[Federal Register Volume 85, Number 127 (Wednesday, July 1, 2020)]
[Notices]
[Pages 39607-39613]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14120]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89152; File No. SR-ISE-2020-23]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Options 9, 
Sections 13 and 15 To Increase the Position and Exercise Limits for 
Options on Certain Exchange-Traded Funds

June 25, 2020.
    Pursuant to 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 June 17, 2020, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') 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.
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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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Options 9, Section 13, Position 
Limits, to increase position limits for options on certain exchange-
traded funds (``ETFs''), and similarly increase exercise limits within 
Options 9, Section 15, Exercise Limits.
    The text of the proposed rule change is available on the Exchange's 
website at http://ise.cchwallstreet.com/, at the principal office of 
the Exchange, 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 Options 9, Section 13, Position 
Limits, to increase position limits for options on certain exchange-
traded funds (``ETFs''), and similarly increase exercise limits within 
Options 9, Section 15, Exercise Limits. The Exchange proposes to 
specifically amend Supplementary Material .01 to Options 9, Section 13 
and Supplementary Material .01 to Options 9, Section 15. These proposed 
rule changes are based on the similar proposal by Cboe Exchange, Inc. 
(``Cboe'').\3\ The Exchange also proposes to make a minor non-
substantive technical corrections to an ETF name within Supplementary 
Material .01 to Options 9, Section 13 and Supplementary Material .01 to 
Options 9, Section 15. Each change will be described below.
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    \3\ See Securities Exchange Act Release No. 88768 (April 29, 
2020) (SR-CBOE-2020-015) (Notice of Filing of Amendment No. 1 and 
Order Granting Accelerated Approval of a Proposed Rule Change, as 
Modified by Amendment No. 1, to Increase Position Limits for Options 
on Certain Exchange-Traded Funds and Indexes). The Cboe proposal 
also proposed to increase position limits for options overlying the 
MSCI Emerging Markets Index (``MXEF'') and the MSCI EAFE Index 
(``MXEA''). The Exchange, however, does not list options on the MXEF 
or MXEA indexes. Accordingly, this proposal is limited to the ETFs 
described above.
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    Position limits are designed to address potential manipulative 
schemes and adverse market impacts surrounding the use of options, such 
as disrupting the market in the security underlying the options. While 
position limits should address and discourage the potential for 
manipulative schemes and adverse market impact, if such limits are set 
too low, participation in the options market may be discouraged. The 
Exchange believes that position limits must therefore be balanced 
between mitigating concerns of any potential manipulation and the cost 
of inhibiting potential hedging activity that could be used for 
legitimate economic purposes.
    The Exchange has observed an ongoing increase in demand in options 
on the SPDR[supreg] S&P 500[supreg] ETF Trust (``SPY''), 
iShares[supreg] MSCI EAFE ETF (``EFA''), iShares[supreg] China Large-
Cap ETF (``FXI''), iShares[supreg] iBoxx[supreg] High Yield Corporate 
Bond Fund (``HYG''), Financial Select Sector SPDR[supreg] Fund 
(``XLF'') (collectively, with the aforementioned ETFs, the ``Underlying 
ETFs'') for both trading and hedging purposes. Though the demand for 
these options on the Underlying ETFs appear to have increased, position 
limits (and corresponding exercise limits) for these options have 
remained the same. The Exchange believes these unchanged position 
limits may have impeded, and may continue to impede, trading activity 
and strategies of investors, such as use of effective hedging vehicles 
or income generating strategies (e.g., buy-write or put-write), and the 
ability of Market Makers to make liquid markets with tighter spreads in 
these options, resulting in the transfer of volume to over-the-counter 
(``OTC'') markets. OTC transactions occur through bilateral agreements, 
the terms of which are not publically disclosed to the marketplace. As 
such, OTC transactions do not contribute to the price discovery process 
on a public exchange or other lit markets. Therefore, the Exchange 
believes that the proposed increases in position limits (and exercise 
limits) for options on the Underlying ETFs may enable liquidity 
providers to provide additional liquidity to the Exchange and other 
market participants to transfer their liquidity demands from OTC 
markets to the Exchange, as well as other options exchange on which 
they participate. As described in further detail below, the Exchange 
believes that the continuously increasing market capitalization of the 
Underlying ETFs and ETF component securities, as well as the highly 
liquid markets for those securities, reduces the concerns for potential 
market manipulation and/or disruption in the underlying markets upon 
increasing position limits, while the rising demand for trading options 
on the Underlying ETFs for legitimate

