[Federal Register Volume 85, Number 172 (Thursday, September 3, 2020)]
[Notices]
[Pages 55040-55050]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19453]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89707; File No. SR-CBOE-2020-074]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change Relating To Adopt Compression Orders

August 28, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on August 19, 2020, Cboe Exchange, Inc. (the ``Exchange'' or 
``Cboe Options'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to adopt Compression orders. The text of the proposed rule change is 
provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to adopt Compression or Position Compression 
Cross (``PCC'') orders. Currently, the Exchange facilitates compression 
forums on the trading floor at the end of each calendar week, month, 
and quarter in which Trading Permit Holders (``TPHs'') may reduce open 
positions in series of S&P 500 Index (``SPX'') options in order to 
mitigate the effects of capital constraints on market participants. SEC 
Rule 15c3-1 (Net Capital Requirements for Brokers or Dealers) (``Net 
Capital Rules'') requires that every registered broker-dealer maintain 
certain specified minimum levels of capital.\3\ The Net Capital Rules 
are designed to protect securities customers, counterparties, and 
creditors by requiring that broker-dealers have sufficient liquid 
resources on hand, at all times, to meet their financial obligations. 
Notably, hedged positions, including offsetting futures and options 
contract positions, result in certain net capital requirement 
reductions under the Net Capital Rules.\4\
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    \3\ 17 CFR 240.15c3-1.
    \4\ In addition, the Net Capital Rules permit various offsets 
under which a percentage of an option position's gain at any one 
valuation point is allowed to offset another position's loss at the 
same valuation point (e.g., vertical spreads).
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    All Options Clearing Corporation (``OCC'') clearing members are 
subject to the Net Capital Rules. However, a subset of clearing members 
are subsidiaries of U.S. bank holding companies, which, due to their 
affiliations with their parent U.S. bank holding companies, must comply 
with additional bank regulatory capital requirements pursuant to 
rulemaking required under the Dodd-Frank Wall Street Reform and 
Consumer Protection Act.\5\ Pursuant to this mandate, the Board of 
Governors of the Federal Reserve System, the Office of the Comptroller 
of the Currency, and the Federal Deposit Insurance Corporation approved 
a comprehensive regulatory capital framework for subsidiaries of U.S. 
bank holding company clearing firms.\6\ Generally, these rules imposed 
higher minimum capital requirements, more restrictive capital 
eligibility standards, and higher asset risk weights than were 
previously mandated for clearing members that are subsidiaries of U.S. 
bank holding companies under the Net Capital Rules. Furthermore, these 
rules do not permit deductions for hedged securities or offsetting 
options positions.\7\ Rather, capital charges under these standards are 
based on the aggregate notional value of short positions regardless of 
offsets. As a result, Clearing Trading Permit Holders (``CTPHs'') 
generally must hold substantially more bank regulatory capital than 
would otherwise be required under the Net Capital Rules.\8\ The impact 
of these regulatory capital rules is compounded in the SPX options 
market due to the large notional value of SPX contracts and the 
significant number of open SPX positions.
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    \5\ H.R. 4173 (amending section 3(a) of the Securities Exchange 
Act of 1934 (the ``Act'') (15 U.S.C. 78c(a))).
    \6\ 12 CFR 50; 79 FR 61440 (Liquidity Coverage Ratio: Liquidity 
Risk Measurement Standards).
    \7\ Many options strategies, including relatively simple 
strategies often used by retail customers and more sophisticated 
strategies used by market-makers and institutions, are risk-limited 
strategies or options spread strategies that employ offsets or 
hedges to achieve certain investment outcomes. Such strategies 
typically involve the purchase and sale of multiple options (and may 
be coupled with purchases or sales of the underlying assets), 
executed simultaneously as part of the same strategy. In many cases, 
the potential market exposure of these strategies is limited and 
defined. Whereas regulatory capital requirements have historically 
reflected the risk-limited nature of carrying offsetting positions, 
these positions may now be subject to large regulatory capital 
requirements. Various factors, including administration costs; 
transaction fees; and limited market demand or counterparty 
interest, however, discourage market participants from closing these 
positions even though many market participants likely would prefer 
to close the positions rather than carry them to expiration.
    \8\ See Letter from Cboe, New York Stock Exchange, and Nasdaq, 
Inc., to the Honorable Randal Quarles, Vice Chair for Supervision of 
the Board of Governors of the Federal Reserve System, March 18, 
2020.
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    The Exchange believes these regulatory capital requirements have 
impeded efficient use of capital and undermine the critical liquidity 
role that Market-Makers play in the SPX options market by limiting the 
amount of capital CTPHs can allocate to clearing member transactions. 
Specifically, the Exchange understands these rules have caused, and may 
continue to cause, CTPHs to impose stricter position limits on their 
clearing members. These stricter position limits may impact the 
liquidity Market-Makers might supply in the SPX market,\9\ which impact 
may be heightened when markets are volatile, and this impact may be 
compounded when a CTPH has multiple Market-

[[Page 55041]]

