[Federal Register Volume 83, Number 60 (Wednesday, March 28, 2018)]
[Notices]
[Pages 13316-13322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06140]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82932; File No. SR-Phlx-2018-24]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Section 
(a) of Exchange Rule 1001, Position Limits, To Increase the Position 
Limits for Options

March 22, 2018.
    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 March 9, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\15 U.S.C. 78s(b)(1).
    \2\17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Section (a) of Exchange Rule 1001, 
Position Limits, to increase the position limits for options on the 
following exchange traded funds (``ETFs''): iShares China Large-Cap ETF 
(``FXI''), iShares MSCI EAFE ETF (``EFA''), iShares MSCI Emerging 
Markets ETF (``EEM''), iShares Russell 2000 ETF (``IWM''), iShares MSCI 
Brazil Capped ETF (``EWZ''), iShares 20+ Year Treasury Bond Fund ETF 
(``TLT''), PowerShares QQQ Trust (``QQQQ''), and iShares MSCI Japan 
Index (``EWJ'').
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqphlx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
Position Limit Increase
    Position limits for options on ETFs such as those subject to this 
proposal are determined pursuant to Exchange Rule 1001, and, with 
certain exceptions, vary by tier according to the number of outstanding 
shares and the trading volume of the underlying security.\3\ Options in 
the highest tier--i.e., options that overlie securities with the 
largest numbers of outstanding shares and trading volumes--have a 
standard option position limit of 250,000 contracts (with adjustments 
for splits, re-capitalizations, etc.) on the same side of the market. 
In addition, Rule 1001 currently sets forth separate position limits 
for options on certain ETFs, including 500,000 contracts for options on 
EEM and IWM, and 900,000 contracts for options on QQQQ.
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    \3\ Pursuant to Exchange Rule 1002, which provides that the 
exercise limits for ETF options are equivalent to their position 
limits, the exercise limits for each of these options would be 
increased to the level of the new position limits.
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    The Exchange proposes to revise Rule 1001 to increase the position 
limits for options on certain ETFs, as described more fully below. The 
Exchange believes that increasing the position limits for these options 
will lead to a more liquid and competitive market environment for these 
options that will benefit customers interested in these products.
    First, the Exchange proposes to increase the position limits for 
options on FXI, EFA, EWZ, TLT, and EWJ, each of which fall into the 
highest standard tier set forth in Exchange Rule 1001(g)(i). Rule 
1001(a) would be amended to increase the current

[[Page 13317]]

