[Federal Register Volume 85, Number 151 (Wednesday, August 5, 2020)]
[Notices]
[Pages 47457-47463]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16995]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89427; File No. SR-NYSEArca-2020-70]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Rule 6.8-O 
To Increase Position Limits for Options on Certain Exchange-Traded 
Funds

July 30, 2020.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that on July 24, 2020, NYSE Arca, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I and II below, which Items have been 
prepared by the self-regulatory organization. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Rule 6.8-O (Position Limits) to 
increase the position limits for options on certain exchange-traded 
funds (``ETFs''). The proposed rule change is available on the 
Exchange's website at www.nyse.com, at the principal office of the 
Exchange, 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 self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those 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 parts of such statements.

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

1. Purpose
    The purpose of this filing is to amend Commentary .06(f) to Rule 
6.4-O to

[[Page 47458]]

increase the position limits for options on the following ETFs: 
Standard and Poor's Depositary Receipts Trust (``SPY''), iShares MSCI 
EAFE ETF (``EFA''), iShares China Large-Cap ETF (``FXI''), iShares 
iBoxx High Yield Corporate Bond Fund (``HYG''), and Financial Select 
Sector SPDR Fund (``XLF''). Although the proposed change does not amend 
the text of Rule 6.9-O (Exercise Limits), when the proposed rule is 
effective and operative, the exercise limits for the options that are 
subject to this proposed rule change would increase, because Rule 6.9-O 
provides that the exercise limits for index options and ETF options, 
respectively, are equivalent to their position limits. This is a 
competitive filing that is based on a proposal recently submitted by 
the Chicago Board Options Exchange Incorporated (``Cboe'') and approved 
by the Commission.\4\
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    \4\ See Securities Exchange Act Release No. 88768 (April 29, 
2020) 85 FR 26736 (May 5, 2020) (SR-CBOE-2020-015) (Notice of Filing 
of Amendment No. 1 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1, to Increase 
Position Limits for Options on Certain Exchange-Traded Funds and 
Indexes) (the ``Cboe Approval Order''). Cboe also increased position 
limits for options overlying the MSCI Emerging Markets Index 
(``MXEF'') and the MSCI EAFE Index (``MXEA''), however, because the 
Exchange does not list options on the MXEF or MXEA indexes this 
proposal does not include them.
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    Position limits are designed to address potential manipulative 
schemes and adverse market impacts surrounding the use of options, such 
as disrupting the market in the security underlying the options. While 
position limits should address and discourage the potential for 
manipulative schemes and adverse market impact, if such limits are set 
too low, participation in the options market may be discouraged. The 
Exchange believes that position limits must therefore be balanced 
between mitigating concerns of any potential manipulation and the cost 
of inhibiting potential hedging activity that could be used for 
legitimate economic purposes.
    According to Cboe, market participants have increased their demand 
for options on SPY, EFA, FXI, HYG, and XLF (collectively, the 
``Underlying ETFs'') for both trading and hedging purposes. Cboe noted 
that although the demand for these options appears to have increased, 
position limits for options on the Underlying ETFs, have remained the 
same. The Exchange believes these unchanged position limits may have 
impeded, and may continue to impede, trading activity and strategies of 
investors, such as use of effective hedging vehicles or income 
generating strategies (e.g., buy-write or put-write), and the ability 
of a Market Maker \5\ to make liquid markets with tighter spreads in 
these options resulting in the transfer of volume to over-the-counter 
(``OTC'') markets. OTC transactions occur through bilateral agreements, 
the terms of which are not publicly disclosed to the marketplace. As 
such, OTC transactions do not contribute to the price discovery process 
on a public exchange or other lit markets.
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    \5\ The term ``Market Maker'' refers to Market Makers and Lead 
Market Makers, collectively. See Rule 6.32-O. A Market Maker has the 
rights and responsibilities set forth in Rules 6.37-O through 6.30-
O.
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    Based on the foregoing, the Exchange believes that the proposed 
increases in position limits (and exercise limits) for options on the 
Underlying ETFs may enable liquidity providers to provide additional 
liquidity to the Exchange and enable other market participants to 
transfer their liquidity demands from OTC markets to the Exchange (or 
other options exchanges on which they participate). As described in 
further detail below, the Exchange believes that the continuously 
increasing market capitalization of the Underlying ETFs and ETF 
component securities, as well as the highly liquid markets for those 
securities, reduces the concerns for potential market manipulation and/
or disruption in the underlying markets upon increasing position 
limits, while the rising demand for trading options on the Underlying 
ETFs for legitimate economic purposes compels an increase in position 
limits (and corresponding exercise limits).
Proposed Position and Exercise Limits for Options on the Underlying 
ETFs
    Position limits for options on ETFs are determined pursuant to Rule 
6.8-O, and vary according to the number of outstanding shares and the 
trading volumes of the underlying stocks or ETFs over the past six 
months. Pursuant to Rule 6.8-O, the largest in capitalization and the 
most frequently traded stocks and ETFs have an option position limit of 
250,000 contracts (with adjustments for splits, re-capitalizations, 
etc.) on the same side of the market; and smaller capitalization stocks 
and ETFs have position limits of 200,000, 75,000, 50,000, or 25,000 
contracts (with adjustments for splits, recapitalizations, etc.) on the 
same side of the market. Options on HYG and XLF are currently subject 
to the standard position limit of 250,000 contracts as set forth in 
Rule 6.8-O. Commentary .06(f) to Rule 6.8-O sets forth separate 
position limits for options on specific ETFs, including SPY, FXI and 
EFA. In addition, Rule 6.9-O (which is not being amended by this 
filing), establishes exercise limits for the aforementioned ETFs.
    The Exchange proposes to amend Rule 6.8-O Commentary .06(f) to 
double the position limits and, as a result, exercise limits, for 
options on the Underlying ETFs, i.e., for each of HYG, XLF, FXI, EFA 
and SPY. By virtue of Rule 6.9-O, the exercise limits for EFA, FXI, 
HYG, XLF, and SPY would similarly increase.
    The table below represents the current and proposed position limits 
for options on the Underlying ETFs, including the addition to the table 
of HYG and XLF, with new text signified by italics and to-be-deleted 
text signified in brackets.\6\
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    \6\ See proposed Rule 6.8-O, Commentary .06(f).