Maker client accounts, each having largely risk-neutral portfolio 
holdings.\10\ The Exchange believes that permitting TPHs to close open 
interest in offsetting SPX options positions in open outcry compression 
forums has had a beneficial effect on the bank regulatory capital 
requirements of CTPHs' parent companies without adversely affecting the 
quality of the SPX options market.
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    \9\ The Exchange notes Market-Makers participate on over 95% of 
SPX option trades on the Exchange.
    \10\ Several TPHs have indicated to the Exchange that these 
rules could hamper their ability to provide consistent liquidity in 
the current SPX market, and have inquired about the ability engage 
in compression trading prior to the end of the current quarter.
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    In November 2019, bank regulatory agencies approved a rulemaking 
requiring banks to replace the Current Exposure Method (``CEM'') with 
the Standardized Approach to Counterparty Credit Risk (``SA-CCR'') by 
January 1, 2022.\11\ The Exchange believes CEM's primary flaws arise 
from the methodology's insensitivity to actual risk. For example, CEM 
does not account for the delta (i.e., market sensitivity) of an option 
position or fully recognize the offsetting of positions with opposite 
economic exposures. The Exchange believes implementation of SA-CCR will 
help correct many of CEM's flaws by incorporating risk-sensitive 
principles, such as delta weighting options positions and more 
beneficial netting of derivative contracts that have economically 
meaningful relationships. This means that SA-CCR will be less penal to 
CTPHs (and the market participants for which they clear options 
positions) than CEM as it relates to options positions. However, the 
implementation of SA-CCR will not eliminate the need for market-makers 
to manage their positions or be concerned about the accumulation of 
cleared positions that ultimately contribute to risk weighted asset 
requirements of their clearing firms and thus the capital ratios with 
which those firms need to comply.
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    \11\ Some TPHs have implemented SA-CCR while others have not.
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    The Exchange notes there are very few clearing banks, and even 
fewer that clear for options market-makers. Increased clearing of over-
the-counter products, such as swaps, by these same clearing banks means 
there is a risk of less available clearing bandwidth for listed 
options, even with the adoption of SA-CCR. Additionally, market-makers 
will continue to hold positions that are virtually riskless but have a 
significant capital impact that could be compressed in order to free up 
balance sheets to enable market-makers to continue to provide 
meaningful liquidity to the market. Therefore, even when all banks have 
implemented SA-CCR, the Exchange believes compression will continue to 
be a valuable tool for market participants.\12\
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    \12\ The Exchange notes another market offers its members a 
compression tool for a competitive product. See Chicago Mercantile 
Exchange, Inc. (``CME'') Rule 857.
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    From March 16 to June 12, 2020, the Exchange's trading floor was 
closed due to the coronavirus pandemic. During that time, the Exchange 
operated in an all-electronic configuration, which would have prevented 
market participants from reducing open SPX interest in open outcry 
compression forums. As a result, the Exchange adopted current Rule 
5.24(e)(1)(E) to permit TPHs to reduce open interest in SPX options in 
electronic compression forums while the trading floor was closed.\13\ 
When the trading floor reopened on June 15, 2020, electronic 
compression forums were no longer available. However, the Exchange 
received feedback from customers while the floor was closed and since 
the floor has reopened regarding the benefits of the electronic 
compression forums, including the efficiency it provided with respect 
to the execution of the orders via an unexposed cross and the 
flexibility to effect these executions at more times than currently 
available in open outcry. In addition to verbal feedback the Exchange 
received, in early May, the Exchange received a letter signed by seven 
TPHs noting the increased efficiency in execution of compression trades 
the electronic compression forums provided and requesting permanent 
approval of daily electronic compression. The firms noted the 
significance of the functionality for evaluation of their risks and 
capital needs. Additionally, the firms noted daily compression using 
the electronic functionality then-available permitted them to respond 
to intra-month reviews of regulatory capital necessary for their 
positions by clearing firms, to which firms are unable to respond in 
real-time using the current open outcry compression forums. Therefore, 
the Exchange proposes to adopt Compression orders that can be executed 
electronically or in open outcry on a permanent basis via unexposed 
crosses.
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    \13\ Pursuant to current Rule 5.24(e)(1), electronic compression 
forums would be available until August 31, 2020 when the trading 
floor is inoperable. Because the proposed rule change proposes to 
adopt Compression Orders on a permanent basis, the proposed rule 
change deletes the temporary electronic compression forum rule in 
Rule 5.24(e)(1)(E). Additionally, because the proposed definition of 
Compression Orders and the proposed provisions regarding the 
execution of Compression Orders include the same information as set 
forth in current Rule 5.88 regarding compression forums, the 
proposed rule change deletes Rule 5.88.
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    The proposed rule change defines ``Compression'' or ``PCC'' order 
in Rule 5.6(c) as an order in SPX option contracts that may execute 
without exposure pursuant to Rules 5.32, 5.33, or 5.88 against another 
Compression order(s) totaling an equal number of option contracts.\14\ 
A Trading Permit Holder may use Compression orders only to reduce the 
capital associated with its open SPX positions. Current Rule 5.88 
specifies when compression forums may occur.\15\ As proposed, as was 
the case for electronic compression forums while the trading floor was 
closed, the Exchange will announce the times at which TPHs may submit 
compression-list positions and at which the Exchange will make 
compression-list positions files available to TPHs.\16\ The Exchange 
will provide TPHs with reasonable, sufficient notice of the timing at 
which lists must be submitted (as described in Rule 1.5), as well as 
when the Exchange will provide the lists of offsetting positions (as 
further discussed below). As further discussed below, a TPH may not 
include a closing SPX position in a Compression order unless it 
previously includes that position on a compression list provided to the 
Exchange in accordance with the required timeframe.\17\
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    \14\ This is substantially similar the definition in Rule 
5.24(e)(1).
    \15\ See Rule 5.88(a)(6) (compression forums occur on the last 
business day of each calendar week, each of the last three business 
days of each calendar month, and each of the last five business days 
of each calendar quarter). Pursuant to Rule 1.5, the Exchange will 
announce the times when the execution of Compression orders may 
occur.
    \16\ See current Rule 5.24(e)(1)(E)(i).
    \17\ For example, if the Exchange indicates it will accept 
compression lists and provide individualized lists on a daily basis, 
if a TPH identifies a position it would like to compress intraday 
but did not submit it on a compression list the prior day (as 
required by the Exchange), the TPH could not submit that position in 
a Compression order that day. Instead, it could submit a compression 
list that day and then include it in a Compression order the 
following trading day.
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    While the Exchange intends to accept compression-list positions and 
make individual position files available at the end of each calendar 
week, month, and quarter, as it currently does, the Exchange believes 
it will be beneficial to offer TPHs the ability to compress their open 
positions more frequently. For example, while the trading floor was 
closed, the Exchange engaged in this process daily due to the 
volatility present at the time, which resulted in market participants, 
particularly market-makers, taking on positions in a larger range of 
strikes than they would during normal market conditions due to the

[[Page 55042]]

sharp swings in the value of the S&P 500 Index.\18\ As noted above, 
TPHs believed the ability to compress more frequently enabled them to 
more adequately and efficiently respond to intra-month reviews by their 
clearing firms of regulatory capital necessary for their open 
positions. The proposed flexibility will permit the Exchange to react 
to market conditions and facilitate TPHs' reduction of SPX open 
interest in response to volatility as necessary, such as during times 
of extreme market volatility when the ability to close open interest to 
alleviate bank regulatory capital requirements is particularly 
important.
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    \18\ See Cboe Options Exchange Notice C2020033103, issued May 
31, 2020.
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    As is the case with current open outcry compression forums, all 
TPHs (or their CTPHs on their behalf) \19\ may submit lists of open 
positions (``compression-list positions'') to the Exchange that they 
wish to close against opposing (long/short) positions of other TPHs 
using Compression orders.\20\ The proposed rule change streamlines the 
process of how the Exchange will make information regarding offsetting 
positions and multi-leg positions available. The Exchange will continue 
to determine the size of offsetting compression list positions, 
including combinations of offsetting multi-leg positions, and send 
individual positions files to each TPH that submitted compression-list 
positions to the Exchange.\21\ Currently, pursuant to Rule 5.88(a)(2), 
the Exchange makes available to all TPHs (on the Exchange website) a 
list including the size of the offsetting compression-list positions 
(including multi-leg positions) in each series (and multi-leg position) 
for which both long and short compression-list positions were submitted 
to the Exchange (``compression-list positions file''). The Exchange has 
identified no added value from the public posting of this list, as it 
has observed the TPHs that participate in the open outcry compression 
forums are those that submit the compression-list positions. All TPHs 
will continue to be able to submit compression-list positions and thus 
have access to the compression-list positions file if they submit 
compression-list positions, so the Exchange no longer believes it is 
necessary to post the list on its website. Additionally, the Exchange 
will no longer send the compression-list positions file to each TPH 
that submitted compression-list positions to the Exchange. The Exchange 
understands from TPHs that the individual position file, which shows 
offsetting size for their single and multi-leg positions, provides them 
with the information they seek by participating in the compression 
forums. Therefore, the Exchange believes it is no longer necessary to 
create and disseminate this separate list.
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    \19\ The Exchange understands the CTPHs coordinate with market 
participants for which they clear positions regarding the positions 
CTPHs may wish to close on those market participants' behalf in 
accordance with their clearing relationship. The Exchange notes the 
current rule permits OCC to also submit lists on behalf of TPHs. 
However, the Exchange understands that occurs only upon the 
direction of TPHs, rather than upon any initiative taken by OCC. In 
other words, OCC may provide a list to the Exchange in an 
administrative capacity at the directive of a TPH. Therefore, the 
proposed rule change deletes from the rule the ability of OCC to 
submit a list to the Exchange on behalf of a Trading Permit Holder, 
because OCC does not make any substantive determinations regarding 
what positions should be compressed.
    \20\ See proposed Rule 5.6(c), subparagraph (1)(A) of definition 
of Compression order; see also current Rule 5.88(a)(1).
    \21\ See proposed Rule 5.6(c), subparagraph (1)(B) of definition 
of Compression order; see also current Rule 5.88(a)(4).
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    Because TPHs that participate in compression forums generally 
consent to having their identities disclosed to other participating 
TPHs, the Exchange also proposes to eliminate the steps of initially 
providing the individual position files on an anonymous basis and then 
requiring TPHs to consent to having their identities disclosed, as it 
is no longer necessary.\22\ Instead, the individual position files the 
Exchange distributes will identify the TPHs that hold offsetting 
positions. TPHs generally submit compression-list positions with the 
goal of identifying other TPHs with offsetting positions that will 
enable them to engage in compression transactions. Including the 
identities of those TPHs at the outset is therefore consistent with the 
goal of compression forums and the proposed Compression orders and more 
efficient than the current process.
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    \22\ See proposed Rule 5.6(c), subparagraph (1)(B) of proposed 
definition of Compression order; see also current Rule 5.88(a)(4) 
and (5). Because these lists will no longer be anonymous, the 
Exchange no longer believes it is necessary to separate provide a 
list of TPHs that submitted compression-list positions, which was 
provided only so that TPHs could reach out to those TPHs to see if 
they had the offsetting positions. Therefore, it is deleting that 
provision. See current Rule 5.88(a)(3).
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    Pursuant to proposed subparagraph (1)(B) in the definition of 
Compression order, the information the Exchange will include in the 
individual position files it sends to each TPH that submitted 
compression-list positions to the Exchange the same information the 
Exchange provides pursuant to current Rule 5.88(a)(4), as well as two 
types of additional information regarding compression positions. First, 
the file will also include series positions within a strike range 
determined by the Exchange. Currently, the Exchange provides 
information (including offsetting positions of other TPHs) for various 
multi-leg positions. This additional information is a list of single-
leg positions and offsetting positions of other TPHs. The Exchange 
provided this series information in addition to multi-leg information 
while the trading floor was closed. The Exchange believes this 
additional information will permit TPHs to create larger packages of 
positions that may be compressed.\23\ Second, the individual positions 
file will also include combos (i.e., purchase (sale) of a call and a 
sale (purchase) of a put with the same expiration date and strike 
price), in addition to the currently provided multi-leg positions of 
vertical call spreads, vertical put spreads, and box spreads.\24\ The 
Exchange included combos in the files it provided to TPHs when 
electronic compression forums were available.\25\ Because a combo is 
essentially a ``synthetic future,'' it is a common multi-leg strategy 
among market participants. Market participants often establish market 
neutral hedges by purchasing (selling) a number of combos with an 
offsetting SPX option position.\26\ As a result, market participants 
maintain a significant number of combos in their portfolios. 
Additionally, when markets are volatile (as they were earlier in 2020), 
market participants often take on positions in a larger range of 
strikes, which positions can be put together as combos.
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    \23\ See current Rule 5.24(e)(1)(E)(ii).
    \24\ See proposed Rule 5.6(c), subparagraph (1)(B) of proposed 
definition of Compression order.
    \25\ See current Rule 5.24(e)(1)(E)(iv); see also current Rule 
5.88, Interpretation and Policy .01, which lists what multi-leg 
position strategies are currently made available in the files.
    \26\ See, e.g., Rule 5.85(e).
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    The Exchange believes closing combo positions will be advantageous 
because such positions can be risk neutral, which means the closing of 
the entire combo has little or no impact on a TPH's risk profile. 
However, the current compression forum framework limits multi-leg 
positions to vertical call \27\ and put \28\ spreads and boxes. The 
Exchange notes that just as one put spread and one call spread combine 
to create a box spread, two combos similarly create a box spread.\29\ 
For example, a box spread