position limit of 250,000 contracts for options on these securities to 
500,000 contracts.
    Second, the Exchange proposes to increase the position limits for 
options on EEM and IWM from 500,000 contracts to 1,000,000 
contracts.\4\
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    \4\ The Exchange is also amending Rule 1001(a) to update and 
correct the names of IWM and EEM, which are currently referred to in 
that rule as the iShares[supreg] Russell 2000[supreg] Index and 
iShares MSCI Emerging Markets Index Fund, respectively.
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    Finally, the Exchange proposes to increase the position limits on 
options on QQQQ from 900,000 contracts to 1,800,000 contracts.
    In support of this proposal, the Exchange represents that the above 
listed ETFs qualify for either: (i) The initial listing criteria set 
forth in Exchange Rule 1009 Commentary .06 for ETFs holding non-U.S. 
component securities; or (ii) for ETFs listed pursuant to generic 
listing standards for series of portfolio depository receipts and index 
fund shares based on international or global indexes under which a 
comprehensive surveillance agreement (``CSA'') is not required.\5\ FXI 
tracks the performance of the FTSE China 50 Index, which is composed of 
the 50 largest Chinese stocks.\6\ EEM tracks the performance of the 
MSCI Emerging Markets Index, which is composed of approximately 800 
component securities.\7\ The MSCI Emerging Markets Index consists of 
the following 21 emerging market country indices: Brazil, Chile, China, 
Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, 
Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South 
Africa, Taiwan, Thailand, and Turkey.\8\ IWM tracks the performance of 
the Russell 2000 Index, which is composed of 2,000 small-cap domestic 
stocks.\9\ EFA tracks the performance of MSCI EAFE Index, which has 
over 900 component securities.\10\ The MSCI EAFE Index is designed to 
represent the performance of large and mid-cap securities across 21 
developed markets, including countries in Europe, Australasia and the 
Far East, excluding the U.S. and Canada.\11\ EWZ tracks the performance 
of the MSCI Brazil 25/50 Index, which is composed of shares of large 
and mid-size companies in Brazil.\12\ TLT tracks the performance of ICE 
U.S. Treasury 20+ Year Bond Index, which is composed of long-term U.S. 
Treasury bonds.\13\ QQQQ tracks the performance of the Nasdaq-100 
Index, which is composed of 100 of the largest domestic and 
international nonfinancial companies listed on the Nasdaq Stock Market 
LLC (``Nasdaq'').\14\ EWJ tracks the MSCI Japan Index, which tracks the 
performance of large and mid-sized companies in Japan.\15\
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    \5\ The Exchange notes that the initial listing criteria for 
options on ETFs that hold non-U.S. component securities are more 
stringent than the maintenance listing criteria for those same ETF 
options. See Exchange Rule 1009 Commentary .06; Exchange Rule 1010, 
Commentary .08.
    \6\ See https://www.ishares.com/us/products/239536/ishares-china-largecap-etf.
    \7\ See http://us.ishares.com/product_info/fund/overview/EEM.htm.
    \8\ See http://www.msci.com/products/indices/tools/index.html#EM.
    \9\ See https://www.ishares.com/us/products/239710/ishares-russell-2000-etf.
    \10\ See https://www.ishares.com/us/products/239623/.
    \11\ See https://www.msci.com/eafe.
    \12\ See https://www.ishares.com/us/products/239612/ishares-msci-brazil-capped-etf.
    \13\ See https://www.ishares.com/us/products/239454/.
    \14\ See https://www.invesco.com/portal/site/us/financial-professional/etfs/productdetail?productId=QQQ&ticker=QQQ&title=powershares-qqq.
    \15\ See https://www.ishares.com/us/products/239665/EWJ.
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    The Exchange represents that more than 50% of the weight of the 
securities held by the options subject to this proposal are also 
