[Federal Register Volume 85, Number 100 (Friday, May 22, 2020)]
[Notices]
[Pages 31267-31273]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11041]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88894; File No. SR-BOX-2020-13]


Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend IM-3120-
2 to BOX Rule 3120 (``Position Limits'') To Increase Position Limits 
for Options on Certain Exchange-Traded Funds (``ETFs''), and Thereby 
Similarly Increase Exercise Limits Under IM-3140-1 for Certain ETFs

May 18, 2020.
    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 May 7, 2020, BOX Exchange LLC (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 self-regulatory organization. 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 IM-3120-2 to BOX Rule 3120 
(``Position Limits'') to increase position limits for options on 
certain exchange-traded funds (``ETFs''), and thereby similarly 
increase exercise limits under IM-3140-1 for certain ETFs. The text of 
the proposed rule change is available from the principal office of the 
Exchange, at the Commission's Public Reference Room and also on the 
Exchange's internet website at http://boxoptions.com.

[[Page 31268]]

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 self-regulatory organization 
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 self-regulatory organization 
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
    The Exchange proposes to amend IM-3120-2 to BOX Rule 3120 
(``Position Limits'') to increase the position limits for options on 
the following exchange trade funds (``ETFs''): Standard and Poor's 
Depositary Receipts Trust (``SPY''), iShares MSCI EAFE ETF (``EFA''), 
iShares China Large-Cap ETF (``FXI''), iShares iBoxx High Yield 
Corporate Bond Fund (``HYG''), and Financial Select Sector SPDR Fund 
(``XLF''). This is a competitive filing that is based on a proposal 
recently submitted by the Chicago Board Options Exchange Incorporated 
(``Cboe'') and approved by the Commission.\3\
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    \3\ See Securities Exchange Act Release No. 34-88768 (April 29, 
2020), 85 FR 26736 (May 5, 2020) (Order Granting Accelerated 
Approval of SR-BOX-2020-015 [sic] as Modified by Amendment No. 1).
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    Position limits are designed to address potential manipulative 
schemes and adverse market impacts surrounding the use of options, such 
as disrupting the market in the security underlying the options. While 
position limits should address and discourage the potential for 
manipulative schemes and adverse market impact, if such limits are set 
too low, participation in the options market may be discouraged. The 
Exchange believes that position limits must therefore be balanced 
between mitigating concerns of any potential manipulation and the cost 
of inhibiting potential hedging activity that could be used for 
legitimate economic purposes.
    According to Cboe, market participants have increased their demand 
for options on SPY, EFA, FXI, HYG, and XLF (collectively, the 
``Underlying ETFs'') for both trading and hedging purposes.\4\ Cboe 
noted that although the demand for these options appears to have 
increased, position limits for options on the Underlying ETFs have 
remained the same. The Exchange believes these unchanged position 
limits may have impeded, and may continue to impede, trading activity 
and strategies of investors, such as use of effective hedging vehicles 
or income generating strategies (e.g., buy-write or put-write), and the 
ability of Market-Makers to make liquid markets with tighter spreads in 
these options resulting in the transfer of volume to over-the-counter 
(``OTC'') markets. OTC transactions occur through bilateral agreements, 
the terms of which are not publically disclosed to the marketplace. As 
such, OTC transactions do not contribute to the price discovery process 
on a public exchange or other lit markets. Therefore, the Exchange 
believes that the proposed increases in position limits for options on 
the Underlying ETFs may enable liquidity providers to provide 
additional liquidity to the Exchange and other market participants to 
transfer their liquidity demands from OTC markets to the Exchange, as 
well as other options exchange on which they participate. As described 
in further detail below, the Exchange believes that the continuously 
increasing market capitalization of the Underlying ETFs and ETF 
component securities, as well as the highly liquid markets for those 
securities, reduces the concerns for potential market manipulation and/
or disruption in the underlying markets upon increasing position 
limits, while the rising demand for trading options on the Underlying 
ETFs for legitimate economic purposes compels an increase in position 
limits.
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    \4\ Id.
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Proposed Position Limits for Options on the Underlying ETFs
    Position limits for options on ETFs are determined pursuant to Rule 
3120, and vary according to the number of outstanding shares and the 
trading volumes of the underlying stocks or ETFs over the past six 
months. Pursuant to Exchange Rule 3120, the largest in capitalization 
and the most frequently traded stocks and ETFs have an option position 
limit of 250,000 contracts (with adjustments for splits, re-
capitalizations, etc.) on the same side of the market; and smaller 
capitalization stocks and ETFs have position limits of 200,000, 75,000, 
50,000 or 25,000 contracts (with adjustments for splits, re-
capitalizations, etc.) on the same side of the market. Options on HYG 
and XLF are currently subject to the standard position limit of 250,000 
contracts as set forth in Exchange Rule 3120. Rule IM-3120-2 sets forth 
separate position limits for options on specific ETFs, including SPY, 
FXI, and EFA. In addition, BOX Rule 3140 and IM-3140-1 (which are not 
being amended by this filing), establish exercise limits for the 
aforementioned ETFs.
    The Exchange proposes to amend Rule IM-3120-2 to double the 
position limits and, as a result, exercise limits, for options on each 
of HYG, XLF, FXI, EFA and SPY. By virtue of IM-3140-1, the exercise 
limits for EFA, FXI, HYG, XLF, and SPY would similarly increase. The 
table below represents the current, and proposed, position limits for 
options on the ETFs subject to this proposal:

