[Federal Register Volume 85, Number 146 (Wednesday, July 29, 2020)]
[Notices]
[Pages 45713-45718]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16263]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89381; File No. SR-FINRA-2020-021]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend Rule 2360 (Options) To Increase Position 
Limits on Options on Certain Exchange-Traded Funds

July 22, 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 July 14, 2020, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by FINRA. FINRA has designated 
the proposed rule change as constituting a ``non-controversial'' rule 
change under paragraph (f)(6) of Rule 19b-4 under the Act,\3\ which 
renders the proposal effective upon receipt of this filing by the 
Commission. 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\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    FINRA is proposing to amend Rule 2360 (Options) to increase the 
position and exercise limits for conventional options on certain 
exchange-traded funds (``ETFs'').
    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *

2360. Options

    (a) No Change.

(b) Requirements

    (1) through (2) No Change.

(3) Position Limits

    (A) Stock Options--
    (i) through (ii) No Change.
    (iii) Conventional Equity Options.
    a. For purposes of this paragraph (b), standardized equity option 
contracts of the put class and call class on the same side of the 
market overlying the same security shall not be aggregated with 
conventional equity option contracts or FLEX Equity Option contracts 
overlying the same security on the same side of the market. 
Conventional equity option contracts of the put class and call class on 
the same side of the market overlying the same security shall be 
subject to a position limit of:
    1. through 5. No Change.
    6. for selected conventional options on exchange-traded funds 
(``ETF''), the position limits are listed in the chart below:

------------------------------------------------------------------------
        Security underlying option           Position limit (contracts)
------------------------------------------------------------------------
The DIAMONDS Trust (DIA)..................                       300,000
The Standard and Poor's Depositary                  [1,800,000]3,600,000
 Receipts Trust (SPY).....................
The iShares Russell 2000 ETF (IWM)........                     1,000,000
The PowerShares QQQ Trust (QQQ)...........                     1,800,000
The iShares MSCI Emerging Markets ETF                          1,000,000
 (EEM)....................................
iShares China Large-Cap ETF (FXI).........            [500,000]1,000,000
iShares MSCI EAFE ETF (EFA)...............            [500,000]1,000,000
iShares MSCI Brazil Capped ETF (EWZ)......                       500,000
iShares 20+ Year Treasury Bond Fund ETF                          500,000
 (TLT)....................................
iShares MSCI Japan ETF (EWJ)..............                       500,000
iShares iBoxx High Yield Corporate Bond                          500,000
 Fund (HYG)...............................
Financial Select Sector SPDR Fund (XLF)...                       500,000
------------------------------------------------------------------------

    b. No Change.
    (B) through (D) No Change.
    (4) through (24) No Change.
    (c) No Change.

Supplementary Material

    .01 through .03 No Change.
* * * * *

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

    In its filing with the Commission, FINRA 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. FINRA 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
    FINRA Rule 2360(b)(3)(A) imposes a position limit on the number of 
equity options contracts in each class on the same side of the market 
that can be held or written by a member, a person associated with a 
member, or a customer or a group of customers acting in concert. 
Position limits are intended to prevent the establishment of options 
positions that can be used to manipulate or disrupt the underlying 
market or might create incentives to manipulate or disrupt the 
underlying market so as to benefit the options position. In addition, 
position limits serve to reduce the potential for disruption of the 
options market itself, especially in illiquid options classes.\4\ This 
consideration has been balanced by the concern that the limits ``not be 
established at levels that are so low as to discourage participation in 
the options market by institutions and other investors with substantial 
hedging needs or to prevent specialists and market makers from 
adequately

[[Page 45714]]