subject to a CSA.\16\ Additionally, the component securities of the 
MSCI Emerging Markets Index on which EEM is based for which the primary 
market is in any one country that is not subject to a CSA do not 
represent 20% or more of the weight of the MSCI Emerging Markets 
Index.\17\ Finally, the component securities of the MSCI Emerging 
Markets Index on which EEM is based, for which the primary market is in 
any two countries that are not subject to CSAs do not represent 33% o2 
[sic] more of the weight of the MSCI Emerging Markets Index.\18\
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    \16\ See Exchange Rule 1009 Commentary .06.
    \17\ See Exchange Rule 1009 Commentary .06(b)(ii)(B).
    \18\ See Exchange Rule 1009 Commentary .06(b)(ii)(C).
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    Market participants have increased their demand for options on FXI, 
EFA, EWZ, TLT, and EWJ for hedging and trading purposes and the 
Exchange believes the current position limits are too low and may be a 
deterrent to successful trading of options on these securities.
The CBOE Analysis
    The Commission has recently approved a proposed rule change of the 
Chicago Board Options Exchange (``CBOE'') to increase position limits 
for these same options.\19\ The discussion that follows is based upon 
the CBOE's analysis presented in that proposal.
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    \19\ See Securities Exchange Act Release No. 82770 (February 23, 
2018) (approving SR-CBOE-2017-057).
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    In its proposal, CBOE stated that it had collected the following 
trading statistics on the ETFs that are subject to this proposal:

----------------------------------------------------------------------------------------------------------------
                                                                                   Shares
                   ETF                     2017 ADV (Mil.   2017 ADV (option     outstanding     Fund market cap
                                               Shares)         contracts)          (Mil.)            ($Mil.)
----------------------------------------------------------------------------------------------------------------
FXI.....................................             15.08            71,944              78.6          $3,343.6
EEM.....................................             52.12           287,357             797.4          34,926.1
IWM.....................................             27.46           490,070             253.1          35,809.1
EFA.....................................             19.42            98,844            1178.4          78,870.3
EWZ.....................................             17.08            95,152             159.4           6,023.4
TLT.....................................              8.53            80,476              60.0             7,442
QQQQ....................................             26.25           579,404             351.6          50,359.7
EWJ.....................................              6.06             4,715             303.6          16,625.1
SPY.....................................             64.63         2,575,153            976.23         240,540.0
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                                                                                                    SGPO Galley 
                                                            End:?>
    In support of its proposal to increase the position limits for QQQQ 
to 1,800,000 contracts, CBOE compared the trading characteristics of 
QQQQ to that of the SPDR S&P 500 ETF (``SPY''), which has no position 
limits. As shown in the above table, the average daily trading volume 
through August 14, 2017 for QQQQ was 26.25 million shares compared to 
64.63 million shares for SPY. The total shares outstanding for QQQQ are 
351.6 million compared to 976.23 million for SPY. The fund market cap 
for QQQQ is $50,359.7 million compared to $240,540 million

