[Federal Register Volume 85, Number 139 (Monday, July 20, 2020)]
[Notices]
[Pages 43887-43897]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15554]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89312; File No. SR-CboeEDGX-2020-031]


Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating To Adopt Rules Regarding Off-Floor Transactions and Transfers

July 14, 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 June 30, 2020, Cboe EDGX Exchange, Inc. (``Exchange'' or ``EDGX'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. The Exchange filed the proposal as 
a ``non-controversial'' proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe EDGX Exchange, Inc. (the ``Exchange'' or ``EDGX'') proposes to 
adopt rules regarding off-floor transactions and transfers. The text of 
the proposed rule change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/edgx/), at the Exchange's Office of the Secretary, and at 
the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to adopt new rules regarding off-floor 
transactions and transfers.
Prohibition on Off-Floor Transactions
    Rules 19c-1 and 19c-3 under the Securities Exchange Act of 1934 
(the ``Act') describe rule provisions that each national securities 
change must include in its Rules regarding the ability of members to 
engage in transactions off an exchange. While the Exchange's rules, 
stated policies, and practices are consistent with these provisions of 
the Act, the Exchange Rules do not currently include these provisions. 
Therefore, the proposed rule change adopts these provisions in new Rule 
20.9 in accordance with Rules 19c-1 and 19c-3 under the Act.\5\
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    \5\ See CFR 240.19c-1 and 240.19c-3; see also Cboe Options, Inc. 
(``Cboe Options'') Rule 5.12(d) and (e).
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Off-Floor Position Transfers
    Today, the Exchange does not permit off-floor transfers of options 
positions and has no rule that specifically addresses off-floor 
transfers. The Exchange proposes to adopt Rule 20.10 to specify the 
limited circumstances under which a Member (``Member'') may effect 
transfers of their options positions without first exposing the 
order.\6\ This rule would permit market participants to move positions 
from one account to another without first exposure of the transaction 
on the Exchange. This Rule would permit transfers upon the occurrence 
of significant, non-recurring events. This Rule states that a Member 
must be on at least one side of the transfer.
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    \6\ See Securities and Exchange Act Release No. 88424 (March 19, 
2020), 85 FR 16981 (March 25, 2020) (SR-Cboe-2019-035) (Notice of 
Filing of Amendment Nos. 1 and 2 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 
and 2, Regarding Off-Floor Position Transfers); see also Cboe 
Options Rule 6.7.
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    Specifically, proposed Rule 20.10(a) states:

    Notwithstanding Rule 20.9, existing positions in options listed 
on the Exchange of a Member or of a Non-Member that are to be 
transferred on, from, or to the books of a Clearing Member may be 
transferred off the Exchange (an ``off-floor transfer'') if the off-
floor transfer involves one or more of the following events:
    (1) An adjustment or transfer in connection with the correction 
of a bona fide error in the recording of a transaction or the 
transferring of a position to another account, provided that the 
original trade documentation confirms the error;
    (2) the transfer of positions from one account to another 
account where no change in ownership is involved (i.e., accounts of 
the same person (as defined in Rule 1.5)), provided the accounts are 
not in separate aggregation units or otherwise subject to 
information barrier or account segregation requirements;
    (3) the consolidation of accounts where no change in ownership 
is involved;
    (4) a merger, acquisition, consolidation, or similar non-
recurring transaction for a person;
    (5) the dissolution of a joint account in which the remaining 
Member assumes the positions of the joint account;
    (6) the dissolution of a corporation or partnership in which a 
former nominee of the corporation or partnership assumes the 
positions;
    (7) positions transferred as part of a Member's capital 
contribution to a new joint account, partnership, or corporation;
    (8) the donation of positions to a not-for-profit corporation;
    (9) the transfer of positions to a minor under the Uniform Gifts 
to Minors Act; or
    (10) the transfer of positions through operation of law from 
death, bankruptcy, or otherwise.\7\
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    \7\ See proposed Rule 20.10(a); see also Cboe Options Rule 
6.7(a).

    The proposed rule change makes clear that the transferred positions 
must be on, from, or to the books of a Clearing Member. The proposed 
rule change states that existing positions of a Member or a non-Member 
may be subject to a transfer, except under specified circumstances in 
which a transfer may only be effected for positions of a Member.\8\ The 
Exchange notes transfers of positions in Exchange-listed options may 
also be subject to applicable laws, rules, and regulations, including 
rules of other self-regulatory organizations.\9\ Except as explicitly 
provided in the proposed rule text, the proposed rule change is not 
intended to exempt position transfers from any other applicable rules 
or regulations,

[[Page 43888]]

and proposed paragraph (h) makes this clear in the rule.
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    \8\ See proposed Rule 20.10(a)(5) and (7).
    \9\ See proposed Rule 20.10(h).
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    Proposed Rule 20.10(b) codifies Exchange guidance regarding certain 
restrictions on permissible transfers related to netting of open 
positions and to margin and haircut treatment, unless otherwise 
permitted by proposed paragraph (f). No position may net against 
another position (``netting''), and no position transfer may result in 
preferential margin or haircut treatment.\10\ Netting occurs when long 
positions and short positions in the same series ``offset'' against 
each other, leaving no or a reduced position. For example, if a Member 
wanted to transfer 100 long calls to another account that contained 
short calls of the same options series as well as other positions, even 
if the transfer is permitted pursuant to one of the 10 permissible 
events listed in the proposed Rule, the Member could not transfer the 
offsetting series, as they would net against each other and close the 
positions.\11\
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    \10\ For example, positions may not transfer from a customer, 
joint back office, or firm account to a Market-Maker account. 
However, positions may transfer from a Market-Maker account to a 
customer, joint back office, or firm account (assuming no netting of 
positions occurs). See also Cboe Options Rule 6.7(b).
    \11\ See Cboe Options Rule 6.7(b).
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    However, netting is permitted for transfers on behalf of a Market-
Maker account for transactions in multiply listed options series on 
different options exchanges, but only if the Market-Maker nominees are 
trading for the same Member, and the options transactions on the 
different options exchanges clear into separate exchange-specific 
accounts because they cannot easily clear into the same Market-Maker 
account at the Clearing Corporation. In such instances, all Market-
Maker positions in the exchange-specific accounts for the multiply 
listed class would be automatically transferred on their trade date 
into one central Market-Maker account (commonly referred to as a 
``universal account'') at the Clearing Corporation. Positions cleared 
into a universal account would automatically net against each other. 
Options exchanges permit different naming conventions with respect to 
Market-Maker account acronyms (for example, lettering versus numbering 
and number of characters), which are used for accounts at the Clearing 
Corporation. A Market-Maker may have a nominee with an appointment in 
class XYZ on Cboe Options, and have another nominee with an appointment 
in class XYZ on the Exchange, but due to account acronym naming 
conventions, those nominees may need to clear their transactions into 
separate accounts (one for Cboe Options transactions and another for 
Exchange transactions) at the Clearing Corporation rather into a 
universal account (in which account the positions may net). The 
proposed rule change permits transfers from these separate exchange-
specific accounts into the Market-Maker's universal account in this 
circumstance to achieve this purpose.
    Proposed Rule 20.10(c) states the transfer price, to the extent it 
is consistent with applicable laws, rules, and regulations, including 
rules of other self-regulatory organizations, and tax and accounting 
rules and regulations, at which an transfer is effected may be: (1) The 
original trade prices of the positions that appear on the books of the 
trading Clearing Member, in which case the records of the transfer must 
indicate the original trade dates for the positions; provided, 
transfers to correct bona fide errors pursuant to proposed subparagraph 
(a)(1) must be transferred at the correct original trade prices; (2) 
mark-to-market prices of the positions at the close of trading the 
transfer date; (3) mark-to-market prices of the positions at the close 
of trading on the trade date prior to the transfer date; \12\ or (4) 
the then-current market price of the positions at the time the transfer 
is effected.\13\
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    \12\ For example, for a transfer that occurs on a Tuesday, the 
transfer price may be based on the closing market price on Monday.
    \13\ See Cboe Options Rule 6.7(c).
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    This proposed rule change provides market participants that effect 
transactions with flexibility to select a transfer price based on 
circumstances of the transfer and their business. However, for 
corrections of bona fide errors, because those transfers are necessary 
to correct processing errors that occurred at the time of transaction, 
those transfers would occur at the original transaction price, as the 
purpose of the transfer is to create the originally intended result of 
the transaction.
    Proposed Rule 20.10(d) requires a Member and its Clearing Member 
(to the extent that the Member is not self-clearing) to submit to the 
Exchange, in a manner determined by the Exchange, written notice prior 
to effecting an transfer from or to the account of a Member(s).\14\ The 
notice must indicate: The Exchange-listed options positions to be 
transferred; the nature of the transaction; the enumerated provision(s) 
under proposed paragraph (a) pursuant to which the positions are being 
transferred; the name of the counterparty(ies); the anticipated 
transfer date; the method for determining the transfer price; and any 
other information requested by the Exchange.\15\ The proposed notice 
will ensure the Exchange is aware of all transfers so that it can 
monitor and review them (including the records that must be retained 
pursuant to proposed paragraph (e)) to determine whether they are 
effected in accordance with the Rules.
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    \14\ This notice provision applies only to transfers involving a 
Member's positions and not to positions of non-Member parties, as 
they are not subject to the Rules. In addition, no notice would be 
required to effect transfers to correct bona fide errors pursuant to 
proposed subparagraph (a)(1).
    \15\ See Cboe Options Rule 6.7(d).
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    Additionally, requiring notice from the Member(s) and its Clearing 
Member(s) will ensure both parties are in agreement with respect to the 
terms of the transfer. As noted in proposed subparagraph (d)(2), 
receipt of notice of a transfer does not constitute a determination by 
the Exchange that the transfer was effected or reported in conformity 
with the requirements of proposed Rule 20.10. Notwithstanding 
submission of written notice to the Exchange, Members and Clearing 
Members that effect transfers that do not conform to the requirements 
of proposed Rule 20.10 will be subject to appropriate disciplinary 
action in accordance with the Rules.
    Similarly, proposed Rule 20.10(e) requires each Member and each 
Clearing Member that is a party to a transfer must make and retain 
records of the information provided in the written notice to the 
Exchange pursuant to proposed subparagraph (e)(1), as well as 
information on the actual Exchange-listed options that are ultimately 
transferred, the actual transfer date, and the actual transfer price 
(and the original trade dates, if applicable), and any other 
information the Exchange may request the Member or Clearing Member 
provide.\16\
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    \16\ See Cboe Options Rule 6.7(e).
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    Proposed paragraph (f) provides exemptions approved by the 
Exchange's Chief Executive Officer or President (or senior-level 
designee). Specifically, this provision is in addition to the 
exemptions set forth in proposed paragraph (a). The Exchange proposes 
that the Exchange Chief Executive Officer or President (or senior-level 
designee) may grant an exemption from the requirement of this proposed 
Rule, on his or her own motion or upon application of the Member (with 
respect to the Member's positions) or a Clearing Member (with respect 
to positions carried and cleared by the Clearing Members). The Chief 
Executive Officer,

