
[Federal Register Volume 81, Number 248 (Tuesday, December 27, 2016)]
[Notices]
[Pages 95219-95225]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31102]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79610; File No. SR-CBOE-2016-090]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to Compression of S&P 500(R) Index 
Options Positions

December 20, 2016.
    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 December 15, 2016, Chicago Board Options Exchange, Incorporated 
(``CBOE'' or the ``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 Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt Rule 6.56 regarding ``compression 
forums.'' The text of the proposed rule change is available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to adopt Rule 6.56 (Compression Forums) to 
describe the Exchange's ``compression forum'' process. Under proposed 
Rule 6.56, the Exchange would facilitate closing-only transactions in 
series of S&P 500(R) Index (``SPX'') options on the final three trading 
days of each calendar month as described below.
Background
    The Exchange's proposal is intended to provide a procedure for 
Trading Permit Holders (``TPHs'') to efficiently reduce open positions 
in series of SPX options at the end of each calendar month in order to 
mitigate the effects of capital constraints on market participants and 
help ensure continued depth of liquidity in the SPX options market.
    SEC Rule 15c3-1 (Net Capital Requirements for Brokers or Dealers) 
(``Net Capital Rules'') requires that every registered broker-dealer 
maintain certain specified minimum levels of capital.\3\ The Net 
Capital Rules are designed to protect securities customers, 
counterparties, and creditors by requiring that broker-dealers have 
sufficient liquid resources on hand, at all times, to meet their 
financial obligations. Notably, hedged positions, including offsetting 
futures and options contract positions, result in certain net capital 
requirement reductions under the Net Capital Rules.\4\
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    \3\ 17 CFR 240.15c3-1.
    \4\ In addition, the Net Capital Rules permit various offsets 
under which a percentage of an option position's gain at any one 
valuation point is allowed to offset another position's loss at the 
same valuation point (e.g. vertical spreads).
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    All Options Clearing Corporation (``OCC'') clearing members are 
subject to the Net Capital Rules. However, a subset of clearing members 
are subsidiaries of U.S. bank holding companies, which, due to their 
affiliations with their parent U.S. bank holding companies, must comply 
with additional bank regulatory capital requirements pursuant to 
rulemaking required under the Dodd-Frank Wall Street Reform and 
Consumer Protection Act.\5\ Pursuant to this mandate, the Board of 
Governors of the Federal Reserve System, the Office of the Comptroller 
of the Currency, and the Federal Deposit Insurance Corporation

[[Page 95220]]