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                Options                          Position limits
------------------------------------------------------------------------
PowerShares QQQ TrustSM, Series 1 (QQQ)  1,800,000 contracts
SPDR[supreg] S&P 500[supreg] ETF (SPY).  [1,800,000]3,600,000 contracts
iShares[supreg] Russell 2000[supreg]     1,000,000 contracts
 ETF (IWM).
SPDR[supreg]Dow Jones Industrial         300,000 contracts
 AverageSM ETF Trust (DIA).
iShares MSCI Emerging Markets ETF (EEM)  1,000,000 contracts
iShares China Large-Cap ETF (FXI)......  [500,000]1,000,000 contracts
iShares MSCI EAFE ETF (EFA)............  [500,000]1,000,000 contracts
iShares MSCI Brazil Capped ETF (EWZ)...  500,000 contracts
iShares 20+ Year Treasury Bond Fund ETF  500,000 contracts
 (TLT).
iShares MSCI Japan ETF (EWJ)...........  500,000 contracts
iShares iBoxx High Yield Corporate Bond  500,000 contracts
 Fund (``HYG'').
Financial Select Sector SPDR Fund        500,000 contracts
 (``XLF'').
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[[Page 47459]]

    The Exchange notes that the proposed position limits for options on 
EFA and FXI are consistent with existing position limits for options on 
the iShares[supreg] Russell 2000 ETF (``IWM'') and the iShares[supreg] 
MSCI Emerging Markets ETF (``EEM''), while the proposed limits for 
options on XLF and HYG are consistent with current position limits for 
options on the iShares[supreg] MSCI Brazil Capped ETF (``EWZ''), 
iShares[supreg] 20+ Year Treasury Bond Fund ETF (``TLT''), and 
iShares[supreg] MSCI Japan ETF (``EWJ''). The Exchange represents that 
the Underlying ETFs qualify for either:
    (1) The initial listing criteria set forth in Rule 5.3-O(g)(2) for 
ETFs holding non-U.S. component securities, or
    (2) the generic listing standards for series of portfolio 
depository receipts and index fund shares based on international or 
global indexes under which a comprehensive surveillance agreement 
(``CSA'') is not required, as well as the continued listing criteria in 
Rule 5.4-O.\7\ In compliance with its listing rules, the Exchange also 
represents that non U.S. component securities that are not subject to a 
CSA do not, in the aggregate, represent more than 50% of the weight of 
any of the Underlying ETFs.\8\
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    \7\ The Exchange notes that the initial listing criteria for 
options on ETFs that hold non-U.S. component securities are more 
stringent than the maintenance listing criteria for those same ETF 
options. See Rules 5.3(g)(2) and 5.4-O(k).
    \8\ See Rule 5.3-O(g)(2)(B).
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Cboe's Composition and Growth Analysis for Underlying ETFs
    As stated above, position limits are intended to prevent the 
establishment of options positions that can be used or might create 
incentives to manipulate the underlying market so as to benefit options 
positions. The Securities and Exchange Commission (the ``Commission'') 
has recognized that these limits are designed to minimize the potential 
for mini-manipulations and for corners or squeezes of the underlying 
market, as well as serve to reduce the possibility for disruption of 
the options market itself, especially in illiquid classes.\9\ The 
Underlying ETFs as well as the ETF components are highly liquid, and 
are based on a broad set of highly liquid securities and other 
reference assets, as demonstrated by the trading statistics collected 
by Cboe.\10\ Indeed, the Commission recognized the liquidity of the 
securities comprising the underlying interest of SPY and permitted no 
position limits on SPY options from 2012 through 2018.\11\
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    \9\ See Securities Exchange Act Release No. 68001 (October 5, 
2012), 77 FR 62303 (October 12, 2012) (SR-NYSEArca-2012-112).
    \10\ See supra note 4.
    \11\ See supra note 9 (Order approving the Exchange's; 
implementation of the pilot program that ran through 2017, during 
which there were no position limits for options on SPY). See also 
Securities Exchange Act Release No. 83413 (June 12, 2018) 83 FR 
28277 (June 18, 2018) (SR-NYSEArca-2018-44). The Exchange notes that 
throughout the duration of the pilot program it was not aware of any 
problems created or adverse consequences as a result of the pilot 
program.
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    To support its proposed position limit increases, Cboe conducted an 
analysis in support of its proposal. The Exchange agrees with Cboe's 
trading statistics and analysis. In support of its proposal, Cboe 
considered both liquidity of the Underlying ETFs and the component 
securities of the Underlying ETFs, as well as the availability of 
economically equivalent products to the overlying options and their 
respective position limits. For instance, some of the Underlying ETFs 
are based upon broad-based indices that underlie cash-settled options, 
and therefore the options on the Underlying ETFs are economically 
equivalent to the options on those indices, which have no position 
limits. Other Underlying ETFs are based upon broad-based indices that 
underlie cash-settled options with position limits reflecting notional 
values that are larger than current position limits for options on the 
ETFs based on the same indices. For indexes that are tracked by an 
Underlying ETF but on which there are no options listed, the Exchange 
believes, based on the liquidity, depth and breadth of the underlying 
market of the components of the indexes, that each of the indexes 
referenced by the applicable ETFs would be considered a broad-based 
index under the Exchange's Rules. Additionally, if in some cases 
certain position limits are appropriate for the options overlying 
comparable indexes or basket of securities that the Underlying ETFs 
track, then those economically equivalent position limits should be 
appropriate for the options overlying the Underlying ETFs.
    The Exchange notes that the following trading statistics regarding 
shares of and options on the Underlying ETFs, as well as the component 
securities have been collected by Cboe: \12\
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    \12\ See Securities Exchange Act Release No. 34-88350 (March 10, 
2020), 85 FR 15003 (March 16, 2020) (SR-CBOE-2020-015).

