[Federal Register Volume 86, Number 215 (Wednesday, November 10, 2021)]
[Notices]
[Pages 62584-62588]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-24531]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93525; File No. SR-CBOE-2021-029]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of Amendment Nos. 2 and 3 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 2, 
and 3, To Increase Position Limits for Options on Two Exchange-Traded 
Funds

November 4, 2021.

I. Introduction

    On April 21, 2021, Cboe Exchange, Inc. (``Exchange'') filed with 
the Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to amend 
Interpretation and Policy .07 of Exchange Rule 8.30, Position Limits, 
to increase the position limits for options on the following exchange-
traded funds (``ETFs'') and exchange-traded note: SPDR Gold Shares 
(``GLD''), iShares iBoxx $ Investment Grade Corporate Bond ETF 
(``LQD''), iShares Silver Trust (``SLV''), iPath S&P 500 VIX Short-Term 
Futures ETN (``VXX''), ProShares Ultra VIX Short-Term Futures ETF 
(``UVXY''), and VanEck Vectors Gold Miners ETF (``GDX'').\3\ The 
proposed rule change was published for comment in the Federal Register 
on May 10, 2021.\4\ On June 17, 2021, pursuant to Section 19(b)(2) of 
the Act,\5\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to approve or disapprove 
the proposed rule change.\6\ On July 27, 2021, the Exchange submitted 
Amendment No. 1 to the proposed rule change, which replaced and 
superseded the proposed rule change as originally

[[Page 62585]]

filed.\7\ On August 5, 2021, the Commission published notice of 
Amendment No. 1 and instituted proceedings pursuant to Section 
19(b)(2)(B) of the Act \8\ to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment No. 1.\9\ 
On October 8, 2021, the Exchange submitted Amendment No. 2 to the 
proposed rule change, which replaced and superseded the proposed rule 
change, as modified by Amendment No. 1.\10\ On October 25, 2021, the 
Exchange submitted Amendment No. 3 to the proposed rule change.\11\ The 
Commission is publishing this notice to solicit comment on Amendment 
Nos. 2 and 3, and is approving the proposed rule change, as modified by 
Amendment Nos. 1, 2, and 3, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ As noted below, the Exchange subsequently amended its 
proposal to remove the proposed increases in position limits for 
options on GLD, SLV, VXX, and UVXY. See infra notes 10-11. As a 
result, the proposal as amended, and this order, address only 
proposed position limit increases for options on LQD and GDX.
    \4\ See Securities Exchange Act Release No. 91767 (May 4, 2021), 
86 FR 25026. To date, the Commission has received no comments on the 
proposed rule change.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 92204, 86 FR 33395 
(June 24, 2021). The Commission designated August 8, 2021, as the 
date by which the Commission was required to approve or disapprove, 
or institute proceedings to determine whether to approve or 
disapprove, the proposed rule change.
    \7\ In Amendment No. 1, the Exchange: (1) Reduced the proposed 
position limit for GLD options from 1,000,000 contracts to 500,000 
contracts; and (2) provided additional justification and analysis in 
support of the proposal. The full text of Amendment No. 1 is 
available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2021-029/srcboe2021029-9094584-246812.pdf.
    \8\ 15 U.S.C. 78s(b)(2)(B).
    \9\ See Securities Exchange Act Release No. 92581, 86 FR 44118 
(August 11, 2021).
    \10\ In Amendment No. 2, the Exchange: (1) Revised its proposal 
to eliminate its originally proposed increases to position limits 
for options on VXX and UVXY; (2) provided additional justification 
and analysis in support of its proposed increases to position limits 
for options on GLD and SLV; and (3) made technical, corrective, and 
clarifying changes. The full text of Amendment No. 2 is available on 
the Commission's website at: https://www.sec.gov/comments/sr-cboe-2021-029/srcboe2021029-9332427-260236.pdf.
    \11\ In Amendment No. 3, the Exchange revised its proposal to 
eliminate the proposed increases to position limits for options on 
GLD and SLV, and stated that it intends separately to propose to 
increase the position limits for these options. The full text of 
Amendment No. 3 is available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2021-029/srcboe2021029-9352219-261347.pdf.
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II. Description of the Proposal, as Modified by Amendment Nos. 1, 2, 
and 3