[[Page 55043]]

would be entered by purchasing 100 DEC 2040 calls and selling 100 DEC 
2070 calls (i.e., bull call spread) and selling 100 DEC 2040 puts and 
purchasing 100 DEC 2070 puts (i.e., bear put spread). The purchase of 
100 DEC 2040 calls and sale of 100 DEC 2040 puts comprises a combo (as 
does the sale of 100 DEC 2070 calls and purchase of 100 DEC 2070 puts). 
The Exchange believes that providing TPHs with this additional way to 
identify multi-leg positions with offsetting interest will enable more 
efficient closing of such common strategy positions and is merely 
providing information regarding positions TPHs are seeking to close 
that is already including in these lists in a different form. Like the 
other multi-leg strategies currently covered by Rule 5.88, the Exchange 
will compile a list of possible combos.
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    \27\ A vertical call spread involves the purchasing and selling 
of an equal number of call options with the same expiration date but 
different strike prices.
    \28\ A vertical put spread involves the purchasing and selling 
of an equal number of put options with the same expiration date but 
different strike prices.
    \29\ A box spread involves purchasing (selling) a bull call 
spread and purchasing (selling) a bear put spread. In other words, a 
box spread is composed of a long (short) call and short (long) put 
position at one strike price and a short (long) call and long 
(short) put position at another strike price.
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    The lists generated by the Exchange pursuant to the proposed 
definition of Compression orders are provided to TPHs for informational 
purposes only. Individual TPHs will continue to determine whether to 
submit compression-list positions and whether to submit Compression 
orders for execution. The Exchange's provision of the list does not 
constitute advice, guidance, a commitment to trade, an execution, or a 
recommendation to trade, as is the case today for open outcry 
compression forums.
    Proposed subparagraph (1)(C) of the proposed definition of 
Compression order provides that to the extent a Clearing TPH submits 
compression-list positions with offsetting to the Exchange on behalf of 
a Trading Permit Holder(s), the Exchange will not include those 
positions on the individual position files the Exchange makes available 
pursuant to proposed subparagraph (1)(B). The Exchange understands from 
Clearing TPHs that they have their own ability to identify compressible 
positions among the TPHs for which they clear. As discussed above, the 
need for compression stems from the regulatory capital requirements 
applicable to CTPHs, which as a result may impose stricter position 
limits on the firms for which they clear. Therefore, CTPHs are well-
positioned to know which positions of the firms for which they clear 
could be compressed in order for those firms to remain in compliance 
with the position limits imposed by CTPHs when they conduct their 
regulatory reviews. Because CTPHs are in a position to identify 
offsetting positions, it is unnecessary for those positions to be 
included in the individual lists that are distributed to other TPHs 
that submitted compression-list positions, which are intended to assist 
those TPHs to identify counterparties with offsetting positions. It may 
be counterproductive and potentially confusing for TPHs if the 
individual positions lists include positions for which no counterparty 
is being sought. While the Exchange initially implemented compression 
forums to assist TPHs in finding counterparties with offsetting 
positions that were similarly seeking to compress positions, the 
Exchange believes expanding the use of Compression orders to CTPHs in 
this manner will provide them with more efficient means to comply with 
regulatory capital rules and permit the firms for which they clear to 
have access to liquidity to provide to the market. The Exchange 
believes it is still appropriate for CTPHs to submit compression-list 
positions prior to using Compression orders so that the Exchange may 
review those positions to determine they are for the purpose of 
compression.
    Proposed subparagraph (2) of the proposed definition of Compression 
order permits Compression orders to be entered in $0.01 increments and 
permits the legs of complex Compression orders to be executed in $0.01 
increments. This is consistent with the increment currently available 
for closing transactions in open outcry compression forums. As 
discussed below, complex orders in any ratio are permitted to be 
executed in open outcry compression forums, so the proposed rule change 
does not expand the complex order strategies that may trade in pennies 
for compression purposes. The proposed rule change will permit open 
positions in Compression orders to be entered and executed in pennies, 
unlike in current open outcry compression forums, which requires any 
opening transactions to be executed in the standard increment for SPX. 
The Exchange believes this is appropriate given that opening positions 
may partly comprise Compression orders as long as the total order is 
net position closing or neutral (as discussed below), and legs of 
single orders are systematically unable to be input or executed in 
different minimum increments. Additionally, the Exchange believes it 
may be confusing to have different portions of orders trade in 
different increments. The Exchange notes if a TPH opens a position 
using a Compression order, it would only be able to close that position 
using the standard increment for the class (unless it closes it using a 
Compression order, subject to the proposed requirements of that order 
type in this proposed rule change).
    Unlike in compression forums, where persons can negotiate leg 
pricing to accommodate the current rule, such negotiation is not 
available in electronic trading. While the proposed rule change may 
increase the number of SPX contracts that may trade in pennies, given 
that a Compression order that will open any positions must be net 
position closing or neutral (as discussed below), the Exchange expects 
the majority of contracts that will benefit from this provision will be 
ones that close positions, as is the case today. As noted above, the 
Exchange believes permitting Compression orders to be partially 
comprised of opening positions will increase amount of open SPX 
interest TPHs are willing to close, and penny pricing for all contracts 
in Compression orders will further encourage closing of these 
positions. Because many series the Exchange expects TPHs will attempt 
to close will be out-of-the-money, and essentially worthless, TPHs may 
not otherwise close positions in these series if a higher minimum 
increment causes the price to be too much higher than the option's 
value. The Exchange believes it is reasonable to permit these orders to 
be entered and executed in penny increments to provide flexibility that 
will enable TPHs to maximize the number of open SPX positions they can 
close using Compression orders.
    The proposed rule change will also permit a complex Compression 
order to have any ratio.\30\ Currently, complex orders with any ratio 
may execute on the trading floor, including in open outcry compression 
forums (and thus they may execute in pennies); however, complex orders 
with a ratio of greater than three-to-one (except for Index Combos, 
which may have a ratio of up to eight-to-one combo) are not currently 
permitted to execute electronically.\31\ Additionally, in open outcry 
(including in compression forums), complex orders with a ratio of less 
than one-to-three or greater than-three-to-one (except for Index 
Combos) do not receive complex order priority benefits and instead must 
execute at prices for which each leg betters any priority customer 
order on the Book rather than improve one leg.\32\ As noted above, 
complex Compression orders may only execute if no leg executes at the 
same price as a priority