have approved a comprehensive regulatory capital framework for 
subsidiaries of U.S. bank holding company clearing firms.\6\ Generally, 
these rules impose higher minimum capital requirements, more 
restrictive capital eligibility standards, and higher asset risk 
weights than were previously mandated for clearing members that are 
subsidiaries of U.S. bank holding companies under the Net Capital 
Rules. Furthermore, the new rules do not permit deductions for hedged 
securities or offsetting options positions.\7\ Rather, capital charges 
under these standards are based on the aggregate notional value of 
short positions regardless of offsets. As a result, Clearing Trading 
Permit Holders (``CTPHs'') generally must hold substantially more bank 
regulatory capital than would otherwise be required under the Net 
Capital Rules. The impact of these regulatory capital rules are 
compounded in the SPX options market due to the large notional value of 
SPX contracts.
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    \5\ H.R. 4173 (amending section 3(a) of the Act) (15 U.S.C. 
78c(a))).
    \6\ 12 CFR 50; 79 FR 61440 (Liquidity Coverage Ratio: Liquidity 
Risk Measurement Standards).
    \7\ Many options strategies, including relatively simple 
strategies often used by retail customers and more sophisticated 
strategies used by market-makers and institutions, are risk-limited 
strategies or options spread strategies that employ offsets or 
hedges to achieve certain investment outcomes. Such strategies 
typically involve the purchase and sale of multiple options (and may 
be coupled with purchases or sales of the underlying assets), 
executed simultaneously as part of the same strategy. In many cases, 
the potential market exposure of these strategies is limited and 
defined. Whereas regulatory capital requirements have historically 
reflected the risk-limited nature of carrying offsetting positions, 
these positions may now be subject to large regulatory capital 
requirements. Various factors, including administration costs; 
transaction fees; and limited market demand or counterparty 
interest, however, discourage market participants from closing these 
positions even though many market participants likely would prefer 
to close the positions rather than carry them to expiration.
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    The Exchange believes that these regulatory capital requirements 
could impede efficient use of capital and undermine the critical 
liquidity role that Market-Makers play in the SPX options market by 
limiting the amount of capital CTPHs can allocate to clearing member 
transactions. Specifically, the rules may cause CTPHs to impose 
stricter position limits on their clearing members. These stricter 
position limits may impact the liquidity Market-Makers might supply in 
the SPX market, and this impact may be compounded when a CTPH has 
multiple Market-Maker client accounts, each having largely risk-neutral 
portfolio holdings.\8\
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    \8\ Several TPHs have indicated to the Exchange that these rules 
could hamper their ability to provide consistent liquidity in the 
SPX options market unless they reduce their positions in SPX by the 
end of the year.
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    The Exchange believes that permitting TPHs to reduce open interest 
in offsetting SPX options positions would have a beneficial effect on 
the bank regulatory capital requirements of CTPHs' parent companies 
without adversely affecting the quality of the SPX options market. 
Accordingly, the Exchange seeks to codify a process in the rules to 
encourage the compression of open interest in SPX at the end of each 
calendar month. The Exchange believes that periodic reductions in open 
interest would likely contribute additional liquidity and continued 
competitiveness to the SPX market. In addition, the Exchange believes 
that the proposed rule change will promote more efficient capital 
deployment in light of the regulatory capital requirements rules and 
help ensure depth of liquidity in the SPX options market.
Proposal
    Currently, TPHs seeking to reduce open interest in SPX options for 
regulatory capital purposes could simply trade out of positions at the 
end of each month as they would trade any open positions. However, the 
Exchange believes that wide-scale reduction of open interest in SPX 
options in such a manner is burdensome. First, the range of positions 
held by different TPHs in SPX varies greatly. In some cases, a TPH may 
hold positions in thousands of series of SPX. With no way of 
efficiently determining whether opposite (long/short) open interest is 
present in the trading crowd or whether there is counterparty interest 
for a particular closing transaction across multiple series, in order 
to close a position, a TPH would need to represent an order and wait 
for a response, if any. Second, given that there are more than 10,000 
series of SPX held by numerous TPHs, attempting to close positions 
during normal trading is inefficient and sometimes ineffective. 
Accordingly, the Exchange proposes to adopt a procedure to facilitate 
these types of transactions on the Exchange in proposed Rule 6.56. The 
Exchange believes that its proposal would allow TPHs seeking to close 
positions in SPX options to more easily identify counterparty interest 
and efficiently conduct closing transactions in SPX options on the 
Exchange without interfering with normal SPX trading.
    In general, the process described in proposed Rule 6.56 would 
permit TPHs to submit lists of open positions to the Exchange that they 
wish to close against opposing (long/short) positions of other TPHs, 
which the Exchange would then aggregate into a single list that would 
allow TPHs to more easily identify those positions with counterparty 
interest on the Exchange. The Exchange would then provide a forum in 
the SPX trading crowd during which TPHs could conduct closing-only 
transactions in series of SPX options.
    The procedure for conducting a compression forum would be set forth 
in paragraph (a) to proposed Rule 6.56. Under paragraph (a)(1), prior 
to the close of Regular Trading Hours on the fourth to last business 
day of each calendar month, in a manner and format determined by the 
Exchange, a TPH could provide the Exchange with a list of open SPX 
options positions with either a required capital charge equal to the 
minimum capital charge pursuant to the risk-based haircut (``RBH'') 
calculator in OCC's rules \9\ or comprised of option series with a 
delta of ten \10\ (i.e.

[[Page 95221]]