[[Page 39608]]

economic purposes compels an increase in position limits (and 
corresponding exercise limits).
Proposed Position Limits for Options on the Underlying ETFs
    Position limits for options on ETFs are determined pursuant to 
Options 9, Section 13, and vary according to the number of outstanding 
shares and the trading volumes of the underlying stocks or ETFs over 
the past six months. Pursuant to Options 9, Section 13, the largest in 
capitalization and the most frequently traded stocks and ETFs have an 
option position limit of 250,000 contracts (with adjustments for 
splits, re-capitalizations, etc.) on the same side of the market; and 
smaller capitalization stocks and ETFs have position limits of 200,000, 
75,000, 50,000 or 25,000 contracts (with adjustments for splits, 
recapitalizations, etc.) on the same side of the market. Options on 
HYG, and XLF are currently subject to the standard position limit of 
250,000 contracts. Options 9, Section 13 sets forth separate position 
limits for options on specific ETFs, including SPY, FXI and EFA. In 
addition, the Exchange is making corresponding amendments to exercise 
limits within Options 9, Section 15.
    The Exchange proposes to amend Options 9, Section 13 and Options 9, 
Section 15, respectively, to double the position and exercise limits 
for options on each of FXI, EFA, SPY, HYG and XLF. The Exchange also 
proposes to list position and exercise limits for HYG and XLF within 
Options 9, Section 13 and Options 9, Section 15, respectively. The 
table below represents the current, and proposed, position limits for 
options on the ETFs subject to this proposal:

------------------------------------------------------------------------
                                              Current        Proposed
                   ETF                    position limit  position limit
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SPY.....................................       1,800,000       3,600,000
EFA.....................................         500,000       1,000,000
FXI.....................................         500,000       1,000,000
HYG.....................................         250,000         500,000
XLF.....................................         250,000         500,000
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    The Exchange notes that the proposed position limits for options on 
EFA and FXI are consistent with existing position limits for options on 
the iShares[supreg] Russell 2000 ETF (``IWM'') and the iShares[supreg] 
MSCI Emerging Markets ETF (``EEM''), while the proposed limits for 
options on XLF and HYG are consistent with current position limits for 
options on the iShares[supreg] MSCI Brazil Capped ETF (``EWZ''), 
iShares[supreg] 20+ Year Treasury Bond Fund ETF (``TLT''), and 
iShares[supreg] MSCI Japan ETF (``EWJ''). The Exchange represents that 
the Underlying ETFs qualify for either (1) the initial listing criteria 
set forth in to Options 4, Section 3(h) for ETFs holding non-U.S. 
component securities, or (2) generic listing standards for series of 
portfolio depository receipts and index fund shares based on 
international or global indexes under which a comprehensive 
surveillance agreement (``CSA'') is not required, as well as the 
continued listing criteria in Options 4, Section 4.\4\ In compliance 
with its listing rules, the Exchange also represents that non-U.S. 
component securities that are not subject to a comprehensive 
surveillance agreement (``CSA'') do not, in the aggregate, represent 
more than more than 50% of the weight of any of the Underlying ETFs.\5\
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    \4\ The Exchange notes that the initial listing criteria for 
options on ETFs that hold non-U.S. component securities are more 
stringent than the maintenance listing criteria for those same ETF 
options. See Options 4, Section 4(h).
    \5\ See Options 4, Section 3(h).
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Composition and Growth Analysis for Underlying ETFs
    As stated above, position (and exercise) limits are intended to 
prevent the establishment of options positions that can be used or 
might create incentives to manipulate the underlying market so as to 
benefit options positions. The Commission has recognized that these 
limits are designed to minimize the potential for mini-manipulations 
and for corners or squeezes of the underlying market, as well as serve 
to reduce the possibility for disruption of the options market itself, 
especially in illiquid classes.\6\ The Underlying ETFs as well as the 
ETF components are highly liquid, and are based on a broad set of 
highly liquid securities and other reference assets, as demonstrated 
through the trading statistics presented in this proposal. Indeed, the 
Commission recognized the liquidity of the securities comprising the 
underlying interest of SPY and permitted no position limits on SPY 
options from 2012 through 2018.\7\
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    \6\ See Securities Exchange Act Release No. 67672 (August 15, 
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29).
    \7\ See Securities Exchange Act Release No. 68000 (October 5, 
2012), 77 FR 62300 (October 12, 2012) (SR-ISE-2012-81), which 
implemented a pilot program that ran through 2017, during which 
there were no position limits for options on SPY. The Exchange notes 
that throughout the duration of the pilot program it was not aware 
of any problems created or adverse consequences as of result of the 
pilot program. See also Securities Exchange Act Release No. 83416 
(June 12, 2018), 83 FR 28293 (June 18, 2018) (SR-ISE-2018-53).
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    To support the proposed position limit increases (and corresponding 
increase in exercise limits), the Exchange considered both liquidity of 
the Underlying ETFs and the component securities of the Underlying 
ETFs, as well as the availability of economically equivalent products 
to the overlying options and their respective position limits. For 
instance, some of the Underlying ETFs are based upon broad-based 
indices that underlie cash-settled options, and therefore the options 
on the Underlying ETFs are economically equivalent to the options on 
those indices, which have no position limits. Other Underlying ETFs are 
based upon broad-based indices that underlie cash-settled options with 
position limits reflecting notional values that are larger than current 
position limits for options on the ETF analogues. For indexes that are 
tracked by an Underlying ETF but on which there are no options listed, 
the Exchange believes, based on the liquidity, depth and breadth of the 
underlying market of the components of the indexes, that each of the 
indexes referenced by the applicable ETFs would be considered a broad-
based index under the Exchange's Rules. Additionally, if in some cases 
certain position limits are appropriate for the options overlying 
comparable indexes or basket of securities that the Underlying ETFs 
track then those economically equivalent position limits should be 
appropriate for the options overlying the Underlying ETFs.
    The Exchange is presenting data collected by Cboe as part of its 
initial filing to increase position and exercise limits on the 
Underlying ETFs, that the

