[Federal Register Volume 89, Number 54 (Tuesday, March 19, 2024)]
[Notices]
[Pages 19622-19629]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-05633]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99721; File No. SR-CBOE-2023-063]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Amend the Exchange's Rules Relating to Position 
and Exercise Limits

March 12, 2024.

I. Introduction

    On November 29, 2023, Cboe Exchange, Inc. (the ``Exchange'' or 
``Cboe'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend its rules relating to position and 
exercise limits. The proposed rule change was published for comment in 
the Federal Register on December 14, 2023.\3\ The Commission has 
received three comment letters regarding the proposed rule change.\4\ 
On January 23, 2024, 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\ This order institutes proceedings pursuant to Section 
19(b)(2)(B) of the Act \7\ to determine whether to approve or 
disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 99119 (Dec. 8, 
2023), 88 FR 86701 (``Notice'').
    \4\ See letters to Vanessa Countryman, Secretary, Commission, 
from: Ellen Greene, Managing Director, Equity and Options Market 
Structure, Securities Industry and Financial Management Association 
(``SIFMA''), dated January 26, 2024 (``SIFMA Letter''); and 
Ji[rcaron][iacute] Kr[oacute]l, Deputy CEO, Global Head of 
Government Affairs, Alternative Investment Management Association 
(``AIMA''), dated January 14, 2024 (``AIMA Letter''); and letter 
from Jennifer W. Han, Executive Vice President, Chief Counsel and 
Head of Global Regulatory Affairs, Managed Funds Association 
(``MFA''), to Sherry R. Haywood, Assistant Secretary, Commission, 
dated January 4, 2024 (``MFA Letter''). Comment letters can be 
accessed at https://www.sec.gov/comments/sr-cboe-2023-063/srcboe2023063.htm.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 99417 (Jan. 23, 
2024), 89 FR 5588 (Jan. 29, 2024). The Commission designated March 
13, 2024, as the date by which the Commission shall approve or 
disapprove, or institute proceedings to determine whether to approve 
or disapprove, the proposed rule change.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal

    The Exchange states that 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.\8\ The Exchange states that, because 
participation in the options market may be discouraged if the position 
limits are too low, position limits must balance concerns regarding 
mitigating potential manipulation and the cost of inhibiting potential 
hedging activity that could be used for legitimate economic 
purposes.\9\
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    \8\ See Notice, 88 FR at 86701.
    \9\ See id.
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    Cboe Rule (``Rule'') 8.30 currently provides that the position 
limits for equity options are 25,000 or 50,000 or 75,000 or 200,000 or 
250,000 contracts on the same side of the market (with adjustments for 
splits and re-capitalizations) or such other number of option contracts 
as may be fixed from time to time by the Exchange.\10\ The position 
limit applicable to a class depends upon the trading volume and

[[Page 19623]]