[[Page 43889]]

the President or his or her designee, may permit a transfer if 
necessary or appropriate for the maintenance of a fair and orderly 
market and the protection of investors and is in the public interest, 
including due to unusual or extraordinary circumstances. For example, 
an exemption may be granted if the market value of the person's 
positions would be compromised by having to comply with the requirement 
to trade on the Exchange pursuant to the normal auction process or 
when, in the judgment of the Chief Executive Officer, President or his 
or her designee, market conditions make trading on the Exchange 
impractical.\17\
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    \17\ See Cboe Options Rule 6.7(f).
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    The Exchange proposes within Rule 20.10(g) that the transfer 
procedure set forth in Rule 20.10 is intended to facilitate non-
routine, nonrecurring movements of positions.\18\ The transfer 
procedure is not to be used repeatedly or routinely in circumvention of 
the normal auction market process.
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    \18\ See Cboe Options Rule 6.7(g).
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    The Exchange proposes within Rule 20.10(h) notes that the transfer 
procedure set forth in Rule 20.10 is only applicable to positions in 
options listed on the Exchange. Transfers of positions in Exchange-
listed options may also be subject to applicable laws, rules, and 
regulations, including rules of other self-regulatory organizations. 
Transfers of non-Exchange listed options and other financial 
instruments are not governed by this Rule.\19\
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    \19\ See Cboe Options Rule 6.7(h).
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Off-Floor RWA Transfers
    The Exchange proposes to adopt Rule 20.11 to facilitate the 
reduction of risk-weighted assets (``RWA'') attributable to open 
options positions.\20\ SEC Rule 15c3-1 (Net Capital Requirements for 
Brokers or Dealers) (``Net Capital Rules'') requires registered broker-
dealers, unless otherwise excepted, to maintain certain specified 
minimum levels of capital.\21\ The Net Capital Rules are designed to 
protect securities customers, counterparties, and creditors by 
requiring that broker-dealers have sufficient liquid resources on hand, 
at all times, to meet their financial obligations. Notably, hedged 
positions, including offsetting futures and options contract positions, 
result in certain net capital requirement reductions under the Net 
Capital Rules.\22\
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    \20\ See Cboe Options Rule 6.8; see also Securities Exchange Act 
Release No. 87107 (September 25, 2019), 84 FR 52149 (October 1, 
2019) (SR-CBOE-2019-044).
    \21\ 17 CFR 240.15c3-1.
    \22\ In addition, the Net Capital Rules permit various offsets 
under which a percentage of an option position's gain at any one 
valuation point is allowed to offset another position's loss at the 
same valuation point (e.g., vertical spreads).
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    Subject to certain exceptions, Clearing Members are subject to the 
Net Capital Rules.\23\ However, a subset of Clearing Members are 
subsidiaries of U.S. bank holding companies, which, due to their 
affiliations with their parent U.S.-bank holding companies, must comply 
with additional bank regulatory capital requirements pursuant to 
rulemaking required under the Dodd-Frank Wall Street Reform and 
Consumer Protection Act.\24\ Pursuant to this mandate, the Board of 
Governors of the Federal Reserve System, the Office of the Comptroller 
of the Currency, and the Federal Deposit Insurance Corporation have 
approved a regulatory capital framework for subsidiaries of U.S. bank 
holding company clearing firms.\25\ Generally, these rules, among other 
things, impose higher minimum capital and higher asset risk weights 
than were previously mandated for Clearing Members that are 
subsidiaries of U.S. bank holding companies under the Net Capital 
Rules. Furthermore, the new rules do not fully permit deductions for 
hedged securities or offsetting options positions.\26\ Rather, capital 
charges under these standards are, in large part, based on the 
aggregate notional value of short positions regardless of offsets. As a 
result, in general, Clearing Members that are subsidiaries of U.S. bank 
holding companies must hold substantially more bank regulatory capital 
than would otherwise be required under the Net Capital Rules.
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    \23\ In the event federal regulators modify bank capital 
requirements in the future, the Exchange will reevaluate the 
proposed rule change at that time to determine whether any 
corresponding changes to the proposed rule are appropriate.
    \24\ H.R. 4173 (amending section 3(a) of the Securities Exchange 
Act of 1934 (the ``Act'') (15 U.S.C. 78c(a))).
    \25\ 12 CFR 50; 79 FR 61440 (Liquidity Coverage Ratio: Liquidity 
Risk Measurement Standards).
    \26\ Many options strategies, including relatively simple 
strategies often used by retail customers and more sophisticated 
strategies used by broker-dealers, are risk limited strategies or 
options spread strategies that employ offsets or hedges to achieve 
certain investment outcomes. Such strategies typically involve the 
purchase and sale of multiple options (and may be coupled with 
purchases or sales of the underlying securities), executed 
simultaneously as part of the same strategy. In many cases, the 
potential market exposure of these strategies is limited and 
defined.
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    The Exchange is concerned with the ability of Market-Makers to 
provide liquidity in their appointed classes. The Exchange believes 
that permitting market participants to efficiently transfer existing 
options positions through an off-exchange transfer process would likely 
have a beneficial effect on continued liquidity in the options market 
without adversely affecting market quality. Liquidity in the listed 
options market is critically important. The Exchange believes that the 
proposed rule change provides market participants with an efficient 
mechanism to transfer their open options positions from one clearing 
account to another clearing account and thereby increase liquidity in 
the listed options market. The Exchange currently has no mechanism that 
firms may use to transfer positions between clearing accounts without 
having to effect a transaction with another party and close a position.
    The proposed rule provides that existing positions in options 
listed on the Exchange of a Member or non-Member (including an 
affiliate of a Member) may be transferred on, from, or to the books of 
a Clearing Member off the Exchange if the transfer establishes a net 
reduction of RWA attributable to those options positions (an ``RWA 
Transfer''). Proposed paragraph (a)(1) adds examples of two transfers 
that would be deemed to establish a net reduction of RWA, and thus 
qualify as a permissible RWA Transfer:

