[Federal Register Volume 85, Number 98 (Wednesday, May 20, 2020)]
[Notices]
[Pages 30779-30782]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-10815]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88872; File No. SR-MIAX-2020-11]


Self-Regulatory Organizations; Miami International Securities 
Exchange, LLC; Notice of Filing of a Proposed Rule Change To Amend 
Exchange Rule 518, Complex Orders, To Adopt New Interpretation and 
Policy .08, Related Futures Cross (``RFC'') Order Type

May 14, 2020.
    Pursuant to the provisions of Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on May 11, 2020, Miami International Securities 
Exchange, LLC (``MIAX Options'' or the ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') a proposed rule 
change as described in Items I and II below, which Items have been 
prepared by the Exchange. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing a proposal to amend Exchange Rule 518, 
Complex Orders.
    The text of the proposed rule change is available on the Exchange's 
website at http://www.miaxoptions.com/rule-filings/ at MIAX Options' 
principal office, 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 Exchange Rule 518, Complex Orders, 
to adopt a new Related Futures Cross (``RFC'') order type.
    In April of 2018, the Exchange adopted a proposal to list and trade 
on the Exchange options on the SPIKESTM Index (``SPIKES'' or 
the ``Index''), a new index that measures expected 30-day volatility of 
the SPDR S&P 500 ETF Trust.\3\ Options on the Index are cash-settled 
and have European-style exercise provisions.\4\
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    \3\ See Securities Exchange Release No. 83619 (July 11, 2018), 
83 FR 32932 (July 16, 2018) (SR-MIAX-2018-14).
    \4\ See Exchange Rule 1809(a)(4).
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    There are currently no futures listed on the Index, therefore 
Members \5\ of the Exchange who want to hedge a position in SPIKES 
options using futures have to hedge using highly correlated related 
instruments, such as VIX futures. While the SPIKES Index is highly 
correlated to the VIX Index (SPIKES is over 99% correlated to VIX), 
there remains some basis risk \6\ between the two products. That basis 
risk can be exacerbated in times of extreme volatility, such as we are 
currently experiencing in the markets. Both the SPIKES Index and VIX 
Index settle on the same day, at the market's open, but using options 
on two different, but highly correlated, products. The SPIKES 
settlement value is determined using the opening prices on the Exchange 
of SPY options which expire in 30 days, whereas the VIX settlement 
value is determined using the opening prices on the Cboe Exchange of 
the SPX options which expire in 30 days. While the two products (SPY 
and SPX) are highly correlated, there are supply and demand variances 
that can

[[Page 30780]]

occur at settlement which can cause the settlement prices of the two 
indexes (SPIKES and VIX) to diverge. For example, the settlement which 
occurred on March 18, 2020 illustrates this divergence.
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    \5\ The term ``Member'' means an individual or organization 
approved to exercise the trading rights associated with a Trading 
Permit. Members are deemed ``members'' under the Exchange Act. See 
Exchange Rule 100.
    \6\ Basis risk is the financial risk that offsetting investments 
in a hedging strategy will not experience price changes in entirely 
opposite directions from each other. This imperfect correlation 
between two investments creates the potential for excess gains or 
losses in a hedging strategy, thus adding risk to the position. 
James Chen, Basis Risk, Investopedia (June 16, 2019), https://www.investopedia.com/terms/b/basisrisk.asp.

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                                                                                                    3/18/20
                         Index                             3/17/20 Close      3/18/20 Close        Settlement
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SPIKE..................................................              75.51              77.77              77.64
VIX....................................................              75.91              76.45              69.76
                                                        --------------------------------------------------------
    Difference (SPIKE--VIX)............................              -0.40               1.32               7.88
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    As illustrated above demand for SPY options expiring on April 17, 
2020, was relatively neutral, however there was selling pressure in 
those options representing the VIX settlement, (SPX options), which 
caused a significant divergence in the settlement prices of the 
indexes.
    The impact this divergence has on a hedged position can be seen in 
the following example.
Example 1
    Firm A has a long position of 10,000 SPIKES call options that are 
deep-in-the-money.\7\
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    \7\ A deep in the money option has an exercise, or strike price, 
significantly below (for a call option) or above (for a put option) 
the market price of the underlying asset. James Chen, Deep In The 
Money, Investopedia (April 30, 2019), https://www.investopedia.com/terms/d/deepinthemoney.asp.
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    Firm A has also sold 1,000 VIX futures contracts to hedge their 
position.

