstanding the exceptional increase as a result of the 2019
inclusion plan), capitalization, and market liquidity in line with
continuous emerging market growth trends and the EM's overall
investment objectives, the Exchange does not believe that the continued
listing of the EM Index following the inclusion plan would circumvent
the additional protections of the component securities threshold nor
would it affect the protection of investors and the maintenance of a
fair and orderly market. In addition to this, the Exchange continues to
maintain and review country and index watch lists, as well as conduct
intermediate reviews on at least a quarterly basis. Thus, it continues
to be able to identify potential compliance concerns in connection with
the continued listing standards and may cease listing series on the EM
Index at any time if it determines that a change in the index's
composition would affect the protection of investors.
As stated above, without the Commission's approval, the Exchange
would not be able to list new series of weekly or monthly options on
the EM Index after the January 2020 review. The Exchange believes that
the Commission's approval to continue listing options on the EM Index
is necessary for the protection of investors and the public interest,
as without such, the Exchange will be prevented from adding the weekly
and monthly EM options. Indeed, market participants that intend to
write optionality with weekly expiration dates in the first weeks of
January 2020 will, instead, have to take their volume OTC. OTC poses
counter party risks for investors that they would not normally
otherwise choose to be subject to if series on the EM Index were
available for trading. The inability to add the EM options would be a
detriment to market participants seeking to hedge positions in ETPs
based on the EM Index (e.g., EEM), options on EEM and EM futures, and
European-traded derivatives on the EM Index. Further, there are ETPs
that use options on the EM Index as part of their investment strategy.
Without the ability to add the EM options, these ETPs could be unable
to achieve their investment objective, to the detriment of investors.
Additionally, market participants that wish to roll a position in EM
options that expire in January to a position in a series with a later
expiration month at a favorable or comparable price, will be prevented
from doing so without this amendment. Furthermore, in the time in which
the Exchange may not list additional series on EM, FLEX trades which
may result in the creation of new FLEX series will be nullified, which
may cause confusion and prove burdensome to market participants. The
Exchange also notes that since the last inclusion phase was implemented
in MSCI's November 2019 review, multiple market participants have
expressed their concern to the Exchange regarding interruption of their
activity in EM Index series as a result of anticipated non-compliance
with the component securities threshold.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the continued listing of options
on the EM Index, and the Commission's approval of which the Exchange
seeks, would 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 continued listing would impose any burden on
intramarket competition that is not necessary or appropriate in
furtherance of the Act as it would facilitate the continued,
uninterrupted trading of options on the EM Index, on which series are
currently listed and readily available for all market participants to
trade, as would be the case for series added following the approval for
the EM Index's continued listing.
The Exchange does not believe that the continued listing of options
on the EM Index would impose any burden on intermarket competition that
is not necessary or appropriate in furtherance of the Act as it does
not alter the types of products offered by the Exchange in which market
participants already may choose to participate. The Commission's
approval would merely allow the Exchange to continue listing certain
index options in light of the MSCI's recent completion of its inclusion
plan and the Exchange would continue to adequately surveil for any
concerning changes.
[[Page 72413]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. 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 Exchange 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-2019-122 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-2019-122. 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 this filing will also be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2019-122 and should be submitted on
or before January 21, 2020.
IV. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change
After careful review, the Commission finds that the Exchange's
proposal is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to a national
securities exchange.\20\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) \21\ of the
Exchange Act, which requires, among other things, that the rules of a
national securities exchange be designed to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system and, in general,
to protect investors and the public interest, and not be designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers.
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\20\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\21\ 15 U.S.C. 78f(b)(5).
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The Commission first notes the Exchange's statement that the 17%
increase in component securities from July 2019 to November 2019 under
MSCI's recent inclusion plans is an isolated departure from the 4.5%
average six-month increases the MSCI EM Index has since 2015.
Additionally, the Exchange points out that the 10% component-securities
threshold was the only threshold implicated as a result of MSCI's
inclusion plan, and that the other threshold tests applicable to the EM
Index under Rule 4.10(h) will be met as-of January 1, 2020.