[[Page 39609]]

Commission approved,\8\ following trading statistics regarding shares 
of and options on the Underlying ETFs, as well as the component 
securities:
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    \8\ See supra note 3.

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                                                                                         Shares outstanding      Fund market cap     Total market cap of
              Product               ADV \9\ (ETF shares)     ADV (option contracts)          (ETFs) \10\              (USD)          ETF components \11\
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SPY...............................  70.3 million........                   2.8 million  968.7 million.......  312.9 billion.......  29.3 trillion
FXI...............................  26.1 million........                       196,600  106.8 million.......  4.8 billion.........  28.0 trillion
EFA...............................  25.1 million........                       155,900  928.2 million.......  64.9 billion........  19.3 trillion
HYG...............................  20.0 million........                       193,700  216.6 million.......  19.1 billion........  906.4 billion \12\
XLF...............................  48.8 million........                       102,100  793.6 million.......  24.6 billion........  3.8 trillion
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    The Exchange is presenting the following data collected by Cboe as 
part of its initial filing, that the Commission has approved,\13\ for 
the same trading statistics, where applicable, as above regarding a 
sample of other ETFs, as well as the current position limits for 
options on such ETFs pursuant to Options 9, Section 13, to draw 
comparisons in support of proposed position limit increases for options 
on a number of the Underlying ETFs (see further discussion below):
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    \9\ Cboe's Average daily volume (ADV) data for ETF shares and 
options contracts are for all of 2019. Additionally, reference to 
ADV in ETF shares, and ETF options herein this proposal are for all 
of 2019, unless otherwise indicated.
    \10\ See Amendment No. 1 to SR-CBOE-2020-015, at page 4, 
available at https://www.sec.gov/comments/sr-cboe-2020-015/srcboe2020015-7081714-215592.pdf (``Amendment No. 1'').
    \11\ See Amendment No. 1, at page 4.
    \12\ See Notice, at note 13.
    \13\ See supra note 3.