------------------------------------------------------------------------
                                              Current        Proposed
                   ETF                    position limit  position limit
------------------------------------------------------------------------
SPY.....................................       1,800,000       3,600,000
EFA.....................................         500,000       1,000,000
FXI.....................................         500,000       1,000,000
HYG.....................................         250,000         500,000
XLF.....................................         250,000         500,000
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    The Exchange notes that the proposed position limits for options on 
EFA and FXI are consistent with existing position limits for options on 
the iShares Russell 2000 ETF (``IWM'') and the iShares MSCI Emerging 
Markets ETF (``EEM''), while the proposed limits for options on XLF and 
HYG are consistent with current position limits for options on the 
iShares MSCI Brazil Capped ETF (``EWZ''), iShares 20+ Year Treasury 
Bond Fund ETF (``TLT''), and iShares MSCI Japan ETF (``EWJ''). The 
Exchange represents that the Underlying ETFs qualify for either (1) the 
initial listing criteria set forth in Exchange Rule 5020(h)(2) for ETFs 
holding non-U.S. component securities, or (2) 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, as well as the 
continued listing criteria in Rule 5030.\5\ In compliance with its 
listing rules, the Exchange also represents that non-U.S. component 
securities that are not subject to a CSA do not, in the aggregate, 
represent more than 50% of the weight of any of the Underlying ETFs.\6\
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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 Rule 5020(h)(2); Rule 5030(h).
    \6\ See Rule 5020(h)(2)(ii)(A).
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Cboe's Composition and Growth Analysis for Underlying ETFs
    As stated above, position (and exercise) limits are intended to 
prevent the establishment of options positions

[[Page 31269]]