[[Page 13318]]

for SPY. SPY is one of the most actively trading ETFs and is, 
therefore, subject to no position limits. QQQQ is also very actively 
traded, and while not to the level of SPY, should be subject to the 
proposed higher position limits based on its trading characteristics 
when compared to SPY. The proposed position limit coupled with QQQQ's 
trading behavior would continue to address potential manipulative 
schemes and adverse market impact surrounding the use of options and 
trading in its [sic] underlying the options.
    In support of its proposal to increase the position limits for EEM 
and IWM from 500,000 contracts to 1,000,000 contracts, CBOE also 
compared the trading characteristics of EEM and IWM to that of QQQQ, 
which currently has a position limit of 900,000 contracts. As shown in 
the above table, the average daily trading volume through July 31, 2017 
for EEM was 52.12 million shares and IWM was 27.46 million shares 
compared to 26.25 million shares for QQQQ. The total shares outstanding 
for EEM are 797.4 million and for IWM are 253.1 million compared to 
351.6 million for QQQQ. The fund market cap for EEM is $34,926.1 
million and IWM is $35,809 million compared to $50,359.7 million for 
QQQQ. EEM, IWM and QQQQ have similar trading characteristics and 
subjecting EEM and IWM to the proposed higher position limit would 
continue be designed to address potential manipulate [sic] schemes that 
may arise from trading in the options and their underlying securities. 
These above trading characteristics for QQQQ when compared to EEM and 
IWM also justify increasing the position limit for QQQQ. QQQQ has a 
higher options ADV than EEM and IWM, a higher numbers [sic] of shares 
outstanding than IWM and a much higher market cap than EEM and IWM 
which justify doubling the position limit for QQQQ. CBOE concluded 
that, based on these statistics, and as stated above, the proposed 
position limit coupled with QQQQ's trading behavior would continue to 
address potential manipulative schemes and adverse market impact 
surrounding the use of options and trading in the securities underlying 
the options.
    In support of its proposal to increase the position limits for FXI, 
EFA, EWZ, TLT, and EWJ from 250,000 contracts to 500,000 contracts, 
CBOE compared the trading characteristics of FXI, EFA, EWZ, TLT, and 
EWJ to that of EEM and IWM, both of which currently have a position 
limit of 500,000 contracts. As shown in the above table, the average 
daily trading volume through July 31, 2017 for FXI is 15.08 million 
shares, EFA is 19.42 million shares, EWZ is 17.08 million shares, TLT 
is 8.53 million shares, and EWJ is 6.06 million shares compared to 
52.12 million shares for EEM and 27.46 million shares for IWM. The 
total shares outstanding for FXI is 78.6 million, EFA is 1178.4 
million, EWZ is 159.4 million, TLT is 60 million, and EWJ is 303.6 
million compared to 797.4 million for EEM and 253.1 million for IWM. 
The fund market cap for FXI is $3,343.6 million, EFA is $78,870.3 
million, EWZ is $6,023.4 million, TLT is $7,442.4 million, and EWJ is 
$16,625.1 million compared to $34,926.1 million for EEM and $35,809.1 
million for IWM.
    In Partial Amendment No. 1 to its proposed rule change, CBOE 
provided additional analysis and support for its proposed rule 
change.\20\ According to CBOE, market participants' trading activity 
has been adversely impacted by the current position limits as such 
limits have caused options trading in the symbols subject to the 
proposed rule change to move from exchanges to the over-the-counter 
market. CBOE stated it had submitted the proposed rule change at the 
request of market participants whose on-exchange activity has been 
hindered by the existing position limits causing them to be unable to 
provide additional liquidity not just on CBOE, but also on other 
options exchanges on which they participate.
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    \20\ See SR-CBOE-2017-057, Partial Amendment No. 1 (November 22, 
2017).
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    CBOE stated it understood that certain market participants wishing 
to make trades involving a large number of options contracts in the 
symbols subject to the proposed rule change are opting to execute those 
trades in the over-the-counter market, that the over-the counter 
transactions occur via bi-lateral agreements the terms of which are not 
publicly disclosed to other market participants, and that therefore, 
these large trades do not contribute to the price discovery process 
performed on a lit market. It stated that position limits are designed 
to address potential manipulative schemes and adverse market impact 
surrounding the use of options, such as disrupting the market in the 
security underlying the options, and that the potential manipulative 
schemes and adverse market impact are balanced against the potential of 
setting the limits so low as to discourage participation in the options 
market. It stated that the level of those position limits must be 
balanced between curtailing potential manipulation and the cost of 
preventing potential hedging activity that could be used for legitimate 
economic purposes.
    CBOE observed that the ETFs that underlie options subject to the 
proposed rule change are highly liquid, and are based on a broad set of 
highly liquid securities and other reference assets, and noted that the 
Commission has generally looked through to the liquidity of securities 
comprising an index in establishing position limits for cash-settled 
index options. It further noted that options on certain broad-based 
security indexes have no position limits. CBOE observed that the 
Commission has recognized the liquidity of the securities comprising 
the underlying interest of the SPDR S&P 500 ETF (``SPY'') in permitting 
no position limits on SPY options since 2012,\21\ and expanded position 
limits for options on EEM, IWM and QQQQ.
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    \21\ See Securities Exchange Act Release No. 67937 (September 
27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012-091).
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    CBOE stated that the creation and redemption process for these ETFs 
also lessen the potential for manipulative activity, explaining that 
when an ETF company wants to create more ETF shares, it looks to an 
Authorized Participant, which is a market maker or other large 
financial institution, to acquire the securities the ETF is to hold. 
For instance, IWM is designed to track the performance of the Russell 
2000 Index, the Authorized Participant will purchase all the Russell 
2000 constituent securities in the exact same weight as the index, then 
deliver those shares to the ETF provider. In exchange, the ETF provider 
gives the Authorized Participant a block of equally valued ETF shares, 
on a one-for-one fair value basis. The price is based on the net asset 
value, not the market value at which the ETF is trading. The creation 
of new ETF units can be conducted all trading day and is not subject to 
position limits. This process can also work in reverse where the ETF 
company seeks to decrease the number of shares that are available to 
trade. The creation and redemption process, therefore, creates a direct 
link to the underlying components of the ETF, and serves to mitigate 
potential price impact of the ETF shares that might otherwise result 
from increased position limits. The ETF creation and redemption seeks 
to keep ETF share prices trading in line with the ETF's underlying net 
asset value. Because an ETF trades like a stock, its price will 
fluctuate during the trading day, due to simple supply and demand. If 
demand to buy an ETF is high, for instance, the ETF's share price might 
rise above the value of its underlying