[[Page 55044]]

customer order in the simple book,\33\ and thus will be subject to the 
same priority as larger-ratio complex orders submitted in compression 
forums today. Therefore, permitting complex Compression orders with any 
ratio to execute electronically or in open outcry is consistent with 
current execution opportunities for complex orders in open outcry 
compression forums, and merely extends these execution opportunities to 
electronic compression trading. This proposed provision will therefore 
not result in any additional orders trading ahead of priority customer 
orders resting in the book.
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    \30\ See proposed Rule 5.6(c), subparagraph (2) of proposed 
definition of Compression order.
    \31\ See Rule 1.1, definition of complex order.
    \32\ See Rule 5.85(b).
    \33\ See proposed Rule 5.33(n) and 5.85(j). Note the Exchange 
proposes to add Rule 5.33(m) in rule filing SR-CBOE-2020-060.
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    One key characteristic of complex compression transactions is that 
they are intended to close open interest to alleviate bank regulatory 
capital requirements while bearing little, if any, market risk. As a 
result, market participants often minimize the net delta of the 
compression strategy (i.e., create a package with a delta of zero or 
near zero). Delta is the ratio comparing the change in the price of the 
underlying asset to the corresponding change in the price of a 
derivative. For example, if an index option has a delta value of 0.65, 
this means that if the underlying index increases in value by 1, the 
price of the option will increase by $0.65, all else equal. Delta 
values can be positive or negative depending on the type of option. For 
example, the delta for a call option always ranges from 0 to 1, because 
as the underlying asset increases in price or value, call options 
increase in price. Put option deltas always range from -1 to 0 because 
as the underlying asset increases in price or value, the value of put 
options decrease. For example, if a put index option has a delta of -
0.33, if the value of the underlying index increases by 1, the price of 
the put option will decrease by $0.33. Generally speaking, an at-the-
money option usually has a delta of approximately 0.5 or -0.5.
    In order to minimize the delta of a compression strategy, the 
Exchange understands that market participants often include combos \34\ 
to offset any residual delta that the other legs may create. For 
example, suppose two market participants seek to execute a transaction 
to close their respective offsetting positions in a spread containing 
100 contracts of SPX Series A and 100 contracts of SPX Series B, which 
has a net delta of 0.02. In order to offset this minimal delta, the 
market participants include two contracts of an SPX combo with a 
mutually agreed upon expiration and strike price. The addition of these 
combos neutralizes the delta market risk of the positions to be 
compressed but creates a package with a ratio of 50-1. Orders with this 
ratio may currently execute in open outcry but may not execute 
electronically. The Exchange believes permitting all complex orders 
with any ratio to be submitted as Compression orders will provide TPHs 
with additional flexibility to close open interest to eliminate as much 
regulatory capital associated with their portfolios as possible while 
minimizing any possible associated risk. Additionally, it is consistent 
with permissible executions in current open outcry compression forums.
---------------------------------------------------------------------------

    \34\ As described above, a ``combo'' is a purchase (sale) of a 
call and a sale (purchase) of a put with the same expiration date 
and strike price, which is essentially a ``synthetic future'' and a 
common multi-leg strategy among market participants.
---------------------------------------------------------------------------

    Proposed subparagraph (3) of the definition of Compression order 
provides that a Compression order may be comprised of all closing 
positions or a combination of opening and closing positions as long as 
it is net position closing or neutral. In other words, the number of 
contracts in closing positions must be larger than or equal to the 
number of contracts in opening positions.\35\ Any closing position 
submitted as part of a Compression order must have been included in a 
compression-position list submitted to the Exchange, and Compression 
orders may be used solely for the purpose of reducing required capital 
associated with TPH's positions. The Exchange believes requiring 
closing positions included in compression-list positions to be 
submitted to the Exchange on compression position lists will create an 
additional control to limit use of Compression orders for legitimate 
compression purposes. The proposed rule change is similar to current 
open outcry compression forums, which permit opening orders to execute 
against closing orders. The goal of compression is for market 
participants to close open interest to reduce regulatory capital 
attributable to those positions. However, permitting a TPH to include 
opening positions in Compression orders may still result in a reduction 
of regulatory capital necessary for a TPH's positions, even if it opens 
new positions, which will provide TPHs with additional flexibility to 
maximize its reduction in required regulatory capital. The files the 
Exchange makes available are intended to provide potential offset 
opportunities for TPHs looking to compress open SPX positions. However, 
TPHs often do not have the same number of offsetting positions to 
complete a risk neutral compression transaction. For example, TPH 1 
might have an offsetting position with TPH 2 in three out of four 
series that comprise a box spread. By trading a box spread, which is 
risk neutral, the TPHs can substantially reduce the regulatory capital 
attributable to the three series that offset while only needing to open 
positions in one series in which they did not have existing position. 
As another example, a TPH may determine it is necessary to add a combo 
position when attempting to close other positions in order to flatten 
the delta risk of a compression trade. To do so, a TPH may need to open 
a position in one series of the combo it and another TPH do not have 
offsetting positions for that combo. The Exchange believes permitting 
TPHs to include opening positions may provide more opportunities to 
close open interest to alleviate bank regulatory capital requirements 
attributable to their open positions using Compression orders than if 
they were restricted to only closing positions.
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    \35\ If the contra-side Compression order is comprised of orders 
from multiple contra-parties, the positions for each contra-party 
must be net position closing or neutral. This is consistent with the 
goal of compression, which is to reduce the regulatory capital 
attributable to positions of a specific market participant.
---------------------------------------------------------------------------

    The Exchange believes permitting TPHs to include opening positions 
may provide additional opportunities to reduce more regulatory capital 
attributable to their portfolios using Compression orders than if they 
were restricted to only closing positions. The requirement that 
Compression orders be net position closing or neutral is consistent 
with the goal of compression, which is to close open interest to 
alleviate bank regulatory capital requirements attributable to their 
portfolios. If an order is net closing, then more positions will be 
closed than opened, ultimately reducing the regulatory capital 
associated with the positions of the TPH.
    While regulatory capital reduction may be achieved with the closing 
of positions, it may also be achieved by ``swapping'' open positions 
with new positions with which there is lower regulatory capital 
associated. The Exchange understands TPHs may do this for risk 
management purposes. Specifically, TPHs retain certain options 
positions in their portfolios for hedging and risk exposure purposes. 
However, the calculation of regulatory capital associated with options 
positions involves a complex formula, but it ultimately is calculating 
an amount based on the quantity of a position times the strike price 
(which is why the large notional value of SPX options has

