[Federal Register Volume 84, Number 205 (Wednesday, October 23, 2019)]
[Notices]
[Pages 56877-56878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23059]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87340; File No. SR-CBOE-2019-048]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Approving on an Accelerated Basis a Proposed Rule Change, as Modified 
by Amendment Nos. 2 and 3, To Adopt Rule 6.9 (In-Kind Exchange of 
Options Positions and ETF Shares)

October 17, 2019.

I. Introduction

    On September 6, 2019, Cboe Exchange, Inc. (``Cboe'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt Rule 6.9. The proposed rule change was 
published for comment in the Federal Register on September 25, 2019.\3\ 
On September 27, 2019, the Exchange filed Amendment No. 1 to the 
proposed rule change. On October 2, 2019, the Exchange withdrew 
Amendment No. 1 and filed Amendment No. 2 to the proposed rule 
change.\4\ On October 7, 2019, the Exchange filed Amendment No. 3 to 
the proposed rule change.\5\ The Commission received one comment on the 
proposed rule change.\6\ The Commission is approving the proposed rule 
change, as modified by Amendment Nos. 2 and 3, on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 87013 (September 19, 
2019), 84 FR 50490 (``Notice'').
    \4\ In Amendment No. 2, the Exchange clarifies: (1) In its 
description of the proposal that the transfer price(s) of the 
options would be the price(s) used to calculate the net asset value 
(``NAV'') of the exchange-traded fund (``ETF'') shares, in 
conformance with the proposed rule text; and (2) its expectation 
regarding the magnitude of the transfers pursuant to the proposed 
rule, asserting that it would constitute a minimal percentage of the 
total average daily volume of the combined standardized and FLexible 
EXchange Options (``FLEX Options'') with the same underlying 
security or index (rather than simply stating that it would 
constitute a minimal percentage of average daily volume of options). 
Amendment No. 2 does not materially alter the substance of the 
proposed rule change or raise unique or novel regulatory issues, and 
therefore it is not subject to notice and comment. Amendment No. 2 
to the proposed rule change is available at: https://www.sec.gov/comments/sr-cboe-2019-048/srcboe2019048-6283760-193330.pdf.
    \5\ In Amendment No. 3, the Exchange revises the proposed rule 
text to renumber proposed Rule 6.49C to Rule 6.9 and correct an 
internal cross-reference to newly renumbered Rule 5.12 in order to 
conform the proposal to rule text organizational changes that became 
effective pursuant to a separate proposed rule change while the 
instant proposal was pending before the Commission. Because 
Amendment No. 3 is a technical amendment that does not materially 
alter the substance of the proposed rule change or raise unique or 
novel regulatory issues, it is not subject to notice and comment. 
Amendment No. 3 to the proposed rule change is available at: https://www.sec.gov/comments/sr-cboe-2019-048/srcboe2019048-6258834-192936.pdf.
    \6\ See letter dated October 11, 2019 from Ken Mungan, Chairman, 
Milliman Financial Risk Management LLC, to Vanessa Countryman, 
Secretary, Commission (``Comment Letter''), which is available at: 
https://www.sec.gov/comments/sr-cboe-2019-048/srcboe2019048-6285127-193334.pdf.
---------------------------------------------------------------------------

II. Summary of the Proposed Rule Change

A. Background

    Specified quantities of ETF shares are created and redeemed for 
consideration by authorized participants. ``In-kind'' creations and 
redemptions occur when the authorized participants present (in the case 
of creations) or receive (in the case of redemptions) securities in 
exchange for ETF shares. The Commission has observed that, when 
creation and redemption transactions occur wholly or partly in-kind, 
certain benefits can accrue to an ETF and its investors; specifically, 
in-kind exchanges generally result in: (1) Lower trading expenses 
(because securities received or delivered in-kind do not need to be 
purchased or sold in the market by the ETF, thus avoiding brokerage 
fees); and (2) lower taxable gains to shareholders (because appreciated 
securities are not sold but are delivered in kind to redeeming 
authorized participants).\7\
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 75165 (June 12, 
2015), 80 FR 34729, 34732-33 (June 17, 2015) (requesting comment on 
topics related to the listing and trading of exchange-traded 
products on national securities exchanges and sales of these 
products by broker-dealers).
---------------------------------------------------------------------------