     A transfer of options positions from Clearing 
Corporation member A to Clearing Corporation member B that net 
(offset) with positions held at Clearing Corporation member B, and 
thus closes all or part of those positions (as demonstrated in the 
example below); \27\ and
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    \27\ This transfer would establish a net reduction of RWA 
attributable to the transferring person, because there would be 
fewer open positions and thus fewer assets subject to Net Capital 
Rules.
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     A transfer of options positions from a bank-affiliated 
Clearing Corporation member to a non-bank-affiliated Clearing 
Corporation member.\28\
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    \28\ This transfer would establish a net reduction of RWA 
attributable to the transferring Person, because the non-bank-
affiliated Clearing Corporation member would not be subject to Net 
Capital Rules, as described above.

    These transfers will not result in a change in ownership, as they 
must occur between accounts of the same person.
    ``Person'' is defined in Rule 1.5(p) a natural person, partnership, 
corporation, limited liability company, entity, government, or 
political subdivision, agency or instrumentality of a government. In 
other words, RWA transfers may only occur between the same individual 
or legal entity. RWA transfers are merely transfers from one clearing 
account to another, both of which are attributable to the same 
individual or legal entity. A market participant effecting an RWA 
Transfer is analogous to an individual transferring funds from a 
checking account to a savings account, or from an account at

[[Page 43890]]

one bank to an account at another bank--the money still belongs to the 
same person, who is just holding it in a different account for personal 
financial reasons.
    For example, Market-Maker A clears transactions on the Exchange 
into an account it has with Clearing Member X, which is affiliated with 
a U.S-bank holding company. Market-Maker A opens a clearing account 
with Clearing Member Y, which is not affiliated with a U.S.-bank 
holding company. Clearing Member X has informed Market-Maker A that its 
open positions may not exceed a certain amount at the end of a calendar 
month, or it will be subject to restrictions on new positions it may 
open the following month. On August 28, Market-Maker A reviews the open 
positions in its Clearing Member X clearing account and determines it 
must reduce its open positions to satisfy Clearing Member X's 
requirements by the end of August. It determines that transferring out 
1000 short calls in class ABC will sufficiently reduce the RWA capital 
requirements in the account with Clearing Member X to avoid additional 
position limits in September. Market-Maker A wants to retain the 
positions in accordance with its risk profile. Pursuant to the proposed 
rule change, on August 31, Market-Maker A transfers 1000 short calls in 
class ABC to its clearing account with Clearing Member Y. As a result, 
Market-Maker A can continue to provide the same level of liquidity in 
class ABC during September as it did in previous months.
    A Member must give up a Clearing Member for each transaction it 
effects on the Exchange, which identifies the Clearing Member through 
which the transaction will clear.\29\ A Member may change the give up 
for a transaction within a specified period of time.\30\ Additionally, 
a Member may also change the Clearing Member \31\ for a specific 
transaction. The transfer of positions from an account with one 
clearing firm to the account of another clearing firm pursuant to the 
proposed rule change has a similar result as changing a give up or 
CMTA, as it results in a position that resulted from a transaction 
moving from the account of one clearing firm to another, just at a 
different time and in a different manner.\32\ In the above example, if 
Market-Maker A had initially given up Clearing Member Y rather than 
Clearing Member X on the transactions that resulted in the 1000 long 
calls in class ABC, or had changed the give-up or CMTA to Clearing 
Member Y pursuant to Rule 6.30 the ultimate result would have been the 
same. There are a variety of reasons why firms give up or CMTA 
transactions to certain clearing firms (and not to non-bank affiliate 
clearing firms) at the time of a transaction, and the proposed rule 
change provides firms with a mechanism to achieve the same result at a 
later time.
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    \29\ See Rule 6.30.
    \30\ See Rule 6.31.
    \31\ The Clearing Member Trade Assignment (``CMTA'') process at 
OCC facilitates the transfer of option trades/positions from one OCC 
clearing member to another in an automated fashion. Changing a CMTA 
for a specific transaction would allocate the trade to a different 
OCC clearing member than the one initially identified on the trade.
    \32\ The transferred positions will continue to be subject to 
OCC rules, as they will continue to be held in an account of an OCC 
member.
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    Proposed paragraph (a)(2) states RWA Transfers may occur on a 
routine, recurring basis. As noted in the example above, clearing firms 
may impose restrictions on the amount of open positions. Permitting 
transfers on a routine, recurring basis will provide market 
participants with the flexibility to comply with these restrictions 
when necessary to avoid position limits on future options activity. 
Additionally, proposed paragraph (a)(6) provides that no prior written 
notice to the Exchange is required for RWA Transfers. Because of the 
potential routine basis on which RWA Transfers may occur, and because 
of the need for flexibility to comply with the restrictions described 
above, the Exchange believes it may interfere with the ability of 
investors firms to comply with any Clearing Member restrictions 
describe above, and may be burdensome to provide notice for these 
routine transfers.
    Proposed paragraph (a)(3) states RWA Transfers may result in the 
netting of positions. Netting occurs when long positions and short 
positions in the same series ``offset'' against each other, leaving no 
or a reduced position. For example, if there were 100 long calls in one 
account, and 100 short calls of the same option series were added to 
that account, the positions would offset, leaving no open positions. 
Currently, the Exchange permits off-exchange transfers on behalf of a 
Market-Maker account for transactions in multiply listed options series 
on different exchanges, but only if the Market-Maker nominees are 
trading for the same Member, and the options transactions on the 
different options exchanges clear into separate exchange-specific 
accounts because they cannot easily clear into the same Market-Maker 
account at OCC. In such instances, all Market-Maker positions in the 
exchange-specific accounts for the multiply listed class would be 
automatically transferred on their trade date into one central Market-
Maker account (commonly referred to as a ``universal account'') at the 
Clearing Corporation. Positions cleared into a universal account would 
automatically net against each other.
    While RWA Transfers are not occurring because of limitations 
related to trading on different exchanges, similar reasoning for the 
above exception applies to why netting should be permissible for the 
limited purpose of reducing RWA. Firms may maintain different clearing 
accounts for a variety of reasons, such as the structure of their 
businesses, the manner in which they trade, their risk management 
procedures, and for capital purposes. If a Market-Maker clears all 
transactions into a universal account, offsetting positions would 
automatically net. However, if a Market-Maker has multiple accounts 
into which its transactions cleared, they would not automatically net. 
While there are times when a firm may not want to close out open 
positions to reduce RWA, there are other times when a firm may 
determine it is appropriate to close out positions to accomplish a 
reduction in RWA.
    In the example above, suppose after making the RWA Transfer 
described above, Market-Maker A effects a transaction on September 25 
that results in 1000 long calls in class ABC, which clears into its 
account with Clearing Member X. If Market-Maker A had not effected its 
RWA Transfer in August, the 1000 long calls would have offset against 
the 1000 short calls, eliminating both positions and thus any RWA 
capital requirements associated with them. At the end of August, 
Market-Maker A did not want to close out the 1000 short calls when it 
made its RWA Transfer. However, given changed circumstances in 
September, Market-Maker A has determined it no longer wants to hold 
those positions. The proposed rule change would permit Market-Maker A 
to effect an RWA Transfer of the 1000 short calls from its account with 
Clearing Member Y to its account with Clearing Member X (or vice 
versa), which results in elimination of those positions (and a 
reduction in RWA associated with them). As noted above, such netting 
would have occurred if Market-Maker A cleared the September transaction 
directly into its account with Clearing Member Y or had not effected an 
RWA Transfer in August. Netting provides market participants with 
appropriate flexibility to conduct their businesses as they see fit 
while having the ability to reduce RWA capital requirements when 
necessary.