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                                                                  ADV  (option         Shares outstanding      Fund market cap      Total market  cap of
              Product                ADV \13\  (ETF Shares)        contracts)             (ETFS) \14\               (USD)           ETF  components \15\
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SPY................................  70.3 million..........  2.8 million...........  968.7 million........  312.9 billion........  29.3 trillion
FXI................................  26.1 million..........  196,600...............  106.8 million........  4.8 billion..........  28.0 trillion
EFA................................  25.1 million..........  155,900...............  928.2 million........  64.9 billion.........  19.3 trillion
HYG................................  20.0 million..........  193,700...............  216.6 million........  19.1 billion.........  906.4 billion \16\
XLF................................  48.8 million..........  102,100...............  793.6 million........  24.6 billion.........  3.8 trillion
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    In addition, Cboe also collected the same trading statistics, where 
applicable, as above regarding a sample of other ETFs, as well as the 
current position limits for options on such ETFs, in order to draw 
comparisons in support of their proposed position limit increases fo9r 
options on a number of Underlying ETFs (see further discussion below):
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    \13\ Cboe's average daily volume (``ADV'') data for ETF shares 
and options contracts are for all of 2019. Additionally, reference 
to ADV in ETF shares, and ETF options in this proposal are for all 
of 2019, unless otherwise indicated.
    \14\ Shares Outstanding and Fund Market Capitalization Data in 
the tables presented in this filing were sourced from Bloomberg and 
the Cboe's internal data on January 2, 2020.
    \15\ Total Market Capitalization of the ETF Components presented 
in the tables in this filing were sourced from Bloomberg on January 
3, 2020, as well as directly from the issuers' websites.
    \16\ Total Market Capitalization of HYG was sourced from IHS 
Markit, which sends daily constituent information to Cboe.

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                                   ADV  (ETF       ADV  (option       Shares outstanding     Fund market cap   Total market cap of ETF       Current
           Product                  shares)         contracts)              (ETFs)                 (USD)             components          position limits
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QQQ..........................  30.2 million....           670,200  410.3 million...........  88.7 billion...  10.1 trillion...........         1,800,000

[[Page 47460]]

