[Federal Register Volume 86, Number 132 (Wednesday, July 14, 2021)]
[Notices]
[Pages 37197-37200]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-14901]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92354; File No. SR-CBOE-2021-020]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1, To Adopt Rule 
6.10 To Introduce a Voluntary Multilateral Compression Service for SPX 
Options

July 8, 2021.

I. Introduction

    On March 24, 2021, Cboe Exchange, Inc. (``Exchange'' or ``Cboe'') 
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 new Cboe Rule 6.10 to introduce a voluntary compression service 
for market makers. The proposed rule change was published for comment 
in the Federal Register on April 12, 2021.\3\ On May 25, 2021, the 
Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\4\ On July 7, 2021, the Exchange filed Amendment No. 1 to the 
proposed rule change, which replaced and superseded the proposed rule 
change in its entirety.\5\ The Commission is publishing this notice to 
solicit comments on the Exchange's proposal, as modified by Amendment 
No. 1, from interested persons and is approving the Exchange's 
proposal, as

[[Page 37198]]

modified by Amendment No. 1, on an accelerated basis.
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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. 91482 (April 6, 
2021), 86 FR 19067. Comments on the proposed rule change can be 
found on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2021-020/srcboe2021020.htm.
    \4\ See Securities Exchange Act Release No. 92011, 86 FR 29334 
(June 1, 2021). The Commission designated July 11, 2021, as the date 
by which it should approve, disapprove, or institute proceedings to 
determine whether to disapprove the proposed rule change.
    \5\ In Amendment No. 1, the Exchange: (1) Narrowed the list of 
index options that could be compressed to include only SPX options 
and limited the compression service to closing positions only, (2) 
expanded eligibility from only market makers to all TPHs, (3) added 
detail to the participation requirements to ensure that the proposed 
compression service is limited to legitimate compression purposes, 
(4) added further detail regarding the proposed compression service, 
and (5) added additional justification for the proposed rule change.
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II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1