[[Page 13319]]

securities. When this happens, the Authorized Participant believes the 
ETF may now be overpriced, and can buy the underlying shares that 
compose the ETF and then sell ETF shares on the open market. This 
should help drive the ETF's share price back toward fair value. 
Likewise, if the ETF starts trading at a discount to the securities it 
holds, the Authorized Participant can buy shares of the ETF and redeem 
them for the underlying securities. Buying undervalued ETF shares 
should drive the price of the ETF back toward fair value. This 
arbitrage process helps to keep an ETF's price in line with the value 
of its underlying portfolio.
    CBOE stated that in proposing the increased position limits, the 
Exchange considered the availability of economically equivalent 
products and their respective position limits. For instance, some of 
the ETFs underlying options subject to the proposed rule change are 
based on broad-based indices that underlie cash settled options that 
are economically equivalent to the ETF options that are the subject of 
the proposed rule change and have no position limits. Other ETFs are 
based on broad-based indexes that underlie cash-settled options with 
position limits reflecting notional values that are larger than the 
current position limits for ETF analogues (EEM, EFA). Where there was 
no approved index analogue, CBOE stated its belief, based on the 
liquidity, breadth and depth of the underlying market, that the index 
referenced by the ETF would be considered a broad-based index.\22\ CBOE 
argued that if certain position limits are appropriate for the options 
overlying the same index or is an analogue to the basket of securities 
that the ETF tracks, then those same economically equivalent position 
limits should be appropriate for the option overlying the ETF. In 
addition, CBOE observed, the market capitalization of the underlying 
index or reference asset is large enough to absorb any price movements 
that may be caused by an oversized trade. Also, the Authorized 
Participant or issuer may look to the stocks comprising the analogous 
underlying index or reference asset when seeking to create additional 
ETF shares are part of the creation/redemption process to address 
supply and demand or to mitigate the price movement the price of the 
ETF. CBOE offered the following specific examples to illustrate:
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    \22\ CBOE Rule 24.4 and Exchange Rule 1001A(a) set forth the 
CBOE and the Phlx position limits for broad-based index options.
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QQQQ
    For example, the PowerShares QQQ Trust or QQQQ is an ETF that 
tracks the Nasdaq 100 Index or NDX, which is an index composed of 100 
of the largest non-financial securities listed on Nasdaq. Options on 
NDX are currently subject to no position limits but share similar 
trading characteristics as QQQQ. Based on QQQQ's share price of $154.54 
\23\ and NDX's index level of 6,339.14, approximately 40 contracts of 
QQQQ equals one contract of NDX. Assume that NDX was subject to the 
standard position limit of 25,000 contracts for broad-based index 
options. Based on the above comparison of notional values, this would 
result in a positon [sic] limit equivalent to 1,000,000 contracts for 
QQQQ as NDX's analogue. However, NDX is not subject to position limits 
and has an average daily trading volume of 15,300 contracts. QQQQ is 
currently subject to a position limit of 900,000 contracts but has a 
much higher average daily trading volume of 579,404 contracts. 
Furthermore, NDX currently has a market capitalization of $17.2 
trillion and QQQQ has a market capitalization of $50,359.7 million, and 
the component securities of NDX, in aggregate, have traded an average 
of 440 million shares per day in 2017, both large enough to absorb any 
price movement cause by a large trade in the QQQQ. The Commission has 
also approved no position limit for NDX, although it has a much lower 
average daily trading volume than its analogue, the QQQQ. Therefore, 
CBOE concluded and the Exchange agrees it was reasonable to increase 
the positon [sic] limit for options on the QQQQ from 900,000 to 
1,800,000 contracts.
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    \23\ CBOE stated that all share prices used in its analysis were 
based on the closing price of the security on November 16, 2017 and 
cited Yahoo Finance as the source.
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IWM
    The iShares Russell 2000 ETF or IWM, is an ETF that also tracks the 
Russell 2000 Index or RUT, which is an index that is composed of 2,000 
small-cap domestic companies in the Russell 3000 index. Options on RUT 
are currently subject to no position limits but share similar trading 
characteristics as IWM. Based on IWM's share price of $144.77 and RUT's 
index level of 1,486.88, approximately 10 contracts of IWM equals one 
contract of RUT. Assume that RUT was subject to the standard position 
limit of 25,000 contracts for broad-based index options under Exchange 
Rule 24.4(a). Based on the above comparison of notional values, this 
would result in a positon [sic] limit equivalent to 250,000 contracts 
for IWM as RUT's analogue. However, RUT is not subject to position 
limits and has an average daily trading volume of 66,200 contracts. IWM 
is currently subject to a position limit of 500,000 contracts but has a 
much higher average daily trading volume of 490,070 contracts. The 
Commission has approved no position limit for RUT, although it has a 
much lower average daily trading volume than its analogue, the IWM. 
Furthermore, RUT currently has a market capitalization of $2.4 trillion 
and IWM has a market capitalization of $35,809.1 million, and the 
component securities of RUT, in aggregate, have traded an average of 
270 million shares per day in 2017, both large enough to absorb any 
price movement cause by a large trade in the IWM. Therefore, CBOE 
concluded and the Exchange agrees it is reasonable to increase the 
positon [sic] limit for options on the IWM from 500,000 to 1,000,000 
contracts.
EEM
    EEM tracks the performance of the MSCI Emerging Markets Index or 
MXEF, which is composed of approximately 800 component securities 
following 21 emerging market country indices: Brazil, Chile, China, 
Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, 
Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South 
Africa, Taiwan, Thailand, and Turkey. Based on EEM's share price of 
$47.06 and MXEF's index level of 1,136.45, approximately 24 contracts 
of EEM equals one contract of MXEF. MXEF is currently subject to the 
standard position limit of 25,000 contracts for broad-based index 
options. Based on the above comparison of notional values, this would 
result in a position limit economically equivalent to 604,000 contracts 
for EEM as MXEF's analogue. However, MXEF has an average daily trading 
volume of 180 contracts. EEM is currently subject to a position limit 
of 500,000 contracts but has a much higher average daily trading volume 
of 287,357 contracts. Furthermore, MXEF currently has a market 
capitalization of $5.18 trillion and EEM has a market capitalization of 
$34,926.1 million, and the component securities of MXEF, in aggregate, 
have traded an average of 33.6 billion shares per day in 2017, both 
large enough to absorb any price movement cause by a large trade in the 
EEM. Therefore, based on the comparison of average daily trading 
volume, CBOE believed and the Exchange agrees that it is reasonable to 
increase the positon [sic] limit for

[[Page 13320]]