 
EWZ..........................  26.7 million....           186,500  233 million.............  11.3 billion...  234.6 billion...........           500,000
TLT..........................  9.6 million.....            95,200  128.1 million...........  17.5 billion...  N/A.....................           500,000
EWJ..........................  7.2 million.....             5,700  236.6 million...........  14.2 billion...  3 trillion..............           500,000
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    The following analysis, which the Exchange agrees with, was 
conducted by Cboe in support of its proposal. Cboe noted that, overall, 
the liquidity in the shares of the Underlying ETFs and in the component 
securities of the Underlying ETFs and in their overlying options, as 
well as the large market capitalization and structure of each of the 
Underlying ETFs support the proposal to increase the position limits 
for each option class. Given the robust liquidity and capitalization in 
the Underlying ETFs and in the component securities of the Underlying 
ETFs the Exchange does not anticipate that the proposed increase in 
position limits would create significant price movements. Also, the 
Exchange believes the market capitalization of the underlying component 
securities of the applicable index or reference asset are large enough 
to adequately absorb potential price movements that may be caused by 
large trades.
    Specifically, the Exchange notes that SPY tracks the performance of 
the S&P 500[supreg] Index, which is an index of diversified large cap 
U.S. companies.\17\ 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.
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    \17\ See SPDR S&P 500 ETF Trust, available at: https://www.ssga.com/us/en/individual/etfs/funds/spdr-sp-500-etf-trust-spy 
(January 21, 2020).
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    In support of its proposal to increase position limits for SPY to 
3,600,000 contracts, Cboe compared SPY's ADV from 2017 to the end of 
2019, and found that SPY's ADV has increased from approximately 64.6 
million shares to 70.3 million shares.\18\ Similarly, Cboe noted SPY's 
ADV in options contracts has increased from 2.6 million to 2.8 million 
through 2019.\19\ Cboe's data shows the demand for options trading on 
SPY has continued to increase, however, the position limits have 
remained the same, which the Exchange believes may have impacted growth 
in SPY option volume from 2017 through 2019. In addition, Cboe notes 
that SPY shares are more liquid than PowerShares QQQ TrustSM (``QQQ'') 
shares, which is also currently subject to a position limit of 
1,800,000 contracts. Specifically, according to Cboe's statistical 
comparison, SPY currently experiences over twice the ADV in shares and 
over four times the ADV in options than that of QQQ.\20\
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    \18\ See Securities Exchange Act Release 83066 (April 19, 2018) 
83 FR 18099 (April 25, 2018) (SR-NYSEArca-2018-23) (Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Modify Rule 
6.8-O, Commentary .06 To Expand Position Limits for Options on 
Certain Exchange-Traded Funds).
    \19\ See Securities Exchange Act Release No. 83413 (June 12, 
2018) 83 FR 28277 (June 18, 2018) (SR-NYSEArca-2018-44) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to Amend 
Commentary .06 to Rule 6.8-O).
    \20\ The 2019 ADV for QQQ shares is 30.2 million and for options 
on QQQ is 670,200.
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    EFA tracks the performance of MSCI EAFE Index (``MXEA''), which is 
comprised of over 900 large and mid-cap securities across 21 developed 
markets, including countries in Europe, Australia and the Far East, 
excluding the U.S. and Canada.\21\ In support of its proposal to 
increase the position limit for EFA, Cboe's proposal specifies, 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 contracts in 2017 to 155,900 
through 2019. Further, Cboe compared the notional value of EFA's share 
price of $69.44 and MXEA's index level of 2036.94, and calculated that 
approximately 29 EFA option contracts equal one MXEA option contract. 
Based on the above comparison of notional values, Cboe concluded that a 
position limit for EFA options would be economically equivalent to that 
of MXEA options which equates to 725,000 contracts (prior to Cboe's 
recent change) and 1,450,000 for Cboe's current 50,000 contract 
position limit for MXEA options.\22\
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    \21\ See iShares MSCI EAFE ETF, available at: https://www.ishares.com/us/products/239623/ishares-msci-eafe-etf (April 30, 
2020).
    \22\ The Exchange notes that it does not list options on foreign 
indexes.
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    Cboe also noted that MXEA index options have an ADV of 594 options 
contracts, which equates to an ADV of 17,226 EFA option contracts (as 
that is 29 times the size of 594). The Exchange believes the 
significantly higher actual ADV (155,900 contracts), economically 
equivalent ADV (17,226 contracts), notional value, and economically 
equivalent position limits for EFA as compared to MXEA options, 
supports an increase in position limits for EFA options from 500,000 
contracts to 1,000,000 contracts.
    FXI tracks the performance of the FTSE China 50 Index, which is 
composed of the 50 largest Chinese stocks.\23\ According to Cboe, FXI 
shares and options have also experienced increased liquidity since 
2017, as ADV has grown from approximately 15.1 million shares in 2017 
to 26.1 million through 2019, as well as approximately 71,900 options 
contracts in 2017 to 196,600 through 2019. Cboe notes that although 
there are currently no options on the FTSE China 50 Index listed for 
trading, the components of the FTSE China 50 Index, which can be used 
to create a basket of stocks that equate to the FXI ETF, currently have 
a market capitalization of approximately $28 trillion and FXI has a 
market capitalization of $4.8 billion (as indicated above), which the 
Exchange believes are both large enough to absorb potential price 
movements caused by a large trade in FXI.
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    \23\ See iShares China Large-Cap ETF, available at: https://www.ishares.com/us/products/239536/ishares-china-largecap-etf (April 
30, 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.\24\ In support of 
its proposal, Cboe compared XLF's ADV to the ADV in shares and options 
for EWZ (26.7 million shares and 186,500 options contracts), TLT (9.6 
million shares and 95,200 options contracts), and EWJ (7.2 million 
shares and 5,700 options contracts). According to Cboe, XLF experiences 
significantly greater ADV in shares and options than EWZ, TLT, and EWJ, 
which already have a position limit of 500,000 contracts--the proposed 
position limit for XLF options. According to Cboe, although there are 
no options listed on the SPDR Financial Select Sector Index listed for 
trading, the components of the index, which can be used to create a

[[Page 47461]]