outstanding shares of the underlying security.\11\ The 25,000-contract 
limit applies to options on an underlying security that does not meet 
the requirements for a higher option contract limit.\12\ To be eligible 
for the 50,000-contract limit, the most recent six-month trading volume 
of the underlying security must have totaled at least 20,000,000 
shares; or the most recent six-month trading volume of the underlying 
security must have totaled at least 15,000,000 shares and the 
underlying security must have at least 40,000,000 shares currently 
outstanding.\13\ To be eligible for the 75,000-contract limit, the most 
recent six-month trading volume of the underlying security must have 
totaled at least 40,000,000 shares; or the most recent six-month 
trading volume of the underlying security must have totaled at least 
30,000,000 shares and the underlying security must have at least 
120,000,000 shares currently outstanding.\14\ To be eligible for the 
200,000-contract limit, the most recent six-month trading volume of the 
underlying security must have totaled at least 80,000,000 shares; or 
the most recent six-month trading volume of the underlying security 
must have totaled at least 60,000,000 shares and the underlying 
security must have at least 240,000,000 shares currently 
outstanding.\15\ To be eligible for the 250,000-contract limit, the 
most recent six-month trading volume of the underlying security must 
have totaled at least 100,000,000 shares; or the most recent six-month 
trading volume of the underlying security must have totaled at least 
75,000,000 shares and the underlying security must have at least 
300,000,000 shares currently outstanding.\16\ These limits have been in 
place since 2005.\17\
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    \10\ Rule 8.42 provides that the exercise limit for an equity 
option is the same as the position limit established in Rule 8.30 
for that equity option. See Notice, 88 FR at 86701, n. 4.
    \11\ See Rule 8.30, Interpretation and Policy (``Int.'') .02.
    \12\ See Rule 8.30, Int. .02(a).
    \13\ See Rule 8.30, Int. .02(b).
    \14\ See Rule 8.30, Int. .02(c).
    \15\ See Rule 8.30, Int. .02(d).
    \16\ See Rule 8.30, Int. .02(e).
    \17\ See Notice, 88 FR at 86701.
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    The Exchange proposes to amend Rule 8.30 to adopt three additional 
equity option position limits of 500,000 option contracts, 1,000,000 
option contracts, and 2,000,000 option contracts.\18\ To be eligible 
for the 500,000-contract limit, the most recent six-month trading 
volume of the underlying security must have totaled at least 
500,000,000 shares; or the most recent six-month trading volume of the 
underlying security must have totaled at least 375,000,000 shares and 
the underlying security must have at least 1,500,000,000 shares 
currently outstanding.\19\ To be eligible for the 1,000,000-contract 
limit, the most recent six-month trading volume of the underlying 
security must have totaled at least 1,000,000,000 shares; or the most 
recent six-month trading volume of the underlying security must have 
totaled at least 750,000,000 shares and the underlying security must 
have at least 3,000,000,000 shares currently outstanding.\20\ To be 
eligible for the 2,000,000-contract limit, the most recent six-month 
trading volume of the underlying security must have totaled at least 
5,000,000,000 shares; or the most recent six-month trading volume of 
the underlying security must have totaled at least 3,750,000,000 shares 
and the underlying security must have at least 15,000,000,000 shares 
currently outstanding.\21\
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    \18\ See id.
    \19\ See proposed Rule 8.30, Int. .02(f).
    \20\ See proposed Rule 8.30, Int. .02(g).
    \21\ See proposed Rule 8.30, Int. .02(h).
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    The Exchange states that since the last position limit increase in 
2005, there has been a significant increase in the overall volume of 
exchange traded equity options and a steady increase in the number of 
accounts that approach the current highest position limit of 250,000 
option contracts.\22\ As described in greater detail in the Notice, the 
Exchange states that annual equity options trading volume in recent 
years is nearly seven times the volume amount when the current position 
limits were adopted in 2005, and has more than doubled since 2017.\23\ 
The Exchange further states that, as of October 12, 2023, over 300 
equity options classes that currently are limited to the maximum 
position limit of 250,000 contracts would qualify for one of the three 
proposed position limits: 182 equity options classes would be eligible 
for the 500,000-contract limit; 110 equity options classes would be 
eligible for the 1,000,000-contract limit; and 13 equity options 
classes would be eligible for the 2,000,000-contract limit.\24\ 
According to the Exchange, the increase in options volume and lack of 
evidence of market manipulation over the past 20 years justifies the 
proposed increases in the position and exercise limits.\25\
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    \22\ See Notice, 88 FR at 86702.
    \23\ See id.
    \24\ See id.
    \25\ See id.
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    The Exchange also points to Apple Inc. (``AAPL'') options as an 
example supporting the proposal. Prior to an AAPL stock split in August 
2020, AAPL had approximately 4,000,000,000 shares outstanding and the 
option position limit of 250,000 contracts represented control of 
25,000,000 AAPL shares, or 0.625% of the shares outstanding.\26\ After 
the stock split, AAPL had approximately 16,000,000,000 shares 
outstanding, and the immediate adjustment of the AAPL option position 
limit to 1,000,000 contracts following the split reflected control of 
100,000,000 shares, or 0.625% of the shares outstanding, which retained 
the pre-stock split ratio.\27\ When the last AAPL option listed at the 
time of the stock split in 2020 expired in September 2022, The Options 
Clearing Corporation (``OCC'') reverted back to the original position 
limit for AAPL of 250,000 contracts, the maximum stock option position 
limit permitted under the Exchange's rules.\28\ The Exchange states 
that this position limit is more restrictive than the original position 
limit because readjusting the position limit back to 250,000 contracts 
when there are 16,000,000,000 shares outstanding reduces the position 
limit to 0.156% of the shares outstanding, making the post-stock split 
position limit more restrictive than the pre-stock split position 
limit, and, in the Exchange's view, arguably no longer meaningfully 
related to the current shares outstanding.\29\
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    \26\ See id.
    \27\ See id.
    \28\ See id.
    \29\ See id.
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    The Exchange further states that the current 250,000-contract limit 
for AAPL options forces market participants to reduce trading activity 
because the maximum position limit represents only 0.156% of the total 
shares outstanding.\30\ The Exchange states that this reduction in 
trading volume also represents a reduction in available liquidity and 
negatively impacts liquidity, trading volume, and possibly execution 
prices.\31\ The Exchange states that, under the proposal, AAPL options 
would qualify for the 2,000,000-contract limit, which is over 12% 
higher than the current maximum position limit.\32\ The adjustment of 
the position limit from 250,000 contracts to 2,000,000 contracts 
reflects control of 200,000,000 shares or 1.25% of the shares 
outstanding, which the Exchange states is well within ratios provided 
by the prior methodology.\33\ The Exchange states that the proposed 
increase would lead to a more liquid and competitive market for AAPL 
options, as well as all qualifying equity

