[Federal Register Volume 85, Number 88 (Wednesday, May 6, 2020)]
[Notices]
[Pages 26998-27002]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-09638]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88786; File No. SR-CBOE-2020-042]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Rule 6.9 To Permit In-Kind Transfers of Positions Off of the Exchange 
in Connection With Unit Investment Trusts (``UITs'')

April 30, 2020.
    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 April 28, 2020, 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 and II 
below, which Items have been prepared by the Exchange. The Exchange 
filed the proposal as a ``non-controversial'' proposed rule change 
pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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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 6.9 to permit in-kind transfers of positions off of the 
Exchange in connection with unit investment trusts (``UITs''). The text 
of the proposed rule change is provided below.
(additions are italicized; deletions are [bracketed])

* * * * *

Rules of Cboe Exchange, Inc.

* * * * *

Rule 6.9. In-Kind Exchange of Options Positions and ETF Shares and UIT 
Units

    Notwithstanding the prohibition set forth in Rule 5.12, 
positions in options listed on the Exchange may be transferred off 
the Exchange by a Trading Permit Holder in connection with 
transactions (a) to purchase or redeem creation units of ETF shares 
between an authorized participant and the issuer of such ETF shares 
or (b) to create or redeem units of a unit investment trust 
(``UIT'') between a broker-dealer and the issuer of such UIT units, 
which transfers would occur at the price(s) used to calculate

[[Page 26999]]

the net asset value of such ETF shares or UIT units, respectively. 
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[.]; and
    (c) an ``issuer of UIT units'' is a trust registered with the 
Commission as a unit investment trust 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 amend Rule 6.9, which permits off-
Exchange, in-kind transfers of options positions in connection with 
ETFs organized as open-end management investment companies under the 
Investment Company Act of 1940 (the ``1940 Act''), to also permit in-
kind transfers of options positions in connection with entities 
registered as UITs under the 1940 Act.
    Rule 6.9 is an 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 5.12.\5\ Specifically, Rule 6.9 permits 
positions in options listed on the Exchange 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 and the issuer of such ETF shares. Such 
transfers pursuant to Rule 6.9 occur between two different parties, off 
the Exchange, and are considered position transfers, as opposed to 
transactions.\6\ Each of these transfers occurs at the price used to 
calculate the net asset value (``NAV'') of such ETF shares. Rule 6.9 
also currently defines an ``authorized participant'' 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), and an ``issuer of ETF shares'' as an 
entity registered with the Commission as an open-end management 
investment company under the 1940 Act. The ability to effect in-kind 
transfers is a key component of the operational structure of an ETF and 
the exception under Rule 6.9 allows options-based ETFs to be more tax-
efficient investment vehicles, to the benefit of their shareholders, 
and potentially result in transaction cost savings, which may be passed 
along to investors. The Exchange now proposes to expand Rule 6.9 to 
provide the same exemption from Rule 5.12 to off-floor, in-kind 
transfers in connection with the creation or redemption of units issued 
by a UIT, another type of investment company registered under the 1940 
Act. Although UITs operate differently than ETFs in certain respects, 
as described below, the anticipated potential benefits to UIT investors 
(i.e., greater tax efficiencies and transaction cost savings) from the 
proposed exemption would be similar as discussed below.
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    \5\ See Rule 5.12(a) (Transactions Off the Exchange), which 
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.
    \6\ 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) are not 
disseminated to OPRA or otherwise publicly available, as they are 
considered position transfers, rather than executions. OCC has 
represented to the Exchange that it has the operational capabilities 
to effect the position transfers and all transfers pursuant to Rule 
6.9 are required to comply with OCC rules. See Rule 8.2 (which 
requires all TPHs that are members of OCC to comply with OCC's 
Rules).
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    Specifically, under the 1940 Act,\7\ a UIT is an investment company 
organized under a trust indenture or similar instrument that issues 
redeemable securities, each of which represents an undivided interest 
in a unit of specified securities.\8\ A UIT's investment portfolio is 
relatively fixed, and, unlike an ETF, a UIT has a fixed life (a 
termination date for the trust is established when the trust is 
created). Similar to other types of investment companies (including 
ETFs), UITs invest their assets in accordance with their investment 
objectives and investment strategies, and UIT units represent interests 
in a UIT's underlying assets. Like ETFs, UITs do not sell or redeem 
individual shares, but instead, through the creation and redemption 
process, a UIT's sponsor (a broker-dealer) may purchase and redeem 
shares directly from the UIT's trustee in aggregations known as 
``units.'' A broker-dealer purchases a unit of UIT shares from the 
UIT's trustee by depositing a basket of securities and/or other assets 
identified by the UIT. These transactions are largely effected by ``in-
kind'' transfers, or the exchange of securities, non-cash assets, and/
or other non-cash positions. The basket deposited by the broker-dealer 
is generally expected to be representative of the UIT's units and will 
be equal in value to the aggregate NAV of the shares of the UIT 
comprising a unit. \9\ The UIT then issues units that are publicly 
offered and sold. Unlike ETFs, UITs typically do not continuously offer 
their shares for sale, but rather, make a one-time or limited public 
offering of only a specific, fixed number of units like a closed-end 
fund (i.e., the primary period, which may range from a single day to a 
few months). Similar to the process for ETFs, UITs allow investor-
owners of units to redeem their units back to the UIT's trustee on a 
daily basis and, upon redemption, such investor-owners are entitled to 
receive the redemption price at the UIT's NAV. While UITs provide for 
daily redemptions directly with the UIT's trustee, UIT sponsors 
frequently maintain a secondary market for units,