basket of stocks that equate to the XLF ETF, currently have a market 
capitalization of $3.8 trillion (indicated above). Additionally, XLF 
has a market capitalization of $24.6 billion. The Exchange believes 
that both of these are large enough to absorb potential price movements 
caused by a large trade in XLF.
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    \24\ See Select Sector SPDR ETFs, XLF, available at: http://www.sectorspdr.com/sectorspdr/sector/xlf (April 30, 2020).
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    Finally, HYG attempts to track the investment results of Markit 
iBoxx[supreg] 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.\25\ To support its proposed position 
limit increase on HYG, Cboe compared the HYG's ADV in share and options 
to that of both TLT (9.6 million shares and 95,200 options contracts), 
and EWJ (7.2 million shares and 5,700 options contracts). The Exchange 
agrees with Cboe's comparison and following analysis. Cboe found that 
HYG experiences significantly higher ADV in shares and options than 
both TLT and EWJ, which are currently subject to a position limit of 
500,000 options contracts--the proposed limit for options on HYG. 
According to Cboe, while HYG does not have an index option analogue 
listed for trading, Cboe believes that its market capitalization of 
$19.1 billion, and of $906.4 billion in component securities, is 
adequate to absorb a potential price movement that may be caused by 
large trades in HYG.
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    \25\ See iShares iBoxx $ High Yield Corporate Bond ETF, 
available at: https://www.ishares.com/us/products/239565/ishares-iboxx-high-yield-corporatebond-etf (April 30, 2020).
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Creation and Redemption for ETFs
    The Exchange believes that the creation and redemption process for 
ETFs will lessen the potential for manipulative activity with options 
on the Underlying ETFs. When an ETF provider wants to create more 
shares, it looks to an Authorized Participant (generally a market maker 
or other large financial institution) to acquire the securities the ETF 
is to hold. For instance, when an ETF is designed to track the 
performance of an index, the Authorized Participant can purchase all 
the constituent securities in the exact same weight as the index, then 
deliver those shares to the ETF provider. In exchange, the ETF provider 
gives the Authorized Participant a block of equally valued ETF shares, 
on a one-for-one fair value basis. The price is based on the net asset 
value, not the market value at which the ETF is trading. The creation 
of new ETF units can be conducted during an entire trading day, and is 
not subject to position limits. This process works in reverse where the 
ETF provider seeks to decrease the number of shares that are available 
to trade. The creation and redemption process, therefore, creates a 
direct link to the underlying components of the ETF, and serves to 
mitigate potential price impact of the ETF shares that might otherwise 
result from increased position limits for the ETF options.
    The Exchange understands that the ETF creation and redemption 
process seeks to keep an ETF's share price trading in line with the 
ETF's underlying net asset value. Because an ETF trades like a stock, 
its share price will fluctuate during the trading day, due to simple 
supply and demand. If demand to buy an ETF is high, for instance, the 
ETF's share price might rise above the value of its underlying 
securities. When this happens, the Authorized Participant believes the 
ETF may now be overpriced, so it may buy shares of the component 
securities and then sell ETF shares in the open market (i.e. 
creations). This may drive the ETF's share price back toward the 
underlying net asset value. Likewise, if the ETF share price starts 
trading at a discount to the securities it holds, the Authorized 
Participant can buy shares of the ETF and redeem them for the 
underlying securities (i.e. redemptions). Buying undervalued ETF shares 
may drive the share price of the ETF back toward fair value. This 
arbitrage process helps to keep an ETF's share price in line with the 