that can be used or might create incentives to manipulate the 
underlying market so as to benefit options positions. The Securities 
and Exchange Commission (the ``Commission'') has recognized that these 
limits are designed to minimize the potential for mini-manipulations 
and for corners or squeezes of the underlying market, as well as serve 
to reduce the possibility for disruption of the options market itself, 
especially in illiquid classes.\7\ The Underlying ETFs as well as the 
ETF components are highly liquid, and are based on a broad set of 
highly liquid securities and other reference assets, as demonstrated by 
the trading statistics collected by Cboe.\8\ The Commission recognized 
the liquidity of the securities comprising the underlying interest of 
SPY and permitted no position limits on SPY options from 2012 through 
2018.\9\
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    \7\ See Securities Exchange Act Release No. 67672 (August 15, 
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29).
    \8\ See supra note 3.
    \9\ See Securities Exchange Act Release Nos. 67936 (September 
27, 2012), 77 FR 60491 (October 3, 2012) (SR-BOX-2012-013), which 
implemented a pilot program that ran through 2017, during which 
there were no position limits for options on SPY. The Exchange notes 
that throughout the duration of the pilot program it was not aware 
of any problems created or adverse consequences as a result of the 
pilot program. See also Securities Exchange Act Release No. 34-83414 
(June 12, 2018), 83 FR 28296 (June 18, 2018) (SR-BOX-2018-22).
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    To support its proposed position limit increases, Cboe conducted an 
analysis in support of its proposal. BOX agrees with Cboe's trading 
statistics and analysis. In support of its proposal, Cboe considered 
both liquidity of the Underlying ETFs and the component securities of 
the Underlying ETFs, as well as the availability of economically 
equivalent products to the overlying options and their respective 
position limits. For instance, some of the Underlying ETFs are based 
upon broad-based indices that underlie cash-settled options, and 
therefore the options on the Underlying ETFs are economically 
equivalent to the options on those indices, which have no position 
limits. Other Underlying ETFs are based upon broad-based indices that 
underlie cash-settled options with position limits reflecting notional 
values that are larger than current position limits for options on the 
ETFs based on the same indices. For indexes that are tracked by an 
Underlying ETF but on which there are no options listed, the Exchange 
believes, based on the liquidity, depth and breadth of the underlying 
market of the components of the indexes, that each of the indexes 
referenced by the applicable ETFs would be considered a broad-based 
index under the Exchange's Rules. Additionally, if in some cases 
certain position limits are appropriate for the options overlying 
comparable indexes or basket of securities that the Underlying ETFs 
track, then those economically equivalent position limits should be 
appropriate for the options overlying the Underlying ETFs.
    The Exchange notes, the following trading statistics have been 
collected by Cboe,\10\ regarding shares of and options on the 
Underlying ETFs, as well as the component securities:
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    \10\ See Securities Exchange Act Release No. 34-88350 (March 10, 
2020), 85 FR 15003 (March 16, 2020) (SR-CBOE-2020-015).
    \11\ Cboe's Average daily volume (ADV) data for ETF shares and 
options contracts are for all of 2019. Additionally, reference to 
ADV in ETF shares, and ETF options herein this proposal are for all 
of 2019, unless otherwise indicated.
    \12\ Shares Outstanding and Fund Market Capitalization Data in 
the tables presented herein this filing were sourced from Bloomberg 
and the Cboe's internal data on January 2, 2020.
    \13\ Total Market Capitalization of the ETF Components presented 
in the tables herein this filing were sourced from Bloomberg on 
January 3, 2020, as well as directly from the issuers' websites.
    \14\ Total Market Capitalization of HYG was sourced from IHS 
Markit, which sends daily constituent information to Cboe.

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                                                                                       Shares outstanding                           Total market cap of
              Product                 ADV \11\ (ETF shares)  ADV (option contracts)       (ETFs) \12\       Fund market cap (USD)   ETF Components \13\
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SPY................................  70.3 million..........  2.8 million...........  968.7 million........  312.9 billion........  29.3 trillion.
FXI................................  26.1 million..........  196,600...............  106.8 million........  4.8 billion..........  28.0 trillion.
EFA................................  25.1 million..........  155,900...............  928.2 million........  64.9 billion.........  19.3 trillion.
HYG................................  20.0 million..........  193,700...............  216.6 million........  19.1 billion.........  \14\906.4 billion.
XLF................................  48.8 million..........  102,100...............  793.6 million........  24.6 billion.........  3.8 trillion.
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    In addition, Cboe also collected the same trading statistics, where 
applicable, as above regarding a sample of other ETFs, as well as the 
current position limits for options on such ETFs, in order to draw 
comparisons in support of their proposed position limit increases for 
options on a number of Underlying ETFs (see further discussion below):