Furthermore, the Exchange explains that the 10% component-
securities threshold under Rule 4.10(i) is designed to prevent
significant adjustments to the number of EM Index constituents,
particularly decreases, that could: (i) Reduce component securities in
the EM Index to a point that would raise manipulation concerns; or (ii)
change the general character of the EM Index over which index options
are issued. The Exchange states that the 10% component-securities
threshold is designed to allow for the more rapid, shorter-term
changes, such as the recent 4.5% average six-month increases the MSCI
EM Index has typically and steadily experienced since 2015. The
Exchange also does not believe that the EM Index is otherwise easily
susceptible to manipulation, as it is a broad-based index, its
component securities have a high market capitalization, it has an
average daily volume of over 42 billion, and no single component
comprises more than 4.5% of the index. Finally, the Exchange asserts
that as a general principle, increases in the elements that make up an
index, such as market capitalization and the weight and number
component securities, do not in and of themselves lead to manipulation
and/or disruption; the Exchange then concludes that this general
principle applies to the recent MSCI inclusions of its EM Index.
Based on the foregoing and after careful consideration, the
Commission finds it consistent with Exchange Act to to allow the
Exchange to open for trading any additional series of options of MSCI
EM options class notwithstanding the maintence standard set forth in
Rule 4.10(i). The Commission believes that allowing an exception to the
10% component-securities threshold under these specific circumstances
is consistent with the purpose behind Rule 4.10, and therefore, is
designed to promote just and equitable principles of trade and to
remove impediments to and perfect the mechanism of a free and open
market. Specifically, the increase in component securities under the
recent MSCI inclusion plan does not appear likely to lead to market
manipulation or disruption. Furthermore, this 17% increase in component
securities does not appear to change the general character of the EM
Index over which index options are issued. Accordingly, Commission
finds that the proposed rule change is consistent with the requirements
of the Exchange Act.
The Exchange has requested that Commission finds good cause for
approving the proposed rule change prior to the 30th day after the date
of publication of notice of in the Federal Register. The Exchange
represents that, although MSCI announced the inclusion phase-in plan
prior to its implementation, the number of component securities
actually added (or removed as part of MSCI's regular quarterly reviews)
in each phase was unknown until the August 2019 and November 2019
review releases. Furthemore, the Exchange asserts that investors and
other market participants will likely be harmed if the Exchange is not
able to list new series of weekly or monthly options on the EM Index
after January 1, 2020. First, market participants that intend to write
optionality with weekly expiration dates in the first weeks of January
2020 will, instead, have to take their volume OTC; the Exchange
believes that OTC poses
[[Page 72414]]
counter party risks for investors that they would not normally
otherwise choose to be subject to if series on the EM Index were
available for trading. Next, the Exchange states that the inability to
add the EM options would be a detriment to market participants seeking
to hedge positions in ETPs based on the EM Index (e.g., EEM), options
on EEM and EM futures, and European-traded derivatives on the EM Index.
Likewise, the Exchange notes that there are ETPs that use options on
the EM Index as part of their investment strategy. Without the ability
to add the EM options, these ETPs could be unable to achieve their
investment objective, which the Exchange believes would be to the
detriment of investors. Additionally, the Exchange states that market
participants that wish to roll a position in EM options that expire in
January to a position in a series with a later expiration month at a
favorable or comparable price, will be prevented from doing so should
the Commission not approve this proposal prior to January 1, 2020.
Based on the foregoing, the Commission believes that good cause
exists to issue this order approving a one-time exception to the 10%
component-securities threshold under Rule 4.10(i) prior to the 30th day
after the date of publication of notice of in the Federal Register.
Approving the proposed rule change on an accelerated basis should
protect investors and the public interest from potential harm that
might arise from a disruption in the listing of classes of options on
the MSCI Emerging Markets Index. Accordingly, pursuant to Section
19(b)(2) of the Exchange Act,\22\ the Commission finds good cause to
approve the proposed rule change on an accelerated basis.
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\22\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\23\ that the proposed rule change (SR-CBOE-2019-122) be,
and it hereby is, approved on an accelerated basis.
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\23\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-28215 Filed 12-30-19; 8:45 am]
BILLING CODE 8011-01-P