meeting their obligations to maintain a fair and orderly market.'' \5\
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    \4\ See Securities Exchange Act Release No. 40969 (January 22, 
1999), 64 FR 4911, 4912-4913 (February 1, 1999) (Order Approving 
File No. SR-CBOE-98-23) (citing H.R. No. IFC-3, 96th Cong., 1st 
Sess. at 189-91 (Comm. Print 1978)).
    \5\ See supra at 4913.
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    Rule 2360(b)(3)(A)(i) does not independently establish a position 
limit for standardized equity options. Rather, the position limit 
established by the rules of an options exchange for a particular equity 
option is the applicable position limit for purposes of Rule 2360.\6\ 
Rule 2360(b)(3)(A)(iii) provides that conventional equity options \7\ 
are subject to a basic position limit of 25,000 contracts or a higher 
tier for conventional option contracts on securities that underlie 
exchange-traded options qualifying for such higher tier as determined 
by the rules of the options exchanges. In addition, FINRA lists 
position limits for options on securities that have higher position 
limits--currently, only the ETFs listed in Rule 
2360(b)(3)(A)(iii)a.6.--that also generally mirror the options exchange 
position limits. At this time, FINRA proposes to conform its 
conventional options position limits to the Cboe Exchange, Inc.'s 
(``Cboe'') recent amendments that increased the position limit options 
due to an ongoing increase in demand in options on the following ETFs: 
The Standard and Poor's Depositary Receipts Trust (``SPY''), iShares 
MSCI EAFE ETF (``EFA''), iShares China Large-Cap ETF (``FXI''), iShares 
iBoxx High Yield Corporate Bond Fund (``HYG''), and Financial Select 
Sector SPDR Fund (``XLF'' collectively, with the aforementioned ETFs, 
the ``Underlying ETFs'').\8\
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    \6\ See e.g., Cboe Rule 8.30; ISE Options 9 Section 13; NASDAQ 
PHLX Options 9 Section 13; NYSE American Rule 904; NYSE Arca Rule 
6.8-0; MIAX Rule 307; BOX Rule 3120 and IM-3120-2; NASDAQ Options 9 
Section 13; BX Options 9 Section 13; and BZX Rule 18.7.
    \7\ Conventional options are over-the-counter options and are 
defined in Rule 2360(a)(9) as ``(A) any option contract not issued, 
or subject to issuance, by The Options Clearing Corporation; or (B) 
an OCC Cleared OTC Option.''
    \8\ See Securities Exchange Act Release No. 88768 (April 29, 
2020), 85 FR 26736 (May 5, 2020) (Order Granting Approval of File 
No. SR-CBOE-2020-015). See also Securities Exchange Act Release No. 
88893 (May 18, 2020), 85 FR 31239 (May 22, 2020) (Notice of Filing 
and Immediate Effectiveness of File No. SR-MIAX-2020-10) and 
Securities Exchange Act Release No. 88894 (May 18, 2020), 85 FR 
31267 (May 22, 2020) (Notice of Filing and Immediate Effectiveness 
of File No. SR-BOX-2020-13).
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    The proposed rule change would amend the table provided in Rule 
2360(b)(3)(A)(iii)a.6. as follows:
     The position limits for options on SPY would be increased 
from 1,800,000 contracts to 3,600,000 contracts;
     The position limit for options on EFA would be increased 
from 500,000 contracts to 1,000,000 contracts; and
     The position limit for options on FXI would be increased 
from 500,000 contracts to 1,000,000 contracts.
    In addition, the proposed rule change would add to the table 
provided in Rule 2360(b)(3)(A)(iii)a.6. as follows, with the effect of 
each ETF being increased from the current position limit of 250,000 
contracts:
     The position limit for options on HYG would be increased 
to 500,000 contracts; and
     The position limit for options on XLF would be increased 
to 500,000 contracts.
    FINRA notes the proposed position limits on EFA and FXI are 
consistent with existing position limits for options on the iShares 
Russell 2000 ETF (``IWM'') and the iShares MSCI Emerging Markets ETF 
(``EEM''), and the proposed limits for options on XLF and HYG are 
consistent with current position limits for options on the iShares MSCI 
Brazil Capped ETF (``EWZ''), iShares 20+Year Treasury Bond Fund ETF 
(``TLT''), and iShares MSCI Japan ETF (``EWJ'').
    In support of the proposed rule change, as noted by Cboe, position 
limits are determined by the option exchange's rules.\9\ The ETFs that 
underlie options subject to the proposed rule change are highly liquid, 
and are based on a broad set of highly liquid securities and other 
reference assets. The above listed ETFs are listed on various national 
securities exchanges and meet their listing standards.
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    \9\ See e.g., Cboe Rule 8.30, Interpretation and Policy .02.
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    In supporting the proposed position limit increases, FINRA 
considered both liquidity of the Underlying ETFs and the component 
securities of the Underlying ETFs, as well as the availability of 
economically equivalent products to the overlying options and their 
respective position limits. For instance, some of the Underlying ETFs 
are based upon broad-based indices that underlie cash-settled options, 
and therefore the options on the Underlying ETFs are economically 
equivalent to the options on those indices, which have no position 
limits. Other Underlying ETFs are based upon broad-based indices that 
underlie cash-settled options with position limits reflecting notional 
values that are larger than current position limits for options on the 
ETF analogues. For indexes that are tracked by an Underlying ETF but on 
which there are no options listed, FINRA believes, based on the 
liquidity, depth and breadth of the underlying market of the components 
of the indexes, that each of the indexes referenced by the applicable 
ETFs would be considered a broad-based index under options exchange 
rules. Additionally, if in some cases certain position limits are 
appropriate for the options overlying comparable indexes or basket of 
securities that the Underlying ETFs track then those economically 
equivalent position limits should be appropriate for the options 
overlying the Underlying ETFs.
    FINRA notes that Cboe has compiled the following trading statistics 
regarding shares of and exchange-traded options on the Underlying ETFs, 
as well as the component securities or components underlying the 
referenced index (as applicable): \10\
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    \10\ See note 8. As noted above, the position limit for 
standardized options under Rule 2360 is the limit established by an 
exchange on which the option trades. The position limit for 
conventional options under Rule 2360 generally mirrors the options 
exchange position. The proposed rule change would maintain 
consistent position limits between standardized and conventional 
options on the same underlying security. FINRA believes that the 
Cboe reasoning regarding the increase to standardized options 
position limits applies equally to increasing the position limit for 
conventional options.