0.1 or -0.1) or less that it would like to close during the compression 
forum for that calendar month (``compression-list positions''). 
Compression-list positions may consist of multi-legged positions in 
series of SPX options, which satisfy the conditions set forth in this 
paragraph of the proposed rule. The Exchange proposes to limit 
compression-list positions to those positions, the closing of which the 
Exchange believes would have the greatest impact on bank regulatory 
capital requirements and which also have little economic risk 
associated with them.\11\ The Exchange believes compression of these 
positions would improve market liquidity by freeing capital currently 
tied up in positions for which there is a minimal chance that a 
significant loss would occur.\12\
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    \9\ Under OCC rules, the required capital charge is equal to 
either the minimum capital charge or an amount equal to the largest 
potential loss pursuant to OCC's RBH calculator. The RBH methodology 
may be used to calculate theoretically based capital charges as set 
forth within the SEC net capital rule http://apps.theocc.com/pmc/pmc.do. For example, a Market-Maker has the following eight-leg 
position: Long 1000 Jan 1000 SPX calls, short 1000 Jan 2000 SPX 
calls, short 842 Jan 2500 SPX calls, short 89 Jan 2600 SPX calls, 
long 200 Jan 700 puts, short 200 Jan 750 SPX puts, short 1000 Jan 
1000 SPX puts, and long 1000 Jan 2000 SPX puts. Under OCC rules, the 
minimum capital charge for this position is $128,435. Using the RBH 
calculator, there is no potential loss that is greater than this 
amount; in fact, under each of the 10 equidistant theoretical 
valuation points of the underlying index, this strategy would net a 
profit. Therefore, the clearing firm incurs a charge of $128,435. 
However, as the RBH calculator values demonstrate, this is 
essentially a riskless position for which there is a minimal chance 
that a theoretical loss of $128,435 could ever occur. Therefore, 
this position is eligible for submission to the Exchange as a 
compression-list position, because the OCC theoretical minimum 
capital charge is larger than any potential loss that may result 
within the range of an 8% decrease to a 6% increase in the 
underlying index value. Alternatively, a Market-Maker has the 
following five-leg strategy position: Short 892 Jan 1400 SPX calls, 
short 80 Jan 1500 SPX calls, long 200 Jan 1950 SPX puts, short 200 
Jan 2000 SPX puts, and long 165 Jan 2100 SPX puts. Under OCC rules, 
the minimum capital charge for this position is $38,425. Using the 
RBH calculator, an increase in the underlying index value of 6% 
could cause this position to lose $12,801,718 (which is the highest 
potential loss under each of the 10 equidistant theoretical 
valuation points of the underlying index). Because this potential 
loss is larger than the theoretical minimum charge, the actual 
capital requirement is this amount of $12,801,718. This position is 
therefore not eligible for submission to the Exchange as a 
compression-list position, as there is a risk of a potential large 
loss on this position.
    \10\ Delta is the ratio comparing the change in the price of the 
underlying asset to the corresponding change in the price of a 
derivative. For example, if a stock option has a delta value of 
0.65, this means that if the underlying stock increases in price by 
$1, the option will rise by $0.65, all else equal. Delta values can 
be positive or negative depending on the type of option. For 
example, the delta for a call option always ranges from 0 to 1, 
because as the underlying asset increases in price, call options 
increase in price. Put option deltas always range from -1 to 0 
because as the underlying security increases, the value of put 
options decrease. For example, if a put option has a delta of -0.33, 
if the price of the underlying asset increases by $1, the price of 
the put option will decrease by $0.33. Generally speaking, an at-
the-money option usually has a delta of approximately 0.5 or -0.5.
    \11\ As further discussed below, positions on this list as well 
as other open SPX positions may be closed during a compression 
forum.
    \12\ This definition of compression-list positions is similar to 
the transaction fee rebate described in SR-CBOE-2015-117, which was 
adopted for reasons similar to those underlying this proposal. See 
Securities Exchange Act Release No. 76842 (January 6, 2016), 81 FR 
1455 (January 12, 2016) (Notice of Filing and Immediate 
Effectiveness of a Proposed Rule To Amend the Fees Schedule) (SR-
CBOE-2015-117).
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    Under paragraph (a)(1) to proposed Rule 6.56, TPHs may also permit 
their CTPHs or the Clearing Corporation to submit a list of these 
positions to the Exchange on their behalf.\13\ The Exchange recognizes 
that a CTPH or OCC may more easily identify all of the positions that 
are held across a TPH firm as well as those that will have the largest 
impact with respect to regulatory capital reductions. The Exchange 
believes that such assistance would help to facilitate the compression 
forum process further.
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    \13\ The Exchange notes that while CTPHs may request that their 
clients holding the out-of-the-money and riskless positions permit 
the CTPHs to attempt to close these positions out, firms are not 
required to do so (i.e., these transactions are voluntary and within 
the discretion of the CTPHs' clients).
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    Under paragraph (a)(2) of proposed Rule 6.56, prior to the open of 