[[Page 43891]]

    RWA Transfers may not result in preferential margin or haircut 
treatment.\33\ Additionally, RWA Transfers may only be effected for 
options listed on the Exchange and will be subject to applicable laws, 
rules, and regulations, including rules of other self-regulatory 
organizations (including OCC).\34\
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    \33\ See proposed paragraph (a)(4).
    \34\ See proposed introductory paragraph and proposed paragraph 
(a)(7). Transfers of non-Exchange listed options and other financial 
instruments are not governed by this proposed rule. All RWA 
transfers will be subject to all applicable recordkeeping 
requirements applicable to Members and Clearing Members under the 
Act, such as Rules 17a-3 and 17a-4.
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In-Kind Exchange of Options Positions and Fund Shares and UIT Interests
    The Exchange proposes to adopt Rule 20.12 regarding in-kind 
exchanges of options positions and exchange-traded fund (``Fund'') 
shares and unit investment trust (``UIT'') interests.\35\ As discussed 
further below, the ability to effect ``in kind'' transfers is a key 
component of the operational structure of a Fund and a UIT. Currently, 
in general, Funds and UITs can effect in-kind transfers with respect to 
equity securities and fixed-income securities. The in-kind process is a 
major benefit to Fund shareholders and UIT unit holders, in general, 
the means by which assets may be added to or removed from Funds and 
UITs. In-kind transfers protect Fund shareholders and UIT unit holders 
from the undesirable tax effects of frequent ``creations and 
redemptions'' (described below) and improve the overall tax efficiency 
of the products. However, currently, the Rules do not provide for Funds 
and UITs to effect in-kind transfers of options off of the Exchange, 
resulting in tax inefficiencies for Funds and UITs that hold them. As a 
result, the use of options by Funds and UITs is substantially limited.
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    \35\ See Cboe Options Rule 6.9; see also Securities Exchange Act 
Release Nos. 87340 (October 17, 2019) (SR-CBOE-2019-048) (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)); and 88786 (April 30, 
2020), 85 FR 26998 (May 6, 2020) (SR-CBOE-2020-042) (Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend Rule 6.9 To Permit In-Kind Transfers of Positions Off of the 
Exchange in Connection With Unit Investment Trusts (``UITs'')).
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    Proposed Rule 20.12 would add a circumstance under which off-
Exchange transfers of options positions would be permitted to occur, in 
addition to the circumstances in proposed Rules 20.10 and 20.11. 
Specifically, under proposed Rule 20.12, positions in options listed on 
the Exchange would be permitted to be transferred off the Exchange by a 
Member in connection with transactions (a) to purchase or redeem 
``creation units'' of Fund Shares between an ``authorized participant'' 
\36\ and the issuer \37\ of such Fund Shares \38\ or (b) to create or 
redeem units of a UIT between a broker-dealer and the issuer \39\ of 
such UIT units, which transfers would occur at the price used to 
calculate the net asset value (``NAV'') of such Fund Shares or UIT 
units, respectively. This proposed new exception, although limited in 
scope, would have a significant impact in that it would help protect 
Fund Shareholders and UIT holders from undesirable tax consequences and 
facilitate tax-efficient operations. The frequency with which Funds and 
authorized participants, and UITs and sponsors, would rely on the 
proposed exception would depend upon such factors as the number of 
Funds and UITs, respectively, holding options positions traded on the 
Exchange, the market demand for the shares of such Funds and units of 
such UITs, the redemption activity of authorized participants and 
sponsors, respectively, and the investment strategies employed by such 
Funds and UITs.
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    \36\ The Exchange is proposing that, for purposes of proposed 
Rule 20.12, the term ``authorized participant'' would be defined as 
an entity that has a written agreement with the issuer of Fund 
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 numbers of Fund Shares). While an 
authorized participant may be a Member and directly effect 
transactions in options on the Exchange, an authorized participant 
that is not a Member may effect transactions in options on the 
Exchange through a Member on its behalf.
    \37\ The Exchange proposes that, for purposes of proposed Rule 
20.12, any issuer of Fund Shares would be registered with the 
Commission as an open-end management investment company under the 
Investment Company Act of 1940 (the ``1940 Act'').
    \38\ A Fund Share is a share or other security principally 
traded on a national securities exchange and defined as an NMS 
stock, which includes interest in open-end management investment 
companies. See Rule 19.3(i).
    \39\ The Exchange proposes that, for purposes of proposed Rule 
20.12, any issuer of UIT units would be a trust registered with the 
Commission as a unit investment trust under the 1940 Act.
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    While the Exchange recognizes that, in general, the execution of 
options transactions on exchanges provides certain benefits, such as 
price discovery and transparency, based on the circumstances under 
which proposed Rule 20.12 would apply, the Exchange does not believe 
that such benefits would be compromised. In this regard, as discussed 
more fully below, the Exchange notes that in conjunction with the 
creation and redemption process, positions would be transferred at a 
price(s) used to calculate the NAV of such Fund Shares and UIT units. 
In addition, although options positions would be transferred off of the 
Exchange, they would not be closed or ``traded.'' Rather, they would 
reside in a different clearing account until closed in a trade on the 
Exchange or until they expire. Further, as discussed below, proposed 
Rule 20.12 would be clearly delineated and limited in scope, given that 
the proposed exception would only apply to transfers of options 
effected in connection with the creation and redemption process.
Funds
    As described in further detail below, while Funds do not sell and 
redeem individual shares to and from investors, they do sell large 
blocks of their shares to, and redeem them from, authorized 
participants in conjunction with what is known as the Fund creation and 
redemption process. Under the proposed exception, Funds that hold 
options listed on the Exchange would be permitted to effect creation 
and redemption transactions with authorized participants on an ``in-
kind'' basis, which is the process that may generally be utilized by 
Funds for other asset types. This ability would allow such Funds to 
function as more tax-efficient investment vehicles to be benefit of 
investors that hold Fund Shares. In addition, it may also result in 
transaction cost savings for the Funds, which may be passed along to 
investors.
    Due to their ability to effect in-kind transfers with authorized 
participants in conjunction with the creation and redemption process 
described below, Funds have the potential to be significantly more tax-
efficient than other pooled investment products, such as mutual 
funds.\40\ Funds issue shares that may be purchased or sold during the 
day in the secondary market at market-determined prices. Similar to 
other types of investment companies, Funds invest their assets in 
accordance with their investment objectives and investment strategies, 
and Fund Shares represent interests in a Fund's underlying assets. 
Funds are, in certain respects, similar to mutual funds in that they 
continuously offer their shares for sale. In contrast to mutual funds,

[[Page 43892]]

however, Funds do not sell or redeem individual shares. Rather, through 
the creation and redemption process referenced above, authorized 
participants have contractual arrangements with a Fund and/or its 
service provider (e.g., its distributor) purchase and redeem shares 
directly from that Fund in large aggregations known as ``creation 
units.'' In general terms, to purchase a creation unit of Fund Shares 
from a Fund, in return for depositing a ``basket'' of securities and/or 
other assets identified by the Fund on a particular day, the authorized 
participant will receive a creation unit of Fund Shares. The basket 
deposited by the authorized participant is generally expected to be 
representative of the Fund's portfolio \41\ and, when combined with a 
cash balancing amount (i.e., generally an amount of cash intended to 
account for any difference between the value of the basket and the NAV 
of a creation unit), if any, will be equal in value to the aggregate 
NAV of the shares of the Fund comprising the creation unit. The NAV for 
Fund Shares is represented by the traded price for Funds holding 
options positions on days of creation or redemption, and an options 
pricing model on days in which creations and redemptions do not occur. 
After purchasing a creation unit, an authorized participant may then 
hold individual shares of the Fund and/or sell them in the secondary 
market. In connection with effecting redemptions, the creation process 
described above is reversed. More specifically, the authorized 
participant will redeem a creation unit of Fund Shares to the Fund in 
return for a basket of securities and/or other assets (along with any 
cash balancing account).
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    \40\ This summary of the Fund creation and redemption process is 
based largely on portions of the discussion set forth in Investment 
Company Act Release No. 33140 (June 28, 2018), 83 FR 37332 (July 31, 
2018) (the ``Proposed ETF Rule Release'') in which the Commission 
proposed a new rule under the 1940 Act that would permit Funds 
registered as open-end management investment companies that satisfy 
certain conditions to operate without the need to obtain an 
exemptive order. The proposed rule was adopted on September 25, 
2019. See Investment Company Act Release No. 33646 (September 25, 
2019).
    \41\ Under certain circumstances, however, and subject to the 
provisions of its exemptive relief from various provisions of the 
1940 Act obtained from the Commission, a Fund may substitute cash 
and/or other instruments in lieu of some or all of the Fund's 
portfolio holdings. For example, today, positions in options traded 
on the Exchange would be generally substituted with cash.
---------------------------------------------------------------------------