value of its underlying portfolio.
Surveillance and Reporting Requirements
    The Exchange believes that increasing the position limits for the 
options on the Underlying ETFs would lead to a more liquid and 
competitive market environment for these options, which will benefit 
customers interested in trading these products. The reporting 
requirement for the options on the Underlying ETFs would remain 
unchanged. Thus, the Exchange would still require that each Member \26\ 
that maintains positions in the options on the same side of the market, 
for its own account or for the account of a customer, report certain 
information to the Exchange. This information would include, but would 
not be limited to, the options' positions, whether such positions are 
hedged and, if so, a description of the hedge(s).
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    \26\ The term ``Member'' means an individual or organization 
approved to exercise the trading rights associated with an OTP. OTP 
Holders and OTP Firms are deemed ``members'' under the Exchange Act. 
See Rule 1.
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    Market Makers would continue to be exempt from this reporting 
requirement, however, the Exchange may access Market Maker position 
information.\27\ Moreover, the Exchange's requirement that Members file 
reports with the Exchange for any customer who held aggregate large 
long or short positions on the same side of the market of 200 or more 
options contracts of any single class for the previous day will remain 
at this level for the options subject to this proposal and will 
continue to serve as an important part of the Exchange's surveillance 
efforts.\28\
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    \27\ The Options Clearing Corporation (``OCC'') through the 
Large Option Position Reporting (``LOPR'') system acts as a 
centralized service provider for Member compliance with position 
reporting requirements by collecting data from each Member, 
consolidating the information, and ultimately providing detailed 
listings of each Member's report to the Exchange, as well as 
Financial Industry Regulatory Authority, Inc. (``FINRA''), acting as 
its agent pursuant to a regulatory services agreement (``RSA'').
    \28\ See Rule 6.6-O.
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    The Exchange believes that the existing surveillance procedures and 
reporting requirements at the Exchange and other SROs are capable of 
properly identifying disruptive and/or manipulative trading activity. 
The Exchange also represents that it has adequate surveillances in 
place to detect potential manipulation, as well as reviews in place to 
identify potential changes in composition of the Underlying ETFs and 
continued compliance with the Exchange's listing standards. These 
procedures utilize daily monitoring of market activity via automated 
surveillance techniques to identify unusual activity in both options 
and the underlyings, as applicable.\29\
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    \29\ The Exchange believes these procedures have been effective 
for the surveillance of trading the options subject to this 
proposal, and will continue to employ them.
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    The Exchange also notes that large stock holdings must be disclosed 
to the Commission by way of Schedules 13D or 13G,\30\ which are used to 
report ownership of stock which exceeds 5% of a company's total stock 
issue and may assist in providing information in monitoring for any 
potential manipulative schemes.
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    \30\ 17 CFR 240.13d-1.
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    The Exchange believes that the current financial requirements 
imposed by the Exchange and by the Commission adequately address 
concerns regarding potentially large, unhedged positions in the options 
on the Underlying ETFs. Current margin and risk-based haircut 
methodologies serve to limit the size of positions maintained by any 
one account by increasing the margin and/or capital that a Member must 
maintain for a large position held by itself or by