[[Page 19624]]

options, which would benefit customers that trade the options.\34\ The 
Exchange also states that, given the total increased volume in options 
trading, it is reasonable to conclude that in addition to AAPL options, 
position limits for many classes are currently more restrictive than 
they were when adopted in 2005.\35\ The Exchange further states that it 
has no reason to believe that the growth in trading volume in equity 
options will not continue, and that it expects continued options volume 
growth as opportunities for investors to participate in the options 
markets increase and evolve.\36\
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    \30\ See id.
    \31\ See id.
    \32\ See id.
    \33\ See id.
    \34\ See Notice, 88 FR at 86702-03.
    \35\ See Notice, 88 FR at 86702.
    \36\ See Notice, 88 FR at 86703.
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    The Exchange states that the current position and exercise limits 
are restrictive, and that not adopting increased position and exercise 
limits will hamper the listed options markets from being able to 
compete fairly and effectively with the over-the-counter (``OTC'') 
markets.\37\ The Exchange states that OTC transactions occur through 
bilateral agreements, the terms of which are not publicly disclosed to 
the marketplace, and, as a result, OTC transactions do not contribute 
to the price discovery process on a public exchange or other lit 
markets.\38\ The Exchange states that without the proposed changes to 
position and exercise limits, market participants will find the 
standard equity position limits an impediment to their business and 
investment objectives.\39\ The Exchange states that market participants 
therefore may find the less transparent OTC markets a more attractive 
alternative to achieve their investment and hedging objectives, leading 
to a retreat from the listed options markets, where trades are subject 
to reporting requirements and daily surveillance.\40\ The Exchange 
further states that the Commission previously highlighted competition 
with the OTC markets as a reason for increasing the standard position 
and exercise limits.\41\
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    \37\ See id.
    \38\ See id.
    \39\ See id.
    \40\ See id.
    \41\ See id. at n.16 (citing Securities Exchange Act Release No. 
40875 (Dec. 31, 1998), 64 FR 1842 (Jan. 12, 1999) (SR-CBOE-1998-
25)).
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    The Exchange states that the proposal will allow market 
participants to more effectively execute their trading and hedging 
activities and allow market makers to maintain their liquidity in these 
options in amounts commensurate with the continued high consumer demand 
in the market for the underlying securities.\42\ The Exchange states 
that the proposed higher position limits also may encourage other 
liquidity providers to continue to trade on the Exchange rather than 
shift their volume to OTC markets, which will enhance the process of 
price discovery conducted on the Exchange through increased order 
flow.\43\
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    \42\ See Notice, 88 FR at 86704.
    \43\ See id.
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    In addition, the Exchange believes that the current liquidity in 
shares of and options on the underlying securities will mitigate 
concerns regarding potential manipulation of the products and/or 
disruption of the underlying markets upon increasing the relevant 
position limits.\44\ The Exchange states that, as a general principle, 
increases in active trading volume and deep liquidity of the underlying 
securities do not lead to manipulation and/or disruption.\45\ The 
Exchange further states that this general principle applies to the 
recently observed increased levels of trading volume and liquidity in 
shares of and options on the underlying securities, and, as a result, 
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 higher position limit categories.\46\ In 
addition, the Exchange expects continued options volume growth as 
opportunities for investors to participate in the options markets 
continue to increase and evolve.\47\ The Exchange states that it 
continues to maintain a process in which, every six months, the status 
of the underlying securities are reviewed to determine what limit 
should apply.\48\ The Exchange states that, accordingly, if the stock 
trading volume and/or outstanding shares for particular securities 
significantly decline in the future, the overlying options classes will 
be moved to a lower corresponding position limit under the rules at the 
next regularly scheduled review.\49\ The Exchange states that the 
proposed rule change to adopt increased position limits for actively 
traded options is not novel, and that the Commission has previously 
expressed the belief that not just increasing, but 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.\50\
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    \44\ See id.
    \45\ See id.
    \46\ See id.
    \47\ See id.
    \48\ See id.
    \49\ See id.
    \50\ See id. at n. 22 (citing Securities Exchange Act Release 
No. 40969 (Jan. 22, 1999), 64 FR 4911, 4913 (Feb. 1, 1999) (SR-CBOE-
98-23)).
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    The Exchange states that the Commission has approved similar 
Exchange proposals to increase position limits for options on highly 
liquid and actively traded exchanged-traded products (``ETP(s)'') 
(e.g., iShares Russell 2000 ETF (``IWM''), iShares MSCI Emerging 
Markets ETF (``EEM''), iShares China Large-Cap ETF (``FXI''), iShares 
MSCI EAFE ETF (``EFA''), VanEck Vectors Gold Miners ETF (``GDX''), and 
iShares iBoxx $ Investment Grade Corporate Bond ETF (``LQD'')).\51\ The 
Exchange states that although those proposals related to options on 
ETPs and the current proposal applies to equity options,\52\ pursuant 
to Rule 8.30, the position limits for options on stock and ETPs are 
generally calculated in the same manner and based in part on trading 
volume of the underlying.\53\ The Exchange states that, by way of 
comparison, the amount of outstanding shares of AAPL stock is 
significantly higher than that of IWM, EEM, FXI and EFA, which have an 
overlying options position limit of 1,000,000 contracts (as compared to 
the 250,000-contract limit for AAPL options).\54\ The Exchange states 
that AAPL currently has nearly 16 billion shares outstanding, and the 
outstanding shares of IWM, EEM, FXI and EFA range between approximately 
187 million and 673 million.\55\ The Exchange also states that the 
criteria under the proposed new position limits of 1,000,000 and 
2,000,000 for equity options require the most recent six-month trading 
volume of the underlying security to have totaled at least 1 billion or 
5 billion shares, respectively, or have at least 3 billion or 15 
billion shares, respectively, of the underlying security 
outstanding.\56\ The Exchange further states that the proposed criteria 
under the 500,000-contract limit category