Regular Trading Hours on the third to last business day of each 
calendar month, the Exchange would make available \14\ to all TPHs an 
aggregate two-sided (long/short) list of compression-list positions for 
which open interest has been submitted to the Exchange on both sides 
pursuant to paragraph (a)(1), including the aggregate size of open 
interest on each side of each series (``compression-list positions 
file'').\15\ This aggregate two-sided list may also include multi-
legged positions of SPX options with opposite open interest submitted 
to the Exchange according to the parameters described in paragraph 
(a)(1) to proposed Rule 6.56. This would allow the Exchange to identify 
multi-leg strategy orders with opposing interest of particular TPHs in 
the various series of the strategy (e.g. vertical spreads, calendar 
spreads, butterflies, iron condors). The Exchange believes that a list 
containing such multi-leg or complex positions may help facilitate a 
more efficient forum by facilitating closing transactions in multiple 
series at a time.
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    \14\ The Exchange expects to publish this list on its Web site.
    \15\ This list would not identify which TPH holds these 
positions.
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    Under paragraph (a)(3) to proposed Rule 6.56, in addition to making 
the compression-list positions file available to all TPHs, the Exchange 
would electronically send the compression-list positions file to the 
TPHs that submitted compression-list positions to the Exchange pursuant 
to paragraph (a)(1), including a list of those TPHs that contributed to 
the compression-list positions file. The list will not include the name 
of any TPH that requests its name be excluded from this list. Pursuant 
to paragraph (a)(3), TPHs would be identified as having contributed to 
the list only and would not be identified as holding any specific 
position. The Exchange believes this process to identify TPHs that seek 
to close compression-list positions in advance of a compression forum 
will increase opportunities for TPHs to ultimately close compression-
list positions during a compression forum while, at the same time, 
providing the opportunity for anonymity. TPHs that do not want to be 
listed as having contributed compression-list positions may inform the 
Exchange and will not be included in the listed TPHs.
    Under paragraph (a)(4) of proposed Rule 6.56, the Exchange would 
conduct an open outcry ``compression forum'' in which all TPHs may 
participate \16\ on each of the last three business days of every 
calendar month at a location on the trading floor determined by the 
Exchange. Compression forums would be held for four (4) hours during 
Regular Trading Hours on each of the last three business days of every 
calendar month, or three (3) hours if any of those days is an 
abbreviated trading day (such as the day before a holiday), at times 
determined by the Exchange. All such notices would be provided to TPHs 
reasonably in advance of any forum as announced via Regulatory Circular 
in accordance with paragraph (d) to proposed Rule 6.56 discussed below. 
The Exchange believes that multiple hours across multiple trading days 
will allow TPHs to close as many positions as possible during this 
process without interfering with normal SPX trading. In some cases, an 
appropriate counterparty may not be present in the crowd at [sic] 
particular time on a particular day when a TPH with an opposite 
position represents the position in the crowd. In other cases, a TPH 
may wish to break up a complex order into single legs after trying 
unsuccessfully to close the multi-leg positions or may have residual 
positions that could not be closed in full. Additionally, news may be 
reported causing a high amount of activity preventing TPHs for [sic] 
participating in the forum at certain times. The Exchange believes that 
the three-day format will provide TPHs sufficient time to close these 
positions in a forum without interfering with normal trading.
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    \16\ As compression forums will be conducted in open outcry, 
TPHs that may participate include Floor Brokers and Market-Makers 
with SPX appointments.
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    Under paragraph (b) of proposed Rule 6.56, trades executed during 
compression forums would be subject to trading rules applicable to 
trading in SPX during Regular Trading Hours, including manner of bids 
and offers and allocation and priority rules, except: (1) Only closing 
transactions in SPX options (including compression-list positions) may 
be executed during a compression forum; and (2) the minimum increment 
for all series will be $0.01 during a compression forum. In other 
words, although trades executed during a compression forum may only be 
closing transactions and may be in penny increments within a specified 
timeframe and at a specific location on the trading floor, trades 
executing during a compression forum will occur in the same manner as 
all other open outcry SPX trades, including in accordance with 
systemization requirements under Rule 6.24, and order allocation and 
priority rules under Rule 6.45B(b). The purpose of the compression 
forum would simply be to facilitate closing transactions in series of 
SPX options so that TPHs would have the opportunity to free up capital 
and eliminate riskless and low delta positions that they may otherwise 
hold until expiration.
    Notably, TPHs would not be required to submit a list of positions 
to the Exchange pursuant to paragraph (a)(1) in order to participate in 
a compression forum, and positions SPX series other