[[Page 47462]]

its customer.\31\ In addition, Rule 15c3-1 imposes a capital charge on 
Members to the extent of any margin deficiency resulting from the 
higher margin requirement.\32\
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    \31\ See Rule 4-O, Section 3.
    \32\ 17 CFR 240.15c3-1.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\33\ in general, and Section 
6(b)(5) of the Act,\34\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general to 
protect investors and the public interest. Additionally, the Exchange 
believes the proposed rule change is consistent with the Section 
6(b)(5) \35\ requirement that the rules of an exchange not be designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \33\ 15 U.S.C. 78f(b).
    \34\ 15 U.S.C. 78f(b)(5).
    \35\ Id.
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    The Exchange believes that the proposed increase in position limits 
for options on the Underlying ETFs will remove impediments to and 
perfect the mechanism of a free and open market and national market 
system, and, in general, protect investors and the public interest, 
because it will provide market participants with the ability to more 
effectively execute their trading and hedging activities. The proposed 
increases will allow market participants to more fully implement 
hedging strategies in related derivative products and to further use 
options to achieve investment strategies (e.g., there are Exchange-
Traded Products (``ETPs'') that use options on the Underlying ETFs as 
part of their investment strategy, and the applicable position limits 
as they stand today may inhibit these ETPs in achieving their 
investment objectives, to the detriment of investors). Also, increasing 
the applicable position limits may allow Market Makers to provide the 
markets for these options with more liquidity in amounts commensurate 
with increased consumer demand in such markets. The proposed position 
limit increases may also encourage other liquidity providers to shift 
liquidity, as well as encourage consumers to shift demand, from OTC 
markets onto the Exchange, which will enhance the process of price 
discovery conducted on the Exchange through increased order flow.
    In addition, the Exchange believes that the structure of the 
Underlying ETFs, the considerable market capitalization of the funds, 
underlying component securities, and the liquidity of the markets for 
the applicable options and underlying component securities will 
mitigate concerns regarding potential manipulation of the products and/
or disruption of the underlying markets upon increasing the relevant 
position limits. As a general principle, increases in market 
capitalizations, active trading volume, and deep liquidity of 
securities tend to deter manipulation and/or disruption. This general 
principle applies to the recently observed increased levels of market 
capitalization, trading volume, and liquidity in shares of the 
Underlying ETFs, and the components of the Underlying ETFs (as 
described above), the Exchange does not believe that the options 
markets or underlying markets would become susceptible to manipulation 
and/or disruption as a result of the proposed position limit increases. 
Indeed, the Commission has previously expressed the belief that 
removing position and exercise limits may bring additional depth and 
liquidity to the options markets without increasing concerns regarding 
intermarket manipulation or disruption of the options or the underlying 
securities.\36\ More specifically, the Commission recently approved 
Cboe's proposal to increase the position limits for the Underlying ETFs 
in this filing.\37\
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    \36\ See Securities Exchange Act Release No. 62147 (October 28, 
2005) (SR-CBOE-2005-41), at 62149.
    \37\ See supra note 4.
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    Further, the Exchange notes that the proposed rule change to 
increase position limits for select actively traded options, is not 
novel and has been previously approved by the Commission. For example, 
the Commission has previously approved, on a pilot basis, eliminating 
position limits for options on SPY.\38\ Additionally, the Commission 
has approved similar proposed rule changes by the Exchange to increase 
position limits for options on highly liquid, actively traded ETFs.\39\ 
In approving increases in position (and exercise limits) for such 
options in the past, the Commission relied heavily upon the exchanges' 
surveillance capabilities, expressing trust in the enhanced 