[[Page 19625]]

requires the most recent six-month trading volume of the underlying 
security to have totaled at least 500 million shares or have at least 
1.5 billion shares of the underlying security outstanding.\57\ The 
Exchange states that, in comparison, LQD and GDX have approximately 275 
million shares and 395 million shares outstanding, and have an 
overlying options position limit of 500,000 contracts.\58\ The Exchange 
states that it is therefore reasonable and appropriate to increase the 
position limit of options, as proposed, to similar position limits that 
apply for certain ETPs.\59\
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    \51\ See Notice, 88 FR at 86704, n. 23 (citing Securities 
Exchange Act Release Nos. 93525 (Nov. 4, 2021), 86 FR 62584 (Nov. 
10, 2021) (SR-CBOE-2021-029); 88768 (Apr. 29, 2020), 85 FR 26736 
(May 5, 2020) (SR-CBOE-2020-015); 83415 (June 12, 2018), 83 FR 28274 
(June 18, 2018) (SR-CBOE-2018-042); and 68086 (Oct. 23, 2012), 77 FR 
65600 (Oct. 29, 2012) (SR-CBOE-2012-066)).
    \52\ The Commission notes that the equity options encompassed by 
the proposal include both stock options and ETP options.
    \53\ See Notice, 88 FR at 86704.
    \54\ See id.
    \55\ See id.
    \56\ See id. The Exchange states that there is also a 
corresponding recent six-month volume of the underlying security 
requirement that must be satisfied in addition to the requirement 
relating to total outstanding shares. See id. at n. 25.
    \57\ See Notice, 88 FR at 86704. The Exchange states that there 
is also a corresponding recent six-month volume of the underlying 
security requirement that must be satisfied in addition to the 
requirement relating to total outstanding shares. See id. at n. 26.
    \58\ See Notice, 88 FR at 86704.
    \59\ See id.
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    The Exchange states that existing surveillance and reporting 
safeguards are designed to deter and detect possible disruptive or 
manipulative trading behavior that might arise from increasing position 
and exercise limits in certain classes.\60\ The Exchange represents 
that it has adequate surveillances in place to detect potential 
manipulation, as well as reviews in place to identify continued 
compliance with the Exchange's listing standards.\61\ The Exchange 
states that daily monitoring of market activity is performed via 
automated surveillance techniques to identify unusual activity in both 
options and the underlying securities, as applicable.\62\
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    \60\ See Notice, 88 FR at 86703.
    \61\ See id.
    \62\ See id.
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    The Exchange also states that the reporting requirement for equity 
options would remain unchanged, and, accordingly, that the Exchange 
would continue to require that each trading permit holder (``TPH'') or 
TPH organization that maintains positions in impacted 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.\63\ The Exchange 
states that this information includes the options positions, whether 
the positions are hedged, and a description of any hedge(s).\64\ The 
Exchange states that although market makers (including the Exchange's 
designated primary market makers) would continue to be exempt from this 
reporting requirement, the Exchange may access market maker position 
information.\65\ The Exchange further states that the Exchange's 
requirement that TPHs file reports with the Exchange for any customer 
who held aggregate long or short positions on the same side of the 
market of 200 or more option contracts of any single class for the 
previous day (referred to as large option position reporting or 
``LOPR'') will remain at this level and continue to serve as an 
important part of the Exchange's surveillance efforts.\66\ The Exchange 
also states that large stock holdings must be disclosed to the 
Commission by way of Schedules 13D or 13G, 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.\67\
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    \63\ See id.
    \64\ See id.
    \65\ See id.
    \66\ See id. and Rule 8.43.
    \67\ See Notice, 88 FR at 86703.
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    The Exchange also believes that the current financial requirements 
imposed by the Exchange and by the Commission adequately address 
concerns regarding potentially large, unhedged positions in equity 
options.\68\ In this vein, the Exchange states that 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 TPH must maintain for a large position held by itself or by its 
customer.\69\ In addition, Rule 15c3-1 \70\ imposes a capital charge on 
TPHs to the extent of any margin deficiency resulting from the higher 
margin requirement.\71\
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    \68\ See id.
    \69\ See id. and Rule 10.3.
    \70\ 17 CFR 240.15c3-1.
    \71\ See Notice, 88 FR at 86703.
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III. Summary of Comments Received