[[Page 95222]]

than compression-list positions may be closed during a compression 
forum, as long as it involves only closing transactions. The 
compression forums will be limited to closing only transactions, 
because if opening transactions were permitted during a compression 
forum, it would defeat the purpose of the proposed rule, which is to 
encourage the closing of positions that are creating high bank 
regulatory capital requirements, often with positions that are of low 
economic benefit and risk and could otherwise be offset. Similarly, the 
minimum increment for series traded during a compression forum will be 
$0.01 to further encourage closing of these positions. Because many 
series the Exchange expects to trade during the compression forum will 
be out-of-the-money, and essentially worthless, TPHs may not otherwise 
close positions in these series if a higher minimum increment causes 
the price to be too much higher than the option's value.
    Under paragraph (c) to proposed Rule 6.56, and as noted above in 
the example, TPHs would be permitted to communicate with other TPHs to 
determine: A TPH's open single-legged or multi-legged SPX positions 
and/or (2) whether a TPH anticipates participating in a compression 
forum at a particular date and time. During these communications, TPHs 
may not discuss the price of a potential transaction involving these 
positions during a compression forum. Trades executed during a 
compression forum pursuant to proposed Rule 6.56 and otherwise in 
compliance with the Rules would not be deemed prearranged trades in 
violation of the Rules.\17\ The purpose of the compression forum 
process is to facilitate closing transactions in series of SPX options 
between counterparties holding opposite open positions. The proposed 
rule is intended to help counterparties find one another so they can 
more efficiently trade out of open positions at the end of each 
calendar month. Communications between one another as to what positions 
they hold and when they will be available to potentially trade out of 
such positions will provide this efficiency and increase opportunities 
for TPHs to close these positions. Without communications regarding 
these logistics, it would be left to chance whether TPH with opposite 
positions would be present to close those positions during a 
compression forum, making it more difficult to close these positions. 
As long as communications are limited to which positions are held and 
timing of participation in a compression forum and do not include 
discussions of other elements of a potential trade, such as the price, 
the Exchange would not deem such communications to form the basis of a 
prearranged trade. The Exchange notes again all orders placed during a 
compression forum must be represented in the crowd and executed against 
the best responsive bid or offer, as they would during normal trading. 
Additionally, as noted above, all TPHs that are able to trade SPX on 
the trading floor may participate in a compression forum in accordance 
with the proposed procedure. TPHs participating in a compression forum 
must continue to comply with all other trading rules.
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    \17\ Under Section 9(a)(1) of the Act, it shall be unlawful for 
any member of a national securities exchange, for the purpose of 
creating a false or misleading appearance of active trading in any 
security registered on a national securities exchange or a false or 
misleading appearance with respect to the market for any such 
security, (A) to effect any transaction in such security which 
involves no change in the beneficial ownership thereof, or (B) to 
enter an order or orders for the purchase of such security with the 
knowledge that an order or orders of substantially the same size, at 
substantially the same time, and at substantially the same price, 
for the sale of any such security, has been or will be entered by or 
for the same or different parties. Prearranged trading could result 
in also result in [sic] a violation of CBOE Rule 4.1, which 
prohibits conduct inconsistent with just and equitable principles of 
trade, Rule 6.45A or 6.45B which addresses the priority of bids and 
offers, and/or Rule 10b-5 of the Act, which prohibits any act, 
practice or course of business which operates or would operate as a 
fraud or deceit upon any person, in connection with the purchase or 
sale of any security, respectively. See Regulatory Circular RG16-190 
(Prearranged Trades) (December 6, 2016).
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    Finally, paragraph (d) to proposed Rule 6.56 states the Exchange 
will announce to TPHs determinations it makes pursuant to the proposed 
rule via Regulatory Circular with reasonable notice.
    The following is an example of how the compression forum process 
would work under paragraph (a) of proposed Rule 6.56. On December 20, 
2016, the Exchange issues a regulatory circular stating a compression 
forum will be held on December 28 and 29 between 10:00 a.m. and 2:00 
p.m. each day, and on December 30 between 9:00 a.m. and 12:00 p.m. The 
circular and [sic] invites all TPHs to submit a password protected .CSV 
file containing SPX positions with either a required capital charge 
equal to the minimum capital charge under Clearing Corporation rules 
risk-based haircut calculator and/or positions in series of SPX options 
with a delta of ten (10) or less via email with appropriate security 
measures containing the following fields: MARKET PARTICIPANT; SYMBOL, 
EXPIRATION DATE, STRIKE, CALL/PUT (either call or put), and SIZE 
(negative size denoting short size). The circular notes that all 
submissions must be received by the Exchange no later than December 27, 
2016 at 3:15 p.m. Additionally, the circular notes a TPH should state 
in its email to CBOE if it does not want its name with the other 
submitting TPHs. Additionally, each submitting TPH must designate a 
point person.
    Prior to 3:15 p.m. on December 27, 2016, the Exchange receives the 
following .CSV files: XYZ closing postions.csv; ABC closing trades.csv; 
and 123 compression.csv.\18\
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    \18\ For purposes of this example, it is assumed that all the 
positions submitted to the Exchange by XYZ Trading, ABC Trading, and 
123 Trading are either positions with a delta of ten or less or 
positions with a required capital charge equal to the minimum 
capital charge under the risk-based haircut calculator in the 
Clearing Corporation rules.