    The Fund creation and redemption process, coupled with the 
secondary market trading of Fund Shares, facilitates arbitrage 
opportunities that are intended to help keep the market price of Fund 
Shares at or close to the NAV per share of the Fund. Authorized 
participants play an important role because of their ability, in 
general terms, to add Fund Shares to, or remove them from, the market. 
In this regard, if shares of a Fund are trading at a discount (i.e., 
below NAV per share), an authorized participant may purchase Fund 
Shares in the secondary market, accumulate enough shares for a creation 
unit and then redeem them from the Fund in exchange for the Fund's more 
valuable redemption basket. Accordingly, the authorized participant 
will profit because it paid less for the Fund Shares than it received 
for the underlying assets. The reduction in the supply of Fund Shares 
available on the secondary market, together with the sale of the Fund's 
basket assets, may cause the price of Fund Shares to increase, the 
price of the basket assets to decrease, or both, thereby causing the 
market price of the Fund Shares and the value of the Fund's holdings to 
move closer together. In contrast, if the Fund Shares are trading at a 
premium (i.e., above NAV per share), the transactions are reversed (and 
the authorized participant would deliver the creation basket in 
exchange for Fund Shares), resulting in an increase in the supply of 
Fund Shares which may also help to keep the price of the shares of a 
Fund close to the value of its holdings.
    In comparison to other pooled investment vehicles, one of the 
significant benefits associated with a Fund's in-kind redemption 
feature is tax efficiency. In this regard, by effecting redemptions on 
an in-kind basis (i.e., delivering certain assets from the Fund's 
portfolio instead of cash), there is no need for the Fund to sell 
assets and potentially realize capital gains that would be distributed 
to shareholders. As indicated above, however, because the Rules 
currently do not allow Funds to effect in-kind transfers of options off 
of the Exchange, Funds that invest in options traded on the Exchange 
are generally required to substitute cash in lieu of such options when 
effecting redemption transactions with authorized participants. Because 
they must sell the options to obtain the requisite cash, such Funds 
(and therefore, investors that hold shares of those Funds) are not able 
to benefit from the tax efficiencies afforded by in-kind transactions.
    An additional benefit associated with the in-kind feature is the 
potential for transaction cost savings. In this regard, by transacting 
on an in-kind basis, Funds may avoid certain transaction costs they 
would otherwise incur in connection with purchases and sales of 
securities and other assets. Again, however, this benefit is not 
available today to Funds with respect to their options holdings.
UITs
    Although UITs operate differently than Funds in certain respects, 
as described below, the anticipated potential benefits to UIT investors 
(i.e., greater tax efficiencies and transaction cost savings) from the 
proposed exemption would be similar as discussed below. Specifically, 
under the 1940 Act,\42\ a UIT is an investment company organized under 
a trust indenture or similar instrument that issues redeemable 
securities, each of which represents an undivided interest in a unit of 
specified securities.\43\ A UIT's investment portfolio is relatively 
fixed, and, unlike a Fund, a UIT has a fixed life (a termination date 
for the trust is established when the trust is created). Similar to 
other types of investment companies (including Funds), UITs invest 
their assets in accordance with their investment objectives and 
investment strategies, and UIT units represent interests in a UIT's 
underlying assets. Like Funds, UITs do not sell or redeem individual 
shares, but instead, through the creation and redemption process, a 
UIT's sponsor (a broker-dealer) may purchase and redeem shares directly 
from the UIT's trustee in aggregations known as ``units.'' A broker-
dealer purchases a unit of UIT shares from the UIT's trustee by 
depositing a basket of securities and/or other assets identified by the 
UIT. These transactions are largely effected by ``in-kind'' transfers, 
or the exchange of securities, non-cash assets, and/or other non-cash 
positions. The basket deposited by the broker-dealer is generally 
expected to be representative of the UIT's units and will be equal in 
value to the aggregate NAV of the shares of the UIT comprising a 
unit.\44\ The UIT then issues units that are publicly offered and sold. 
Unlike Funds, UITs typically do not continuously offer their shares for 
sale, but rather, make a one-time or limited public offering of only a 
specific, fixed number of units like a closed-end fund (i.e., the 
primary period, which may range from a single day to a few months). 
Similar to the process for Funds, UITs allow investor-owners of units 
to redeem their units

[[Page 43893]]

back to the UIT's trustee on a daily basis and, upon redemption, such 
investor-owners are entitled to receive the redemption price at the 
UIT's NAV. While UITs provide for daily redemptions directly with the 
UIT's trustee, UIT sponsors frequently maintain a secondary market for 
units, also like that of Funds, and will buy back units at the 
applicable redemption price per unit. To satisfy redemptions, a UIT 
typically sells securities and/or other assets, which results in 
negative tax implications and an incurrence of trading costs borne by 
remaining unit holders.
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 80a-4(2).
    \43\ The Exchange also notes that, though a majority of Funds 
are structured as open-ended funds, some Funds are structured as 
UITs, and currently represent a significant amount of assets within 
the Fund industry. These include, for example, SPDR S&P 500 ETF 
Trust (``SPY'') and PowerShares QQQ Trust, Series 1 (``QQQ'').
    \44\ The NAV is an investment company's total assets minus its 
total liabilities. UITs must calculate their NAV at least once every 
business day, typically after market close. See Sec.  270.2a-4(c), 
which provides that any interim determination of current net asset 
value between calculations made as of the close of the New York 
Stock Exchange on the preceding business day and the current 
business day may be estimated so as to reflect any change in current 
net asset value since the closing calculation on the preceding 
business day. This, however, is notwithstanding the requirements of 
Sec.  270.2a-4(a), which provides for other events that would 
trigger computation of a UIT's NAV.
---------------------------------------------------------------------------

Proposed Rule
    The Exchange believes that it is appropriate to permit off-Exchange 
transfers of options positions in connection with the creation and 
redemption process and recognizes that the prevalence and popularity of 
Funds have increased greatly. Currently, Funds serve both as popular 
investment vehicles and trading tools \45\ and, as discussed above, the 
creation and redemption process, along with the arbitrage opportunities 
that accompany it, are key Fund features. Although Funds and UITs 
operate differently in certain respects, the ability to effect in-kind 
transfers is also significant for UITs. As described above, UITs and 
Funds are situated in substantially the same manner; the key 
differences being a UIT's fixed duration, and that a UIT generally 
makes a one-time public offering of only a specific, fixed number of 
units. Negative tax implication and trading costs for remaining unit 
holders would be mitigated by allowing a UIT sponsor or another broker-
dealer to receive an in-kind distribution of options upon redemption. 
Accordingly, the Exchange believes that providing for an additional, 
narrow circumstance to make it possible for Funds and UITs that invest 
in options to effect creations and redemptions on an in-kind basis is 
justified.
---------------------------------------------------------------------------

    \45\ As noted in the Proposed ETF Rule Release, during the first 
quarter of 2018, trading in U.S.-listed Funds comprised 
approximately 18.75% of U.S. equity trading by share volume and 
28.2% of U.S. equity trading by dollar volume (based on trade and 
quote data from the New York Stock Exchange and Trade Reporting 
Facility data from the Financial Industry Regulatory Authority, Inc. 
(FINRA)). See Proposed ETF Rule Release at 83 FR 37334.
---------------------------------------------------------------------------