    The Commission has received three comment letters regarding the 
proposal.\72\ All three commenters expressed support for the proposal. 
Two commenters stated that the current position limits have remained 
unchanged for 18 years, despite significant increases in options 
trading volume,\73\ and one stated that the position limits should be 
modernized.\74\ One commenter stated that position limits that are too 
low impede trading activity and the ability of market participants to 
implement investment strategies in names with large market 
capitalizations.\75\ Another commenter stated that the current position 
limits could limit hedging in accounts that are treated as acting in 
concert but have different trading strategies.\76\ The commenter 
further stated that there has been a steady increase in the number of 
accounts that approach the current highest position limit of 250,000 
contracts.\77\ Another commenter stated that the current position 
limits have limited the trading volume for some equity options and 
suggested that the current limits have negatively impacted liquidity 
and execution prices in some cases.\78\ Commenters stated that the 
proposal would lead to a more liquid and competitive market for equity 
options,\79\ and would help to address concerns associated with the 
temporary increase in option position limits following a stock split 
and the subsequent reversion to pre-split position limits.\80\ In 
addition, one commenter stated that existing surveillance procedures 
and reporting requirements would remain in place and help the Exchange 
and other self-regulatory organizations identify disruptive and/or 
manipulative trading activity.\81\ Another commenter stated that 
Commission and Exchange financial requirements limit a member firm's 
ability to establish a large unhedged position in equity options, and 
that the OCC and prime brokers review accounts for concentration risk 
in single securities like equity options.\82\
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    \72\ See supra note 4.
    \73\ See AIMA Letter at 1-2; and SIFMA Letter at 1.
    \74\ See AIMA Letter at 1.
    \75\ MFA Letter at 1.
    \76\ See SIFMA Letter at 2.
    \77\ See id.
    \78\ See AIMA Letter at 2.
    \79\ See AIMA Letter at 2; SIFMA Letter at 2.
    \80\ See MFA Letter at 2; SIFMA Letter at 2.
    \81\ See AIMA Letter at 2; see also SIFMA Letter at 3.
    \82\ See SIFMA Letter at 3.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2023-063 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \83\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposed rule change, as discussed below. Institution of 
proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved. Rather, as 
described below, the Commission seeks and encourages interested persons 
to provide comments on the proposed rule change.
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    \83\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\84\ the Commission is 
providing

[[Page 19626]]

notice of the grounds for disapproval under consideration. The 
Commission is instituting proceedings to allow for additional analysis 
of the proposed rule change's consistency with Section 6(b)(5) of the 
Act,\85\ 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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    \84\ 15 U.S.C. 78s(b)(2)(B).
    \85\ 15 U.S.C. 78f(b)(5).
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the [Act] 
and the rules and regulations issued thereunder . . . is on the self-
regulatory organization that proposed the rule change.'' \86\ The 
description of a proposed rule change, its purpose and operation, its 
effect, and a legal analysis of its consistency with applicable 
requirements must all be sufficiently detailed and specific to support 
an affirmative Commission finding,\87\ and any failure of a self-
regulatory organization to provide this information may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Act and the 
applicable rules and regulations.\88\
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    \86\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \87\ See id.
    \88\ See id.
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    As discussed above, the Exchange has proposed to increase the 
position and exercise limits for equity options by establishing new, 
additional position limits of 500,000 contracts, 1,000,000 contracts, 
and 2,000,000 contracts. The proposed position and exercise limits 
would be available for options with underlying securities that meet 
specified requirements with respect to six-month trading volume or six-
month trading volume and number of shares outstanding.\89\ The Exchange 
states that since the current position limits were last updated, there 
has been an almost seven-fold increase in the overall volume of 
exchange-traded equity options and a steady increase in the number of 
accounts that approach the current highest position limit of 250,000 
contracts.\90\ Commenters reiterated the Exchange's statements, 
asserting that current option volumes justify a position limit increase 
and that the number of accounts approaching the current limits has 
steadily increased.\91\
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    \89\ See supra notes 19-21 and accompanying text.
    \90\ See Notice, 88 FR at 86702. The Commission notes that 
certain ETP options have positions limits that are higher than 
250,000 contracts, which limits are set forth in Int. .07 to Rule 
8.30. 250,000 contracts is the current maximum position limit set 
forth in Int. .02 to Rule 8.30 for stock options and ETP options not 
identified in Int. .07.
    \91\ See AIMA Letter at 1-2; SIFMA Letter at 1-2.
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    Position and exercise limits serve as a regulatory tool designed to 
address the potential for manipulative schemes and adverse market 
impact surrounding the use of options.\92\ The proposal would establish 
new equity option position limits that are substantially larger than 
the existing maximum limit and would affect a significant number of 
option classes. The proposed new maximum equity option position and 
exercise limit of 2,000,000 contracts represents an eightfold increase 
over the current maximum equity option position and exercise limit of 
250,000 contracts. In contrast, when the current maximum limit of 
250,000 contracts was approved, it represented a three and one-third 
fold increase over the then-existing maximum equity option position and 
exercise limit of 75,000 contracts.\93\ The additional proposed equity 
option position and exercise limits of 1,000,000 contracts and 500,000 
contracts represent, respectively, a fourfold increase over and a 
doubling of the current maximum limit. These proposed increases--
particularly the proposed increase to 2,000,000 contracts--represent a 
significant increase in the size of equity options positions that 
market participants would be able to establish on a given side of the 
market, and raise the potential for adverse impacts in the markets for 
the underlying equity securities and for manipulative schemes.
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    \92\ See, e.g., Securities Exchange Act Release No. 68086 (Oct. 
23, 2012), 77 FR 65600 (Oct. 29, 2012) (SR-CBOE-2012-066).
    \93\ See, e.g., Securities Exchange Act Release No. 51244 (Feb. 
23, 2005), 70 FR 10010 (Mar.1, 2005) (File No. SR-CBOE-2003-30) 
(order approving two option position and exercise limit programs on 
a pilot basis) (``Pilot Approval''); and Securities Exchange Act 
Release No. 57352 (Feb.19, 2007), 73 FR 10076 (Feb. 25, 2008) (File 
No. SR-CBOE-2008-007) (order granting permanent approval of two 
option position and exercise limit pilot programs) (``Pilot 
Permanent Approval,'' and together with the ``Pilot Approval,'' the 
``Pilot Programs''). In addition to increasing the maximum equity 
option position limit from 75,000 to 250,000 contracts, the Pilot 
Programs increased other equity option position and exercise limits 
as follows: the 13,500-contact limit was increased to 25,000 
contracts; the 22,500-contract limit was increased to 50,000 
contracts; the 31,500-contract limit was increased to 75,000 
contracts; and the 60,000-contract limit was increased to 200,000 
contracts.
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    The Exchange states that the overall increase in options volumes 
since the equity option position limits were last updated justifies the 
Exchange's proposal. But options volume is not part of the eligibility 
criteria for any equity option position limit. The Exchange does not 
explain how overall option volume establishes that the proposed 
position limits are consistent with the Act. The Exchange sets forth no 
data or analysis as to why each proposed position limit is appropriate 
or as to why each proposed limit's underlying security share trading 
volume or share trading volume plus shares outstanding thresholds 
appropriately correspond to the particular limit. The Commission 
therefore has no basis to conclude, for example, that a 2,000,000-
contract limit is appropriate for equity options where the most recent 
six-month trading volume of the underlying security totaled at least 
5,000,000,000 shares or where the most recent six-month trading volume 
of the underlying security totaled at least 3,750,000,000 shares and 
the underlying security had at least 15,000,000,000 shares currently 
outstanding. Likewise, while the Exchange and commenters assert that 
the number of accounts approaching the current maximum position limit 
has increased, the Exchange provides no data or detail to support these 
assertions, such as, for example, the number of accounts that have 
approached the current maximum limit.\94\
---------------------------------------------------------------------------