[[Page 55045]]

created issues for TPHs). Therefore, an option position with a lower 
strike price will likely have lower regulatory capital associated with 
that position than regulatory capital associated with a higher strike 
price. A market participant may identify options with lower strikes 
that provide it with substantially similar risk exposure as some of its 
open positions while maintaining a hedge within its portfolio. Merely 
closing such higher-strike positions may reduce the required capital 
associated with the market participant's portfolio, but such closure 
may leave portions of that portfolio unhedged and thus subject to 
higher risk. By ``swapping'' its current open positions in options with 
higher strikes with positions in options with lower strikes (often 
using boxes and combos), a market participant may maintain the same 
risk exposure in its portfolio while replacing higher-strike positions 
with lower-strike positions in order to swap related exposures. For 
example, suppose a TPH has 100 contracts in an SPX box spread with 
October expiration and strike prices of 3500 and 3600. Suppose another 
TPH has 100 contracts for the offsetting box spread, but also want to 
buy 100 contracts in an SPX box spread with October expiration and 
strike prices of 1500 and 1600. Each TPH in this close would be opening 
positions in 400 contracts as well as closing positions in 400 
contracts, making each side net position neutral. While each TPH would 
have the same number of open positions after this transaction, the 
regulatory capital associated with each TPH's positions would be 
significantly reduced given the newly opened positions have strike 
prices 2000 lower than the closed positions. Execution of this 
transaction would be riskless and would provide meaningful regulatory 
capital relief to the TPHs. Ultimately, transactions like this are 
essentially riskless exchanges that carry no profit or loss for market 
participants, but rather are intended to provide a seamless method for 
market participants to reduce margin and capital requirements while 
maintaining the same risk exposure within their portfolios.\36\
---------------------------------------------------------------------------

    \36\ The Exchange notes TPHs similarly swap exposures in order 
to reduce capital and margin requirements by exchanging positions in 
options with positions in future. See SR-CBOE-2020-060 (the 
Exchange's recent proposal to adopt related futures cross (``RFC'') 
orders (which were recently adopted by another options exchange), 
which would provide market participants with an additional mechanism 
to reduce required capital associated with their positions while 
maintaining risk exposure within their portfolios).
---------------------------------------------------------------------------

    Currently, TPHs may only execute compression transactions in open 
outcry compression forums in accordance with open outcry trading rules, 
except that opening transactions in SPX option could not execute 
against opening transactions through a compression forum, and only 
closing transactions could be executed in $0.01 increments.\37\ In 
accordance with standard open outcry trading rules, a floor broker 
would represent a cross of orders representing this interest to the 
trading crowd. While other in-crowd market participants have the 
opportunity to respond and participate in the transaction, generally 
the orders represented in the cross execute cleanly against each other.
---------------------------------------------------------------------------

    \37\ See current Rule 5.88(b).
---------------------------------------------------------------------------

    The proposed rule change will permit Compression orders to be 
executed electronically and in open outcry as unexposed clean 
crosses.\38\ While orders in open outcry compression forums are 
currently required to be exposed, they generally execute as clean 
crosses. Therefore, permitting Compression orders to execute as clean 
crosses replicates how SPX orders generally execute in open outcry 
compression forums. As proposed, a Compression order with one leg 
submitted for electronic execution will execute automatically on entry 
without exposure if the execution price: (a) Is not at the same price 
as a Priority Customer order resting in the Book; and (b) is at or 
between the national best bid or offer (``NBBO'').\39\ This provision 
provides that Compression orders with single legs submitted for 
electronic execution must execute in accordance with the same priority 
principles that apply to all other simple orders on the Exchange, which 
protects Priority Customer orders in the simple book and prohibits 
trades through prices available in the book. A Compression order with 
multiple legs submitted for electronic execution will execute 
automatically on entry without exposure if: (1) Each option leg 
executes at a price that complies with Rule 5.33(f)(2),\40\ provided 
that no option leg executes at the same price as a Priority Customer 
Order in the Simple Book; (2) each option leg executes at a price at or 
between the NBBO for the applicable series; and (3) the execution price 
is better than the price of any complex order resting in the COB, 
unless the submitted complex order is a Priority Customer Order and the 
resting complex order is a non-Priority Customer Order, in which case 
the execution price may be the same as or better than the price of the 
resting complex order.\41\ This provision provides that Compression 
orders with multiple legs submitted for electronic execution may only 
execute if they provide additional protection to Priority Customer 
orders on the Simple Book compared to other ``standard'' complex order 
executions, as Compression orders may only execute if no leg trades at 
the same price as a customer order on the book rather than just 
improving one leg (which priority principles require for other 
electronic complex order executions). The System cancels a Compression 
order if it cannot execute.\42\ Therefore, if an order cannot execute 
in accordance with the execution price and priority requirements 
described above, it will be cancelled.
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    \38\ See proposed Rules 5.30(a)(2) and (b)(2), 5.33(c), 
5.70(a)(2), and 5.83(a)(2) and (b)(2). Unlike current compression 
forums, which are restricted to Regular Trading Hours, electronic 
Compression orders may be executed during Regular or Global Trading 
Hours, as the Exchange makes electronic trading of SPX options 
available during Global Trading Hours. This will provide TPHs with 
additional flexibility regarding when they may execute Compression 
orders and related capital that may be put back into the market. 
FLEX SPX options may currently be executed in open outcry 
compression forums, and the proposed rule change clarifies the 
availability of Compression orders for FLEX SPX options, which will 
execute in the same manner as Compression orders for non-FLEX SPX 
options. See Rule 5.72(a), which provides that trading of FLEX 
Options is subject to all other Rules applicable to the trading of 
options on the Exchange, unless otherwise provided in Chapter 5, 
Section F of the Rules. Since Compression orders will not be 
exposed, as proposed, FLEX Compression orders would execute in the 
same manner as opposed to in a FLEX Auction pursuant to Rule 5.72.
    \39\ See proposed Rule 5.32(g).
    \40\ Rule 5.33(f)(2) requires complex orders to execute only if 
the execution price: At a net price: (1) That would cause any 
component of the complex strategy to be executed at a price of zero; 
(2) worse than the synthetic best bid or offer (``SBBO'') or equal 
to the SBBO when there is a Priority Customer Order at the SBBO, 
except all-or-none complex orders may only execute at prices better 
than the SBBO; (3) that would cause any component of the complex 
strategy to be executed at a price worse than the individual 
component prices on the Simple Book; (4) worse than the price that 
would be available if the complex order Legged into the Simple Book; 
or (5) that would cause any component of the complex strategy to be 
executed at a price ahead of a Priority Customer Order on the Simple 
Book without improving the BBO of at least one component of the 
complex strategy.
    \41\ See proposed Rule 5.33(n).
    \42\ See proposed Rules 5.32(g)(1) and 5.33(n)(1).
---------------------------------------------------------------------------

    Similarly, proposed Rule 5.85(j) \43\ describes how Compression 
orders submitted for open outcry execution will execute. A Compression 
order with a single leg will execute without representation on the 
trading floor if it executes at a price that is not at the same price 
as a Priority Customer order resting on the Book and is at or between 
the NBBO. These are the same proposed execution price requirements for 
electronic Compression orders with a single leg and are also the same 
as the