    Currently, position limits for options on ETFs traded on the 
Exchange, such as those subject to this proposal, as amended, are 
determined pursuant to Exchange Rule 8.30, and generally vary according 
to the number of outstanding shares and past six-month trading volume 
of the underlying security. Options on the securities with the largest 
numbers of outstanding shares and trading volume have a standard option 
position limit of 250,000 contracts (with adjustments for splits, re-
capitalizations, etc.) on the same side of the market.\12\ In addition, 
Interpretation and Policy .07 of Exchange Rule 8.30 currently sets 
forth separate position limits for options on certain ETFs that range 
from 300,000 to 3.6 million contracts.
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    \12\ See Interpretation and Policy .02(e) to Exchange Rule 8.30.
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    Options on LQD and GDX are currently subject to the standard 
position limit of 250,000 contracts as set forth in Exchange Rule 
8.30.\13\ The purpose of the proposed rule change, as modified, is to 
amend Interpretation and Policy .07 to Exchange Rule 8.30 to increase 
the position limits for options on LQD and GDX from 250,000 contracts 
to 500,000 contracts.\14\ The Exchange believes that the proposed 
position limit increases will lead to a more liquid and competitive 
market environment for these options that will benefit customers 
interested in trading these products.\15\ To support the proposed 
position limit increases, the Exchange has provided statistics 
regarding: The liquidity of LQD and GDX, as well as the value of these 
ETFs, their components, and the relevant marketplace; the share volume 
for LQD and GDX and contract volume for the options on these ETFs; and 
the trading characteristics of products that the Exchange believes are 
economically equivalent to LQD and GDX and options thereon.
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    \13\ See Amendment No. 2, supra note 10, at 6; see also id. at 
18-20, for descriptions provided by the Exchange regarding the 
composition, design, and investment objectives of LQD and GDX.
    \14\ Pursuant to Exchange Rule 8.42, Interpretation and Policy 
.02, the text of which is not being amended by this proposal, the 
exercise limits for LQD and GDX options would be similarly increased 
as a result of this proposal.
    \15\ See Amendment No. 2, supra note 10, at 22.
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    Specifically, in support of its proposal to increase the position 
limit for options on GDX from 250,000 contracts to 500,000 contracts, 
the Exchange, among other things, compares the trading characteristics 
of GDX to those of the iShares MSCI Brazil Capped ETF (``EWZ''), the 
iShares 20+ Year Treasury Bond Fund ETF (``TLT''), the iShares MSCI 
Japan ETF (``EWJ''), and the iShares iBoxx High Yield Corporate Bond 
Fund (``HYG''), options on all of which currently have a position limit 
of 500,000 contracts.\16\ The Exchange states that the average daily 
trading volume (``ADV'') in calendar year 2020 for GDX was 39.4 million 
shares compared to 29.2 million shares for EWZ, 11.5 million shares for 
TLT, 8.2 million shares for EWJ, and 30.5 million shares for HYG; \17\ 
the total shares outstanding as of April 5, 2021 for GDX was 419.8 
million compared to 173.8 million for EWZ, 103.7 million for TLT, 185.3 
million for EWJ, and 254.5 million for HYG; \18\ and the fund market 
cap as of January 14, 2021 for GDX was $16,170.5 million compared to 
$6,506.8 million for EWZ, $17,121.3 million for TLT, $13,860.7 million 
for EWJ, and $24,067.5 million for HYG.\19\ The Exchange also states 
that many of the Brazil-based gold mining constituents included in GDX 
are also included in EWZ, and that the Exchange has not identified any 
issues with the continued listing and trading of EWZ options or any 
adverse market impact on EWZ in connection with the current 500,000 
position limit in place for EWZ options.\20\ Further, the Exchange 
states that the components of the NYSE Arca Gold Miners Index--the 
price and yield performance of which GDX seeks to replicate as closely 
as possible--can be used to create GDX, and currently must each have a 
market capitalization greater than $750 million, an ADV of at least 
50,000 shares, and an average daily value traded of at least $1 million 
in order to be eligible for inclusion in the index.\21\
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    \16\ See id. at 9, 20. See also Exchange Rule 8.30, 
Interpretation and Policy .07.
    \17\ See Amendment No. 2, supra note 10, at 20.
    \18\ See id. at 9.
    \19\ See id. at 9, 20.
    \20\ See id. at 20.
    \21\ See id. at 20-21.
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    In support of its proposal to increase the position limit for 
options on LQD from 250,000 contracts to 500,000 contracts, the 
Exchange, among other things, compares the trading characteristics of 
LQD to those of EWZ, TLT, and EWJ, options on all of which currently 
have a position limit of 500,000 contracts.\22\ The Exchange provides 
data demonstrating that the ADV in calendar year 2020 for LQD was 14.1 
million shares compared to 29.2 million shares for EWZ, 11.5 million 
shares for TLT, and 8.2 million shares for EWJ; \23\ the total shares 
outstanding as of April 5, 2021 for LQD was 308.1 million compared to 
173.8 million for EWZ, 103.7 million for TLT, and 185.3 million for 
EWJ; \24\ and the fund market cap as of January 14, 2021 for LQD was 
$54,113.7 million compared to $6,506.8 million for EWZ, $17,121.3 
million for TLT, and $13,860.7 million for EWJ.\25\ The Exchange also 
states that LQD tracks the performance of the Markit iBoxx USD Liquid 
Investment Grade Index, which is an index designed as a subset of the 
broader U.S. dollar-denominated corporate bond market and can be used 
in creating a basket of securities that equates to LQD, and which is 
comprised of over 8,000 bonds for which the outstanding face value of

