[Federal Register Volume 85, Number 203 (Tuesday, October 20, 2020)]
[Notices]
[Pages 66590-66592]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23150]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90179; File No. SR-CBOE-2020-074]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change To Adopt Position 
Compression Cross (``PCC'') Orders for SPX

October 14, 2020.

I. Introduction

    On August 19, 2020, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt Position Compression Cross (``PCC'') 
orders for S&P 500 Index (``SPX'') options. The proposed rule change 
was published for comment in the Federal Register on September 3, 
2020.\3\ The Commission received four comments in support of the 
proposed rule change.\4\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 89707 (August 28, 
2020), 85 FR 55040 (``Notice'').
    \4\ See Letter to Vanessa Countryman, Secretary, Commission, 
dated September 17, 2020, from Steve Crutchfield, Head of Market 
Structure, CTC, LLC, available at https://www.sec.gov/comments/sr-cboe-2020-074/srcboe2020074-7794086-223555.pdf; Letter to Vanessa 
Countryman, Secretary, Commission, dated September 18, 2020, from 
Joanna Mallers, Secretary, FIA Principal Traders Group, available at 
https://www.sec.gov/comments/sr-cboe-2020-074/srcboe2020074-7793926-223553.pdf; Letter to Vanessa Countryman, Secretary, Commission, 
dated September 18, 2020, from Michael Golding, Head of Trading, 
Optiver US LLC, and Rutger Brinkhuis, Head of Trading, AMS 
Derivatives B.V., available at https://www.sec.gov/comments/sr-cboe-2020-074/srcboe2020074-7793838-223548.pdf; and Comment from Erik 
Swanson, CEO, Simplex Trading, LLC, dated September 18, 2020, 
available at https://www.sec.gov/comments/sr-cboe-2020-074/srcboe2020074-7793878-223549.htm.

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[[Page 66591]]