[[Page 55046]]

priority principles that apply to all other simple orders executed on 
the trading floor, which protects Priority Customer orders in the 
simple book and prohibits trades through prices available in the 
book.\44\ A Compression order with multiple legs will execute without 
representation on the trading floor if: (1) Each option leg executes at 
a price that complies with Rule 5.85(b),\45\ provided that no option 
leg executes at the same price as a Priority Customer Order in the 
Simple Book; (2) each option leg executes at a price at or between the 
NBBO for the applicable series; and (3) the execution price is better 
than the price of a complex order resting in the COB, unless the 
Compression order is a Priority Customer Order and the resting complex 
order is a non-Priority Customer Order, in which case the execution 
price may be the same as or better than the price of the resting 
complex order. Like the execution and priority requirements described 
above for electronic complex Compression orders, this proposed 
provision provides that complex Compression orders with multiple legs 
submitted for open outcry execution must execute in accordance with the 
same priority principles that apply to all other complex orders 
executed on the trading floor on the Exchange, except that additional 
protection will be provided for Priority Customer Orders in the Simple 
Book (the proposed priority principle is the same as the priority 
applicable to larger-ratio complex orders executed in open outcry). As 
a result, this proposed provision protects Priority Customer orders in 
the simple book and COB and prohibits trades through prices available 
in the book. A Compression order may not be executed in open outcry 
unless these criteria are satisfied. While open outcry Compression 
orders do not need to be represented on the trading floor, executions 
of such orders will be systematically recorded and reported by TPHs in 
the same manner they currently record and report open outcry 
transactions.
---------------------------------------------------------------------------

    \43\ The Exchange proposes to add Rule 5.85(i) in rule filing 
SR-CBOE-2020-060.
    \44\ See Rule 5.85(a).
    \45\ Pursuant to Rule 5.85(b), a complex order (1) with any 
ratio equal to or greater than one-to-three (.333) and less than or 
equal to three-to-one (3.00) or (2) that is an Index Combo order may 
be executed at a net debit or credit price without giving priority 
to equivalent bids (offers) in the individual series legs that are 
represented in the trading crowd or in the Book if the price of at 
least one leg of the order improves the corresponding bid (offer) of 
a Priority Customer order(s) in the Book by at least one minimum 
trading increment as set forth in Rule 5.4(b). A complex order with 
any ratio less than one-to-three (.333) and greater than three-to-
one (3.00) (except for an Index Combo order) may be executed in open 
outcry on the trading floor at a net debit or credit price without 
giving priority to equivalent bids (offers) in the individual series 
legs that are represented in the trading crowd or in the Book if 
each leg of the order betters the corresponding bid (offer) of a 
Priority Customer order(s) in the Book on each leg by at least one 
minimum trading increment as set forth in Rule 5.4(b).
---------------------------------------------------------------------------

    Generally, in SPX options (and other classes), the Exchange lists 
series with narrower strike intervals that are closer to the at-the-
money value, and with wider strike intervals that are further from the 
at-the-money value. The Exchange's internal listing procedures are 
intended to balance the need to list sufficient strikes to provide 
market participants with flexibility to manage their risk with Market-
Makers' quoting obligations. The Exchange recently reviewed and 
modified these procedures for SPX options in an effort to reduce the 
number of listed strikes in a manner intended to permit Market-Makers 
to further reduce regulatory capital attributable to their SPX open 
interest (and thus free up capital to continue to provide 
liquidity).\46\
---------------------------------------------------------------------------

    \46\ While SPX options are listed for trading exclusively on 
Cboe Options, it competes with other listed options, such as options 
on the SPDR S&P 500 exchange-traded fund.
---------------------------------------------------------------------------

    The proposed rule change moves the provision regarding solicitation 
in current Rule 5.88(c) to subparagraph (4) of the proposed definition 
of Compression order in Rule 5.6(c) with no substantive changes, and 
thus that provision will apply to Compression orders in the same manner 
it applies to compression forums, as the process for providing 
compression position lists and files will generally be the same. 
Proposed subparagraph (5) of the proposed definition of Compression 
order in Rule 5.6(c) also provides that Rule 5.9 (related to exposure 
of orders on the Exchange) will not apply to executions of Compression 
orders, as they will be able to execute without exposure, as discussed 
above.\47\
---------------------------------------------------------------------------

    \47\ See current Rule 5.24(e)(1)(E)(iii)(b).
---------------------------------------------------------------------------

    Pursuant to the proposed rule change, Compression orders will be 
identified as such when submitted into the System for execution. As a 
result, the Exchange's Regulatory Division intends to put in place a 
regulatory review plan that will permit it to ensure any Compression 
orders are submitted and executed in accordance with the proposed rule.
    The Exchange understands from customers, and SPX Market-Makers in 
particular, that there continues to be significant need to reduce 
regulatory capital attributable to their open interest based on then-
current market conditions. These market participants regularly avail 
themselves of open outcry compression forums when available, in which 
they use the information provided in the Exchange-provided position 
lists to identify potential counterparties that similarly need to close 
SPX open interest. Providing TPHs, and Market-Makers in particular, 
with the ability to more efficiently close or exchange SPX open 
interest using this Exchange-provided information, either 
electronically or in open outcry, will provide them with additional 
flexibility to obtain needed relief from the effect of bank regulatory 
capital requirements on the options market at more times than are 
currently available and either electronically or in open outcry. As 
noted above, because some CTPHs carrying these are bank-owned broker/
dealers, those CTPHs are subject to further bank regulatory capital 
requirements, which result in these additional punitive capital 
requirements being passed on to their market-maker clients.\48\ Such 
flexibility is particularly true during times of extreme volatility, 
such as the recent the historic levels of market volatility, which can 
make providing liquidity in SPX options immensely more challenging. The 
Exchange believes use of Compression orders to close or exchange open 
SPX interest in order to alleviate bank regulatory capital requirements 
may be more efficient and effective than current open outcry 
compression forums, given that orders generally execute in compression 
forums as clean crosses.
---------------------------------------------------------------------------

    \48\ See Letter from Cboe, New York Stock Exchange, and Nasdaq, 
Inc., to the Honorable Randal Quarles, Vice Chair for Supervision of 
the Board of Governors of the Federal Reserve System, March 18, 
2020.
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change to expand and 
enhance functionality currently only available on the trading floor 
will allow liquidity providers to execute trades to reduce regulatory 
capital attributable to SPX open interest in a substantially similar 
manner as they are currently able to in open outcry compression forums. 
The Exchange believes Compression orders will assist TPHs to more 
efficiently and effectively reduce any potential negative impact on the 
market-making community that may result from bank regulatory capital 
requirements, which could reduce liquidity available in an extremely 
volatile market when the market needs this liquidity the most. The 
Exchange believes the proposed rule change will eliminate certain 
existing inefficiencies that exist in current open outcry compression 
forums, which the Exchange expects will free up liquidity providers' 
much needed capital, which will benefit the entire market and all 
investors.