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                                                                                                                                              Current
             Product                 ADV (ETF shares)      ADV (option    Shares outstanding      Fund market cap    Total market cap of     position
                                                           contracts)           (ETFs)                 (USD)            ETF components        limits
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QQQ..............................  30.2 million........         670,200  410.3 million.......  88.7 billion........  10.1 trillion......       1,800,000
EWZ..............................  26.7 million........         186,500  233 million.........  11.3 billion........  234.6 billion......         500,000
TLT..............................  9.6 million.........          95,200  128.1 million.......  17.5 billion........  N/A................         500,000
EWJ..............................  7.2 million.........           5,700  236.6 million.......  14.2 billion........  3 trillion.........         500,000
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    The Exchange believes that, overall, the liquidity in the shares of 
the Underlying ETFs and in the component securities of the Underlying 
ETFs and in their overlying options, as well as the large market 
capitalizations and structure of each of the Underlying ETFs support 
the proposal to increase the position limits for each option class (and 
corresponding exercise limits). Given the robust liquidity and 
capitalization in the Underlying ETFs and in the component securities 
of the Underlying ETFs the Exchange does not anticipate that the 
proposed increase in position limits would create significant price 
movements. Also, the Exchange believes the market capitalization of the 
underlying component securities of the applicable index or reference 
asset are large enough to adequately absorb potential price movements 
that may be caused by large trades.
    The following analyses for the Underlying ETFs, which the Exchange 
agrees with in support of this proposal, as well as the statistics 
presented in support thereof, were presented by Cboe in their initial 
filing, which was approved by the Commission.\14\ The Exchange notes 
that SPY tracks the performance of the S&P 500 Index, which is an index 
of diversified large cap U.S. companies.\15\ It is composed of 505 
selected stocks spanning over approximately 24 separate industry 
groups. The S&P 500 is one of the most commonly followed equity 
indices, and is widely considered to be the best indicator of stock 
market performance as a whole. SPY is one of the most actively traded 
ETFs, and, since 2017,\16\ its ADV has increased from approximately 
64.6 million shares to 70.3 million shares by the end of 2019. 
Similarly, its ADV in options contracts has increased from 2.6 million 
to 2.8 million through 2019.\17\ As noted, the demand for options 
trading on SPY has continued to increase, however, the position limits 
have remained the same, which the Exchange believes may have impacted 
growth in SPY option volume from 2017 through 2019. The Exchange also 
notes that SPY shares are more liquid than INVESCO QQQ Trust\SM\, 
Series 1 (``QQQ'') shares, which is also currently subject to a 
position limit of 1,800,000 contracts. Specifically, SPY currently 
experiences over twice the ADV in shares and over four times the ADV in 
options than that of QQQ.\18\
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    \14\ See supra note 3.
    \15\ See SPDR S&P 500 ETF Trust, available at https://www.ssga.com/us/en/individual/etfs/funds/spdr-sp-500-etf-trust-spy 
(January 21, 2020).
    \16\ See Securities Exchange Release No. 83156 (May 2, 2018), 83 
FR 20882 (May 8, 2018) (SR-ISE-2018-39) (Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change To Amend ISE Rules 
412, Position Limits, and 414, Exercise Limits). See also supra note 
3.
    \17\ See also Securities Exchange Act Release No. 83416 (June 
12, 2018), 83 FR 28293 (June 18, 2018) (SR-ISE-2018-53) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
Position and Exercise Limits for Options on the SPY Exchange Traded 
Fund).
    \18\ The 2019 ADV for QQQ shares is 30.2 million and for options 
on QQQ is 670,200.
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    EFA tracks the performance of MSCI EAFE Index (``MXEA''), which is 
comprised of over 900 large and mid-cap securities across 21 developed 
markets, including countries in Europe, Australia and the Far East, 
excluding the U.S. and Canada.\19\ In support of its proposal to 
increase the position limit for EFA, Cboe's proposal specifies, that 
from 2017 through 2019, ADV has grown significantly in shares of EFA 
and in options on EFA, from approximately 19.4 million shares in 2017 
to 25.1 million through 2019, and from approximately 98,800 options 
contract in 2017 to 155,900 through 2019. Further, Cboe compared the 
notional value of EFA's share price of $69.44 and MXEA's index level of 
2036.94, approximately 29 EFA option contracts equal one MXEA option 
contract. Based on the above comparison of notional values, Cboe 
concluded that a position limit for EFA options would be economically 
equivalent to that of MXEA options which equates to 725,000 contracts 
(previously) and 1,450,000 for Cboe's