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                                                                                                                                              Current
             Product                 ADV (ETF shares)      ADV (option    Shares outstanding      Fund market cap    Total market cap of     position
                                                           contracts)           (EFTs)                 (USD)            ETF components        limits
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QQQ..............................  30.2 million........         670,200  410.3 million.......  88.7 billion........  10.1 trillion......       1,800,000
EWZ..............................  26.7 million........         186,500  233 million.........  11.3 billion........  234.6 billion......         500,000
TLT..............................  9.6 million.........          95,200  128.1 million.......  17.5 billion........  N/A................         500,000
EWJ..............................  7.2 million.........           5,700  236.6 million.......  14.2 billion........  3 trillion.........         500,000
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    The following analysis, which BOX agrees with, was conducted by 
Cboe in support of its proposal. Cboe noted that, overall, the 
liquidity in the shares of the Underlying ETFs and in the component 
securities of the Underlying ETFs, and in their overlying options, as 
well as the large market capitalizations and structure of each of the 
Underlying ETFs, support the proposal to increase the position limits 
for each option class. Given the robust liquidity and capitalization in 
the Underlying ETFs and in the component securities of the Underlying 
ETFs, the Exchange does not anticipate that the proposed increase in 
position limits would create significant price movements. Also, the 
Exchange believes the market capitalization of the underlying component 
securities of the applicable index or reference asset are large enough 
to adequately absorb potential price movements that may be caused by 
large trades.
    Specifically, the Exchange notes that SPY tracks the performance of 
the S&P 500 Index, which is an index of

[[Page 31270]]