    The Exchange submits that its proposal is clearly delineated and 
limited in scope and not intended to facilitate ``trading'' options off 
of the Exchange. In this regard, the proposed circumstance would be 
available solely in the context of transfers of options positions 
effected in connection with transactions to purchase or redeem creation 
units of Fund Shares between Funds and authorized participants,\46\ and 
units of UITs between UITs and sponsors. As a result of this process, 
such transfers would occur at the price(s) used to calculate the NAV of 
such Fund Shares and UIT units (as discussed above), which removes the 
need for price discovery on an Exchange for pricing these transfers. 
Moreover, as described above, Funds and authorized participants, and 
UITs and sponsors, are not seeking to effect the opening or closing of 
new options positions in connection with the creation and redemption 
process. Rather, the options positions would reside in a different 
clearing account until closed in a trade on the Exchange or until they 
expire.
---------------------------------------------------------------------------

    \46\ See supra note 37. The term ``authorized participant'' is 
specific and narrowly defined. As noted in the Proposed ETF Rule 
Release, the requirement that only authorized participants of a Fund 
may purchase creation units from (or sell creation units to) a Fund 
``is designed to preserve an orderly creation unit issuance and 
redemption process between [Funds] and authorized participants.'' 
Furthermore, an ``orderly creation unit issuance and redemption 
process is of central importance to the arbitrage mechanism.'' See 
Proposed ETF Rule Release at 83 FR 37348.
---------------------------------------------------------------------------

    The proposed transfers, while occurring between two different 
parties, will occur off the Exchange and will not be considered 
transactions (as is the case for current off-Exchange transfers 
permitted by proposed Rule 20.10(a)). While the prices of options 
transactions effected on the Exchange are disseminated to OPRA, back-
office transfers of options positions in clearing accounts held at OCC 
(in accordance with OCC Rules) \47\ are not disseminated to OPRA or 
otherwise publicly available, as they are considered position 
transfers, rather than executions.\48\ The Exchange believes that price 
transparency is important in the options markets. However, the Exchange 
expects any transfers pursuant to the proposed rule will constitute a 
minimal percentage of the total average daily volume of options. Today, 
the trading of Funds and UITs that invest in options is substantially 
limited on the Exchange, primarily because the current rules do not 
permit Funds or UITs to effect in-kind transfers of options off the 
Exchange. The Exchange continues to expect that any impact this 
proposal could have on price transparency in the options market is 
minimal because proposed Rule 20.12 is limited in scope and is intended 
to provide market participants with an efficient and effective means to 
transfer options positions under clearly delineated, specified 
circumstances. Additionally, as noted above, the NAV for Fund and UIT 
transfers will generally be based on the disseminated closing price for 
an options series on the day of a creation or redemption, and thus the 
price (although not the time or quantity of the transfer) at which 
these transfers will generally be effected will be publicly 
available.\49\ 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.\50\ 
Therefore, the Exchange expects that any impact the proposed rule 
change could have on price transparency in the options market would be 
de minimis.
---------------------------------------------------------------------------

    \47\ OCC has informed the Exchange that it has the operational 
capabilities to effect the proposed position transfers. All 
transfers pursuant to proposed Rule 20.12 would be required to 
comply with OCC rules.
    \48\ For example, any transfers that would be effected pursuant 
to proposed Rule 20.10(a) are not disseminated to OPRA.
    \49\ If there is no disseminated closing price, the Fund or UIT 
would price according to a pricing model or procedure as described 
in the fund's prospectus.
    \50\ The Exchange notes that for in-kind creations, an 
authorized participant will acquire the necessary options positions 
in an on-exchange transaction that will be reported to OPRA. For in-
kind redemptions, the Exchange generally 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. Such an options 
position would likely be acquired in an on-exchange transaction that 
would be reported to OPRA. Such transactions are generally identical 
to the way that creations and redemptions work for equities and 
fixed income transactions--while the transfer between the authorized 
participant and the fund is not necessarily reported, there are 
generally corresponding transactions that would be reported, 
providing transparency into the transactions.
---------------------------------------------------------------------------

    Other than the transfers covered by the proposed rule, transactions 
involving options, whether held by a Fund or an authorized participant, 
or a UIT or a sponsor would be fully subject to all applicable trading 
Rules.\51\ Accordingly, the Exchange does not believe that the proposed 
new exception would compromise price discovery or transparency.
---------------------------------------------------------------------------

    \51\ As indicated above, the operation of the arbitrage 
mechanism accompanying the creation and redemption process generally 
contemplates ongoing interactions between authorized participants 
and the market in transactions involving both Fund Shares and the 
assets comprising a Fund's creation/redemption basket.
---------------------------------------------------------------------------

    Further, the Exchange believes that providing an additional 
exception to make it possible for Funds and UITs that invest in options 
to effect creations and redemptions on an in-kind basis is justified 
because, while the proposed exception would be limited in scope, the 
benefits that may flow to Funds that hold options and their investors 
may be significant. Specifically, the Exchange

[[Page 43894]]

expects such Funds and UITs and their investors would benefit from 
increased tax efficiencies and potential transaction cost savings. By 
making such Funds and UITs more attractive to both current and 
prospective investors, the proposed rule change would enable them to 
compete more effectively with other Funds and UITs that, due to their 
particular portfolio holdings, may effect in-kind creations and 
redemptions without restriction.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\52\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \53\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \54\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78f(b).
    \53\ 15 U.S.C. 78f(b)(5).
    \54\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes proposed Rule 20.9 is 
consistent with the Act, because it adopts provisions in the Rules 
specifically required by Rules 19c-1 and 19c-3 under the Act. The 
Exchange's rules, stated policies, and procedures currently comply with 
these provisions of the Rules under the Act, and the proposed rule will 
change will add transparency to the Rules, which will benefit 
investors.
    The Exchange believes proposed Rule 20.10 regarding off-floor 
position transfers is consistent with the Section 6(b)(5) \55\ 
requirements that the rules of an exchange be prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest. Additionally, the Exchange 
believes the proposed rule change is consistent with the Section 
6(b)(5) \56\ requirement that the rules of an exchange not be designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers.
---------------------------------------------------------------------------

    \55\ Id.
    \56\ Id.
---------------------------------------------------------------------------

    The Exchange believes that permitting transfers under new Rule 
20.10 in very limited circumstances is reasonable to allow a Member to 
accomplish certain goals efficiently. The proposed rule permits 
transfers in situations involving dissolutions of entities or accounts, 
for purposes of donations, mergers or by operation of law. For example, 
a Member that is undergoing a structural change and a one-time movement 
of positions may require a transfer of positions or a Member that is 
leaving a firm that will no longer be in business may require a 
transfer of positions to another firm. Also, a Member may require a 
transfer of positions to make a capital contribution. The above-
referenced circumstances are non-recurring situations where the 
transferor continues to maintain some ownership interest or manage the 
positions transferred. By contrast, repeated or routine transfers 
between entities or accounts--even if there is no change in beneficial 
ownership as a result of the transfer--is inconsistent with the 
purposes for which the proposed rule was adopted. Accordingly, the 
Exchange believes that such activity should not be permitted under the 
rules and thus, seeks to adopt language in proposed Rule 20.10(f) that 
the transfer of positions procedures set forth the proposed rule are 
intended to facilitate non-recurring movements of positions.
    The proposed rule change will provide market participants that 
experience these limited, non-recurring events with an efficient and 
effective means to transfer positions in these situations. The Exchange 
believes the proposed rule change regarding permissible transfer prices 
provides market participants with flexibility to determine the price 
appropriate for their business, which maintain cost bases in accordance 
with normal accounting practices and removes impediments to a free and 
open market.
    The proposed rule change which requires notice and maintenance of 
records will enable the Exchange to review transfers for compliance 
with the Rules, which prevents fraudulent and manipulative acts and 
practices. The requirement to retain records is consistent with the 
requirements of Rule 17a-3 and 17a-4 under the Act.
    Similar to Cboe Options Rule 6.7, the Exchange would permit a 
presidential exemption. The Exchange believes that this exemption is 
consistent with the Act because the Exchange's Chief Executive Officer 
or President (or senior-level designee) would consider an exemption in 
very limited circumstances. The transfer process is intended to 
facilitate non-routine, nonrecurring movements of positions and, 
therefore, is not to be used repeatedly or routinely in circumvention 
of the normal auction market process.
    Proposed Rule 20.10(f) specifically provides within the rule text 
that the Exchange's Chief Executive Officer or President (or senior-
level designee) may in his or her judgment allow a transfer if it is 
necessary or appropriate for the maintenance of a fair and orderly 
market and the protection of investors and is in the public interest, 
including due to unusual or extraordinary circumstances such as the 
market value of the person's positions will be comprised by having to 
comply with the requirement to trade on the Exchange pursuant to the 
normal auction process or, when in the judgment of President or his or 
her designee, market conditions make trading on the Exchange 
impractical. These standards within proposed Rule 20.10(f) are intended 
to provide guidance concerning the use of this exemption which is 
intended to provide the Exchange with the ability to utilize the 
exemption for the maintenance of a fair and orderly market and the 
protection of investors and is in the public interest. The Exchange 
believes that the exemption is consistent with the Act because it would 
allow the Exchange's Chief Executive Officer or President (or senior-
level designee) to act in certain situations which comply with the 
guidance within Rule 20.10(f) which are intended to protect investors 
and the general public. While Cboe Options grants an exemption to the 
President (or senior-level designee),\57\ the Exchange has elected to 
grant an exemption to Exchange's Chief Executive Officer or President 
(or senior-level designee), who are similarly situated with the 
organization as senior-level individuals.
---------------------------------------------------------------------------