----------------------------------------------------------------------------------------------------------------
                                                                     Shares
                                  ADV (ETF        ADV (option      outstanding     Fund market     Total market
           Product               shares) (in      contracts)       (ETFs) (in       Cap (USD)       cap of ETF
                                  millions)                         millions)       (billion)       components
----------------------------------------------------------------------------------------------------------------
SPY..........................            70.3  2.8 million.....           968.7           312.9  29.3 trillion
FXI..........................            26.1  196,600.........           106.8             4.8  28.0 trillion
EFA..........................            25.1  155,900.........           928.2            64.9  19.3 trillion
HYG..........................            20.0  193,700.........           216.6            19.1  906.4 billion
XLF..........................            48.8  102,100.........           793.6            24.6  3.8 trillion
----------------------------------------------------------------------------------------------------------------


[[Page 45715]]

    Further, Cboe has collected the same trading statistics, where 
applicable, as above regarding a sample of other ETFs, as well as the 
current position limits for options on such ETFs, to draw comparisons 
in support of proposed position limit increases for options on a number 
of the Underlying ETFs:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Shares
                                               ADV (ETF       ADV (option     outstanding     Fund market      Total market cap of ETF        Current
                  Product                     shares) (in     contracts)      (ETFs) (in       cap (USD)             components           position limit
                                               millions)                       millions)       (billion)
--------------------------------------------------------------------------------------------------------------------------------------------------------
QQQ.......................................            30.2         670,200           410.3            88.7  10.1 trillion...............       1,800,000
EWZ.......................................            26.7         186,500             233            11.3  234.6 billion...............         500,000
TLT.......................................             9.6          95,200           128.1            17.5  N/A.........................         500,000
EWJ.......................................             7.2           5,700           236.6            14.2  3 trillion..................         500,000
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    FINRA agrees with Cboe that, overall, the liquidity in the shares 
of the Underlying ETFs and in the component securities of the 
Underlying ETFs, and in their overlying options, as well as the large 
market capitalizations and structure of each of the Underlying ETFs, 
support the proposal to increase the position limits for each option 
class. Given the robust liquidity and capitalization in the Underlying 
ETFs and in the component securities of the Underlying ETFs, FINRA 
believes the market capitalization of the underlying component 
securities of the applicable ETF is large enough to adequately absorb 
potential price movements that may be caused by large trades. The 
following analyses for the Underlying ETFs, which FINRA agrees with in 
support of the proposed rule change, as well as the statistics 
presented in support thereof, were presented by Cboe in their initial 
filing, which was approved by the Commission.
    Specifically, Cboe notes that SPY tracks the performance of the S&P 
500[supreg] Index, which is an index of diversified large cap U.S. 
companies.\11\ It is composed of 505 selected stocks spanning over 
approximately 24 separate industry groups. The S&P 500[supreg] is one 
of the most commonly followed equity indices, and is widely considered 
to be the best indicator of stock market performance as a whole. SPY is 
one of the most actively traded ETFs, and, since 2017, its ADV has 
increased from approximately 64.6 million shares to 70.3 million shares 
by the end of 2019. Similarly, its ADV in options contracts has 
increased from 2.6 million to 2.8 million through 2019. As noted, the 
demand for options trading on SPY has continued to increase, however, 
the position limits have remained the same, which may have impacted 