options on the IWM from 500,000 to 1,000,000 contracts.
EFA
    EFA tracks the performance of MSCI EAFE Index or MXEA, which has 
over 900 component securities designed to represent the performance of 
large and mid-cap securities across 21 developed markets, including 
countries in Europe, Australasia and the Far East, excluding the U.S. 
and Canada. Based on EFA's share price of $69.16 and MXEA's index level 
of 1,986.15, approximately 29 contracts of EFA equals one contract of 
MXEA. MXEA is currently subject to the standard position limit of 
25,000 contracts for broad-based index options. Based on the above 
comparison of notional values, this would result in a positon [sic] 
limit economically equivalent to 721,000 contracts for EFA as MXEA's 
analogue. Furthermore, MXEA currently has a market capitalization of 
$18.7 trillion and EFA has a market capitalization of $78,870.3 
million, and the component securities of MXEA, in aggregate, have 
traded an average of 4.6 billion shares per day in 2017, both large 
enough to absorb any price movement cause by a large trade in the EEM. 
However, MXEA has an average daily trading volume of 270 contracts. EFA 
is currently subject to a position limit of 250,000 contracts but has a 
much higher average daily trading volume of 98,844 contracts. Based on 
the above comparisons, CBOE believed and the Exchange agrees that it is 
reasonable to increase the positon [sic] limit for options on the EFA 
from 250,000 to 500,000 contracts.
FXI
    FXI tracks the performance of the FTSE China 50 Index, which is 
composed of the 50 largest Chinese stocks. There is currently no index 
analogue for FXI approved for options trading. However, the FTSE China 
50 Index currently has a market capitalization of $1.7 trillion and FXI 
has a market capitalization of $2,623.18 million, both large enough to 
absorb any price movement cause by a large trade in FXI. The components 
of the FTSE China 50 Index, in aggregate, have an average daily trading 
volume of 2.3 billion shares. FXI is currently subject to a position 
limit of 250,000 contracts but has a much higher average daily trading 
volume of 15.08 million shares. Based on the above comparisons, CBOE 
believed, and that Exchange agrees, that it is reasonable to increase 
the positon [sic] limit for options on the FXI from 250,000 to 500,000 
contracts.
EWZ
    EWZ tracks the performance of the MSCI Brazil 25/50 Index, which is 
composed of shares of large and mid-size companies in Brazil. There is 
currently no index analogue for EWZ approved for options trading. 
However, the MSCI Brazil 25/50 Index currently has a market 
capitalization of $700 billion and EWZ has a market capitalization of 
$6,023.4 million, both large enough to absorb any price movement cause 
by a large trade in EWZ. The components of the MSCI Brazil 25/50 Index, 
in aggregate, have an average daily trading volume of 285 million 
shares. EWZ is currently subject to a position limit of 250,000 
contracts but has a much higher average daily trading volume of 17.08 
million shares. Based on the above comparisons, CBOE believed and the 
Exchange agrees that it is reasonable to increase the positon [sic] 
limit for options on the EWZ from 250,000 to 500,000 contracts.
TLT
    TLT tracks the performance of ICE U.S. Treasury 20+ Year Bond 
Index, which is composed of long-term U.S. Treasury bonds. There is 
currently no index analogue for TLT approved for options trading. 
However, the U.S. Treasury market is one of the largest and most liquid 
markets in the world, with over $14 trillion outstanding and turnover 
of approximately $500 billion per day. TLT currently has a market 
capitalization of $7,442.4 million, both large enough to absorb any 
price movement cause by a large trade in TLT. Therefore, the potential 
for manipulation will not increase solely due the increase in position 
limits as set forth in the proposed rule change. Based on the above 
comparisons, CBOE believed and the Exchange agrees it is reasonable to 
increase the positon [sic] limit for options on the TLT from 250,000 to 
500,000 contracts.
EWJ
    EWJ tracks the MSCI Japan Index, which tracks the performance of 
large and mid-sized companies in Japan. There is currently no index 
analogue for EWJ approved for options trading. However, the MSCI Japan 
Index has a market capitalization of $3.5 trillion and EWJ has a market 
capitalization of $16,625.1 million, and the component securities of 
the MSCI Japan Index, in aggregate, have traded an average of 1.1 
billion shares per day in 2017, both large enough to absorb any price 
movement cause by a large trade in EWJ. EWJ is currently subject to a 
position limit of 250,000 contracts and has an average daily trading 
volume of 6.6 million shares. Based on the above comparisons, CBOE 
believed and the Exchange agrees that it is reasonable to increase the 
positon [sic] limit for options on EWJ from 250,000 to 500,000 
contracts.
Phlx Analysis and Conclusions
    Phlx has reviewed the CBOE analysis set forth above. On the basis 
of that analysis Phlx believes that market participants' trading 
activity could be adversely impacted by the current position limits for 
FXI, EFA, EWZ, TLT and EWJ and such limits may cause options trading in 
these symbols to move from exchanges to the over-the-counter market. 
The above trading characteristics of FXI, EFA, EWZ, TLT and EWJ are 
either similar to those of EEM and IWM or sufficiently active so that 
the proposed limit would continue to address potential manipulation 
that may arise. Specifically, EFA has far more shares outstanding and a 
larger fund market cap than EEM, IWM, and QQQQ. EWJ has more shares 
outstanding than IWM and only slightly fewer shares outstanding than 
QQQQ.
    On the other hand, while FXI, EWZ and TLT do not exceed EEM, IWM or 
QQQQ in any of the specified areas, they are all actively trading so 
that market participants' trading activity has been impacted by them 
being restricted by the current position limits. The Exchange believes 
that the trading activity and these securities being based on a broad 
basket of underlying securities alleviates concerns as to any potential 
manipulative activity that may arise. In addition, as discussed in more 
detail below, the Exchange's existing surveillance procedures and 
reporting requirements at the Exchange, at other options exchanges, and 
at the several clearing firms are capable of properly identifying 
unusual and/or illegal trading activity.
    On the basis of CBOE's analysis Phlx also believes that market 
participants' trading activity could be adversely impacted by the 
current position limits for EEM, IWM and QQQQ. As discussed above, EEM, 
IWM and QQQQ have similar trading characteristics. Subjecting EEM and 
IWM to the proposed higher position limit would continue be designed to 
address potential manipulate [sic] schemes that may arise from trading 
in the options and their underlying securities. The trading 
characteristics for QQQQ described above, when compared to EEM and IWM, 
also justify increasing the position limit for QQQQ. QQQQ has a higher 
options ADV than EEM and IWM, a higher numbers [sic] of shares