[[Page 39610]]

current 50,000 contract position limit for MXEA options.\20\ Cboe also 
noted that MXEA index options have an ADV of 594 options contracts, 
which equate to an ADV of 17,226 EFA option contracts (as that is 29 
times the size of 594). The Exchange believes the significantly higher 
actual ADV (155,900 contracts), economically equivalent ADV (17,226 
contracts), notional value, and economically equivalent position limits 
for EFA as compared to MXEA options, supports an increase in position 
limits for EFA options from 500,000 contracts to 1,000,000 contracts.
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    \19\ See iShares MSCI EAFE ETF, available at https://www.ishares.com/us/products/239623/ishares-msci-eafe-etf (February 
10, 2020).
    \20\ The Exchange does not list options on foreign indexes.
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    FXI tracks the performance of the FTSE China 50 Index, which is 
composed of the 50 largest Chinese stocks.\21\ According to Cboe, FXI 
shares and options have also experienced increased liquidity since 
2017, as ADV has grown from approximately 15.1 million shares in 2017 
to 26.1 million through 2019, as well as approximately 71,900 options 
contracts in 2017 to 196,600 through 2019. Cboe notes that although 
there are currently no options on the FTSE China 50 Index listed for 
trading, the components of the FTSE China 50 Index, which can be used 
to create a basket of stocks that equate to the FXI ETF, currently have 
a market capitalization of approximately $28 trillion and FXI has a 
market capitalization of $4.8 billion (as indicated above), which the 
Exchange believes are both large enough to absorb potential price 
movements caused by a large trade in FXI.
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    \21\ See iShares China Large-Cap ETF, available at https://www.ishares.com/us/products/239536/ishares-china-largecap-etf 
(February 10, 2020).
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    XLF invests in a wide array of financial service firms with 
diversified business lines ranging from investment management to 
commercial and investment banking. It generally corresponds to the 
price and yield performance of publicly traded equity securities of 
companies in the SPDR Financial Select Sector Index.\22\ In support of 
its proposal, Cboe compared XLF's ADV in shares and in options to the 
ADV in shares and options for EWZ (26.7 million shares and 186,500 
options contracts), TLT (9.6 million shares and 95,200 options 
contracts), and EWJ (7.2 million shares and 5,700 options contracts). 
According to Cboe, XLF experiences significantly greater ADV in shares 
and options than EWZ, TLT, and EWJ, which already have a position limit 
of 500,000 contracts--the proposed position limit for XLF options. 
According to Cboe, although there are no options listed on the SPDR 
Financial Select Sector Index listed for trading, the components of the 
index, which can be used to create a basket of stocks that equate to 
the XLF ETF, currently have a market capitalization of $3.8 trillion 
(indicated above). Additionally, XLF has a market capitalization of 
$24.6 billion. The Exchange believes that both of these are large 
enough to absorb potential price movements caused by a large trade in 
XLF.
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    \22\ See Select Sector SPDR ETFs, XLF, available at http://www.sectorspdr.com/sectorspdr/sector/xlf (January 15, 2020).
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    Finally, HYG attempts to track the investment results of Markit 
iBoxx[supreg] USD Liquid High Yield Index, which is composed of U.S. 
dollar-denominated, high-yield corporate bonds and is one of the most 
widely used high-yield bond ETFs.\23\ To support its proposed position 
limit increase on HYG, Cboe compared the HYG's ADV in share and options 
to that of both TLT (9.6 million shares and 95,200 options contracts), 
and EWJ (7.2 million shares and 5,700 options contracts). The Exchange 
agrees with Cboe's comparison and following analysis. Cboe found that 