growth in SPY option volume from 2017 through 2019. SPY shares are more 
liquid than PowerShares QQQ Trust (``QQQ'') shares, which is also 
currently subject to a position limit of 1,800,000 contracts. 
Specifically, SPY currently experiences over twice the ADV in shares 
and over four times the ADV in options than that of QQQ.
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    \11\ See SPDR[supreg] S&P 500[supreg] ETF Trust, available at 
https://www.ssga.com/us/en/individual/etfs/funds/spdr-sp-500-etf-trust-spy (January 21, 2020).
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    EFA tracks the performance of MSCI EAFE Index, which is composed of 
over 900 large and mid-cap securities across 21 developed markets, 
including countries in Europe, Australia and the Far East, excluding 
the U.S. and Canada.\12\ From 2017 through 2019, ADV has grown 
significantly in shares of EFA and in options on EFA, from 
approximately 19.4 million shares in 2017 to 25.1 million through 2019, 
and from approximately 98,800 options contract in 2017 to 155,900 
through 2019. Options are available on the MSCI EAFE Index (``MXEA''), 
the analogue index, which was previously subject to a position limit of 
25,000 contracts (50,000 as proposed by Cboe and approved the 
Commission).\13\ Using the notional value comparison of EFA's share 
price of $69.44 and MXEA's index level of 2036.94, approximately 29 EFA 
option contracts equal one MXEA option contract.\14\ Based on the above 
comparison of notional values, a position limit for EFA options that 
would be economically equivalent to that of MXEA options equates to 
725,000 contracts (previously) and 1,450,000 (for the Cboe proposed 
50,000 contracts position limit increase for MXEA options that was 
approved by the Commission). Also, MXEA index options have an ADV of 
594 options contracts, in which equate to an ADV of 17,226 EFA option 
contracts (as that is 29 times the size of 594). EFA options, which are 
more actively traded and held than MXEA options, are currently subject 
to a position limit of 500,000 options contracts despite their much 
higher ADV of approximately 155,900 options contracts.
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    \12\ See iShares MSCI EAFE ETF, available at https://www.ishares.com/us/products/239623/ishares-msci-eafe-etf (February 
10, 2020).
    \13\ See note 8. Cboe is proposing [sic] to raise the position 
limit on certain indexes. FINRA incorporates by reference the 
exchange position limits on indexes in FINRA Rule 2360(b)(3)(B) and 
accordingly does not need to propose any corresponding FINRA rule 
change.
    \14\ See note 8. The values were presented by Cboe in their 
initial filing, which was approved by the Commission.
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    FXI tracks the performance of the FTSE China 50 Index, which is 
composed of the 50 largest Chinese stocks.\15\ FXI shares and options 
have also experienced increased liquidity since 2017, as ADV has grown 
from approximately 15.1 million shares in 2017 to 26.1 million through 
2019, as well as approximately 71,900 options contracts in 2017 to 
196,600 through 2019. Although there are currently no options on the 
FTSE China 50 Index listed for trading, the components of the FTSE 
China 50 Index, which can be used to create a basket of stocks that 
equate to the FXI ETF, currently have a market capitalization of 
approximately $28 trillion and FXI has a market capitalization of $4.8 
billion (as indicated above), which are both large enough to absorb 
potential price movements caused by a large trade in FXI.
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    \15\ See iShares China Large-Cap ETF, available at https://www.ishares.com/us/products/239536/ishares-china-largecap-etf 
(February 10, 2020).
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    XLF invests in a wide array of financial service firms with 
diversified business lines ranging from investment management to 
commercial and investment banking. It generally corresponds to the 
price and yield performance of publicly traded equity securities of 
companies in the SPDR Financial Select Sector Index.\16\ XLF 
experiences ADV in shares and in exchange-traded options (48.8 million 
shares and 102,100 options contracts) that is significantly greater 
than the ADV in shares and options for EWZ (26.7 million shares and 
186,500 options contracts), TLT (9.6 million shares and 95,200 options 
contracts), and EWJ (7.2 million shares and 5,700 options contracts), 
each of which already have a position limit of 500,000 contracts--the 
proposed position limit