[[Page 13321]]

outstanding than IWM and a much higher market cap than EEM and IWM 
which justify doubling the positon [sic] limit for QQQQ. Based on these 
statistics, the proposed position limit coupled with QQQQ's trading 
behavior would continue to address potential manipulative schemes and 
adverse market impact surrounding the use of options and trading in its 
[sic] underlying the options.
    The Exchange believes that increasing the position limits for the 
options subject to this proposal would lead to a more liquid and 
competitive market environment for these options, which will benefit 
customers interested in this product. Under the proposal, the reporting 
requirement for the above options would be unchanged. Thus, the 
Exchange would still require that each member and member organization 
that maintains a position in the options on the same side of the 
market, for its own account or for the account of a customer, report 
certain information to the Exchange. This information would include, 
but would not be limited to, the options' position, whether such 
position is hedged and, if so, a description of the hedge, and the 
collateral used to carry the position, if applicable. Registered option 
traders (``ROTs'') and specialists would continue to be exempt from 
this reporting requirement, as ROT and specialist information can be 
accessed through the Exchange's market surveillance systems. In 
addition, the general reporting requirement for customer accounts that 
maintain an aggregate position of 200 or more options contracts would 
remain at this level for the options subject to this proposal.\24\
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    \24\ See Exchange Rule 1003 for reporting requirements.
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    The Exchange believes that the existing surveillance procedures and 
reporting requirements at the Exchange, other options exchanges, and at 
the several clearing firms are capable of properly identifying unusual 
and/or illegal trading activity. In addition, routine oversight 
inspections of the Exchange's regulatory programs by the Commission 
have not uncovered any material inconsistencies or shortcomings in the 
manner in which the Exchange's market surveillance is conducted. These 
procedures utilize daily monitoring of market movements via automated 
surveillance techniques to identify unusual activity in both options 
and underlying stocks.\25\
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    \25\ These procedures have been effective for the surveillance 
of trading the options subject to this proposal and will continue to 
be employed.
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    Furthermore, large stock holdings must be disclosed to the 
Commission by way of Schedules 13D or 13G.\26\ The positions for 
options subject to this proposal are part of any reportable positions 
and, thus, cannot be legally hidden. Moreover, the Exchange's 
requirement that members and member organizations file reports with the 
Exchange for any customer who held aggregate large long or short 
positions of any single class for the previous day will continue to 
serve as an important part of the Exchange's surveillance efforts.
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    \26\ 17 CFR 240.13d-1.
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    The Exchange believes that the current financial requirements 
imposed by the Exchange and by the Commission adequately address 
concerns that a member organization or its customer may try to maintain 
an inordinately large un-hedged position in the options subject to this 
proposal. Current margin and risk-based haircut methodologies serve to 
limit the size of positions maintained by any one account by increasing 
the margin and/or capital that a member organization must maintain for 
a large position held by itself or by its customer.\27\ In addition, 
Rule 15c3-1 \28\ imposes a capital charge on member organizations to 
the extent of any margin deficiency resulting from the higher margin 
requirement.
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    \27\ See Exchange Rule 721 for a description of margin 
requirements.
    \28\ 17 CFR 240.15c3-1.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\29\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\30\ in particular, in that it is designed 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. As noted above, the Commission has recently approved 
increasing position limits to the levels proposed herein on the same 
ETF options on the CBOE. The Exchange believes that the proposed 
position limits would continue to address potential manipulative 
activity while allowing for potential hedging activity for appropriate 
economic purposes.
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    \29\ 15 U.S.C. 78f(b).
    \30\ 15 U.S.C. 78f(b)(5).
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    The current position limits for the options subject to this 
proposal have inhibited the ability of ROTs and specialists to make 
markets on the Exchange. Specifically, the proposal is designed to 
encourage ROTs and specialists to shift liquidity from over the counter 
markets onto the Exchange, which will enhance the process of price 
discovery conducted on the Exchange through increased order flow. The 
proposal will also benefit institutional investors as well as retail 
traders, and public customers, by providing them with a more effective 
trading and hedging vehicle. In addition, the Exchange believes that 
the structure of the ETFs subject to this proposal and the considerable 
liquidity of the market for options on those ETFs diminishes the 
opportunity to manipulate this product and disrupt the underlying 
market that a lower position limit may protect against.
    Increased position limits for select actively traded options, such 
as that proposed herein, is not novel and has been previously approved 
by the Commission. For example, the Commission has previously approved, 
on a pilot basis, eliminating position limits for certain options.\31\ 
Additionally, the Commission has approved similar proposed rule changes 
to increase position limits for options on highly liquid, actively-
traded ETFs,\32\ including a proposal to permanently eliminate the 
position and exercise limits for options overlaying the S&P 500 Index, 
S&P 100 Index, Dow Jones Industrial Average, Nasdaq 100 Index, and the 
Russell 2000(R) Index (``RUT'').\33\ In approving the permanent 
elimination of position and exercise limits for these index options, 
the Commission relied heavily upon the Exchange's surveillance 
capabilities, and the Commission expressed trust in the enhanced 
surveillance and reporting safeguards that the Exchange took in order 
to detect and deter possible manipulative behavior which might