II. Summary of the Proposal

    As described in more detail in the Notice,\5\ the Exchange proposes 
to adopt PCC orders to assist Trading Permit Holders (``TPHs'') in 
reducing their open positions in series of SPX options to reduce the 
required capital associated with their open SPX positions. The Exchange 
currently facilitates compression forums on the trading floor at the 
end of each calendar week, month, and quarter, where TPHs can seek to 
reduce their open positions in SPX.\6\ These SPX compression forums 
allow TPHs and their clearing firms to reduce open interest in 
offsetting SPX positions, which can help clearing brokers that are 
affiliates of bank holding companies comply with the unique regulatory 
capital requirements that apply to them. In turn, compression forums 
may help some firms, particularly market makers, mitigate the effects 
of capital constraints and provide them with continued access to the 
capital they need through their clearing brokers to provide liquidity 
during periods of volatility.
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    \5\ See Notice, supra note 3.
    \6\ See id. at 55040. See also Cboe Rule 5.88.
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    From March 16 to June 12, 2020, the Exchange closed its trading 
floor in response to the coronavirus pandemic, and as a result, the 
Exchange operated in an all-electronic configuration.\7\ Because the 
trading floor was closed during this time, market participants could 
not participate in open outcry compression forums. To enable TPHs to 
reduce open interest in SPX options in electronic compression forums 
when the floor was closed, the Exchange adopted Rule 5.24(e)(1)(E) as 
part of its Disaster Recovery rule.\8\
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    \7\ See id. at 55041.
    \8\ See Securities Exchange Act Release No. 88490 (March 26, 
2020), 85 FR 18318 (April 1, 2020) (File No. SR-CBOE-2020-026).
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    Under Rule 5.24(e)(1)(E), when the Exchange's trading floor becomes 
inoperable, it can conduct electronic compression forums as frequently 
as daily.\9\ Those electronic compression forums permit an order in SPX 
option contracts to be coupled with a contra-side order(s) and be 
executed automatically on entry without exposure.\10\ In order to 
obtain a clean cross, the orders are required to execute in accordance 
with the same priority principles that apply to complex orders on the 
Exchange.\11\ Specifically: (i) Each option leg may only execute at a 
price that complies with Rule 5.33(f)(2), provided that no option leg 
executes at the same price as a Priority Customer Order in the Simple 
Book; (ii) each option leg may only execute at a price at or between 
the national best bid or offer (``NBBO'') for the applicable series; 
and (iii) the execution price must be better than the price of any 
complex order resting in the complex order book, unless the submitted 
complex order was 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.\12\ If a compression order could not execute in 
accordance with these requirements, it would be cancelled.\13\
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    \9\ See id. at 18319-20.
    \10\ See id. at 18320.
    \11\ See id.
    \12\ See id.
    \13\ See id.
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    When the Cboe Options trading floor reopened on June 15, 2020, 
electronic compression forums were no longer available because the 
Exchange does not offer electronic compression forums when its trading 
floor is operable.\14\
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    \14\ See Notice, supra note 3, at 55041.
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    In light of its recent experience with electronic compression 
forums, and the interest among certain TPHs that they continue, the 
Exchange proposes to adopt PCC orders for SPX on a permanent basis and 
delete its floor-based compression forum rule.\15\ The proposed rule 
explicitly provides that PCC orders, which may be submitted for 
automatic electronic execution or for manual handling on the trading 
floor, may only be used to reduce the required capital associated with 
open SPX positions.\16\
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    \15\ See id. at 55041-46 for a more detailed description of the 
proposal.
    \16\ See Rule 5.6(c). The Exchange explains that electronic PCC 
orders are uniquely relevant to SPX options because of the large 
notational value of SPX contracts and the significant open interest 
in them. See Notice, supra note 3, at 55040.
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    To facilitate this proposed rule change, the Exchange first 
proposes to delete Rule 5.24(e)(1)(E) and reserve Rule 5.88. Second, 
the Exchange proposes to add PCC orders to its list of orders types 
under Rule 5.6(c). The procedures for submitting PCC orders will be 
similar to the procedures that currently apply to open outcry 
compression forums under Rule 5.88,\17\ except that they will allow a 
clean cross for SPX without exposure either on the floor or 
electronically. PCC orders will be available during regular trading 
hours and global trading hours.\18\ The same execution and priority 
protection principles that apply under Rule 5.24(e)(1)(E) will apply to 
PCC orders,\19\ and if a PCC order cannot be executed in accordance 
with these provisions, it will be cancelled. The PCC order type will 
also be available for SPX FLEX options.\20\ Finally, the Exchange 
proposes to make PCC orders available for PAR routing for manual 
handling.\21\
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    \17\ The PCC order procedures for electronic and open outcry 
will differ slightly from the open outcry compression forum 
currently available under Rule 5.88. In particular, the Exchange may 
make PCC orders available more often than current compression 
forums, which take place only at the end of the week, month, and 
quarter. The Exchange will determine the times to permit PCC orders 
and will provide TPHs with reasonable and sufficient notice before 
doing so. Additionally, the Exchange will no longer post the 
compression-list position file on the Exchange's website because it 
does not believe those lists are used by TPHs or useful to the 
public. The new procedure also eliminates the step of initially 
providing individual position files on an anonymous basis and then 
requiring TPHs to consent to having their identities disclosed since 
most TPHs submit the compression-list positions with the goal of 
identifying other TPHs with offsetting positions to enable them to 
engage in the compression transactions. Lastly, the Exchange will 
provide two additional types of information in the compression-list 
positions sent to TPHs: Series positions within a strike range 
determined by the Exchange and combos (i.e., purchase (sale) of a 
call and a sale (purchase) of a put with the same expiration date 
and the strike price) in addition to the currently provided multi-
leg positions of vertical call spreads, vertical put spreads, and 
box spreads. See id. at 55042.
    \18\ See id. at 55045, n.38. See also Rules 5.32(g) and 5.33(n).
    \19\ See supra note 12 and accompanying text.
    \20\ See Notice, supra note 3, at 55045, n.38. See also Rule 
5.70(a)(2).
    \21\ See id. at 55045-46. See also Rule 5.83(a) and (b); Rule 
5.85.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\22\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\23\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system and, in general, to protect 
investors and the public interest, and not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \22\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \23\ 15 U.S.C. 78f(b)(5).
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    The Exchange seeks to make the electronic PCC order type permanent, 
even when the trading floor of the Exchange is operable, and also offer 
the ability to submit a PCC order for manual handling on the trading 
floor. This order type will allow TPHs to execute clean