[[Page 45716]]

for XLF options. Although there are no options on the SPDR Financial 
Select Sector Index listed for trading, the components of the index, 
which can be used to create a basket of stocks that equate to the XLF 
ETF, currently have a market capitalization of $3.8 trillion (indicated 
above). Additionally, XLF has a market capitalization of $24.6 billion. 
Both of these are large enough to absorb potential price movements 
caused by a large trade in XLF.
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    \16\ See Select Sector SPDR ETFs, XLF, available at http://www.sectorspdr.com/sectorspdr/sector/xlf (January 15, 2020).
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    Finally, HYG attempts to track the investment results of Markit 
iBoxx USD Liquid High Yield Index, which is composed of U.S. dollar-
denominated, high-yield corporate bonds and is one of the most widely 
used high-yield bond ETFs.\17\ HYG experiences significantly higher ADV 
in shares and exchange-traded options (20 million shares and 193,700 
options contracts) than both TLT (9.6 million shares and 95,200 options 
contracts), and EWJ (7.2 million shares and 5,700 options contracts), 
which are currently subject to a position limit of 500,000 options 
contracts--the proposed limit for options on HYG. While HYG does not 
have an index option analogue listed for trading, FINRA agrees with 
Cboe's belief that HYG's market capitalization of $19.1 billion, and of 
$906.4 billion in component securities, is adequate to absorb a 
potential price movement that may be caused by large trades in HYG.
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    \17\ See iShares iBoxx $ High Yield Corporate Bond ETF, 
available at https://www.ishares.com/us/products/239565/ishares-iboxx-high-yield-corporatebond-etf (January 15, 2020).
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    FINRA believes that increasing the position limits for conventional 
options subject to the proposed rule change would lead to a more liquid 
and competitive market for these options, which will benefit customers 
interested in these products.
Creation and Redemption for ETFs
    FINRA believes that the creation and redemption process for ETFs 
will lessen the potential for manipulative activity with options on the 
Underlying ETFs. When an ETF provider wants to create more shares, it 
looks to an Authorized Participant (generally a market maker or other 
large financial institution) to acquire the securities the ETF is to 
hold. For instance, when an ETF is designed to track the performance of 
an index, the Authorized Participant can purchase all the constituent 
securities in the exact same weight as the index, then deliver those 
shares to the ETF provider. In exchange, the ETF provider gives the 
Authorized Participant a block of equally valued ETF shares, on a one-
for-one fair value basis. The price is based on the net asset value, 
not the market value at which the ETF is trading. The creation of new 
ETF units can be conducted during an entire trading day, and is not 
subject to position limits. This process works in reverse where the ETF 
provider seeks to decrease the number of shares that are available to 
trade. The creation and redemption process, therefore, creates a direct 
link to the underlying components of the ETF, and serves to mitigate 
potential price impact of the ETF shares that might otherwise result 
from increased position limits for the ETF options.
    FINRA understands that the ETF creation and redemption process 
seeks to keep an ETF's share price trading in line with the ETF's 
underlying net asset value. Because an ETF trades like a stock, its 
share price will fluctuate during the trading day, due to simple supply 
and demand. If demand to buy an ETF is high, for instance, the ETF's 
share price might rise above the value of its underlying securities. 
When this happens, the Authorized Participant believes the ETF may now 
be overpriced, so it may buy shares of the component securities and 
then sell ETF shares in the open market (i.e., creations). This may 
drive the ETF's share price back toward the underlying net asset value. 
Likewise, if the ETF share price starts trading at a discount to the 
securities it holds, the Authorized Participant can buy shares of the 
ETF and redeem them for the underlying securities (i.e., redemptions). 
Buying undervalued ETF shares may drive the share price of the ETF back 
toward fair value. This arbitrage process helps to keep an ETF's share 
price in line with the value of its underlying portfolio.
Surveillance and Reporting
    FINRA believes that the increased position limits provisions are 
appropriate in light of the existing surveillance procedures and 
reporting requirements at FINRA,\18\ the options exchanges, and at the 
several clearing firms, which are capable of properly identifying 
unusual or illegal trading activity. These procedures use daily 
monitoring of market movements by automated surveillance techniques to 
identify unusual activity in both options and underlying stocks.\19\
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    \18\ See Rule 2360(b)(5) for the options reporting requirements.
    \19\ These procedures have been effective for the surveillance 
of options trading and will continue to be employed.
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    In addition, large stock holdings must be disclosed to the 
Commission by way of Schedules 13D or 13G.\20\ Options positions are 
part of any reportable positions and cannot legally be hidden. 
Moreover, the previously noted Rule 2360(b)(5) requirement that members 
must file reports with FINRA for any customer that held aggregate large 
long or short positions of any single class for the previous day will 
continue to serve as an important part of FINRA's surveillance efforts.
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    \20\ 17 CFR 240.13d-1.
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    Finally, FINRA believes that the current financial requirements 
imposed by FINRA and by the Commission adequately address financial 
responsibility concerns that a member or its customer will maintain an 
inordinately large unhedged position in any option with a higher 
position limit. Current margin and risk-based haircut methodologies 
serve to limit the size of positions maintained by any one account by 
increasing the margin or capital that a member must maintain for a 
large position. Under Rule 4210(f)(8)(A), FINRA also may impose a 
higher margin requirement upon a member when FINRA determines a higher 
requirement is warranted. In addition, the Commission's net capital 
rule \21\ imposes a capital charge on members to the extent of any 
margin deficiency resulting from the higher margin requirement.
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    \21\ 17 CFR 240.15c3-1.
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    FINRA has filed the proposed rule change for immediate 
effectiveness and has requested that the SEC waive the requirement that 
the proposed rule change not become operative for 30 days after the 
date of the filing, so FINRA can implement the proposed rule change 
immediately.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\22\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change promotes 
consistent regulation by harmonizing position limits with those of the 
other self-regulatory organizations. FINRA further believes that 
increasing the position limit on conventional options promotes 
consistent regulation by harmonizing the position limit with its 
standardized counterpart. In addition, FINRA believes the proposed rule 
change will be beneficial to large market makers and institutions 
(which generally have the greatest ability to provide liquidity and 
depth in products