HYG experiences significantly higher ADV in shares and options than 
both TLT and EWJ, which are currently subject to a position limit of 
500,000 options contracts--the proposed limit for options on HYG. 
According to Cboe, while HYG does not have an index option analogue 
listed for trading, Cboe believes that its market capitalization of 
$19.1 billion, and of $906.4 billion in component securities, is 
adequate to absorb a potential price movement that may be caused by 
large trades in HYG.
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    \23\ See iShares iBoxx $ High Yield Corporate Bond ETF, 
available at https://www.ishares.com/us/products/239565/ishares-iboxx-high-yield-corporatebond-etf (January 15, 2020).
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Creation and Redemption for ETFs
    The Exchange believes that the creation and redemption process for 
ETFs will lessen the potential for manipulative activity with options 
on the Underlying ETFs. When an ETF provider wants to create more 
shares, it looks to an Authorized Participant (generally a market maker 
or other large financial institution) to acquire the securities the ETF 
is to hold. For instance, when an ETF is designed to track the 
performance of an index, the Authorized Participant can purchase all 
the constituent securities in the exact same weight as the index, then 
deliver those shares to the ETF provider. In exchange, the ETF provider 
gives the Authorized Participant a block of equally valued ETF shares, 
on a one-for-one fair value basis. The price is based on the net asset 
value, not the market value at which the ETF is trading. The creation 
of new ETF units can be conducted during an entire trading day, and is 
not subject to position limits. This process works in reverse where the 
ETF provider seeks to decrease the number of shares that are available 
to trade. The creation and redemption process, therefore, creates a 
direct link to the underlying components of the ETF, and serves to 
mitigate potential price impact of the ETF shares that might otherwise 
result from increased position limits for the ETF options.
    The Exchange understands that the ETF creation and redemption 
process seeks to keep an ETF's share price trading in line with the 
ETF's underlying net asset value. Because an ETF trades like a stock, 
its share price will fluctuate during the trading day, due to simple 
supply and demand. If demand to buy an ETF is high, for instance, the 
ETF's share price might rise above the value of its underlying 
securities. When this happens, the Authorized Participant believes the 
ETF may now be overpriced, so it may buy shares of the component 
securities and then sell ETF shares in the open market (i.e., 
creations). This may drive the ETF's share price back toward the 
underlying net asset value. Likewise, if the ETF share price starts 
trading at a discount to the securities it holds, the Authorized 
Participant can buy shares of the ETF and redeem them for the 
underlying securities (i.e., redemptions). Buying undervalued ETF 
shares may drive the share price of the ETF back toward fair value. 
This arbitrage process helps to keep an ETF's share price in line with 
the value of its underlying portfolio.
Surveillance and Reporting Requirements
    The Exchange believes that increasing the position limits for the 
options on the Underlying ETFs would lead to a more liquid and 
competitive market environment for these options, which will benefit 
customers interested in trading these products. The reporting 
requirement for the options on the Underlying ETFs would remain 
unchanged. Thus, the Exchange would still require that each Member that 
maintains positions in the options on the same side of the market, for 
its own account or for the account of a customer, report certain 
information to the Exchange. This information would include, but would 
not be limited to, the options' positions, whether such positions are 
hedged and, if so, a description of the hedge(s). Market Makers would 
continue to be exempt