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                                                        Expiration
       Market participant               Symbol             date           Strike       Call/put        Size
----------------------------------------------------------------------------------------------------------------
XYZ TRADING....................  SPXW                     12/30/2016            1500  C                     -125
XYZ TRADING....................  SPXW                     12/30/2016            1505  P                       25
XYZ TRADING....................  SPX                       1/20/2017            1610  P                      -75
XYZ TRADING....................  SPX                       1/20/2017            1700  P                     -166
XYZ TRADING....................  SPXW                       1/8/2016            1800  C                      250
XYZ TRADING....................  SPXW                       1/8/2016            1850  C                      500
XYZ TRADING....................  SPXW                       1/8/2016            1900  C                      250
XYZ TRADING....................  SPXW                     12/30/2016            2350  C                     -652
XYZ TRADING....................  SPXW                     12/30/2016            2460  C                    -1425
----------------------------------------------------------------------------------------------------------------


[[Page 95223]]


----------------------------------------------------------------------------------------------------------------
                                                        Expiration
       Market participant               Symbol             date           Strike       Call/put        Size
----------------------------------------------------------------------------------------------------------------
ABC TRADING....................  SPXW                     12/30/2016            1500  C                      -76
ABC TRADING....................  SPXW                     12/30/2016            1505  P                     -105
ABC TRADING....................  SPX                       2/17/2017            1850  P                     -166
ABC TRADING....................  SPXW                     12/30/2016            2350  C                      -62
ABC TRADING....................  SPXW                     12/30/2016            2460  C                      322
ABC TRADING....................  SPX                       2/17/2017            2500  P                      -50
----------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                                        Expiration
       Market participant               Symbol             date           Strike       Call/put        Size
----------------------------------------------------------------------------------------------------------------
123 TRADING....................  SPXW                     12/30/2016            1500  C                       50
123 TRADING....................  SPX                       1/20/2017            1610  P                     -105
123 TRADING....................  SPXW                       1/8/2016            1800  C                     -200
123 TRADING....................  SPXW                       1/8/2016            1850  P                     -400
123 TRADING....................  SPX                       2/17/2017            1850  C                     -107
123 TRADING....................  SPXW                       1/8/2016            1900  C                     -200
123 TRADING....................  SPXW                     12/30/2016            2350  P                      -62
123 TRADING....................  SPXW                     12/30/2016            2460  C                       25
123 TRADING....................  SPXW                     12/30/2017            2500  P                     -300
----------------------------------------------------------------------------------------------------------------

    The email identify the following point people: XYZ Trading Firm--
John Smith; ABC Trading Firm--Jane Doe; and 123 Trading Company--Sam 
Jones. No TPH requests to remain anonymous.
    The Exchange then aggregates the closing positions and publishes 
the aggregated position data on its Web site for series of SPX options 
with two-sided compression-list positions submitted to the Exchange. 
Additionally, it distributes the list, as well as the TPHs that 
submitted individual position lists, to those TPHs:

----------------------------------------------------------------------------------------------------------------
             Symbol                Expiration date       Strike        Call/put      Long size      Short size
----------------------------------------------------------------------------------------------------------------
SPXW...........................  12/30/2016........            1500  C                        50            -201
SPXW...........................  12/30/2016........            1505  P                        25            -105
SPXW...........................  1/8/2016..........            1800  C                       250            -200
SPXW...........................  1/8/2016..........            1850  P                       500            -400
SPXW...........................  1/8/2016..........            1900  C                       250            -200
SPXW...........................  12/30/2016........            2350  P                         0             -62
SPXW...........................  12/30/2016........            2460  C                       347           -1425
----------------------------------------------------
 