[[Page 45717]]

that may be subject to higher position limits as has been the case with 
recently approved increased position limits),\23\ as well as retail 
traders and public customers, by providing them with a more effective 
trading and hedging vehicle.
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    \22\ 15 U.S.C. 78o-3(b)(6).
    \23\ See note 8.
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    In addition, FINRA believes that the structure of the Underlying 
ETFs, the considerable market capitalization of the funds, underlying 
component securities, and the liquidity of the markets for the 
applicable options and underlying component securities will mitigate 
concerns regarding potential manipulation of the products or disruption 
of the underlying markets upon increasing the relevant position limits. 
As a general principle, increases in market capitalizations, active 
trading volume, and deep liquidity of securities tend to deter 
manipulation or disruption. This general principle applies to the 
recently observed increased levels of market capitalization, trading 
volume, and liquidity in shares of the Underlying ETFs, and the 
components of the Underlying ETFs (as described above). FINRA does not 
believe that the options markets or underlying markets would become 
susceptible to manipulation or disruption as a result of the proposed 
position limit increases.
    Increased position limits for select actively traded options, such 
as those proposed herein, are not novel and have been previously 
approved by the Commission. For example, a position limit of 1,800,000 
contracts on options on SPY has been established.\24\ Additionally, the 
Commission has approved similar proposed rule changes by the options 
exchanges to increase position and exercise limits for options on 
highly liquid, actively traded ETFs.\25\ Furthermore, the proposed 
position limits on EFA and FXI are consistent with existing position 
limits for options on IWM and EEM, and the proposed limits for options 
on XLF and HYG are consistent with current position limits for options 
on EWZ, TLT and EWJ.
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    \24\ See Securities Exchange Act Release No. 83349 (May 30, 
2018), 83 FR 26123 (June 5, 2018) (Notice of Filing and Immediate 
Effectiveness of File No. SR-MIAX-2018-11). See also Securities 
Exchange Act Release No. 83412 (June 12, 2018), 83 FR 28298 (June 
18, 2018) (Notice of Filing and Immediate Effectiveness of File No. 
SR-PHLX-2018-44); Securities Exchange Act Release No. 83414 (June 
12, 2018), 83 FR 28296 (June 18, 2018) (Notice of Filing and 
Immediate Effectiveness of File No. SR-BOX-2018-22); Securities 
Exchange Act Release No. 83415 (June 12, 2018), 83 FR 28274 (June 
18, 2018) (Notice of Filing and Immediate Effectiveness of File No. 
SR-CBOE-2018-042); Securities Exchange Act Release No. 83413 (June 
12, 2018), 83 FR 28277 (June 18, 2018) (Notice of Filing and 
Immediate Effectiveness of File No. SR-NYSEArca-2018-44) and 
Securities Exchange Act Release No. 83417 (June 12, 2018), 83 FR 
28279 (June 18, 2018) (Notice of Filing and Immediate Effectiveness 
of File No. SR-NYSEAMER-2018-26).
    \25\ See note 6. See also Securities Exchange Act Release No. 
68086 (October 23, 2012), 77 FR 65600 (October 29, 2012) (Order 
Approving File No. SR-CBOE-2012-66); Securities Exchange Act Release 
No. 68478 (December 19, 2012), 77 FR 76132 (December 26, 2012) 
(Notice of Filing and Immediate Effectiveness of File No. SR-BOX-
2012-23); Securities Exchange Act Release No. 68398 (December 11, 
2012), 77 FR 74700 (December 17, 2012) (Notice of Filing and 
Immediate Effectiveness of File No. SR-ISE-2012-93); Securities 
Exchange Act Release No. 68293 (November 27, 2012), 77 FR 71644 
(December 3, 2012) (Notice of Filing and Immediate Effectiveness of 
File No. SR-Phlx-2012-132); Securities Exchange Act Release No. 
68358 (December 5, 2012), 77 FR 73708 (December 11, 2012) (Notice of 
Filing and Immediate Effectiveness of File No. SR-NYSE MKT-2012-71); 
Securities Exchange Act Release No. 68359 (December 5, 2012), 77 FR 