    \57\ See Cboe Options Rule 6.7(f).
---------------------------------------------------------------------------

    The Exchange believes proposed Rule 20.11 regarding RWA Transfers 
will remove impediments to and perfect the mechanism of a free and open 
market

[[Page 43895]]

and a national market system by providing liquidity in the listed 
options market. The Exchange believes providing market participants 
with an efficient process to reduce RWA capital requirements 
attributable to open positions in clearing accounts with U.S. bank-
affiliated clearing firms may contribute to additional liquidity in the 
listed options market, which, in general, protects investors and the 
public interest.
    The proposed rule change, in particular the proposed changes to 
permit RWA transfers to occur on a routine, recurring basis and result 
in netting, also provides market participants with sufficient 
flexibility to reduce RWA capital requirements at times necessary to 
comply with requirements imposed on them by clearing firms. This will 
permit market participants to respond to then-current market 
conditions, including volatility and increased volume, by reducing the 
RWA capital requirements associated with any new positions they may 
open while those conditions exist. Given the additional capital that 
may become available to market participants as a result of the RWA 
Transfers, market participants will be able to continue to provide 
liquidity to the market, even during periods of increased volume and 
volatility, which liquidity ultimately benefits investors. It is not 
possible for market participants to predict what market conditions will 
exist at a specific time, and when volatility will occur. The proposed 
rule change to permit routine, recurring RWA Transfers (and to not 
provide prior written notice) will provide market participants with the 
ability to respond to these conditions whenever they occur. Permitting 
transfers on a routine, recurring basis will provide market 
participants with the flexibility to comply with these restrictions 
when necessary to avoid position limits on future options activity. In 
addition, with respect to netting, as discussed above, firms may 
maintain different clearing accounts for a variety of reasons, such as 
the structure of their businesses, the manner in which they trade, 
their risk management procedures, and for capital purposes. Netting may 
otherwise occur with respect to a firm's positions if it structured its 
clearing accounts differently, such as by using a universal account. 
Therefore, the proposed rule change will permit netting while allowing 
firms to continue to maintain different clearing accounts in a manner 
consistent with their businesses.
    The Exchange recognizes the numerous benefits of executing options 
transactions occur on an exchange, including price transparency, 
potential price improvement, and a clearing guarantee. However, the 
Exchange believes it is appropriate to permit RWA Transfers to occur 
off the exchange, as these benefits are inapplicable to RWA Transfers. 
RWA Transfers have a narrow scope and are intended to achieve a 
limited, benefit purpose. RWA Transfers are not intended to be a 
competitive trading tool. There is no need for price discovery or 
improvement, as the purpose of the transfer is to reduce RWA asset 
capital requirements attributable to a market participants' positions. 
Unlike trades on an exchange, the price at which an RWA Transfers 
occurs is immaterial--the resulting reduction in RWA is the critical 
part of the transfer. RWA Transfers will result in no change in 
ownership, and thus they do not constitute trades with a counterparty 
(and thus eliminating the need for a counterparty guarantee). The 
transactions that resulted in the open positions to be transferred as 
an RWA Transfer were already guaranteed by an OCC clearing member, and 
the positions will continue to be subject to OCC rules, as they will 
continue to be held in an account with an OCC clearing member. The 
narrow scope of the proposed rule change and the limited, beneficial 
purpose of RWA Transfers make allowing RWA Transfers to occur off the 
floor appropriate and important to support the provision of liquidity 
in the listed options market.
    Proposed Rule 20.11 does not unfairly discriminate against market 
participants, as all Members and non-Members with open positions in 
options listed on the Exchange may use the proposed off-exchange 
transfer process to reduce the RWA capital requirements of Clearing 
Members.
    The Exchange believes proposed Rule 20.12 to permit off-Exchange 
transfers in connection with the in-kind Fund and UIT creation and 
redemption process will promote just and equitable principles of trade 
and help remove impediments to and perfect the mechanism of a free and 
open market and a national market system, as it would permit Funds and 
UITs that invest in options traded on the Exchange to utilize the in-
kind creation and redemption process that is available for Funds and 
UITs that invest in equities and fixed-income securities. This process 
represents a significant feature of the Fund and UIT structure 
generally, with advantages that distinguish Funds and UITs from other 
types of pooled investment vehicles. In light of the associated tax 
efficiencies and potential transaction cost savings, the Exchange 
believes the ability to utilize an in-kind process would make such 
Funds and UITs more attractive to both current and prospective 
investors and enable them to compete more effectively with other Funds 
and UITs that, based on their portfolio holdings, may effect in-kind 
creations and redemptions without restriction. In addition, the 
Exchange believes that because it would permit Funds and UITs that 
invest in options traded on the Exchange to benefit from tax 
efficiencies and potential transaction cost savings afforded by the in-
kind creation and redemption process, which benefits the Exchange 
expects would generally be passed along to investors that hold Fund 
Shares and UIT units, the proposed rule change would protect investors 
and the public interest.
    Moreover, the Exchange submits that the proposed exception is 
clearly delineated and limited in scope and not intended to facilitate 
``trading'' options off the Exchange. Other than the transfers covered 
by the proposed exception, transactions involving options, whether held 
by a Fund or an authorized participant, or a UIT or a sponsor, would be 
fully subject to the applicable trading Rules. Additionally, the 
transfers covered by the proposed exception would occur at a price(s) 
used to calculate the NAV of the applicable Fund Shares or UIT units, 
which removes the need for price discovery on the Exchange. 
Accordingly, the Exchange does not believe that the proposed rule 
change would compromise price discovery or transparency.
    When Congress charged the Commission with supervising the 
development of a ``national market system'' for securities, Congress 
stated its intent that the ``national market system evolve through the 
interplay of competitive forces as unnecessary regulatory restrictions 
are removed.'' \58\ Consistent with this purpose, Congress and the 
Commission have repeatedly stated their preference for competition, 
rather than regulatory intervention to determine products and services 
in the securities markets.\59\ This consistent