diversified large cap U.S. companies.\15\ It is composed of 505 
selected stocks spanning over approximately 24 separate industry 
groups. The S&P 500 is one of the most commonly followed equity 
indices, and is widely considered to be the best indicator of stock 
market performance as a whole. SPY is one of the most actively traded 
ETFs. In support of its proposal to increase position limits for SPY to 
3,600,000 contracts, Cboe compared SPY's ADV from 2017 to the end of 
2019, and found that SPY's ADV has increased from approximately 64.6 
million shares to 70.3 million shares.\16\ Similarly, Cboe noted SPY's 
ADV in options contracts has increased from 2.6 million to 2.8 million 
through 2019.\17\ Cboe's data shows the demand for options trading on 
SPY has continued to increase; however, the position limits have 
remained the same, which the Exchange believes may have impacted growth 
in SPY option volume from 2017 through 2019. In addition, Cboe notes 
that SPY shares are more liquid than PowerShares QQQ Trust (``QQQ'') 
shares, which is also currently subject to a position limit of 
1,800,000 contracts.\18\ Specifically, according to Cboe's statistical 
comparison, SPY currently experiences over twice the ADV in shares and 
over four times the ADV in options than that of QQQ.\19\
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    \15\ See SPDR S&P 500 ETF Trust, available at: https://www.ssga.com/us/en/individual/etfs/funds/spdr-sp-500-etf-trust-spy 
(January 21, 2020).
    \16\ See supra note 3.
    \17\ See Securities Exchange Act Release No. 83415 (June 12, 
2018), 83 FR 28274 (June 18, 2018) (SR-CBOE-2018-042); and 34-83414 
(June 12, 2018), 83 FR 28296 (June 18, 2020) (SR-BOX-2018-22).
    \18\ The Exchange notes that it also updates the PowerShares QQQ 
Trust symbol in IM-3120-2 from QQQQ to QQQ as this accurately 
reflects the current ticker symbol for PowerShares QQQ, which was 
officially changed from QQQQ to QQQ by Invesco PowerShares Capital 
Management LLC in 2011. See Morningstar, PowerShares Changes Ticker 
Symbol of Tech-Heavy QQQ ETF, available at morningstar.com/articles/374713/powershares-changes-tickersymbol-of-tech-heavy-qqq-etf (March 
23, 2011).
    \19\ The 2019 ADV for QQQ shares is 30.2 million and for options 
on QQQ is 670,200.
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    EFA tracks the performance of MSCI EAFE Index (``MXEA''), which is 
comprised of over 900 large and mid-cap securities across 21 developed 
markets, including countries in Europe, Australia and the Far East, 
excluding the U.S. and Canada.\20\ In support of its proposal to 
increase the position limit for EFA, Cboe's proposal specifies, that 
from 2017 through 2019, ADV has grown significantly in shares of EFA 
and in options on EFA, from approximately 19.4 million shares in 2017 
to 25.1 million through 2019, and from approximately 98,800 options 
contract in 2017 to 155,900 through 2019. Further, Cboe compared the 
notional value of EFA's share price of $69.44 and MXEA's index level of 
2036.94, approximately 29 EFA option contracts equal one MXEA option 
contract. Based on the above comparison of notional values, Cboe 
concluded that a position limit for EFA options would be economically 
equivalent to that of MXEA options which equates to 725,000 contracts 
(previously) and 1,450,000 for Cboe's current 50,000 contract position 
limit for MXEA options.\21\ Cboe also noted that MXEA index options 
have an ADV of 594 options contracts, which equate to an ADV of 17,226 
EFA option contracts (as that is 29 times the size of 594). The 
Exchange believes the significantly higher actual ADV (155,900 
contracts), economically equivalent ADV (17,226 contracts), notional 
value, and economically equivalent position limits for EFA as compared 
to MXEA options, supports an increase in position limits for EFA 
options from 500,000 contracts to 1,000,000 contracts.
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    \20\ See iShares MSCI EAFE ETF, available at https://www.ishares.com/us/products/239623/ishares-msci-eafe-etf (February 
10, 2020).
    \21\ The Exchange notes that BOX does not list options on 
foreign indexes.
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    FXI tracks the performance of the FTSE China 50 Index, which is 
composed of the 50 largest Chinese stocks.\22\ According to Cboe, FXI 
shares and options have also experienced increased liquidity since 
2017, as ADV has grown from approximately 15.1 million shares in 2017 
to 26.1 million through 2019, as well as approximately 71,900 options 
contracts in 2017 to 196,600 through 2019. Cboe notes that although 
there are currently no options on the FTSE China 50 Index listed for 
trading, the components of the FTSE China 50 Index, which can be used 
to create a basket of stocks that equate to the FXI ETF, currently have 
a market capitalization of approximately $28 trillion and FXI has a 
market capitalization of $4.8 billion (as indicated above), which the 
Exchange believes are both large enough to absorb potential price 
movements caused by a large trade in FXI.
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    \22\ See iShares China Large-Cap ETF, available at https://www.ishares.com/us/products/239536/ishares-china-largecap-etf 
(February 10, 2020).
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    XLF invests in a wide array of financial service firms with 
diversified business lines ranging from investment management to 
commercial and investment banking. It generally corresponds to the 
price and yield performance of publicly traded equity securities of 
companies in the SPDR Financial Select Sector Index.\23\ In support of 
its proposal, Cboe compared XLF's ADV in shares and in options to the 
ADV in shares and options for EWZ (26.7 million shares and 186,500 
options contracts), TLT (9.6 million shares and 95,200 options 
contracts), and EWJ (7.2 million shares and 5,700 options contracts). 
According to Cboe, XLF experiences significantly greater ADV in shares 
and options than EWZ, TLT, and EWJ, which already have a position limit 
of 500,000 contracts--the proposed position limit for XLF options. 
According to Cboe, although there are no options listed on the SPDR 
Financial Select Sector Index listed for trading, the components of the 
index, which can be used to create a basket of stocks that equate to 
the XLF ETF, currently have a market capitalization of $3.8 trillion 
(indicated above). Additionally, XLF has a market capitalization of 
$24.6 billion. The Exchange believes that both of these are large 
enough to absorb potential price movements caused by a large trade in 
XLF.
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    \23\ See Select Sector SPDR ETFs, XLF, available at http://www.sectorspdr.com/sectorspdr/sector/xlf (January 15, 2020).
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    Finally, HYG attempts to track the investment results of Markit 
iBoxx USD Liquid High Yield Index, which is composed of U.S. dollar-
denominated, high-yield corporate bonds and is one of the most widely 
used high-yield bond ETFs.\24\ To support its proposed position limit 
increase on HYG, Cboe compared the HYG's ADV in share and options to 
that of both TLT (9.6 million shares and 95,200 options contracts), and 
EWJ (7.2 million shares and 5,700 options contracts). BOX agrees with 
Cboe's comparison and following analysis. Cboe found that HYG 
experiences significantly higher ADV in shares and options than both 
TLT and EWJ, which are currently subject to a position limit of 500,000 
options contracts--the proposed limit for options on HYG. According to 
Cboe, while HYG does not have an index option analogue listed for 
trading, Cboe believes that its market capitalization of $19.1 billion, 
and of $906.4 billion in component securities, is adequate to absorb a 
potential price movement that may be caused by large trades in HYG.
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    \24\ See iShares iBoxx $ High Yield Corporate Bond ETF, 
available at https://www.ishares.com/us/products/239565/ishares-iboxx-high-yield-corporatebond-etf (January 15, 2020).
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Creation and Redemption for ETFs
    The Exchange believes that the creation and redemption process for 
ETFs will lessen the potential for manipulative activity with options 
on the Underlying ETFs. When an ETF