[[Page 62586]]

each must be greater than or equal to $2 billion.\26\
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    \22\ See id. at 9, 18-19. See also Exchange Rule 8.30, 
Interpretation and Policy .07.
    \23\ See Amendment No. 2, supra note 10, at 18.
    \24\ See id. at 9.
    \25\ See id. at 9, 19.
    \26\ See id. at 18-19.
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    The Exchange states that the current position limits for options on 
LQD and GDX may have impeded the ability of market makers to make 
markets on the Exchange.\27\ According to the Exchange, the proposal is 
designed to encourage liquidity providers to provide additional 
liquidity to the Exchange and other market participants to shift 
liquidity from over-the-counter markets onto the Exchange, which, it 
believes, would enhance the process of price discovery conducted on the 
Exchange through increased order flow.\28\ The proposal also would 
benefit market participants, the Exchange maintains, by providing them 
with the ability to more effectively execute their trading and hedging 
activities.\29\
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    \27\ See id. at 5.
    \28\ See id. at 5, 25-26.
    \29\ See id. at 5, 25.
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    With regard to the concerns that position limits generally are 
meant to address, the Exchange represents that the structure of LQD and 
GDX, the considerable market capitalization of these ETFs and their 
underlying component securities, and the liquidity of the markets for 
options on these ETFs and the underlying component securities mitigate 
concerns regarding potential manipulation of the products and 
disruption of the underlying markets due to the increased position 
limits.\30\ The Exchange also states that the creation and redemption 
process for an ETF creates a direct link to the underlying components 
of the ETF and serves to mitigate the potential price impact of the ETF 
shares that might otherwise result from increased position limits, and 
that arbitrage activity helps to keep an ETF's price in line with the 
value of its underlying portfolio.\31\
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    \30\ See id. at 5-6, 26.
    \31\ See id. at 21-22.
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    In addition, the Exchange states that the options reporting 
requirements of Exchange Rule 8.43 would continue to be applicable to 
the options subject to this proposal.\32\ As set forth in Exchange Rule 
8.43(a), each Trading Permit Holder (``TPH'') must report to the 
Exchange certain information in relation to any customer who, acting 
alone, or in concert with others, on the previous business day 
maintained aggregate long or short positions on the same side of the 
market of 200 or more contracts in any single class of option contracts 
dealt in on the Exchange.\33\ Further, Exchange Rule 8.43(b) requires 
each TPH (other than an Exchange market-maker or designated primary 
market-maker) \34\ that maintains a position in excess of 10,000 non-
FLEX equity option contracts on the same side of the market, on behalf 
of its own account or for the account of a customer, to report to the 
Exchange information as to whether such positions are hedged, and 
provide documentation as to how such contracts are hedged.\35\
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    \32\ See id. at 22-23.
    \33\ The report must include, for each such class of options, 
the number of option contracts comprising each such position and, in 
the case of short positions, whether covered or uncovered. See 
Exchange Rule 8.43(a).
    \34\ According to the Exchange, market-makers (including 
designated primary market-makers) are exempt from the referenced 
reporting requirement because market-maker information can be 
accessed through the Exchange's market surveillance systems. See 
Amendment No. 2, supra note 10, at 23.
    \35\ See id. at 22-23.
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    The Exchange also represents that the existing surveillance 
procedures and reporting requirements at the Exchange and other self-
regulatory organizations are capable of properly identifying disruptive 
and/or manipulative trading activity.\36\ According to the Exchange, 
its surveillance procedures utilize daily monitoring of market activity 
via automated surveillance techniques to identify unusual activity in 
both options and the underlying products.\37\ In addition, the Exchange 
states that its surveillance procedures have been effective for the 
surveillance of trading in the options subject to this proposal, and 
will continue to be employed.\38\
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    \36\ See id. at 23.
    \37\ See id. at 23-24.
    \38\ See id. at 24 n.39. The Exchange represents that non-U.S. 
component securities that are not subject to a comprehensive 
surveillance agreement do not, in the aggregate, represent more than 
50% of the weight of LQD or GDX. See id. at 7-8.
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    The Exchange further states that the current financial requirements 
imposed by the Exchange and by the Commission adequately address 
concerns that a TPH or its customer may try to maintain an inordinately 
large unhedged position in the options subject to this proposal.\39\ 
Current margin and risk-based haircut methodologies, the Exchange 
states, serve to limit the size of positions maintained by any one 
account by increasing the margin and/or capital that a TPH must 
maintain for a large position held by itself or by its customer.\40\ In 
addition, the Exchange notes that the Commission's net capital rule, 
Rule 15c3-1 under the Act,\41\ imposes a capital charge on TPHs to the 
extent of any margin deficiency resulting from the higher margin 
requirement.\42\
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    \39\ See id. at 24.
    \40\ See id.
    \41\ 17 CFR 240.15c3-1.
    \42\ See Amendment No. 2, supra note 10, at 24.
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III. Discussion and Commission Findings