    \94\ See, e.g., Pilot Permanent Approval, supra note 93 (setting 
forth data showing, among other things, the number of accounts 
approaching the pilot position limits).
---------------------------------------------------------------------------

    The Exchange puts forth AAPL as an example of an equity option for 
which a position limit increase is warranted, stating that, as a result 
of the AAPL stock split in August 2020, the 250,000-contract limit that 
applies to AAPL options represents 0.156% of the post-split shares 
outstanding, a level that the Exchange characterizes as not 
meaningfully related to the current shares outstanding.\95\ The 
Exchange also states that, under the proposal, by contrast, a 
2,000,000-contract limit for AAPL options would result in maximum 
ownership of 1.25% of outstanding shares, which the Exchange states is 
well within ratios provided by the prior methodology. But an equity 
option's underlying security share trading volume is a necessary metric 
in the determination of the appropriate position limit, aside from 
consideration of the number of outstanding shares of the underlying 
security or what proportion of those shares would be represented by an 
option position that is at the maximum limit. As noted above, the 
Exchange does not explain how it

[[Page 19627]]

determined that the proposed underlying security share trading volume 
eligibility criteria for each proposed position limit justifies the 
corresponding limit, nor has the Exchange done so in the particular 
case of AAPL options.
---------------------------------------------------------------------------

    \95\ See Notice, 88 FR at 86702.
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    The Exchange further states that the current 250,000-contract limit 
for AAPL options forces market participants to reduce trading activity, 
and that ``[t]his reduction in trading volume also represents a 
reduction in available liquidity and negatively impacts liquidity, 
trading volume, and possibly execution prices.'' \96\ Commenters also 
stated that the current position limits impede trading and hedging 
activity, and suggested that the current limits have negatively 
impacted liquidity and execution prices.\97\ But the Exchange provides 
no analysis or data to support these assertions, such as the types of 
trading activity that may be limited by the current position limit 
levels or data showing, for example, wider quote spreads or reduced 
quote sizes in AAPL or other equity options.
---------------------------------------------------------------------------

    \96\ Id.
    \97\ See MFA Letter at 1; SIFMA Letter at 2; AIMA Letter at 2.
---------------------------------------------------------------------------