    The Exchange's current rules do not allow its Trading Permit 
Holders to effect options transfers in connection with ETF creations or 
redemptions because such transfers do not occur on Cboe or on another 
national securities exchange. Specifically, Cboe Rule 5.12(a) \8\ 
generally requires that transactions by Trading Permit Holders in 
option contracts listed on the Exchange for a premium in excess of 
$1.00 must be effected on the Exchange or on another national 
securities exchange.\9\
---------------------------------------------------------------------------

    \8\ See Amendment No. 3, supra note 5 (describing the relocation 
of this rule to its current location in the Cboe rulebook).
    \9\ Cboe Rule 6.7(a) lists the circumstances under which Trading 
Permit Holders may transfer their positions off of the Exchange. The 
circumstances listed include: (1) The dissolution of a joint account 
in which the remaining Trading Permit Holder assumes the positions 
of the joint account; (2) the dissolution of a corporation or 
partnership in which a former nominee of the corporation or 
partnership assumes the positions; (3) positions transferred as part 
of a Trading Permit Holder's capital contribution to a new joint 
account, partnership, or corporation; (4) the donation of positions 
to a not-for-profit corporation; (5) the transfer of positions to a 
minor under the Uniform Gifts to Minors Act; and (6) a merger or 
acquisition where continuity of ownership or management results. 
Additionally, Cboe Rule 5.12(b) allows a Trading Permit Holder 
acting as agent to execute a customer's order off the Exchange floor 
with any other person (except when such Trading Permit Holder also 
is acting as agent for such other person in such transaction) for 
the purchase or sale of an option contract listed on the Exchange.
---------------------------------------------------------------------------

B. Proposed Rule 6.9

    The Exchange proposes to adopt Rule 6.9, which would add a new 
circumstance under which off-floor transfers of options positions by 
Trading Permit Holders would be allowed. Under proposed Rule 6.9, 
positions in options listed on the Exchange would be permitted to be 
transferred off the Exchange by a Trading Permit Holder in connection 
with transactions to purchase or redeem ``creation units'' of ETF 
shares between an ``authorized participant'' \10\ and the issuer \11\ 
of such ETF shares, which transfer would occur at the price used to 
calculate the NAV of such ETF shares.
---------------------------------------------------------------------------

    \10\ For purposes of proposed Rule 6.9, an ``authorized 
participant'' is an entity that has a written agreement with the 
issuer of ETF shares or one of its service providers, which allows 
the authorized participant to place orders for the purchase and 
redemption of creation units (i.e., specified quantities of ETF 
shares).
    \11\ For purposes of proposed Rule 6.9, an issuer of ETF shares 
would be registered with the Commission as an open-end management 
investment company under the Investment Company Act of 1940.
---------------------------------------------------------------------------

    The Exchange asserts that proposed Rule 6.9: (1) Would allow 
options-based

[[Page 56878]]

ETFs to be more tax-efficient investment vehicles, to the benefit of 
their shareholders; and (2) may result in transaction cost savings for 
such ETFs, which may be passed along to investors.\12\ The Exchange 
states that, while information regarding options transactions effected 
on the Exchange is disseminated to OPRA, information regarding 
transferred options positions such as those that would occur pursuant 
to the proposed rule is not disseminated to OPRA and is not otherwise 
publicly available.\13\ Nevertheless, the Exchange asserts that price 
discovery and transparency for Exchange-listed options would not be 
compromised under proposed Rule 6.9. The Exchange notes that, in 
conjunction with the creation and redemption process, positions would 
be transferred at price(s) used to calculate the NAV of the ETF 
shares.\14\ The Exchange further states that any transfers effected 
pursuant to the proposed rule would constitute a minimal percentage of 
the total average daily volume of the combined standardized and FLEX 
Options with the same underlying security or index.\15\ Further, the 
Exchange generally expects creations or redemptions to include 
corresponding transactions by the authorized participant that will 
occur on an exchange and be reported to OPRA.\16\
---------------------------------------------------------------------------