73716 (December 11, 2012) (Notice of Filing and Immediate 
Effectiveness of File No. SR-NYSEArca-2012-132) and Securities 
Exchange Act Release No. 69457 (April 25, 2013), 78 FR 25502 (May 1, 
2013) (Notice of Filing and Immediate Effectiveness of File No. SR-
MIAX-2013-17).
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    FINRA's existing surveillance and reporting safeguards are designed 
to deter and detect possible manipulative behavior that might arise 
from changing position and exercise limits.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
Economic Impact Analysis
    FINRA has undertaken an economic impact assessment, as set forth 
below, to analyze the potential economic impacts, including anticipated 
costs, benefits, and distributional and competitive effects transfers 
of wealth, relative to the current baseline, and the alternatives FINRA 
considered in assessing how to best meet its regulatory objectives.
Regulatory Objective
    FINRA is proposing to amend Rule 2360 to harmonize FINRA's position 
limits for conventional options with the position limit for 
standardized options.\26\
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    \26\ See note 8.
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Economic Baseline
    Per FINRA Rule 2360(b)(3)(A)(iii) conventional equity options are 
subject to a basic position limit of 25,000 contracts or higher for 
conventional option contracts on securities that underlie exchange-
traded options qualifying for a higher tier as determined by option 
exchange rules. The existing position limits for conventional options 
on ETFs are: 1,800,000 contracts for SPY, 500,000 contracts for EFA or 
FXI and 250,000 contracts for HYG or XLF. Cboe has recently increased 
position limit options on these ETFs.
Economic Impact
Benefits
    As noted above, the proposed rule change would amend Rule 2360 to 
harmonize FINRA's position limits for conventional options with the 
position limits for standardized options.\27\ If the existing position 
limits for conventional equity options on select ETFs constrains 
trading in these ETFs, then investors may be able to better manage risk 
and trade on information when the position limit is relaxed. In 
general, the improvement in risk management and informational 
efficiency may increase more when position limits are increased. FINRA 
acknowledges, however, that the conventional options on these ETFs, the 
ETFs themselves, and the securities underlying these ETFs are liquid, 
so improvements in informational efficiency may be relatively small.
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    \27\ See note 8.
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    For investors that trade conventional equity options, there is 
likely to be a natural size for an executed order that minimizes fixed 
and variable transaction costs, including but not limited to, the bid-
ask spread, price impact, and transaction fees. If the existing 
position limits for conventional equity options on select ETFs 
constrains the order size such that fixed and variable transaction 
costs are higher than optimal, then investors may benefit if the new 
position limit is no less than the natural size. In such an event, the 
cost to hedge an ETF would decline, thereby making it less costly to 
manage downside risk.
    In addition, if the existing position limits serve as a constraint, 
then an increase in the position limits for conventional options on 
select ETFs could permit investors to more easily find a counterparty. 
If the number of counterparties increases, then the cost of hedging 
should decline as the half-spread narrows, thereby making it less 
expensive to manage downside risk.
    The extent of the constraint imposed by the current limit on 
conventional options is related to the ability of an investor to 
achieve similar economic exposure through other means. If there are 
other securities, such as an option on a closely related index, that 
exist and provide similar economic exposure less expensively, then the 
value of lessening the position limits on conventional options on ETFs 
is lower.