    In addition, as discussed above, the Exchange states that, as of 
October 12, 2023, over 300 equity options classes that currently are 
limited to the maximum position limit of 250,000 contracts would 
qualify for one of the three proposed new position limits, with 182 
equity options classes eligible for the 500,000-contract limit, 110 
equity options classes eligible for the 1,000,000-contract limit, and 
13 equity options classes eligible for the 2,000,000-contract 
limit.\98\ The proposed position limits would apply not only to options 
on stock, but also to options on ETPs. Indeed, the Commission 
understands that the proposal encompasses equity options with a variety 
of underlying exposures including, for example, commodity-based ETPs, 
volatility-based ETPs, leveraged and inverse leveraged ETPs, and 
American Depository Receipts (``ADRs''). The proposal gives no 
consideration to the heterogeneity among the securities underlying the 
options covered by the proposal or whether differences in underlying 
exposures present different levels of risk of adverse market impact.
---------------------------------------------------------------------------

    \98\ See Notice, 88 FR at 86702. The Commission understands 
that, based on more recent statistics, over 400 equity option 
classes would qualify for a position limit increase under the 
proposal.
---------------------------------------------------------------------------

    The Exchange also seeks to justify the proposal in part by 
providing a comparative analysis of options on certain broad-based 
index exchange-traded funds (``ETFs'') that currently have position 
limits of 500,000 or 1,000,000 contracts.\99\ But the proposal does not 
provide sufficient information to explain why the underlying markets 
for the broad-based index ETFs are sufficiently comparable to the 
market for stock, or sufficient information to independently support a 
finding that the proposed position limits would not have an adverse 
market impact. Unlike an ETF, a stock is not subject to the creation 
and redemption processes that apply to ETFs, nor to the issuer 
arbitrage mechanisms that help to keep an 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. The Commission 
previously has considered how these processes and mechanisms may serve 
to mitigate the potential price impact that might otherwise result from 
increased position limits for an ETF option.\100\
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    \99\ See Notice, 88 FR at 86704; see also Rule 8.30, Int. 07.
    \100\ See Securities Exchange Act Release No. 93525 (Nov. 4, 
2021), 86 FR 62584, 62587 (Nov. 10, 2021) (order approving File No. 
SR-Cboe-2021-029).
---------------------------------------------------------------------------

    Further, Rule 8.30, Int. .07 provides bespoke position limits for 
certain ETF options that are higher than the current maximum position 
limit of 250,000 contracts set forth in Rule 8.30, Int. .02, including 
a 1,800,000-contract limit for options on the PowerShares QQQ Trust 
(``QQQ''), and a 500,000-contract limit for options on each of the 
following ETFs: LQD, GDX, the iShares MSCI Brazil Capped ETF (``EWZ''), 
the iShares iBoxx High Yield Corporate Bond Fund (``HYG''), the iShares 
20+ Year Treasury Bond Fund ETF (``TLT''), and the Financial Select 
Sector SPDR Fund (``XLF''). The Commission understands that, under the 
proposal, these ETF options could qualify for position limits higher 
than those set forth in Rule 8.30, Int. .07 by satisfying proposed Rule 
8.30, Int. .02's share volume or share volume plus shares outstanding 
thresholds for the proposed 2,000,000-contract limit in the case of QQQ 
options and the proposed 1,000,000-contract limit in the cases of the 
other aforementioned ETF options. But the proposal does not set forth 
corresponding revisions to Rule 8.30, Int. .07 to account for this or 
otherwise address what these ETF options' position limits would be 
under the proposal. As a result, the position limits set forth in Rule 
8.30, Int .07 for certain ETF options could be lower than the proposed 
position limits that these ETF options could qualify for in proposed 
Rule 8.30, Int. .02, rendering it unclear what position limit would 
apply to these options under the proposal.
    Accordingly, the Exchange has not provided an adequate basis for 
the Commission to conclude that the proposal would be consistent with 
Section 6(b)(5) of the Act.

V. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their data, views, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule change 
is consistent with Section 6(b)(5), or any other provision of the Act, 
or the rules and regulations thereunder. Although there do not appear 
to be any issues relevant to approval or disapproval which would be 
facilitated by an oral presentation of data, views, and arguments, the 
Commission will consider, pursuant to Rule 19b-4 under the Act,\101\ 
any request for an opportunity to make an oral presentation.\102\
---------------------------------------------------------------------------

    \101\ 17 CFR 240.19b-4.
    \102\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants to 
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is 
appropriate for consideration of a particular proposal by a self-
regulatory organization. See Securities Acts Amendments of 1975, 
Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 
94th Cong., 1st Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by April 9, 2024. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
April 23, 2024. The Commission asks that commenters address the 
sufficiency of the Exchange's statements in support of the proposal, 
which are set forth in the Notice,\103\ in addition to any other 
comments they may wish to submit about the proposed rule change. In 
particular, the Commission seeks comment on the following questions and 
asks commenters to submit data where appropriate to support their 
views:
---------------------------------------------------------------------------

    \103\ See supra note 3.
---------------------------------------------------------------------------

    1. Has the Exchange demonstrated that the proposed position limit 
increases are appropriate based on the share trading volumes and shares 
outstanding of the securities underlying the equity options that would 
be