      Market participants          Designated lead
----------------------------------------------------
XYZ TRADING....................  John Smith
ABC TRADING....................  Jane Doe
123 TRADING....................  Sam Jones
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    Following the dissemination of the .CSV file, TPHs discuss the 
positions included in the disseminated .CSV file with the designated 
leads in order to determine when each intended to participate in an 
upcoming compression forum. Each TPH coordinates with another TPH that 
holds an opposite position when they will be present at one of the 
upcoming compression forums. During the compression forums held on 
December 28 through 30, these three TPHs conducted the following 
trades: \19\
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    \19\ This example assumes: (1) No customer orders are on the 
book at the same or better price of the compression forum 
transaction; (2) if two TPHs respond to an order represented in the 
compression forum, they do so at the same price and time and, thus, 
the order is allocated equally among them; and (3) no other TPHs 
enter the compression forum to attempt to participate in the trades.
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    1. 123 Trading sells 25 SPXW 12/30/16 1500 C to each of ABC Trading 
and XYZ Trading.
    2. XYZ Trading sells 25 SPXW 12/30/16 1505 P to ABC Trading.
    3. XYZ Trading sells 200 butterflies consisting of 200 SPXW 1/8/
2016 1800 C, 400 SPXW 1/8/2016 1850 C, and 200 SPXW 1/8/16 1900 C to 
123 Trading.
    4. 123 Trading sells 12 SPXW 12/30/2016 2460 C to each of ABC 
Trading and XYZ Trading (and the parties determine which of ABC Trading 
and XYZ Trading receive the extra contract).
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\20\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \21\ 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

[[Page 95224]]

the Section 6(b)(5) \22\ requirement that the rules of an exchange not 
be designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
    \22\ Id.
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    In particular, the Exchange believes the proposed rule change is 
reasonable, equitable, and does not unfairly discriminate against any 
market participants. The Exchange notes that all TPHs with open SPX 
positions may participate in a compression forum in accordance with the 
proposed procedure. Other market participants with open SPX positions 
may participate through CBOE floor brokers, as they would for any other 
SPX trading. Participation in compression forums, as well as advanced 
submission of compression-list positions, is optional, and TPHs may 
continue to attempt to trade open SPX positions during normal trading.
    The Exchange believes it is reasonable, equitable and not unfairly 
discriminatory to limit compression-list positions to certain riskless 
and low delta positions and trading in compression forums to closing 
only transactions because these types of positions and transactions 
will result in large bank regulatory capital requirements impacts for 
CTPHs even though there is minimal chance for large losses to occur. 
The Exchange notes that if opening transactions were permitted during a 
compression forum, it would defeat the purpose of the proposed rule, 
which is to encourage the closing of positions that are creating high 
bank regulatory capital requirements, often with positions that are of 
low economic benefit and risk and could otherwise be offset. The 
Exchange notes that there are other circumstances involving liquidity 
concerns in which the Exchange limits transactions in particular 
securities to closing only transactions. For example, the Exchange 
[sic] transactions in restricted option classes to [sic] closing only 
(subject to certain exceptions).\23\ Additionally, cabinet trades are 
limited to closing only (subject to certain exceptions).\24\ Similarly, 
the minimum increment for series traded during a compression forum will 
be $0.01 to further encourage closing of these positions. Because many 
series the Exchange expects to trade during the compression forum will 
be out-of-the-money, and essentially worthless, TPHs may not otherwise 
close positions in these series if a higher minimum increment causes 
the price to be too much higher than the option's value.
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    \23\ See Rule 5.4.
    \24\ See Rule 6.54.
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    In addition, the Exchange believes it's reasonable, equitable and 
not unfairly discriminatory to limit the compression forum process to 
SPX options (including SPXW and SPXPM) because SPX has a substantially 
higher notional value than other options classes. As such, open 
interest in SPX has a much greater effect on a bank's regulatory 
capital requirements. Compressing out-of-the-money and riskless SPX 
option positions therefore has a greater impact on reducing a bank 
regulatory capital requirement.
    Furthermore, the Exchange believes that its proposal is consistent 
with the Act in that it seeks to mitigate the potentially negative 
effects of the bank capital requirements on liquidity in the SPX 
options market. As described above, the Exchange believes that the new 
regulatory capital requirements could potentially impede efficient use 
of capital and undermine the critical liquidity role that Market-Makers 
play in the SPX options market by limiting the amount of capital CTPHs 
an [sic] allocate to clearing member transactions. Specifically, the 
rules may cause CTPHs to impose stricter position limits on their 
clearing members. In turn, this could force Market-Makers to reduce the 
size of their quotes in SPX and result in reduced liquidity in the 
market. The Exchange believes that permitting TPHs to reduce open 
interest in offsetting SPX options positions would likely contribute to 
the availability of liquidity in the SPX options market and help ensure 
that the SPX options market retains its competitive balance. The 
Exchange believes that the proposed rule would serve to protect 
investors by helping to ensure consistent continued depth of liquidity 
in the SPX options market.
    The Exchange also believes the proposed rule change is consistent 
with the Act, because the proposed procedure is consistent with its 
current rules. The proposed rule would direct that all trading during 
compression forums be conducted in accordance with normal SPX trading 
rules and thus, all transactions that would occur during compression 
forums would occur in the same manner as transactions during normal SPX 
trading, except transactions must be closing only and may be in penny 
increments. This process is narrowly tailored for a for [sic] the 
specific purpose of facilitating the closing of positions in the SPX 
options market, which the Exchange believes will serve to protect 
investors by helping to ensure continued depth of liquidity in the SPX 
options market. The Exchange also notes the proposed provisions 
regarding the position lists are optional procedures to help facilitate 
compression transactions. Submission of lists of positions for 
compression is completely voluntary, open to all TPHs, and non-binding, 
in that submission of a list does not require a TPH to trade any 
position or even represent any position in a trading crowd. 
Furthermore, the list of positions will be made available to all market 
participants and contain very limited information regarding open 
interest in positions in SPX. The list will not advantage or 
disadvantage any TPH, but rather simply alert TPHs to certain SPX 
positions that other TPHs are interested in closing at the end of each 
calendar month.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on intramarket competition that is not necessary or 
appropriate in furtherance of the Act because it applies to all market 
participants in the same manner with positions that meet the eligible 
criteria. The proposed change would encourage the closing of positions 
that needlessly result in burdensome capital requirements, which, once 
closed, would alleviate the capital requirement constraints on TPHs and 
improve overall market liquidity by freeing capital currently tied up 
in certain unwanted SPX positions. The Exchange does not believe that 
the proposed rule changes will impose any burden on intermarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act because the proposed rule change applies only to 
the trading of SPX options, which are exclusively-listed on CBOE. To 
the extent that the proposed changes make the Exchange a more 
attractive marketplace for market participants at other exchanges, such 
market participants are welcome to become CBOE market participants. 
Furthermore, as stated in Item 3(b) above, submission of lists of 
positions for compression is completely voluntary, open to all TPHs, 
and non-binding, in that submission of a list does not require a TPH to 
trade any position or even represent any position in a trading crowd. 
Lists of positions will be made available to all TPHs and contain very 
limited information regarding open interest in positions in SPX. The 
list will simply alert TPHs to certain SPX positions that other TPHs 
are interested in closing at the end of each calendar month.