[[Page 45718]]

    Members may rely on information and data feeds from the Options 
Clearing Corporation to assist in their monitoring position limits. 
Because position limits on the standardized and conventional side have 
traditionally been consistent, members have relied on this feed for 
both standardized and conventional options. If the position limits 
between standardized and conventional options are conformed, then the 
cost from monitoring position limits should decline for member firms. 
Having the same position limits on standardized and conventional 
options, reduces the potential for excess loss that may be incurred 
when different limits are applied to the standardized versus 
conventional options on the same ETF. The economic loss may arise from 
building and maintaining trading and compliance systems to support the 
different regimes. Furthermore, the harmonization of position limits on 
standardized and conventional options eliminates the potential risk and 
cost arising from regulatory arbitrage.
Costs
    The proposed rule change may impose limited operational cost on 
member firms that trade conventional options on ETFs, as these same 
firms would need to revise position limits that are used in trading 
systems. However, the proposed rule change should not impose additional 
costs, because it is difficult to disrupt or manipulate the underlying 
market, create an incentive to disrupt or manipulate the underlying 
market for the purpose of profiting from the options position, or 
disrupt or manipulate the options market for conventional options on 
ETFs affected by this proposed rule. ETFs that underlie options subject 
to the proposed rule change are highly liquid and are based on a broad 
set of highly liquid securities, which makes the market difficult to 
manipulate or disrupt. In fact, options on certain broad-based security 
indexes have no position limits. Furthermore, the creation and 
redemption process for these ETFs reduces the potential for disruptive 
or manipulative activity. New ETF units may be created at any time 
during the trading day and are not subject to position limits. 
Consequently, there is a direct link between the underlying components 
of the ETF and the ETF, which keeps the ETF's share prices trading in 
line with the ETF's underlying net asset value.
Alternatives
    No further alternatives are under consideration.

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

    Written comments were neither solicited nor received.

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 after the date of the filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \28\ and Rule 19b-
4(f)(6) \29\ thereunder.
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    \28\ 15 U.S.C. 78s(b)(3)(A).
    \29\ 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 the text of the proposed rule change, 
at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. FINRA has satisfied this requirement.
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    FINRA has asked the Commission to waive the 30-day operative delay 
so that FINRA may immediately harmonize position limits with those of 
other self-regulatory organizations to ensure consistent regulation. 
For this reason, the Commission believes that waiving the 30-day 
operative delay is consistent with the protection of investors and the 
public interest. Therefore, the Commission hereby waives the operative 
delay and designates the proposal operative upon filing.\30\
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    \30\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2020-021 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-FINRA-2020-021. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of FINRA. 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-FINRA-2020-021, and should be submitted 
on or before August 19, 2020.
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    \31\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-16263 Filed 7-28-20; 8:45 am]
BILLING CODE 8011-01-P