[[Page 31271]]

provider wants to create more shares, it looks to an Authorized 
Participant (generally a market maker or other large financial 
institution) to acquire the securities the ETF is to hold. For 
instance, when an ETF is designed to track the performance of an index, 
the Authorized Participant can purchase all the 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 during an entire trading day, and is not subject to position 
limits. This process works in reverse where the ETF provider 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 for the ETF options.
    The Exchange understands that the ETF creation and redemption 
process seeks to keep an ETF's share price trading in line with the 
ETF's underlying net asset value. Because an ETF trades like a stock, 
its share 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 
securities. When this happens, the Authorized Participant believes the 
ETF may now be overpriced, so it may buy shares of the component 
securities and then sell ETF shares in the open market (i.e. 
creations). This may drive the ETF's share price back toward the 
underlying net asset value. Likewise, if the ETF share price 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 (i.e. redemptions). Buying undervalued ETF shares 
may drive the share price of the ETF back toward fair value. This 
arbitrage process helps to keep an ETF's share price in line with the 
value of its underlying portfolio.
Surveillance and Reporting Requirements
    The Exchange believes that increasing the position limits for the 
options on the Underlying ETFs would lead to a more liquid and 
competitive market environment for these options, which will benefit 
customers interested in trading these products. The reporting 
requirement for the options on the Underlying ETFs would remain 
unchanged. Thus, the Exchange would still require that each BOX 
Participant that maintains positions 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' positions, whether 
such positions are hedged and, if so, a description of the hedge(s). 
Exchange Market-Makers \25\ are exempt from this reporting requirement, 
because Market Maker information can be accessed through the Exchange's 
market surveillance systems.\26\ In addition, the general reporting 
requirement for customer accounts that maintain an aggregate long or 
short position of 200 or more options contracts of any single class of 
options traded on BOX would remain at this level for the options 
subject to this proposal, and continue to serve as an important part of 
the Exchange's surveillance efforts.\27\
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    \25\ A Market Maker ``is an Options Participant registered with 
the Exchange for the purpose of making markets in options contracts 
traded on the Exchange and that is vested with the rights and 
responsibilities specified in the Rule 8000 Series. All Market 
Makers are designated as specialists on the Exchange for all 
purposes under the Exchange Act or Rules thereunder.'' See BOX Rule 
100(a)(31).
    \26\ The Exchange notes that the Financial Industry Regulatory 
Authority (``FINRA''), pursuant to a regulatory services agreement, 
operates surveillance on behalf of BOX. This type of Market Maker 
information can be found through FINRA.
    \27\ See BOX Rule 3150 for reporting requirements.
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    The Exchange believes that the existing surveillance procedures and 
reporting requirements at the Exchange and other SROs are capable of 
properly identifying disruptive and/or manipulative trading activity. 
The Exchange also represents that it has adequate surveillances in 
place to detect potential manipulation, as well as reviews in place to 
identify potential changes in composition of the Underlying ETFs, and 
continued compliance with the Exchange's listing standards. These 
procedures utilize daily monitoring of market activity via automated 
surveillance techniques to identify unusual activity in both options 
and the underlyings, as applicable.\28\ The Exchange also notes that 
large stock holdings must be disclosed to the Commission by way of 
Schedules 13D or 13G,\29\ which are used to report ownership of stock 
which exceeds 5% of a company's total stock issue and may assist in 
providing information in monitoring for any potential manipulative 
schemes.
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    \28\ These procedures have been effective for the surveillance 
of trading the options subject to this proposal and will continue to 
be employed by FINRA on behalf of BOX.
    \29\ 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 regarding potentially large, unhedged positions in the options 
on the Underlying ETFs. 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 BOX 
Participant must maintain for a large position held by itself or by its 
customer.\30\ In addition, Rule 15c3-1 \31\ imposes a capital charge on 
BOX Participants to the extent of any margin deficiency resulting from 
the higher margin requirement.
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    \30\ See BOX Rule 10100 Series for a description of margin 
requirements.
    \31\ 17 CFR 240.15c3-1.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\32\ in general, and Section 
6(b)(5) of the Act,\33\ in particular, in that it is 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 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 the Section 
6(b)(5) \34\ requirement that the rules of an exchange not be designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \32\ 15 U.S.C. 78f(b).
    \33\ 15 U.S.C. 78f(b)(5).
    \34\ Id.
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    The Exchange believes that the proposed increase in position limits 
for options on the Underlying ETFs will remove impediments to and 
perfect the mechanism of a free and open market and national market 
system, and, in general, protect investors and the public interest, 
because it will provide market participants with the ability to more 
effectively execute their trading and hedging activities. The proposed 
increases will allow market participants to more fully implement 
hedging strategies in related derivative products and to further use 
options to achieve investment strategies (e.g., there are Exchange-
Traded Products (``ETPs'') that use options on the Underlying ETFs as 
part of their investment strategy, and