[[Page 39611]]

from this reporting requirement, however, the Exchange may access 
Market-Maker position information.\24\ Moreover, the Exchange's 
requirement that Members file reports with the Exchange for any 
customer who held aggregate large long or short positions on the same 
side of the market of 200 or more options contracts of any single class 
for the previous day will remain at this level for the options subject 
to this proposal and will continue to serve as an important part of the 
Exchange's surveillance efforts.\25\
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    \24\ The Options Clearing Corporation (``OCC'') through the 
Large Option Position Reporting (``LOPR'') system acts as a 
centralized service provider for Member compliance with position 
reporting requirements by collecting data from each Member, 
consolidating the information, and ultimately providing detailed 
listings of each Member's report to the Exchange, as well as 
Financial Industry Regulatory Authority, Inc. (``FINRA''), acting as 
its agent pursuant to a regulatory services agreement (``RSA'').
    \25\ See Options 6E, Section 2 for reporting requirements.
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    The Exchange believes that the existing surveillance procedures and 
reporting requirements at the Exchange and other SROs are capable of 
properly identifying disruptive and/or manipulative trading activity. 
The Exchange also represents that it has adequate surveillances in 
place to detect potential manipulation, as well as reviews in place to 
identify potential changes in composition of the Underlying ETFs and 
continued compliance with the Exchange's listing standards. These 
procedures utilize daily monitoring of market activity via automated 
surveillance techniques to identify unusual activity in both options 
and the underlyings, as applicable.\26\ The Exchange also notes that 
large stock holdings must be disclosed to the Commission by way of 
Schedules 13D or 13G,\27\ which are used to report ownership of stock 
which exceeds 5% of a company's total stock issue and may assist in 
providing information in monitoring for any potential manipulative 
schemes.
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    \26\ The Exchange believes these procedures have been effective 
for the surveillance of trading the options subject to this 
proposal, and will continue to employ them.
    \27\ 17 CFR 240.13d-1.
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    The Exchange believes that the current financial requirements 
imposed by the Exchange and by the Commission adequately address 
concerns regarding potentially large, unhedged positions in the options 
on the Underlying ETFs. Current margin and risk-based haircut 
methodologies serve to limit the size of positions maintained by any 
one account by increasing the margin and/or capital that a Member must 
maintain for a large position held by itself or by its customer.\28\ In 
addition, Rule 15c3-1 \29\ imposes a capital charge on Members to the 
extent of any margin deficiency resulting from the higher margin 
requirement.
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    \28\ See Options 6C, Section 3 for a description of margin 
requirements.
    \29\ 17 CFR 240.15c3-1.
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Technical Corrections
    The Exchange also proposes to rename SPDR Dow Jones[supreg] 
Industrial Average ETF Trust (SPY) as SPDR[supreg] S&P 500[supreg] ETF 
Trust (SPY) to conform to the correct name of the product.
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.\30\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \31\ 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. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \32\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \30\ 15 U.S.C. 78f(b).
    \31\ 15 U.S.C. 78f(b)(5).
    \32\ Id.
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    The Exchange believes that the proposed increase in position limits 
for options on the Underlying ETFs 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 provide market participants with the ability to more 
effectively execute their trading and hedging activities. The proposed 
increases will allow market participants to more fully implement 
hedging strategies in related derivative products and to further use 
options to achieve investment strategies (e.g., there are Exchange-
Traded Products (``ETPs'') that use options on the Underlying ETFs as 
part of their investment strategy, and the applicable position limits 
(and corresponding exercise limits) as they stand today may inhibit 
these ETPs in achieving their investment objectives, to the detriment 
of investors). Also, increasing the applicable position limits may 
allow Market Makers to provide the markets for these options with more 
liquidity in amounts commensurate with increased consumer demand in 
such markets. The proposed position limit increases may also encourage 
other liquidity providers to shift liquidity, as well as encourage 
consumers to shift demand, from over the counter markets onto the 
Exchange, which will enhance the process of price discovery conducted 
on the Exchange through increased order flow.
    In addition, the Exchange believes that the structure of the 
Underlying ETFs, the considerable market capitalization of the funds, 
underlying component securities and the liquidity of the markets for 
the applicable options and underlying component securities will 
mitigate concerns regarding potential manipulation of the products and/
or disruption of the underlying markets upon increasing the relevant 
position limits. As a general principle, increases in market 
capitalizations, active trading volume, and deep liquidity of 
securities deter manipulation and/or disruption. This general principle 
applies to the recently observed increased levels of market 
capitalization, trading volume, and liquidity in shares of the 
Underlying ETFs, and the components of the Underlying ETFs (as 
described above). The Exchange does not believe that the options 
markets or underlying markets would become susceptible to manipulation 
and/or disruption as a result of the proposed position limit increases. 
Indeed, the Commission has previously expressed the belief that 
removing position and exercise limits may bring additional depth and 
liquidity to the options markets without increasing concerns regarding 
intermarket manipulation or disruption of the options or the underlying 
securities.\33\
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    \33\ See Securities Exchange Act Release No. 62147 (October 28, 
2005) (SR-CBOE-2005-41), at 62149.
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    Further, the Exchange notes that the proposed rule change to 
increase position limits for select actively traded options, is not 
novel and has been previously approved by the Commission. The proposed 
increase to the position and exercise limits on the Underlying ETFs has 
recently been approved by the Commission.\34\ The Commission has 
previously approved, on a pilot basis, eliminating position

[[Page 39612]]