    The Commission finds that the proposed rule change, as modified by 
Amendment Nos. 1, 2, and 3, is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to a national 
securities exchange.\43\ In particular, the Commission finds that the 
proposed rule change, as modified, is consistent with Section 6(b)(5) 
of the Act,\44\ which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system and, in general, 
to protect investors and the public interest.
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    \43\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \44\ 15 U.S.C. 78f(b)(5).
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    Position and exercise limits serve as a regulatory tool designed to 
deter manipulative schemes and adverse market impact surrounding the 
use of options. Since the inception of standardized options trading, 
the options exchanges have had rules limiting the aggregate number of 
options contracts that a member or customer may hold or exercise.\45\ 
These 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 the 
options positions, or that might contribute to disruptions in the 
underlying market.\46\ In addition, such limits serve to reduce the 
possibility of disruption in the options market itself, especially in 
illiquid classes.\47\
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    \45\ See, e.g., Securities Exchange Act Release No. 45236 
(January 4, 2002), 67 FR 1378 (January 10, 2002) (SR-Amex-2001-42).
    \46\ See, e.g., Securities Exchange Act Release No. 47346 
(February 11, 2003), 68 FR 8316 (February 20, 2003) (SR-CBOE-2002-
26).
    \47\ See id.
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    Over the years, the Commission has taken a gradual, evolutionary 
approach toward expansion of position and exercise limits for option 
products overlying certain ETFs where there is considerable liquidity 
in both the underlying securities markets and the options markets.\48\ 
The Commission has

[[Page 62587]]