[[Page 31272]]

the applicable position limits as they stand today may inhibit these 
ETPs in achieving their investment objectives, to the detriment of 
investors). Also, increasing the applicable position limits may allow 
Market-Makers to provide the markets for these options with more 
liquidity in amounts commensurate with increased consumer demand in 
such markets. The proposed position limit increases may also encourage 
other liquidity providers to shift liquidity, as well as encourage 
consumers to shift demand, from over the counter markets onto the 
Exchange, which will enhance the process of price discovery conducted 
on the Exchange through increased order flow.
    In addition, the Exchange believes that the structure of the 
Underlying ETFs, the considerable market capitalization of the funds, 
underlying component securities, and the liquidity of the markets for 
the applicable options and underlying component securities will 
mitigate concerns regarding potential manipulation of the products and/
or disruption of the underlying markets upon increasing the relevant 
position limits. As a general principle, increases in market 
capitalizations, active trading volume, and deep liquidity of 
securities do not lead to manipulation and/or disruption. This general 
principle applies to the recently observed increased levels of market 
capitalization, trading volume, and liquidity in shares of the 
Underlying ETFs, and the components of the Underlying ETFs (as 
described above), the Exchange does not believe that the options 
markets or underlying markets would become susceptible to manipulation 
and/or disruption as a result of the proposed position limit increases. 
Indeed, the Commission has previously expressed the belief that 
removing position and exercise limits may bring additional depth and 
liquidity to the options markets without increasing concerns regarding 
intermarket manipulation or disruption of the options or the underlying 
securities.\35\ More specifically, the Commission recently approved 
Cboe's proposal to increase the position limits for the Underlying ETFs 
in this filing.\36\
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    \35\ See Securities Exchange Act Release No. 62147 (October 28, 
2005) (SR-CBOE-2005-41), at 62149.
    \36\ See supra note 3.
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    Further, the Exchange notes that the proposed rule change to 
increase position limits for select actively traded options, 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 options on SPY.\37\ Additionally, the Commission 
has approved similar proposed rule changes by the Exchange to increase 
position limits for options on highly liquid, actively-traded ETFs.\38\ 
In approving the permanent elimination of position (and exercise 
limits) for such options, the Commission relied heavily upon Cboe's 
surveillance capabilities, expressing trust in the enhanced 
surveillances and reporting safeguards that Cboe took in order to 
detect and deter possible manipulative behavior which might arise from 
eliminating position and exercise limits.\39\ Furthermore, as described 
more fully above, the proposed position limits for options on EFA and 
FXI are consistent with existing position limits for options on IWM and 
EEM, and the proposed limits for options on XLF and HYG are consistent 
with current position limits for options on EWZ, TLT, and EWJ.
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    \37\ See supra notes 9 and 10.
    \38\ See supra note 3; see also Securities Exchange Act Release 
No. 68086 (October 23, 2012), 77 FR 65600 (October 29, 2012) (SR-
CBOE-2012-066); and 34-68478 (December 19, 2012), 77 FR 76132 
(December 26, 2012) (SR-BOX-2012-023).
    \39\ See Securities Exchange Act Release Nos. 52650 (October 21, 
2005), 70 FR 62147, at 62149 (October 28, 2005) (SR-CBOE-2005-41).
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    The Exchange believes that BOX's surveillance and reporting 
safeguards continue to be designed to deter and detect possible 
manipulative behavior that might arise from increasing or eliminating 
position and exercise limits in certain classes. Lastly, the Exchange 
believes that the current financial requirements imposed by the 
Exchange and by the Commission adequately address concerns regarding 
potentially large, unhedged position in the options on the Underlying 
ETFs, further promoting just and equitable principles of trading, the 
maintenance of a fair and orderly market, and the protection of 
investors.