(SPIKES options have a $100 multiplier; VIX futures have a $1,000 
multiplier)

    To unwind the position Firm A has two options:
    1. Wait until expiration and allow both the SPIKES calls and the 
VIX futures to expire into cash; or
    2. Unwind the position by transferring the risk from the VIX 
futures into SPIKES options by simultaneously:
    a. Buying back the short VIX futures position; and
    b. Selling the long SPIKES options position by selling SPIKES 
option combos
    If Firm A chooses option 1 and allows the position to expire, Firm 
A assumes additional market risk by assuming the basis risk at 
settlement. Under this scenario if Firm A had allowed the long SPIKES 
options position and the short VIX futures position to expire at the 
March 2020 settlement, the Firm would have realized an unplanned profit 
of 7.88M (7.88 x 10,000 x $100). However, the settlement variance could 
have gone in the opposite direction and resulted in an unplanned loss 
for Firm A.
    If Firm A chooses option 2, Firm A must use a broker to find a 
party to take the other side of the position (contra party), which is a 
hedged position in highly correlated products, with some basis risk. 
Since these are highly correlated indexes (SPIKE and VIX), if one were 
to find another participant (or participants), the optimal transaction 
would be to trade the 10,000 SPIKES option combos and 1,000 VIX futures 
as a single trade. If a contra party (Firm B) to the trade can be 
located, Firm A and Firm B will have to agree to a price for the 
``package.'' Once a price is agreed upon there will have to be two 
trades between the parties as the products trade on two different 
market centers with the options trading only on the MIAX Options 
Exchange and the VIX futures trading only on the Cboe Futures Exchange 
(``CFE'').
    To facilitate this type of exchange, the Exchange is proposing to 
adopt a new order type that will permit a Member to convert their hedge 
in VIX futures into SPIKES options combos, a synthetic equivalent, that 
does not carry any basis risk (the proposed order type can also be used 
to exchange SPIKES options combos for a corresponding futures position 
in order to reduce margin and capital requirements). If both the SPIKES 
option combos on MIAX Options and the VIX futures on the CFE are 
executed as a ``clean cross'' Firm A is left with a long position of 
10,000 SPIKES calls perfectly hedged with 10,000 short SPIKES option 
combos, while Firm B has a hedged position long 10,000 SPIKES options 
combos and a short position of 1,000 VIX futures. If the transaction is 
not executed as a clean cross and the options transaction is exposed to 
the market, there is an additional risk that a 3rd party could join the 
transaction on MIAX Options and purchase 5,000 SPIKES options, which 
would leave Firm B with a long position of 5,000 SPIKES option combos, 
but a short position of 1,000 VIX futures, leaving a portion of the 
transaction unhedged.
    Therefore, the Exchange now proposes to amend Interpretations and 
Policies of Exchange Rule 518, to adopt new Policy .08, Related Futures 
Cross (``RFC'') Orders. The Exchange proposes to adopt rule text that 
will provide that: (a) An EEM \8\ may execute an RFC order, which is 
comprised of a SPIKES options combo coupled with a contra-side order or 
orders totaling an equal number of option combo orders, which is 
identified to the Exchange as being part of an exchange of option 
contracts for related futures positions. For purposes of RFC orders:
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    \8\ The term ``Electronic Exchange Member'' or ``EEM'' means the 
holder of a Trading Permit who is not a Market Maker. Electronic 
Exchange Members are deemed ``members'' under the Exchange Act. See 
Exchange Rule 100.
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    (1) In order to execute an RFC order an EEM must submit the RFC to 
the System,\9\ which may execute automatically on entry without 
exposure.
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    \9\ The term ``System'' means the automated trading system used 
by the Exchange for the trading of securities. See Exchange Rule 
100.
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    (2) An EEM may execute an RFC order pursuant to subparagraph (1) 
above only if: (i) Each option leg executes at a price that complies 
with Exchange Rule 518(c), provided that no option leg executes at the 
same price as a Priority Customer Order \10\ in the Simple Book; (ii) 
each option leg executes at a price at or between the NBBO \11\ for the 
applicable series; and (iii) the execution price is better than the 
price of any complex order resting in the Strategy Book,\12\ unless the 
RFC order is a Priority Customer Order and the resting complex order is 
a non-Priority Customer Order, in which case the execution price may be 
the same as or better than the price of the resting complex order. The 
System cancels an RFC order if it cannot execute.
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    \10\ The term ``Priority Customer'' means a person or entity 
that (i) is not a broker or dealer in securities, and (ii) does not 
place more than 390 orders in listed options per day on average 
during a calendar month for its own beneficial account(s). See 
Exchange Rule 100.
    \11\ The term ``NBBO'' means the national best bid or offer as 
calculated by the Exchange based on market information received by 
the Exchange from OPRA. See Exchange Rule 100.
    \12\ The ``Strategy Book'' is the Exchange's electronic book of 
complex orders and complex quotes. See Exchange Rule 518(a)(17).
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    (3) An RFC order may only be entered in the standard increment 
applicable to the class under Rule 518(c)(1).
    (4) For purposes of this subparagraph (a), a SPIKES options combo 
is a two-