[[Page 27000]]

also like that of ETFs, and will buy back units at the applicable 
redemption price per unit. To satisfy redemptions, a UIT typically 
sells securities and/or other assets, which results in negative tax 
implications and an incurrence of trading costs borne by remaining unit 
holders.
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    \7\ 15 U.S.C. 80a-4(2).
    \8\ The Exchange also notes that, though a majority of ETFs are 
structured as open-ended funds (i.e., those ETFs currently covered 
by Rule 6.9), some ETFs are structured as UITs, and currently 
represent a significant amount of assets within the ETF industry. 
These include, for example, SPDR S&P 500 ETF Trust (``SPY'') and 
PowerShares QQQ Trust, Series 1 (``QQQ'').
    \9\ The NAV is an investment company's total assets minus its 
total liabilities. UITs must calculate their NAV at least once every 
business day, typically after market close. See Sec.  270.2a-4(c), 
which provides that any interim determination of current net asset 
value between calculations made as of the close of the New York 
Stock Exchange on the preceding business day and the current 
business day may be estimated so as to reflect any change in current 
net asset value since the closing calculation on the preceding 
business day. This, however, is notwithstanding the requirements of 
Sec.  270.2a-4(a), which provides for other events that would 
trigger computation of a UIT's NAV.
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    Although ETFs and UITs operate differently in certain respects, the 
ability to effect in-kind transfers is significant to both types of 
investment vehicles. Currently, in-kind transfers of options pursuant 
to Rule 6.9 protect ETF shareholders from certain undesirable tax 
consequences and improve the overall tax efficiency of the products. 
Indeed, by effecting redemptions on an in-kind basis, as permitted by 
Rule 6.9, there is no need for an ETF to sell assets and potentially 
realize capital gains that would be distributed to shareholders. 
Additionally, by transacting on an in-kind basis, ETFs may currently 
avoid certain transaction costs they would otherwise incur in 
connection with purchases and sales of securities and other assets 
(including options). As stated, Rule 6.9 does not currently permit 
these in-kind transfers for UITs, as they are still generally required 
to sell options on an exchange to obtain the requisite cash when 
effecting redemption transactions with broker-dealers. Thus, the 
Exchange proposes to extend the Rule 6.9 exemption to UITs. As 
described above, UITs and ETFs are situated in substantially the same 
manner; the key differences being a UIT's fixed duration, and that a 
UIT generally makes a one-time public offering of only a specific, 
fixed number of units. Negative tax implication and trading costs for 
remaining unit holders would be mitigated by allowing a UIT sponsor or 
another broker-dealer to receive an in-kind distribution of options 
upon redemption. Therefore, permitting off-exchange in-kind transfers 
for UITs would benefit investors by potentially providing tax 
efficiencies and transaction cost savings similar to those that 
investors in ETFs may enjoy today. The Exchange does not believe the 
proposed extension of Rule 6.9 to UITs will adversely impact investors 
or the maintenance of a fair and orderly market as it does not 
circumvent the prohibition under Rule 5.12(a) nor does it compromise 
price discovery or transparency. To note, Rule 6.9 is already 
applicable to options in connection with ETF creations and redemptions, 
previously approved by the Commission.\10\ Although options positions 
in connection with ETF and UIT (as proposed) creations and redemptions 
are transferred off of the Exchange, they are not closed or ``traded'', 
and instead, merely reside in a different clearing account until closed 
in a trade on the Exchange or until they expire. The Exchange also 
notes that Rule 6.9 will continue to be clearly delineated and limited 
in scope, given that the exception will continue to apply only to 
transfers of options effected in connection with the creation and 
redemption process, and for certain investment companies registered 
under the 1940 Act. Moreover, the Exchange notes that transfers of 
options in connection with the creation or redemption of open-end fund 
ETFs constitute a minimal percentage of the total average daily volume 
(``ADV'') of options and the Exchange expects options transfers in 
connection with UITs to comprise a similar minimal percentage of ADV. 
Additionally the options transfers that would be permitted by the 
exemption are generally expected to include corresponding transactions 
by a broker-dealer that would occur on an exchange and would be 
reported to OPRA.\11\
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    \10\ See Securities Exchange Act Release No. 87340 (October 17, 
2019), 84 FR 56877 (October 23, 2019) Order Approving on an 
Accelerated Basis a Proposed Rule Change, as Modified by Amendment 
Nos. 2 and 3, To Adopt Rule 6.9 (In-Kind Exchange of Options 
Positions and ETF Shares)) (SR-CBOE-2019-048).
    \11\ The Exchange notes that in conjunction with depositing 
options with a UIT's trustee and creating units, the necessary 
options positions will be acquired in an on-exchange transaction 
that is reported to OPRA. In conjunction with redemptions, the 
sponsor or other broker-dealer will generally acquire both the units 
redeemed by a redeeming unit holder and an options position to 
offset the position that it will receive as proceeds for the 
redemption. Such an options position is likely acquired in an on-
exchange transaction that would be reported to OPRA. Thus, while the 
transfer of options positions between the sponsor or other broker-
dealer and the UIT would not necessarily be reported, there are 
generally corresponding transactions that would be reported, 
providing transparency into the transactions.
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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.\12\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \13\ 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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    \12\ 15 U.S.C. 78f(b).
    \13\ 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 UIT 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 UITs that invest in 
options traded on the Exchange to transfer options off of the Exchange 
in connection with their in-kind creation and redemption process as 
ETFs are currently able to do under Rule 6.9, as previously approved by 
the Commission.\14\ Further, the Exchange believes that permitting a 
comparable investment vehicle, also registered as an investment company 
under the 1940 Act, to be included in the Rule 6.9 exemption, removes 
impediments to and perfect the mechanism of a free and open market and 
national market system as it would enable UITs to compete more 
effectively with other investment vehicles that, based on their 
portfolio holdings, may effect in-kind creations and redemptions 
without restriction. The Exchange notes that the ability to effect in-
kind transfers is significant to both ETFs and UITs as investment 
vehicles. By permitting UITs that invest in options traded on the 
Exchange to benefit from potential tax efficiencies and transaction 
cost savings similar to those that ETFs may currently enjoy, the 
proposed rule change would protect investors and the public interest by 
passing along such potential benefits to investors that participate in 
UITs. The Exchange does not believe that the proposed rule change 
affects the protection of investors or the maintenance of a fair and 
orderly market because the Rule 6.9 exception would continue to be 
clearly delineated and limited in scope. Rule 6.9 already applies to 
ETFs, which operate in a similar manner as UITs, and the proposed rule 
change to make the transfer exemption available to UITs is based on a 
similar rationale and does not raise any new or novel issues. In this 
regard, as with in-kind, off-exchange transfers of options in 
connection with ETFs, those transfers in connection with UITs would 
also occur at a price related to the NAV of the applicable UIT units, 
which removes the need for price discovery on an