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe the proposed rule change will impose any burden on intramarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act because the increased position limits (and exercise 
limits) will be available to all market participants and apply to each 
in the same manner. The Exchange believes that the proposed rule change 
will provide additional opportunities for market participants to more 
efficiently achieve their investment and trading objectives.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the Act. On the contrary, the Exchange 
believes the proposal promotes competition because it may attract 
additional order flow from the OTC market to exchanges, which would in 
turn compete amongst each other for those orders. The Exchange believes 
market participants would benefit from being able to trade options with 
increased position limits in an exchange environment in several ways, 
including but not limited to the following: (1) Enhanced efficiency in 
initiating and closing out position; (2) increased market transparency; 
and (3) heightened contra-party creditworthiness due to the role of OCC 
as issuer and guarantor. Further, the Exchange notes that the rule 
change is being proposed as a competitive response to a filing 
submitted by Cboe that was recently approved by the Commission.\40\
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    \40\ See supra, note 3.
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    As such, 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.

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

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

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

    Because the foregoing 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 \41\ and Rule 19b-
4(f)(6) thereunder.\42\
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    \41\ 15 U.S.C. 78s(b)(3)(A).
    \42\ 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.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the

[[Page 31273]]

Act \43\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \44\ 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 operative upon filing. The Exchange 
states that waiver of the operative delay would be consistent with the 
protection of investors and the public interest because it will ensure 
fair competition among the exchanges by allowing the Exchange to 
immediately increase the position limits for the products subject to 
this proposal, which the Exchange believes will provide consistency for 
BOX Participants that are also members at CBOE where these increased 
position limits are currently in place. For this reason, the Commission 
believes that waiver of 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.\45\
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    \43\ 17 CFR 240.19b-4(f)(6).
    \44\ 17 CFR 240.19b-4(f)(6)(iii).
    \45\ For purposes only of waiving the 30-day operative delay, 
the Commission also has 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 change 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 rule-comments@sec.gov. Please include 
File Number SR-BOX-2020-13 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-BOX-2020-13. 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-BOX-2020-13, and should be submitted on 
or before June 12, 2020.
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    \46\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11041 Filed 5-21-20; 8:45 am]
 BILLING CODE 8011-01-P