[[Page 30781]]

legged order with one leg to purchase (sell) SPIKE calls and another 
leg to sell (purchase) the same number of SPIKE puts with the same 
expiration date and strike price.
    (5) For purposes of this subparagraph (a), an exchange of option 
contracts for related futures positions is a transaction entered into 
by market participants seeking to swap option positions with related 
futures positions with related exposures.
    (a) A related futures position is a position in a futures contract 
with either the same underlying as, or a high degree of price 
correlation to, the underlying of the option combo in the RFC order so 
that the execution of the option combos in the RFC order would serve as 
an appropriate hedge for the related future positions.
    (b) In an exchange of contracts for related positions, one 
party(ies) must be the buyer(s) of (or the holder(s) of) the long 
market exposure associated with the options positions and the seller(s) 
of corresponding futures contracts and the other party(ies) must be the 
seller(s) of (or holder(s) of) the short market exposure associated 
with the options positions and the buyer(s) of the corresponding 
futures contracts.\13\ The quantity of the option contracts executed as 
part of the RFC order must correlate to the quantity represented by the 
related futures position portion of the exchange.
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    \13\ As proposed, one side of the cross will consist of one 
party, and the other side may consist of multiple parties.
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    (6) An RFC order may be executed only during Regular Trading Hours 
and contemporaneously with the execution of the related futures 
position portion of the exchange.
    (7) The transaction involving the related futures position of the 
exchange must comply with all applicable rules of the designated 
contract market on which the futures are listed for trading.
    A ``clean cross'' transaction which is not broken up is the optimal 
transaction for executing this type of transaction because it allows 
both components of the transaction to be executed in their 
entirety.\14\ If the trade is exposed on the Exchange it is subject to 
an additional risk that it is broken up, leaving one party with an 
unhedged position. These types of exchanges are permitted for products 
listed on the Cboe Futures Exchange LLC (``CFE'') pursuant to CFE Rule 
414. The Exchange understands from customers that the need to reduce 
risk is prevalent in SPIKES based on current market conditions. The 
proposed rule change will provide market participants with the ability 
to exchange a corresponding futures position with a SPIKES options 
position, and also to exchange a SPIKES options position for a 
corresponding futures position, depending upon the position being held 
by the participant and the current market circumstances, provided that 
the transaction involving the related futures position complies with 
all applicable rules of the designated contract market on which the 
futures are listed for trading. This will allow market participants to 
reduce the basis risk, or better manage capital requirements, in their 
hedged portfolios while maintaining the same risk exposure.
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    \14\ A Qualified Contingent Cross Order is similarly executed as 
a clean cross. See Exchange Rule 516(j).
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    The proposed rule will require that the executing EEM identify 
these crosses as related to an exchange for related positions. As a 
result, the Exchange's Regulatory Department has put in place a 
regulatory review plan that will permit it to ensure that any RFC 
orders that are executed are done in conjunction with an exchange of 
contract for related positions as required by the proposed rule. This 
proposed rule is substantially based upon the functionality described 
in Cboe Exchange Rule 5.24(e)(1)(D).\15\
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    \15\ See Securities Exchange Release No. 88447 (March 20, 2020) 
85 FR 17129 (March 26, 2020) (SR-CBOE-2020-023).
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2. Statutory Basis
    MIAX believes that its proposed rule change is consistent with 