limits for options on SPY.\35\ Additionally, the Commission has 
approved similar proposed rule changes by the Exchange to increase 
position limits for options on highly liquid, actively traded ETFs.\36\ 
In approving increases in position limits in the past, the Commission 
relied heavily upon the exchange's surveillance capabilities, 
expressing trust in the enhanced surveillances and reporting safeguards 
that the exchange took in order to detect and deter possible 
manipulative behavior which might arise from eliminating position and 
exercise limits.
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    \34\ See supra note 3.
    \35\ See supra notes 7 and 8.
    \36\ See supra note 20.
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    Furthermore, the Exchange again notes that that the proposed 
position limits for options on EFA and FXI are consistent with existing 
position limits for options on IWM and EEM, and the proposed limits for 
options on XLF and HYG are consistent with current position limits for 
options on EWZ, TLT, and EWJ.
    The Exchange's surveillance and reporting safeguards continue to be 
designed to deter and detect possible manipulative behavior that might 
arise from increasing or eliminating position and exercise limits in 
certain classes. The Exchange believes that the current financial 
requirements imposed by the Exchange and by the Commission adequately 
address concerns regarding potentially large, unhedged position in the 
options on the Underlying ETFs, further promoting just and equitable 
principles of trading, the maintenance of a fair and orderly market, 
and the protection of investors.
Technical Corrections
    The Exchange's proposal to make a technical amendment to the name 
of an ETF, within Supplementary Material .01 to Options 9, Section 13 
and Supplementary Material .01 to Options 9, Section 15 will correct 
the name of this product and is therefore non-substantive. Accordingly, 
this technical amendment is intended to bring greater clarity to the 
rule text and is consistent with the Act.

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

    The Exchange does not believe that the proposed rule change will 
impose an unnecessary burden on intra-market competition because it 
will apply to all market participants. The Exchange does not believe 
the proposed rule change will impose any burden on inter-market 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act because the increased position limits (and exercise 
limits) will be available to all market participants and apply to each 
in the same manner. The Exchange believes that the proposed rule change 
will provide additional opportunities for market participants to more 
efficiently achieve their investment and trading objectives of market 
participants.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the Act. On the contrary, the Exchange 
believes the proposal promotes competition because it may attract 
additional order flow from the OTC market to exchanges, which would in 
turn compete amongst each other for those orders.\37\ The Exchange 
believes market participants would benefit from being able to trade 
options with increased position limits in an exchange environment in 
several ways, including but not limited to the following: (1) Enhanced 
efficiency in initiating and closing out position; (2) increased market 
transparency; and (3) heightened contra-party creditworthiness due to 
the role of OCC as issuer and guarantor. The Exchange understands that 
other options exchanges intend to file similar proposed rule changes 
with the Commission to increase position limits on options on the 
Underlying ETFs. This may further contribute to fair competition among 
exchanges for multiply listed options.
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    \37\ Additionally, several other options exchanges have the same 
position limits as the Exchange is proposing, as they incorporate by 
reference to Cboe's position limits, and as a result the position 
limits for options on the Underlying ETFs and will increase at those 
exchanges. See Nasdaq Stock Market LLC Rules, Options 9, Section 13 
(Position Limits).
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Technical Corrections
    The Exchange's proposal to make a technical amendment to the name 
of an ETF, within Supplementary Material .01 to Options 9, Section 13 
and Supplementary Material .01 to Options 9, Section 15 will correct 
the name of this product and is therefore non-substantive. Accordingly, 
this technical amendment is intended to bring greater clarity to the 
rule text and does not impose a burden on competition.

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

    No written comments were either solicited or received.

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

    Because the foregoing 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 \38\ and Rule 19b-
4(f)(6) thereunder.\39\
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    \38\ 15 U.S.C. 78s(b)(3)(A).
    \39\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-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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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \40\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \41\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposed rule change may become operative upon filing. The Exchange 
states that waiver of the operative delay would be consistent with the 
protection of investors and the public interest because it would allow 
the Exchange to immediately increase its position and exercise limits 
for the products subject to this proposal to those of Cboe, which the 
Exchange believes will ensure fair competition among exchanges and 
provide consistency and uniformity among members of both Cboe and ISE 
by subjecting members of both exchanges to the same position and 
exercise limits for these multiply-listed options classes. For this 
reason, the Commission believes that waiver of the 30-day operative 
delay is consistent with the protection of investors and the public 
interest. Therefore, the Commission hereby waives the operative delay 
and designates the proposal as operative upon filing.\42\
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    \40\ 17 CFR 240.19b-4(f)(6).
    \41\ 17 CFR 240.19b-4(f)(6)(iii).
    \42\ For purposes only of waiving the 30-day operative delay, 
the Commission also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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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

[[Page 39613]]

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-ISE-2020-23 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-ISE-2020-23. 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 such 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-ISE-2020-23, and should be submitted on 
or before July 22, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
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    \43\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-14120 Filed 6-30-20; 8:45 am]
BILLING CODE 8011-01-P