    \12\ See Notice, supra note 3, 84 FR at 50491.
    \13\ See id. at 50493.
    \14\ See Amendment No. 2, supra note 4.
    \15\ See id.
    \16\ The Exchange states that: (1) For in-kind creations, an 
authorized participant will acquire the necessary options positions 
in an on-exchange transaction that will be reported to OPRA; and (2) 
for in-kind redemptions, it expects that an authorized participant 
will acquire both the shares necessary to effect the redemption and 
an options position to offset the position that it will receive as 
proceeds for the redemption, and that such options position likely 
would be acquired in an on-exchange transaction that would be 
reported to OPRA. See Notice, supra note 3, 84 FR at 50493, n.16.
---------------------------------------------------------------------------

C. Comment Letter

    The Commission received one comment letter, and the commenter 
supports Cboe's proposal. The commenter states that Cboe's current 
rules do not permit off-floor transfers for an equal value of shares of 
an ETF. As a result, only equity- and bond-based ETFs may utilize the 
in-kind redemption process, which provides tax efficiency.\17\ The 
commenter asserts that, by helping to improve the tax efficiency of 
ETFs that hold options, the proposal would establish a level for 
options-based ETFs and thereby increase the choices available to 
investors, including allowing more investors to access investment 
strategies previously available only to institutions and high net worth 
individuals.\18\
---------------------------------------------------------------------------

    \17\ See Comment Letter, supra note 6, at 2.
    \18\ See id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment Nos. 2 and 3, is consistent with the 
Act and the rules and regulations thereunder applicable to a national 
securities exchange.\19\ Specifically, the Exchange finds that the 
proposed rule change is consistent with Section 6(b)(5) \20\ of the 
Act, which requires (among other things) 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 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.
---------------------------------------------------------------------------

    \19\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \20\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes that proposed Rule 6.9 is designed to 
protect investors and the public interest because it should facilitate 
in-kind creations and redemptions by options-based ETFs, which should 
lower taxable gains of shareholders of such ETFs. The Commission 
further believes that, by facilitating in-kind creations and 
redemptions by options-based ETFs, the proposed rule may also lower 
such funds' transaction costs.
    In support of this proposal, the Exchange has made the following 
representations:
    1. OCC has informed the Exchange that it has the operational 
capabilities to effect the proposed position transfers.\21\
---------------------------------------------------------------------------

    \21\ See Notice, supra note 3, 84 FR at 50493, n.14.
---------------------------------------------------------------------------

    2. All transfers pursuant to proposed Rule 6.9 would be required to 
comply with OCC rules.\22\
---------------------------------------------------------------------------

    \22\ See id.
---------------------------------------------------------------------------

    This approval order is based on all of the Exchange's statements 
and representations, including those set forth above, in the Notice, 
and in Amendment No. 2.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment Nos. 2 and 3, is consistent with 
the Act \23\ and the rules and regulations thereunder applicable to a 
national securities exchange.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment Nos. 2 and 3, prior to the thirtieth 
day after the date of publication of the Notice in the Federal 
Register. The Exchange represents that October 31, 2019 is the fiscal 
year end for certain options-based ETFs whose shares are listed on Cboe 
BZX Exchange, Inc. and that, if such ETFs transition to in-kind 
transactions by the end of their fiscal year, their shareholders would 
no longer be subject to taxable distributions. The Exchange further 
represents that the funds and their authorized participants require 
time to implement the transition to in-kind creations and redemptions. 
The potential for tax savings for options-based ETF shareholders 
constitutes good cause to approve the proposal on an accelerated basis. 
The Commission also notes that, during the 21-day comment period after 
the Notice was published in the Federal Register, the only comment 
received supports the proposal.\24\
---------------------------------------------------------------------------

    \24\ See supra section II.C.
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-CBOE-2019-048), as modified 
by Amendment Nos. 2 and 3, be, and it hereby is, approved on an 
accelerated basis.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-23059 Filed 10-22-19; 8:45 am]
 BILLING CODE 8011-01-P