[[Page 43896]]

and considered judgment of Congress and the Commission is correct, 
particularly in light of evidence of robust competition among 
exchanges. The fact that an exchange proposed something new is a reason 
to be receptive, not skeptical--innovation is the lifeblood of a 
vibrant competitive market--and that is particularly so given the 
continued internalization of the securities markets, as exchanges 
continue to implement new products and services to compete not only in 
the United States but throughout the world. Exchanges continuously 
adopt new and different products and trading services in response to 
industry demands in order to attract order flow and liquidity to 
increase their trading volume. This competition has led to a growth in 
investment choices, which ultimately benefits the marketplace and the 
public.
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    \58\ See H.R. Rep. 94-229, at 92 (1975) (Conf. Rep.).
    \59\ See S. Rep. No. 94-75, 94th Cong., 1st Sess. 8 (1975) 
(``The objective [in enacting the 1975 amendments to the Exchange 
Act] would be to enhance competition and to allow economic forces, 
interacting within a fair regulatory field, to arrive at appropriate 
variations in practices and services.''); Order Approving Proposed 
Rule Change Relating to NYSE Arca Data, Securities Exchange Act 
Release No. 59039 (December 2, 2008), 73 FR 74770 (December 9, 2008) 
(``The Exchange Act and its legislative history strongly support the 
Commission's reliance on competition, whenever possible, in meeting 
its regulatory responsibilities for overseeing the [self-regulatory 
organizations] and the national market system. Indeed, competition 
among multiple markets and market participants trading the same 
products is the hallmark of the national market system.''); and 
Regulation NMS, 70 FR at 37499 (observing that NMS regulation ``has 
been remarkably successful in promoting market competition in [the] 
forms that are most important to investors and listed companies'').
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    Currently, the Exchange Rules do not allow Funds or UITs to effect 
in-kind transfers of options off of the Exchange, resulting in tax 
inefficiencies for Funds and UITs that hold them. As a result, the use 
of options by Funds and UITs is substantially limited. While the 
proposed exception would be limited in scope, the Exchange believes the 
benefits that may flow to Funds and UITs that hold options and their 
investors may be significant. Specifically, the Exchange expects that 
such Funds and UITs and their investors could benefit from increased 
tax efficiencies and potential transaction cost savings. By making such 
Funds and UITs more attractive to both current and prospective 
investors, the proposed rule change would enable them to compete more 
effectively with other Funds and UITs, and other investment vehicles, 
that, due to their particular portfolio holdings, may effect in-kind 
creations and redemptions without restriction. This may lead to further 
development of Funds and UITs that invest in options, thereby fostering 
competition and resulting in additional choices for investors, which 
ultimately benefits the marketplace and the public.

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 proposed rule change is 
not intended to be a competitive trading tool.
    The Exchange does not believe the proposed rule change regarding 
off-floor position transfers will impose an undue burden on intramarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act as the transfer procedure may be utilized by any 
Member and the rule will apply uniformly to all Members. Use of the 
transfer procedure is voluntary, and all Members may use the procedure 
to transfer positions as long as the criteria in the proposed rule are 
satisfied. With this change, a Member that experiences limited 
permissible, non-recurring events would have an efficient and effective 
means to transfer positions in these situations. The Exchange believes 
the proposed rule change regarding permissible transfer prices provides 
market participants with flexibility to determine the price appropriate 
for their business, which determine prices in accordance with normal 
accounting practices and removes impediments to a free and open market. 
The Exchange does not believe the proposed notice and record 
requirements are unduly burdensome to market participants. The Exchange 
believes the proposed requirements are reasonable and will enable the 
Exchange to be aware of transfers and monitor and review the transfers 
for compliance with the proposed rule.
    Adopting an exemption, similar to Cboe Options Rule 6.7, to permit 
the Exchange's Chief Executive Officer or President (or senior-level 
designee) to grant an exemption to proposed Rule 20.9 prohibition if, 
in his or her judgment, does not impose an undue burden on competition. 
Circumstances where, due to unusual or extraordinary circumstances such 
as the market value of the person's positions would be comprised by 
having to comply with the requirement to trade on the Exchange pursuant 
to the normal auction process or, would be taken into consideration in 
each case where, in the judgment of the Exchange's Chief Executive 
Officer or President (or senior-level designee), market conditions make 
trading on the Exchange impractical.
    The Exchange does not believe the proposed rule change regarding 
off-floor position transfers will impose an undue burden on inter-
market competition that is not necessary or appropriate in furtherance 
of the purposes of the Act. The proposed position transfer procedure is 
not intended to be a competitive trading tool. The proposed rule change 
permits, in limited circumstances, a transfer to facilitate non-
routine, nonrecurring movements of positions. As provided for in 
proposed Rule 20.10(g), it would not be used repeatedly or routinely in 
circumvention of the normal auction market process. Proposed Rule 
20.10(g) specifically provides within the rule text that the Exchange's 
Chief Executive Officer or President (or senior-level designee) may in 
his or her judgment allow a transfer for the maintenance of a fair and 
orderly market and the protection of investors and is in the public 
interest. The Exchange believes that the exemption does not impose an 
undue burden on competition as the Exchange's Chief Executive Officer 
or President (or senior-level designee) would apply the exemption 
consistent with the guidance within Options 6, Section 5(f). 
Additionally, as discussed above, the proposed rule change is similar 
to Cboe Options Rule 6.7. The Exchange believes having similar rules 
related to transfer positions to those of other options exchanges will 
reduce the administrative burden on market participants of determining 
whether their transfers comply with multiple sets of rules.
    The Exchange does not believe the proposed rule change regarding 
off-floor RWA Transfers will impose an undue burden on intramarket 
competition that is not necessary or appropriate in furtherance of the 
Act, as use of the proposed process is voluntary. All Members and non-
Members with open positions in options listed on the Exchange may use 
the proposed off-exchange transfer process to reduce the RWA capital 
requirements attributable to those positions. 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 purposes of the Act. RWA Transfers have a limited 
purpose, which is to reduce RWA attributable to open positions in 
listed options in order to free up capital. The Exchange believes the 
proposed rule change may relieve the burden on liquidity providers in 
the options market by reducing the RWA attributable to their open 
positions. As a result, market participants may be able to increase 
liquidity they provide to the market, which liquidity benefits all 
market participants.
    The Exchange does not believe the proposed rule change regarding 
off-floor in-kind transfers will impose any burden on intramarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. Utilizing the proposed exception would be 
voluntary. As an alternative to the normal auction process, proposed 
Rule

[[Page 43897]]

20.12 would provide market participants with an efficient and effective 
means to transfer positions as part of the creation and redemption 
process for Funds and UITs under specified circumstances. The proposed 
exception would enable all Funds and UITs that hold options to enjoy 
the benefits of in-kind creations and redemptions already available to 
other Funds and UITs (and to pass these benefits along to investors). 
The proposed rule change would apply in the same manner to all 
authorized participants and sponsor broker-dealers that choose to use 
the proposed process.
    The Exchange does not believe the proposed rule change will impose 
any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. As indicated 
above, it is intended to provide an additional clearly delineated and 
limited circumstance in which options positions can be transferred off 
an exchange. Further, the Exchange believes the proposed rule change 
will eliminate a significant competitive disadvantage for Funds and 
UITs that invest in options. Furthermore, as indicated above, in light 
of the significant benefits provided (e.g., tax efficiencies and 
potential transaction cost savings), the proposed exception may lead to 
further development of Funds and UITs that invest in options, thereby 
fostering competition and resulting in additional choices for 
investors, which ultimately benefits the marketplace and the public. 
Lastly, the Exchange notes that the proposed rule change is based on 
Cboe Rule 6.9. As such, the Exchange believes that its proposal 
enhances fair competition between markets by providing for additional 
listing venues for Funds that hold options to utilize the in-kind 
transfers proposed herein.

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

    The Exchange neither solicited nor received 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 \60\ and Rule 19b-
4(f)(6) thereunder.\61\
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    \60\ 15 U.S.C. 78s(b)(3)(A).
    \61\ 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 under Rule 19b-4(f)(6) \62\ normally 
does not become operative for 30 days after the date of the filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\63\ the Commission may 
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 to so that it may 
adopt the proposed position transfer rules as soon as possible which, 
according to the Exchange, would provide for fair competition among 
options exchanges. The proposed rule change does not present any unique 
or novel regulatory issues and is substantively similar to the rules of 
Cboe Options. Accordingly, the Commission hereby waives the operative 
delay and designates the proposal operative upon filing.\64\
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    \62\ 17 CFR 240.19b-4(f)(6).
    \63\ 17 CFR 240.19b-4(f)(6)(iii).
    \64\ 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 will 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-CboeEDGX-2020-031 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-CboeEDGX-2020-031. 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 the 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-CboeEDGX-2020-031 and should be 
submitted on or before August 10, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\65\
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    \65\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-15554 Filed 7-17-20; 8:45 am]
BILLING CODE 8011-01-P