[[Page 55047]]

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\49\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \50\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \51\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78f(b).
    \50\ 15 U.S.C. 78f(b)(5).
    \51\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes the proposed rule change will 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, protect investors 
and the public interest because it seeks to further mitigate the 
potentially negative effects of the bank capital requirements on 
liquidity in the SPX markets. As described above, current regulatory 
capital requirements could potentially impede efficient use of capital 
and undermine the critical liquidity role that Market-Makers and other 
liquidity providers play in the SPX options market by limiting the 
amount of capital CTPHs allocate to clearing member transactions. 
Specifically, the rules may cause CTPHs to impose stricter position 
limits on their clearing members. In turn, this could force Market-
Makers to reduce the size of their quotes and result in reduced 
liquidity in the market. The Exchange believes that permitting TPHs to 
close SPX options positions to reduce regulatory capital attributable 
to their portfolios will permit to contribute to the availability of 
liquidity in the SPX options market and help ensure that these markets 
retain their competitive balance. The Exchange believes that the 
proposed rule would serve to protect investors by helping to ensure 
consistent continued depth of liquidity, particularly given current 
market conditions when liquidity is needed the most by investors.
    The proposed rule change will provide liquidity providers and other 
market participants with the ability to reduce regulatory capital 
attributable to their open interest in SPX options electronically or in 
open outcry in a substantially similar manner as they are able to do on 
the trading floor. The proposed flexibility with respect to when the 
Exchange will accept and make available lists of positions TPHs would 
like to compress will permit the Exchange to react to market conditions 
and facilitate TPHs' reduction of SPX open interest in response to 
volatility as necessary. Permitting Compression orders to be submitted 
for execution at any time will also provide TPHs with flexibility to 
complete these compression transactions in accordance with their own 
needs (as long as they previously submitted the applicable positions to 
be closed to the Exchange in advance), as well as to address intra-
month position reviews by their CTPHs. The Exchange believes this 
enhanced compression process will allow market participants to reduce 
the necessary regulatory capital associated with their options 
positions and permit them to provide more liquidity in the market. This 
additional liquidity may result in tighter spreads and more execution 
opportunities, which benefits all investors, particularly in volatile 
markets.
    Additionally, the Exchange believes the proposed rule change will 
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 by adding information (combos and 
individual positions) to the lists the Exchange will make available to 
TPHs for informational purposes. The Exchange believes the additional 
information that may be provided to TPHs in compression forums may 
encourage TPHs to close additional positions via the compression 
process. With respect to the addition of combos, that information may 
enable TPHs to more efficiently and effectively close positions 
comprising a common multi-leg strategy in the SPX market via 
Compression orders, which, in general, helps to protect investors and 
the public interest because closing positions via the compression 
process serves to alleviate the adverse impact of bank capital 
requirements. The information regarding individual and combo positions 
is currently included in the compression position lists the Exchange 
provides to TPHs in different forms--the single leg positions are part 
of multi-leg strategies and combos are parts of box spreads. The 
proposed rule change merely provides the Exchange with the ability to 
list single leg positions and combo positions separately, which will 
provide TPHs with additional flexibility when locating counterparties 
with which to execute Compression orders. This may create opportunities 
for TPHs to compress additional positions, which frees up additional 
liquidity and ultimately benefits investors.
    The Exchange also believes the proposed rule change is consistent 
with the Act, because the proposed compression process is a streamlined 
version of the current open outcry compression forums on the trading 
floor. It eliminates the provisions of compression-list positions 
files, which the Exchange understands were generally unused by TPHs. 
Additionally, it eliminates the additional steps the Exchange and TPHs 
must take to have TPHs names disclosed with their associated 
compression-list positions, as TPHs that currently participate in open 
outcry compression forums do not choose to remain anonymous. The 
Exchange understands that TPHs generally submit compression-list 
positions with the goal of identifying other TPHs with offsetting 
positions that will enable them to engage in compression transactions. 
Therefore, eliminating the ability to remain anonymous in the 
individual position files is consistent with the goal of Compression 
orders and more efficient than the current process. Submission of 
compression-list positions will constitute TPHs' consent to disclosure 
of their names and associated positions on the individual positions 
files. The Exchange believes the proposed rule will provide an enhanced 
and more efficient open outcry and electronic mechanism for compression 
of SPX open positions.
    The Exchange believes the proposed rule change to exclude 
compression-list positions submitted by a Clearing TPH to the Exchange 
on behalf of a Trading Permit Holder(s) from the individual position 
files will further remove impediments to and perfect the mechanism of a 
free and open market and a national market system. As discussed above, 
the need for compression stems from the regulatory capital requirements 
applicable to CTPHs, which as a result may impose stricter position 
limits on the firms for which they clear. Therefore, CTPHs are well-
positioned to know which positions of the firms for which they clear 
could be compressed in order for

[[Page 55048]]

those firms to remain in compliance with the position limits imposed by 
CTPHs when they conduct their regulatory reviews. Because CTPHs are in 
a position to identify offsetting positions, it is unnecessary for 
those positions to be included in the individual position files, which 
are intended to assist those TPHs to identify counterparties with 
offsetting positions.\52\ It may be counterproductive and potentially 
confusing for TPHs if the individual positions lists include positions 
for which no counterparty is being sought. While the Exchange initially 
implemented compression forums to assist TPHs in finding counterparties 
with offsetting positions that were similarly seeking to compress 
positions, the Exchange believes expanding the use of Compression 
orders to CTPHs in this manner will provide CTPHs with more efficient 
means to comply with regulatory capital rules and permit the firms for 
which they clear to have access to liquidity to provide to the market, 
which ultimately benefits all investors.
---------------------------------------------------------------------------

    \52\ The Exchange notes CTPHs can continue to submit compression 
position lists without a list of offsetting positions, in which case 
those positions would be included in the individual position files 
and assist those CTPHs with identifying TPHs with offsetting 
positions.
---------------------------------------------------------------------------

    The proposed rule change imposes priority requirements that will 
protect Priority Customer orders and orders on top of the book that 
comprise the BBO. In fact, the proposed priority requirements for 
complex orders will provide customers orders in the book with 
additional protection with respect to electronic complex orders and 
smaller ratio complex orders in open outcry, as no leg of a Compression 
order may execute at the same price as any Priority Customer order on 
the Simple Book.
    The proposed rule change is consistent with how compression 
transactions currently execute on the trading floor. The proposed rule 
change is replicating a procedure that is currently available to market 
participants only on the trading floor and enhances the current open 
outcry procedure. The proposed rule change will protect Priority 
Customer orders and orders on top of the book that comprise the BBO, as 
well as Priority Customer orders on the top of the COB, and thus will 
provide additional protection to customers on the book compared to 
other executions of orders on the Exchange. While orders are currently 
required to be exposed on the trading floor, the Exchange has observed 
that market participants generally defer their allocations to permit a 
clean cross, as that is necessary for these transactions to achieve 
their intended effect and not leave market participants with unhedged 
positions (and thus more risk). As a result, the lack of exposure of 
Compression orders will be practically consistent with how orders are 
currently executed in compression forums--it just eliminates the need 
to represent the orders on the floor, which representation during 
compression forums has been demonstrated to be unnecessary.
    While orders in compression forums are currently required to be 
exposed to the trading crowd, the Exchange has observed that market 
participants generally deferred their allocations to permit a clean 
cross. Because orders that are executed in compression forums on the 
trading floor are generally not broken, and because the purpose of 
these trades is unrelated to profits and losses (making the price at 
which the transaction is executed relatively unimportant like 
competitive trades), the Exchange believes it is appropriate to not 
require exposure of these orders in an electronic or open outcry 
setting. As noted above, during the time the Exchange's trading floor 
was closed, the Exchange made Compression orders available to TPHs for 
immediate (and thus unexposed) electronic execution. The Exchange 
received feedback from several TPHs regarding the increased efficiency 
provided by electronic Compression orders, which feedback included 
requests to make Compression orders available when the trading floor 
reopened. The Exchange believes it is unlikely that TPHs on the trading 
floor would seek to break up the execution of Compression orders in the 
future, as several TPHs engage in compression to reduce capital 
attributable to the positions in their portfolio and would similarly 
expect to be able to execute their Compression orders without other 
TPHs breaking them up. The Exchange understands this type of mutual 
understanding among TPHs contributes to smoother operations on the 
trading floor. The Exchange also believes that TPHs understand the 
benefits that compression may bring to liquidity on the trading floor.
    Even if TPHs decided to attempt to break up these orders in the 
future, the Exchange believes the benefits of permitting Compression 
orders to execute as clean crosses greatly outweigh any benefits that 
may result from exposing these orders for potential break up. The 
Exchange notes that the benefits of requiring a broker to expose an 
order on the trading floor generally flow to that order, which include 
the potential of price improvement for the order and to locate 
liquidity against which to execute the order. In the case of a 
Compression order, the representing broker has already located the 
necessary liquidity to execute the order, as that is necessary given 
the nature of these transactions. If TPHs believed it was reasonably 
possible that other TPHs in the trading crowd would break up 
Compression orders, those TPHs would not attempt to execute those 
orders on the trading floor (and thus there would be no orders for 
other TPHs to break up). If an electronic Compression order that 
immediately executes without exposure were available (as it was when 
the trading floor was closed), then TPHs would merely submit 
Compression orders for electronic execution. Permitting open outcry 
Compression orders will permit TPHs to cross these orders using the 
same tools they use to currently execute those orders.
    It is critical that TPHs are able to efficiently manage capital and 
margin requirements so that they continuously have sufficient capital 
available to provide to the markets, which benefits all market 
participants, including those that may seek to break up Compression 
orders. Many TPHs clear through CTPHs that have been impacted by bank 
regulatory capital requirements, and therefore the Exchange believes 
all TPHs on the trading floor understand and respect the need of other 
TPHs to reduce capital attributable to their positions in accordance 
with capital reviews performed by CTPHs as efficiently as possible, 
including through the use of compression.
    While the proposed rule change eliminates certain steps with 
respect to the compression files the Exchange provides, as discussed 
above, the Exchange believes these steps provide no current value to 
the process. As a result, the Exchange believes the proposed process is 
practically consistent with the current process. Because the changes 
create a process that is practically consistent with the current 
process, the Exchange does not believe they will have any negative 
impact on the ability of TPHs to effect compression transactions. The 
proposed rule change streamlines the process by eliminating steps that 
add no demonstrable value to the compression process and will enable 
TPHs to engage in compression transactions more efficiently.
    The Exchange believes the proposed rule change to permit 
Compression orders to have any ratio will 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