[[Page 27001]]

exchange. As stated above, the Exchange expects that off-exchange 
options transfers in connection with the creation and redemption 
process for UITs will comprise a minimal percentage of ADV, just as 
such transfers currently permissible in connection with ETFs comprise a 
minimal percentage of ADV. Further, the general price at which UIT-
related transfers are effected will be publicly available as they are 
based on the disseminated closing prices and are generally expected to 
include corresponding, transactions by a broker-dealer that would occur 
on an exchange and be reported to OPRA.\15\
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    \14\ See supra note 10.
    \15\ See supra note 11.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe the proposed rule change will impose any burden on intramarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act because invoking the exception under Rule 6.9 in 
connection with UITs is voluntary and the proposed exception for UITs 
is not intended as a competitive trading tool. Instead, it is intended 
as an alternative to the normal auction process to provide market 
participants with an efficient and effective means to transfer option 
positions as part of the UIT creation and redemption process under the 
same specified circumstances currently applicable to ETFs in connection 
with creating and redeeming units of UITs. The proposed expansion of 
the Rule 6.9 exception to UITs would enable this investment vehicle, 
which is comparable to ETFs, to enjoy the potential benefits of off-
exchange, in-kind transfers of option positions in connection with 
creating and redeeming, and to pass these benefits along to investors. 
Use of the in-kind, off-exchange transfer process in connection with 
creating UIT units and the redemption process would be voluntary and 
would apply in the same manner to all broker-dealers choosing to invoke 
such process.
    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, because the in-
kind transfer rule would continue to provide a clearly delineated and 
limited exception to the requirement that options positions in 
connection with certain entities registered as a type of investment 
company under the 1940 Act be transferred on the floor of an exchange. 
The proposed rule change merely extends the Rule 6.9 exemption (and any 
potential benefits) to UITs. The Exchange again notes that Rule 6.9 was 
previously approved by the Commission \16\ and is currently applicable 
to ETFs that are similarly situated and also in invest in options. 
Also, as indicated above, in light of the significant benefits provided 
(e.g., potential tax efficiencies and transaction cost savings), the 
proposed exception may lead to further development of UITs 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.
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    \16\ See supra note 10.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received written comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the proposed rule change does not: (i) Significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate, it has become effective pursuant to Section 
19(b)(3)(A) of the Act \17\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\18\
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6). In addition, Rule19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2020-042 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-2020-042. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2020-042, and should be submitted 
on or before May 27, 2020.


[[Page 27002]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-09638 Filed 5-5-20; 8:45 am]
 BILLING CODE 8011-01-P