surveillances and reporting safeguards that exchanges took in order to 
detect and deter possible manipulative behavior which might arise from 
eliminating position and exercise limits.
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    \38\ See supra notes 9 and 11.
    \39\ See supra note 19.
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    Furthermore, as described more fully above, the proposed position 
limits for options on EFA and FXI are consistent with existing position 
limits for options on IWM and EEM, and the proposed limits for options 
on XLF and HYG are consistent with current position limits for options 
on EWZ, TLT, and EWJ.
    The Exchange believes that its surveillance and reporting 
safeguards continue to be designed to deter and detect possible 
manipulative behavior that might arise from increasing or eliminating 
position and exercise limits in certain classes. Lastly, the Exchange 
believes that the current financial requirements imposed by the 
Exchange and by the Commission adequately address concerns regarding 
potentially large, unhedged position in the options on the Underlying 
ETFs, further promoting just and equitable principles of trading, the 
maintenance of a fair and orderly market, and the protection of 
investors.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe the proposed rule change will impose any burden on intramarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act because the increased position limits (and exercise 
limits) will be available to all market participants and apply to each 
in the same manner. The Exchange believes that the proposed rule change 
will provide additional opportunities for market participants to more 
efficiently achieve their investment and trading objectives.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the Act. On the contrary, the Exchange 
believes the proposal promotes competition because it may attract 
additional order flow from the OTC market to exchanges, which would in 
turn compete amongst each other for those orders. The Exchange believes 
market participants would benefit from being able to trade options with 
increased position limits in an exchange environment in several ways, 
including but not limited to the following: (1) Enhanced efficiency in 
initiating and closing out positions; (2) increased market 
transparency; and (3) heightened

[[Page 47463]]

contra-party creditworthiness due to the role of OCC as issuer and 
guarantor. Further, the Exchange notes that the rule change is being 
proposed as a competitive response to a filing submitted by Cboe that 
was recently approved by the Commission.\40\ As such, the Exchange does 
not believe that the proposed rule change will impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act.
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    \40\ See supra note 4.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \41\ and Rule 19b-
4(f)(6) thereunder.\42\
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    \41\ 15 U.S.C. 78s(b)(3)(A).
    \42\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \43\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \44\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposed rule change may become operative upon filing. The Exchange 
states that waiver of the operative delay would be consistent with the 
protection of investors and the public interest because it will ensure 
fair competition among the exchanges by allowing the Exchange to 
immediately increase the position limits for the products subject to 
this proposal, which the Exchange believes will provide consistency for 
Exchange participants that are also members at Cboe where these 
increased position limits are currently in place. For this reason, the 
Commission believes that waiver of the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
Therefore, the Commission hereby waives the operative delay and 
designates the proposal as operative upon filing.\45\
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    \43\ 17 CFR 240.19b-4(f)(6).
    \44\ 17 CFR 240.19b-4(f)(6)(iii).
    \45\ For purposes only of waiving the 30-day operative delay, 
the Commission also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2020-70 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-NYSEArca-2020-70. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSEArca-2020-70, and should be 
submitted on or before August 26, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
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    \46\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-16995 Filed 8-4-20; 8:45 am]
BILLING CODE 8011-01-P