[[Page 55049]]

public interest, as it will provide TPHs with the ability to maximize 
positions they may close while minimizing market risk. Currently in 
open outcry compression forums, complex orders may be executed in any 
ratio (and in pennies if closing positions). Because the proposed 
priority requirements are consistent with the open outcry complex order 
priority for larger ratio orders, the Exchange believes the proposed 
rule change will not disadvantage the simple order market, as no leg of 
a Compression order may execute at the same price as a resting Priority 
Customer order in the simple book.
    The proposed rule change to permit the opening portions of 
Compression orders to be entered and executed in pennies will benefit 
investors, as it will eliminate potential confusion about different 
portions of different trades executing at different increments. The 
Exchange believes this is appropriate given that opening positions may 
partly comprise Compression orders as long as the total order is net 
position closing or neutral and legs of single orders are 
systematically unable to be input or executed in different minimum 
increments. The Exchange believes restricting use of Compression orders 
to positions intended to reduce required capital associated with a 
TPH's positions will limit the use of Compression orders, including the 
inclusion of opening positions in those orders, to the intended purpose 
of these orders. Additionally, the Exchange believes it may reduce 
potential investor confusion that may result from requiring different 
portions of orders to trade in different increments, if that were 
systematically possible. Unlike in compression forums on the trading 
floor, where persons can negotiate leg pricing to accommodate the 
current rule, such negotiation is not available in electronic trading. 
While the proposed rule change may increase the number of SPX contracts 
that may trade in pennies, given that a Compression order that will 
open any positions must be net position closing or neutral, the 
Exchange expects the majority of contracts that execute as part of 
Compression orders will be ones that close positions, as is the case 
today.
    As noted above, the Exchange believes permitting Compression orders 
to be partially comprised of opening positions will increase amount of 
open SPX interest TPHs are willing to close, and penny pricing for all 
contracts in Compression orders will further encourage closing of these 
positions. Because many series the Exchange expects TPHs will attempt 
to close will be out-of-the-money, and essentially worthless, TPHs may 
not otherwise close positions in these series if a higher minimum 
increment causes the price to be too much higher than the option's 
value. The Exchange believes it is reasonable to permit these orders to 
be entered and executed in penny increments to provide flexibility that 
will enable TPHs to maximize the number of open SPX positions they can 
close using Compression orders. While the Exchange understands there 
may be a concern that market participants may attempt to use 
Compression orders to execute orders in pennies that would otherwise be 
required to execute in a larger increment, the Exchange believes this 
minimal risk is outweigh by the benefits the proposed rule change may 
provide to the market and all investors. Additionally, the Exchange 
believes the requirements that Compression orders be net closing or 
neutral and include closing positions previously submitted to the 
Exchange on compression position lists, and be for the purpose of 
reducing required capital associated with open positions will create 
additional controls to limit use of Compression orders for legitimate 
compression purposes that further minimizes this potential risk.
    It is critical to the ongoing stability of the options markets that 
TPHs are able to efficiently manage capital and margin requirements so 
that they continuously have sufficient capital available to provide to 
the markets, which benefits all market participants, including those 
that may seek to break up Compression orders. As all TPHs are subject 
to capital and margin requirements, the Exchange believes all TPHs on 
the trading floor understand and respect the need of other TPHs to 
manage these requirements as efficiently as possible. The Exchange 
believes the proposed rule change, which is limited to one class the 
Exchange believes is being significantly impacted by bank regulatory 
capital requirements and the one class in which open outcry compression 
forums may currently occur, as well as limiting the use of Compression 
orders for reducing the required capital associated with a TPH's open 
SPX positions, is narrowly tailored for the specific purpose of 
facilitating the ability of liquidity providers to alleviate the 
negative effects of current bank regulatory capital requirements. The 
Exchange believes the proposed rule change will protect investors by 
providing a more seamless execution of compression transactions and 
thus facilitate a more efficient way for liquidity providers to meeting 
their capital requirements, which will protect investors by contributed 
to the continued depth of liquidity in the SPX options market.
    Based on activity in open outcry compression forums and the number 
of orders executed in electronic compression forums when the trading 
floor was closed, the Exchange believes it has sufficient system 
capacity to handle any additional traffic that may result from the 
proposed rule change. The Exchange's Regulatory Division intends to 
incorporate Compression orders into its surveillances.

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 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, as 
Compression orders will be available to all market participants with 
SPX open interest. As discussed above, while the proposed rule change 
is directed at market-makers, all market participants may submit 
Compression orders in the same manner as long as all criteria of the 
proposed rule are satisfied. While compression-list positions submitted 
by CTPHs on behalf of TPHs for which they clear will no longer be 
included in individual position files, the Exchange believes this is 
appropriate given that bank regulatory capital requirements apply to 
CTPHs, who are therefore positioned to identify offsetting positions 
among TPHs for which they clear that will enable them to more 
efficiently comply with those requirements. Ultimately, this still 
benefits TPHs on whose behalf CTPHs submit compression-list positions, 
as the resulting compression transactions will result in the ability of 
those TPHs to provide additional liquidity to the market.
    The Exchange does not believe the proposed rule change will impose 
any burden on intermarket competition, as it will apply only to SPX 
options, which are currently listed for trading only on the Exchange. 
Additionally, open outcry compression forums are currently limited to 
SPX options. In addition, the proposed rule change is intended create a 
more efficient effective mechanism for market participants to close SPX 
option interest to reduce regulatory capital attributable to their 
portfolios.

[[Page 55050]]

Compression orders are not seeking price improvement but rather looking 
to free up capital that will permit those parties to continue to 
provide liquidity to the market, and thus is not intended to have a 
competitive impact.

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

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

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be 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-CBOE-2020-074 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-CBOE-2020-074. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2020-074 and should be submitted on 
or before September 18, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\53\
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    \53\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-19453 Filed 9-2-20; 8:45 am]
BILLING CODE 8011-01-P