[[Page 13322]]

arise from eliminating position and exercise limits.\34\ Furthermore, 
as described more fully above, options on other ETFs have the position 
limits proposed herein and those ETFs have trading characteristics and 
trading volumes that are similar to those of the ETFs subject to this 
proposed rule change.
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    \31\ See Securities Exchange Act Release Nos. 67672 (August 15, 
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29); 67937 
(September 27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012-
091).
    \32\ See Securities Exchange Act Release Nos. 68086 (October 23, 
2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-066); 64928 
(July 20, 2011), 76 FR 44633 (July 26, 2011) (SR-CBOE-2011-065); 
64695 (June 17, 2011), 76 FR 36942 (June 23, 2011) (SR-PHLX-2011-
58); and 55176 (January 25, 2007), 72 FR 4741 (February 1, 2017) 
(SR-CBOE- 2007-008.).
    \33\ See Securities Exchange Act Release Nos. 44994 (October 26, 
2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-2001-22) (elimination 
of position and exercise limits on SPX, OEX, and DJX options) 
(``SPX, OEX, and DJX Position Limit Elimination Approval Order''); 
52650 (October 21, 2005), 70 FR 62147 (October 28, 2005) (SR-CBOE-
2005-41) (elimination of position and exercise limits on NDX 
options) (``NDX Position Limit Elimination Approval Order''); 56651 
(October 12, 2007), 72 FR 59130 (October 18, 2007) (SR-Phlx-2007-71) 
(``RUT Position Limit Elimination Approval Order'').
    \34\ Id.
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    Last, the Commission has expressed the belief that removing 
position and exercise limits may bring additional depth and liquidity 
without increasing concerns regarding intermarket manipulation or 
disruption of the options or the underlying securities.\35\ The 
Exchange's enhanced surveillance and reporting safeguards continue to 
be designed to deter and detect possible manipulative behavior which 
might arise from eliminating position and exercise limits.
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    \35\ Id.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. On the contrary, the Exchange 
believes that the proposed rule change will result in additional 
opportunities to achieve the investment and trading objectives of 
market participants seeking efficient trading and hedging vehicles, to 
the benefit of investors, market participants, and the marketplace in 
general.

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

    No written comments were either solicited or received.

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

    Because the proposed rule change does not (i) significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate, it has become effective pursuant to Section 
19(b)(3)(A) of the Act \36\ and Rule 19b-4(f)(6) thereunder.\37\
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    \36\ 15 U.S.C. 78s(b)(3)(A).
    \37\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the 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.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \38\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \39\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposed rule change may become effective and operative upon 
filing. The Exchange states that waiver of the operative delay would 
permit the Exchange to immediately implement the proposed rule change 
to increase the position limits as proposed herein and thereby 
seamlessly continue to offer traders and the investing public the 
ability to use these products as effective hedging and trading 
vehicles. The Exchange further states that waiver would allow the 
Exchange to remain competitive with other exchanges. The Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest. Therefore, the 
Commission hereby waives the operative delay and designates the 
proposal as operative upon filing.\40\
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    \38\ 17 CFR 240.19b-4(f)(6).
    \39\ 17 CFR 240.19b-4(f)(6)(iii).
    \40\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-Phlx-2018-24 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-Phlx-2018-24. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-Phlx-2018-24, and should be submitted on 
or before April 18, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-06140 Filed 3-27-18; 8:45 am]
 BILLING CODE 8011-01-P


