[Federal Register Volume 85, Number 131 (Wednesday, July 8, 2020)]
[Notices]
[Pages 41077-41079]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14631]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89213; File No. SR-MIAX-2020-11]


Self-Regulatory Organizations; Miami International Securities 
Exchange, LLC; Order Approving a Proposed Rule Change To Amend Exchange 
Rule 518, Complex Orders, To Adopt New Interpretation and Policy .08, 
Related Futures Cross Orders

July 1, 2020.

I. Introduction

    On May 11, 2020, Miami International Securities Exchange, LLC 
(``MIAX'' 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 provide for the trading of 
Related Futures Cross (``RFC'') orders. The proposed rule change was 
published for comment in the Federal Register on May 20, 2020.\3\ The 
Commission received no comment letters regarding the proposed rule 
change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 88872 (May 14, 
2020), 85 FR 30779 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to amend MIAX Rule 518, Complex Orders, to 
adopt new Interpretation and Policy .08 to provide for the trading of 
RFC orders. An RFC order is comprised of a SPIKES options \4\ combo 
coupled with a contra-side order or orders totaling an equal number of 
SPIKES option combo orders, which is identified to MIAX as being part 
of an exchange of option contracts for related futures positions.\5\ 
For purposes of proposed MIAX Rule 518(a), an exchange of option 
contracts for related futures positions is a transaction entered into 
by market participants seeking to swap option positions with related 
futures positions

[[Page 41078]]