[[Page 66592]]

crosses of SPX compression forum orders without exposure and they will 
be available at any point during a month designated by the Exchange 
rather than just at the end of each calendar week, month, and quarter, 
as is the case under the current compression forum process.
    The affiliation of clearing brokers with bank holding companies has 
introduced the need for liquidity providers and their clearing firms to 
more conservatively manage holdings to comply with applicable bank 
regulatory capital requirements, which particularly affects SPX options 
given the large notional exposure associated with holdings of SPX by 
liquidity providers in SPX across a large number of strikes and series. 
While these positions may be hedged, the applicable bank capital rules 
currently disregard offsets when calculating the notional value of 
short positions. As a result, the ability to close and ``compress'' 
positions in an efficient, cost-effective manner can help liquidity 
providers and their clearing firms reduce risk weighted assets and 
alleviate associated bank capital constraints.
    The current floor-based compression forums are labor-intensive and 
can be inefficient as a result. The Exchange asserts that this proposal 
will increase the efficiency of SPX compression activity without 
causing any significant negative effect on price discovery or the 
ability of a TPH to access liquidity.\24\ The commenters on the 
proposal similarly believe the proposal will increase efficiency by 
providing an electronic risk management tool to reduce SPX risk 
weighted assets, which will support the ability of SPX liquidity 
providers to provide displayed quotes in SPX options.\25\ Accordingly, 
PCC orders can help assure the continued availability of capital to 
liquidity providers so that they can quote competitively with size, 
particularly during periods of heightened volatility, which removes 
impediments and supports fair and orderly markets to the benefit of 
investors.
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    \24\ See Notice, supra note 3, at 55041.
    \25\ See supra note 4 (citing to the comment letters on the 
proposal).
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    The proposed PCC order type contains the same priority protections 
that apply under Rule 5.24(e)(1)(E) when the Exchange permits 
electronic compression orders as clean crosses when its trading floor 
is inoperable.\26\ Likewise, PCC orders handled by floor brokers will 
be covered by the same protections.\27\ Additionally, under the 
proposal, TPHs will be permitted to enter PCC orders in the same 
increment that is currently available for closing transactions in open 
outcry compression forums, which are increments of $0.01.\28\
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    \26\ See Notice, supra note 3, at 55045. The Commission also 
notes that the proposal only allows a TPH to use PCC orders to 
reduce the required capital associated with the TPH's open SPX 
positions and the Exchange represents that the Exchange's Regulatory 
Division will incorporate PCC orders into its surveillance. See id. 
at 55049.
    \27\ See id.
    \28\ See id. at 55043.
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    The Exchange states that the benefits of permitting PCC orders to 
execute as clean crosses greatly outweigh any detriments that may 
result from not exposing these orders for potential break up.\29\ The 
Exchange notes that the benefits of requiring a TPH to expose an order 
or a proposed cross generally flow to that order, which benefits 
include the potential for price improvement and, for single orders, to 
locate contra-side liquidity.\30\ In the case of an SPX transaction to 
reduce risk weighted capital for which a TPH could use the PCC order 
type, the representing TPH has already located the necessary liquidity 
prior to submitting the matches for execution, and the ability to 
execute the single or complex order in full to reduce risk weighted 
capital is the primary concern.\31\ Any likelihood of another TPH 
breaking up the PCC order could deter the order-originating TPH from 
entering its compression order, which would fail to achieve the aims of 
the compression order and thus fail to mitigate the associated capital 
constraints that could impact the liquidity provider's continued 
ability to quote SPX series.\32\
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    \29\ See id. at 55048.
    \30\ See id.
    \31\ See id. at 55049. See also supra note 27.
    \32\ See Notice, supra note 3, at 55049.
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    Based on the foregoing and for the above reasons, the Commission 
finds that the proposed rule change is consistent with the requirements 
of the Act in that it is designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest.

IV. Conclusion

    It is therefore ordered that, pursuant to Section 19(b)(2) of the 
Act,\33\ the proposed rule change (SR-CBOE-2020-074) be, and hereby is, 
is approved.
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    \33\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
J. Matthew DeLesDernier,
Assistant Secretary.


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    \34\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2020-23150 Filed 10-19-20; 8:45 am]
BILLING CODE 8011-01-P