Section 6(b) of the Act \16\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act \17\ in particular, in that it is 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 mechanisms 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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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change 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. The proposed rule change will provide market 
participants with the ability to exchange SPIKES options positions with 
corresponding futures positions, or exchange corresponding futures 
positions with SPIKES options positions. This will allow market 
participants to reduce basis risk, or better manage capital 
requirements, in their hedged portfolios while maintaining the same 
risk exposure.
    The Exchange believes that the proposed rule change is consistent 
with the Act as it promotes just and equitable principles of trade and 
facilitates transactions in securities. The Exchange believes that 
because these orders must be executed on separate exchanges that 
executing these orders as a clean cross is justified as it allows them 
to achieve their intended purpose to reduce basis risk or better manage 
capital and margin requirements. Additionally, as the purpose of these 
trades is an exchange of risk in a hedged position, the Exchange 
believes it is appropriate to not expose these orders, as exposing 
these orders to the market introduces the risk that one side of the 
hedged transaction could be broken up, leaving one party with an 
unhedged position.
    The Exchange believes that the proposed rule change, which is 
limited to a single class of a proprietary product listed only on the 
Exchange, is narrowly tailored for the specific purpose of exchanging a 
corresponding futures positions with a SPIKES options position, or to 
exchange a SPIKES options positions with a corresponding futures 
positions, to reduce basis risk and/or better manage capital 
requirements. The proposed rule change provides the Exchange with 
substantially the same functionality currently permitted on the Cboe 
Exchange.\18\ The Exchange believes that this proposal does not present 
any novel or unique issues because at least one other exchange has a 
substantially similar rule.\19\
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    \18\ See Cboe Exchange Rule 5.24(e)(1)(D).
    \19\ Id.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe that the proposed rule change will impose any burden on intra-
market competition, as the Rules of the Exchange apply equally to all 
Exchange Members,\20\ and any Member of the Exchange may use the RFC 
order type.
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    \20\ The term ``Member'' means an individual or organization 
approved to exercise the trading rights associated with a Trading 
Permit. Members are deemed ``members'' under the Exchange Act. See 
Exchange Rule 100.

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[[Page 30782]]

    The Exchange does not believe the proposed rule change will impose 
any burden on inter-market competition because the proposed rule change 
applies only to products listed on the Exchange. Additionally, the 
proposed order type is intended to accommodate riskless transactions 
for parties that are not seeking price improvement, but rather looking 
to swap risk exposure, and therefore is not intended to have a 
competitive impact. Further, the proposed rule is substantially similar 
to a rule on the Cboe Exchange and may promote inter-market 
competition.\21\
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    \21\ See supra note 19. [sic]
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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 self-regulatory organization 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-MIAX-2020-11 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-MIAX-2020-11. 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-MIAX-2020-11, and should be submitted on 
or before June 10, 2020.

    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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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-10815 Filed 5-19-20; 8:45 am]
 BILLING CODE 8011-01-P