been careful to balance two competing concerns when considering 
proposals by self-regulatory organizations to change position and 
exercise limits. The Commission has recognized that the limits can be 
useful to prevent investors from disrupting the market in securities 
underlying the options.\49\ At the same time, the Commission has 
determined that limits should not be established in a manner that will 
unnecessarily discourage participation in the options market by 
institutions and other investors with substantial hedging needs or 
prevent specialists and market makers from adequately meeting their 
obligations to maintain a fair and orderly market.\50\
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    \48\ The Commission's incremental approach to approving changes 
in position and exercise limits for option products overlying 
certain ETFs is well-established. See, e.g., Securities Exchange Act 
Release Nos. 88768 (April 29, 2020), 85 FR 26736 (May 5, 2020) (SR-
CBOE-2020-015) (approving increase of position limits for options on 
certain ETFs and indices); and 82770 (February 23, 2018), 83 FR 8907 
(March 1, 2018) (SR-CBOE-2017-057) (approving increase of position 
limits for options on certain ETFs).
    \49\ See Securities Exchange Act Release No. 39489 (December 24, 
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-97-11).
    \50\ See id.
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    After careful consideration of the proposal, as modified by 
Amendment Nos. 1, 2, and 3, the Commission believes that it is 
reasonable for the Exchange to increase the position and exercise 
limits for options on LQD and GDX to 500,000 contracts. As noted above, 
the markets for standardized options on these securities and for the 
underlying securities have substantial trading volume and liquidity. 
The Commission believes that this liquidity should reduce the 
possibility of manipulation and underlying market disruption.
    The Commission also has considered the creation and redemption 
processes for the ETFs subject to the proposal; the existence of an 
issuer arbitrage mechanism that helps keep each ETF's price in line 
with the value of its underlying portfolio when overpriced or trading 
at a discount to the securities on which it is based; and how these 
processes can serve to mitigate the potential price impact that might 
otherwise result from increased position limits.\51\
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    \51\ See supra notes 30-31 and accompanying text.
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    In addition, as discussed above, the Exchange believes that current 
margin and net capital requirements serve to limit the size of 
positions maintained by any one account.\52\ The Commission agrees that 
these financial requirements should help to address concerns that a 
member or its customer may try to maintain an inordinately large 
unhedged position in the options subject to this proposal and will help 
to reduce risks if such a position is established.
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    \52\ See supra notes 39-42 and accompanying text.
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    The Commission also believes that the reporting requirements 
imposed by Exchange Rule 8.43,\53\ as well as the Exchange's 
surveillance procedures, together with those of other self-regulatory 
organizations,\54\ should help protect against potential manipulation. 
The Commission expects that the Exchange will continue to monitor 
trading in the options subject to this proposal for the purpose of 
discovering and sanctioning manipulative acts and practices, and will 
reassess the position and exercise limits, if and when appropriate, in 
light of its findings.
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    \53\ See supra notes 32-35 and accompanying text.
    \54\ See supra notes 36-38 and accompanying text.
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    In sum, given the measures of liquidity for the options subject to 
this proposal and the underlying securities, the creation and 
redemption processes and issuer arbitrage mechanisms that exist 
relating to the underlying instruments, the margin and capital 
requirements cited above, the Exchange's options reporting 
requirements, and the Exchange's surveillance procedures and agreements 
with other markets, the Commission believes that it is consistent with 
the Act to increase the position and exercise limits to 500,000 
contracts for options on LQD and GDX.

IV. Solicitation of Comments on Amendment Nos. 2 and 3 to the Proposed 
Rule Change

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment Nos. 2 and 3 are 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-2021-029 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-2021-029. 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-2021-029, and should be submitted 
on or before [insert date 21 days from publication in the Federal 
Register].

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment Nos. 1, 2, and 3

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment Nos. 1, 2, and 3, prior to the 
thirtieth day after the date of publication of notice of the filing of 
Amendment Nos. 2 and 3 in the Federal Register. The sum effect of these 
amendments was to eliminate the proposed increases to position limits 
for options on VXX, UVXY, GLD, and SLV from the proposal, and to make 
technical, corrective, and clarifying changes. As a result, Amendment 
Nos. 2 and 3 narrow the scope of the proposal such that it would 
increase the position limits to 500,000 contracts only for LQD and GDX 
options--which increases have been subject to a full notice-and-comment 
period since publication of the original notice--and leave in place the 
current position limits of 250,000 contracts for options on VXX, UVXY, 
GLD, and SLV. Accordingly, the Commission finds good cause, pursuant to 
Section 19(b)(2) of the Act,\55\ to approve the proposed rule change, 
as modified by Amendment Nos. 1, 2, and 3, on an accelerated basis.
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    \55\ 15 U.S.C. 78s(b)(2).

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[[Page 62588]]

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\56\ that the proposed rule change, as modified by Amendment Nos. 
1, 2, and 3 (SR-CBOE-2021-029), be, and hereby is, approved on an 
accelerated basis.
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    \56\ Id.
    \57\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\57\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-24531 Filed 11-9-21; 8:45 am]
BILLING CODE 8011-01-P