with related exposures.\6\ A related futures position is a position in 
a futures contract with either the same underlying as, or a high degree 
of price correlation to, the underlying of the option combo in the RFC 
order so that the execution of the option combos in the RFC order would 
serve as an appropriate hedge for the related future positions.\7\ In 
an exchange of contracts for related positions, one party(ies) must be 
the buyer(s) of (or the holder(s) of) the long market exposure 
associated with the options positions and the seller(s) of 
corresponding futures contracts and the other party(ies) must be the 
seller(s) of (or holder(s) of) the short market exposure associated 
with the options positions and the buyer(s) of the corresponding 
futures contracts.\8\ The quantity of the option contracts executed as 
part of the RFC order must correlate to the quantity represented by the 
related futures position portion of the exchange.\9\ The transaction 
involving the related futures position of the exchange must comply with 
all applicable rules of the designated contract market on which the 
futures are listed for trading.\10\ An RFC order may be executed only 
during Regular Trading Hours and contemporaneously with the execution 
of the related futures position portion of the exchange.\11\ The 
Exchange notes that the proposal is limited to a single class of a 
proprietary product listed only on the Exchange.\12\
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    \4\ The SPIKES Index (``SPIKES'' or ``Index'') measures expected 
30-day volatility of the SPDR S&P 500 ETF Trust (``SPY''). See 
Securities Exchange Act Release No. 84417 (October 12, 2018), 83 FR 
52865 (October 18, 2018) (File No. SR-MIAX-2018-14) (approving the 
listing and trading of SPIKES Index options).
    \5\ See proposed MIAX Rule 518, Interpretation and Policy 
.08(a). For purposes of proposed MIAX Rule 518(a), a SPIKES options 
combo is a two-legged order with one leg to purchase (sell) SPIKE 
calls and another leg to sell (purchase) the same number of SPIKE 
puts with the same expiration date and strike price. See proposed 
MIAX Rule 518, Interpretation and Policy .08(a)(4).
    \6\ See proposed MIAX Rule 518(a)(5).
    \7\ See proposed MIAX Rule 518(a)(5)(a).
    \8\ See proposed MIAX Rule 518(a)(5)(b).
    \9\ See id.
    \10\ See proposed MIAX Rule 518(a)(7).
    \11\ See proposed MIAX Rule 518(a)(6).
    \12\ See Notice, 85 FR at 30781.
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    To execute an RFC order, an Electronic Exchange Member (``EEM'') 
\13\ must submit the RFC order to the System, which may execute 
automatically on entry without exposure.\14\ An EEM may execute an RFC 
order only if: (i) Each option leg executes at a price that complies 
with MIAX Rule 518(c), provided that no option leg executes at the same 
price as a Priority Customer Order in the Simple Book; (ii) each option 
leg executes at a price at or between the NBBO for the applicable 
series; and (iii) the execution price is better than the price of any 
complex order resting in the Strategy Book, unless the RFC order is a 
Priority Customer Order and the resting complex order is a non-Priority 
Customer Order, in which case the execution price may be the same as or 
better than the price of the resting complex order.\15\ The System 
cancels an RFC order if it cannot execute.\16\
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    \13\ An EEM is a Trading Permit who is not a Market Maker. EEMs 
are deemed ``members'' under the Exchange Act. The System is the 
automated trading system used by the Exchange for the trading of 
securities. See MIAX Rule 100.
    \14\ See proposed MIAX Rule 518(a)(1). The Exchange notes that a 
Qualified Contingent Cross Order is similarly executed as a clean 
cross. See Notice, 85 FR at 30781, n. 14 (citing MIAX Rule 516(j)). 
See also MIAX Rules 515(h)(4) (execution of Complex Qualified 
Contingent Cross (``cQCC'') Orders) and 518(b)(6) (defining cQCC 
Orders).
    \15\ See proposed MIAX Rule 518(a)(2).
    \16\ See id.
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    Because there currently are no futures on the SPIKES Index, market 
participants that wish to hedge a position in SPIKES options using 
futures must use a highly correlated related instrument, such as VIX 
futures.\17\ The Exchange notes that although SPIKES is highly 
correlated to VIX, there is some basis risk between the two products, 
which can be exacerbated during times of market volatility.\18\ As 
described more fully in the Notice, a market participant that has 
hedged a SPIKES options position with VIX futures could eliminate the 
basis risk in that position by exchanging the VIX futures position for 
a hedge comprised of SPIKES option combos, a synthetic equivalent to 
the VIX futures position that does not carry basis risk.\19\ A market 
participant seeking to reduce margin and capital requirements could 
exchange a position in SPIKES options combos for a corresponding VIX 
futures position.\20\ The Exchange proposes to adopt RFC orders to 
facilitate these trades.\21\ The Exchange has put in place a regulatory 
review plan to ensure that RFC orders are executed in conjunction with 
an exchange of contracts for related positions as required by the 
proposed rule.\22\
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    \17\ MIAX notes that SPIKES is over 99% correlated to VIX. VIX 
futures trade on the Chicago Futures Exchange. See Notice, 85 FR at 
30779-80.
    \18\ Basis risk is the financial risk that offsetting 
investments in a hedging strategy will not experience price changes 
in entirely opposite directions from each other. This imperfect 
correlation between two investments creates the potential for excess 
gains or losses in a hedging strategy, thus adding risk to the 
position. See Notice, 85 FR at 30779, n. 6. The Exchanges notes that 
the SPIKES settlement value is determined using the opening prices 
on MIAX of SPY options that expire in 30 days, while the VIX 
settlement value is determined using the opening prices on the Cboe 
Exchange of SPX options that expire in 30 days. Although SPY and SPX 
are highly correlated, variances in supply and demand can cause the 
settlement prices of the SPIKES and VIX Indexes to diverge. See 
Notice, 85 FR at 30779-80.
    \19\ See id.
    \20\ See id. at 30780.
    \21\ See id.
    \22\ See id. at 30781.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act,\23\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.\24\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\25\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest, and that the rules are not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. RFC 
orders would allow market participants trading SPIKES options to 
eliminate basis risk by exchanging a VIX futures hedge for SPIKES 
options combos, or to manage capital and margin requirements by 
exchanging positions in SPIKES options combos with corresponding 
positions in VIX futures, as described above. The Commission notes that 
an RFC order may execute automatically without exposure only if: (i) 
Each option leg executes at a price that complies with MIAX Rule 
518(c), provided that no option leg executes at the same price as a 
Priority Customer Order in the Simple Book; (ii) each option leg 
executes at a price at or between the NBBO for the applicable series; 
and (iii) the execution price is better than the price of any complex 
order resting in the Strategy Book, unless the RFC order is a Priority 
Customer Order and the resting complex order is a non-Priority Customer 
Order, in which case the execution price may be the same as or better 
than the price of the resting complex order.\26\ In addition, the 
transaction involving the related futures position of an RFC order must 
comply with all applicable rules of the designated contract market on 
which the futures are listed for trading.\27\ The Exchange has put in 
place a regulatory review plan to ensure that RFC orders are executed 
in conjunction with an exchange of

[[Page 41079]]

contracts for related positions as required by the proposed rule.\28\
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    \23\ 15 U.S.C. 78f.
    \24\ 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).
    \25\ 15 U.S.C. 78f(b)(5).
    \26\ See proposed MIAX Rules 518(a)(1) and (2). The Commission 
notes that cQCC Orders also may execute automatically upon entry. 
See MIAX Rule 518(b)(6).
    \27\ See proposed MIAX Rule 518(a)(7).
    \28\ See Notice, 85 FR at 30781.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-MIAX-2020-11) is approved.
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    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-14631 Filed 7-7-20; 8:45 am]
BILLING CODE 8011-01-P