[[Page 19628]]

covered by the proposal? Has the Exchange adequately explained the need 
for the proposed 2,000,000-contract limit? Would a more measured, 
incremental approach, beginning with an increase in the maximum 
position limit to a level less than 2,000,000 contracts, be more 
appropriate as a means of implementing an equity option position limit 
increase? If so, what would be an appropriate maximum limit? If not, 
why?
    2. Has the Exchange provided sufficient data and analysis to 
support a conclusion that the proposed position limit increases should 
not result in attempted manipulations of the underlying securities or 
in adverse market impacts, such as disruptions in the markets for the 
underlying securities? As discussed above, the proposal would 
significantly increase the position limits for options on a large 
number of underlying securities. The proposal discusses trading in AAPL 
but provides no discussion or analysis of the trading volume and other 
characteristics of the many other underlying securities that also would 
be subject to options position limit increases under the proposal. Are 
the proposed position limit increases also appropriate for the many 
equity options on underlying securities with lower share trading 
volumes and numbers of shares outstanding than AAPL that would qualify 
for higher limits under the proposal?
    3. Are the proposed position limits appropriate for all of the 
equity options covered by the proposal in light of the heterogeneity in 
their underlying instruments? For example, should options on commodity-
based ETPs be subject to the same position limits as options on stock? 
Should position limits for options on commodity-based ETPs consider the 
available supply in the markets for the commodity on which the ETP is 
based? As other examples, the proposal would encompass options on 
volatility-based ETPs, leveraged or inverse leveraged ETPs, and ADRs 
that provide non-U.S. market exposure. What are commenters views as to 
the appropriateness of increasing position limits for these equity 
options or any other type of equity option that is not based on U.S. 
company stock exposure?
    4. Should the proposed position limit increases be implemented on a 
pilot basis to allow the Exchange to assess the impact of the proposed 
position limit increases on the markets for the underlying securities? 
If so, what pilot data should be collected?
    5. The Exchange states that existing surveillance procedures as 
well as, among other things, TPH option position and hedge reporting 
requirements and LOPR for customer positions are adequate to identify 
violative and/or disruptive trading activity. Do commenters agree that 
existing surveillance and reporting mechanisms will be adequate if 
equity option position limits are increased as the Exchange has 
proposed? Are current intra-day surveillance procedures capable of 
monitoring the intra-day trading in underlying securities by large 
option position holders that could have a strong incentive to 
manipulate an options settlement price, a practice known as ``marking 
the close'' or ``marking the open?'' To what extent are such 
surveillance procedures conducted on a manual or automated basis?
    6. The Exchange and commenters suggest that the existing position 
limits unnecessarily restrict market participants' trading or hedging 
strategies. The Commission understands that multi-strategy funds that 
employ relative value trading strategies may be one example where this 
is the case. Can commenters provide other examples of trading or 
hedging strategies that are impeded by the current position limits? 
Would higher position limits facilitate the execution of relative value 
strategies or other trading strategies on exchanges?
    7. The Exchange states that listed option position limits that are 
too restrictive may cause market participants to find the OTC market 
for conventional options a more attractive alternative to achieve their 
investment and hedging objectives, leading to a retreat from the listed 
options markets.\104\ Can commenters provide data or analysis to 
support the notion that the existing equity option position limits 
cause trades to occur in the OTC market that otherwise would occur in 
listed options on exchanges if the position limits were higher? Can 
commenters provide data or analysis to support the notion that equity 
option position limit increases would result in the migration of equity 
option trading interest from the OTC market to exchanges? Customizable 
FLEX equity options generally are not subject to position limits with 
the exceptions of FLEX equity options with third-Friday-of-the-month 
expirations and certain FLEX equity options that are cash-settled.\105\ 
Do FLEX equity options serve market participants' needs for an 
alternative to standardized, listed equity options? In contrast to FLEX 
equity options, OTC equity options are subject to position limits. If 
the listed, standardized option position limits restrict market 
participants' ability to implement their trading strategies, why would 
market participants seek to utilize OTC equity options instead of FLEX 
equity options given that OTC equity options are subject to position 
limits whereas FLEX equity options generally are not? Historically, a 
justification for not imposing position limits on FLEX equity options 
has been that this would encourage exchange trading of listed options 
instead of OTC option trading.\106\ Are commenters able to provide 
evidence that the general lack of FLEX equity option position limits 
has had this effect?
---------------------------------------------------------------------------

    \104\ See Notice, 88 FR at 86703.
    \105\ See, e.g., Rule 8.35(c).
    \106\ See, e.g., Securities Exchange Act Release No. 42223 (Dec. 
10, 1999), 64 FR 71158 (Dec. 20, 1999).
---------------------------------------------------------------------------

    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 No. SR-CBOE-2023-063 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-2023-063. 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 (https://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 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or

[[Page 19629]]

withhold entirely from publication submitted material that is obscene 
or subject to copyright protection. All submissions should refer to 
file number SR-CBOE-2023-063 and should be submitted by April 9, 2024. 
Rebuttal comments should be submitted by April 23, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\107\
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    \107\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-05633 Filed 3-18-24; 8:45 am]
BILLING CODE 8011-01-P