[[Page 95225]]

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

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

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \25\ and Rule 19b-4(f)(6) thereunder.\26\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \25\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \26\ 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.
---------------------------------------------------------------------------

    The Exchange has asked the Commission to waive the 30-day operative 
delay to allow the compression forum process to begin in December 2016 
and trading to take place on the final three days of trading in 2016. 
The Exchange stated that it is requesting this waiver because it 
believes that bank capital requirements will have substantial adverse 
consequences on some CTPHs if TPHs are not able to sufficiently reduce 
their open interest in SPX by the end of the year. The Exchange 
understands that bank-imposed capital limits for TPHs, measured at the 
end of the year and based on the aggregate notional value of short 
positions regardless of offsets, may impact CTPHs and the firms for 
which they clear depending on the open interest they hold. CBOE 
believes, as it explained above, that the impact of these rules 
uniquely affects the SPX options market due to the large notional value 
of SPX contracts. In response, CTPHs may impose stricter position 
limits on the firms for which they clear and, to the extent they do so, 
it may effectively limit the amount of liquidity that some TPHs, 
notably Market-Makers, will be able to provide in SPX options. The 
Exchange believes that it is in the best interest of investors to use 
this new compression forum process to help foster continued liquidity 
in the SPX options market by allowing firms to free up capital by 
finding opportunities to trade out of relatively worthless positions.
    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because this waiver will enable the Exchange to hold compression forums 
for SPX options prior to the end of the year, thereby helping to 
facilitate transactions and remove impediments to year-end trading in 
SPX options, through a limited process designed to protect investors 
and the public interest. The Commission notes that CBOE's compression 
forum rule is limited in its application, involves no material changes 
to how trading is conducted on the Exchange, creates a process in which 
participation is voluntary and open to all, and is provided as a means 
to help Market Makers and other market participants, as well as their 
clearing brokers, avoid the need to limit their activities as a result 
of out-of-the-money positions on SPX options that such firms wish to 
exit. For this reason, the Commission hereby waives the 30-day 
operative delay requirement and designates the proposed rule change as 
operative upon filing.\27\
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    \27\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \28\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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 rule-comments@sec.gov. Please include 
File Number SR-CBOE-2016-090 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2016-090. 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 Web site (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 Web site 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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2016-090, and should be 
submitted on or before January 17, 2017.
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    \29\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-31102 Filed 12-23-16; 8:45 am]
 BILLING CODE 8011-01-P