    The Exchange proposes to adopt new Cboe Rule 6.10 to provide 
Trading Permit Holders (``TPHs'') with an additional voluntary 
compression tool that they can use to reduce required capital 
attributable to their S&P 500 Index (``SPX'') options holdings.\6\ The 
Exchange's proposal is designed to address the impact on liquidity 
providers of the limited amount of capital available from clearing 
broker-dealers that is a consequence of, among other things, the fact 
that a number of clearing TPHs are now subsidiaries of U.S. bank 
holding companies that must, as a result of this affiliation, comply 
with additional bank capital regulatory requirements. In particular, 
bank capital rules do not currently permit deductions for hedged 
securities or offsetting options positions to the same extent that the 
federal securities laws and self-regulatory organization rules do for 
securities. The impact of this dynamic most acutely impacts SPX options 
due to the popularity of SPX options and the significant number of open 
index options positions combined with their large notional value.
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    \6\ Currently, the Exchange offers other methods by which TPHs 
can compress certain types of options holdings, including (1) Cboe 
Rule 5.6, which allows for compression orders in SPX options and (2) 
Cboe Rule 6.8, which allows TPHs to transfer positions off-exchange 
if the transfer does not result in a change of ownership and reduced 
the risk-weighted assets associated with those positions.
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    In its filing, the Exchange explains that it has observed that 
these bank capital rules have caused clearing broker-dealers to impose 
stricter position limits on their clearing members, which can impact 
the liquidity that TPHs, notably market makers who are frequently the 
counterparties to a significant portion of SPX option trades, might be 
able to supply.\7\ This impact would be most pronounced when markets 
are volatile, precisely at the time when the market would benefit from 
increased liquidity provision.
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    \7\ See Amendment No. 1, at 8-10.
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    The bank regulatory agencies have approved replacing the Current 
Exposure Method (``CEM'') with the Standardized Approach to 
Counterparty Credit Risk (``SA-CCR'') in the near future, and the 
Exchange believes SA-CCR will be ``less punitive'' to clearing broker-
dealers because 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.'' \8\ Nevertheless, 
the Exchange believes that SA-CCR ``will not eliminate [TPHs'] need for 
compression'' as the ability to compress SPX positions can ``enable 
them to provide more meaningful liquidity to the market, particularly 
during times of volatility when the market needs this liquidity most.'' 
\9\ The Exchange further asserts that ``this additional liquidity may 
result in tighter spreads and more execution opportunities, which 
benefits all investors.'' \10\
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    \8\ See id. at 10.
    \9\ See id. at 11.
    \10\ See id.
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    As described more fully in the Notice, as modified by Amendment No. 
1, in order to be able to participate in the new multilateral 
compression service, a TPH must request access to the service and 
complete a standard test to demonstrate its capacity to participate. 
While the Exchange initially proposed that only registered market 
makers would be eligible to participate and a larger number of index 
options would be eligible for inclusion, the Exchange has modified its 
proposal to allow any TPH to request access and to limit the service to 
SPX options only, where the need for compression is most present.\11\
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    \11\ See generally Amendment No. 1.
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    The Exchange will offer multilateral compression periodically, 
initially twice per month, in order to allow TPHs to respond to intra-
month reviews of regulatory capital for their positions by their 
clearing broker-dealers.\12\ To participate, a TPH must submit a 
``position list'' after the close of trading on the specified day that 
details all of the open SPX positions it would like to close out and 
compress. The list must specify the amount of capital reduction 
associated with each closing position, the theoretical value of each 
position, the maximum cost the TPH is willing to accept to compress all 
of the positions (in the aggregate), the maximum cost per unit of 
capital reduction the TPH is willing to accept, and at least one risk 
constraint of the TPH's choosing including a minimum and maximum value. 
TPHs have flexibility in choosing these values as specified in the 
proposed rule.\13\
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    \12\ See Amendment No. 1, at 17.
    \13\ See, e.g., proposed Cboe Rule 6.10(b)(2) (concerning a 
theoretical value ``calculated in a manner of the compression 
participant's choosing'').
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    After the deadline for submission of the position lists, the 
Exchange runs an automated process to match offsetting positions in an 
anonymized manner. The process identifies the outcome that would result 
in the maximum aggregate capital reduction among all participating TPHs 
(picking at random from among equal outcomes). The Exchange determines 
the compression price for each option, which will be ``as close as 
possible to the midpoint of the [national best bid and offer] at the 
close of the trading day or the daily marking time, subject to 
adjustment using generally accepted volatility and options pricing 
models in the event of wide markets, market volatility, or other 
unusual circumstances.'' \14\
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    \14\ Proposed Cboe Rule 6.10(c)(2).
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    The Exchange then notifies the TPH participants of each TPH's 
individual compression proposal.\15\ Each TPH with at least one 
offsetting position must notify the Exchange whether it accepts its 
individual proposal.\16\ If all compression participants accept their 
individual proposals, then the Exchange effects the transactions at the 
specified prices off the exchange.\17\ If one compression participant 
declines, then no compression transactions are effected.\18\
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    \15\ See id.
    \16\ See proposed Cboe Rule 6.10(d).
    \17\ See id. In Amendment No. 1, the Exchange represented that 
it will disseminate compression transaction information to OPRA. The 
Exchange further states that it has completed system work to apply 
an indicator to such information and is working with OPRA so that 
OPRA is able to incorporate that indicator. The Exchange expects 
OPRA to complete its work in 2021, but notes that the indicator may 
not be available upon implementation of the compression service. See 
Amendment No. 1, at 27.
    \18\ See id.
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III. Discussion and Commission Findings

    After careful review of the proposal and the comments received, all 
of which supported the proposal and recommended that the Commission 
approve it, the Commission finds that the proposed rule change, as 
modified by Amendment No. 1, is consistent with the Act and the rules 
and regulations thereunder applicable to a national securities 
exchange.\19\ In particular, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5) of the Act,\20\ which requires, among other things, that the 
rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove

[[Page 37199]]

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.
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    \19\ 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).
    \20\ 15 U.S.C. 78f(b)(5).
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    In support of its proposal, the Exchange states that compression 
transactions under Cboe Rule 6.10 will have a narrow scope and are 
intended and designed to achieve the limited purpose of capital 
reduction.\21\ The Exchange further explains that it understands that 
TPHs have no need for price discovery or price improvement for 
compression transactions, because the purpose of the transfer is to 
reduce capital requirements attributable to the TPHs' positions and the 
price of the compression transaction is a secondary concern.\22\ The 
Exchange further states that its proposal is needed because liquidity 
providers accumulate SPX positions to accommodate executions of 
customer orders, and do so at increasing levels during times of market 
volatility.\23\ While TPHs hold these positions prior to expiration, 
many may have little to no value and closure of these positions may 
have little impact on the risk exposure of the TPH's portfolio.\24\ 
Yet, maintenance of these positions requires ongoing risk management 
and capital, which can impact the capital the TPHs have available to 
trade.\25\ The Exchange asserts that its proposal will limit the use of 
the compression service to legitimate compression purposes and provide 
an objective process to allow TPHs to manage capital and margin 
requirements so that they have sufficient capital available to provide 
to the markets, which will benefit all market participants.\26\
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    \21\ See Amendment No. 1, at 37.
    \22\ See id.
    \23\ See id. at 38.
    \24\ See id.
    \25\ See id.
    \26\ See id. at 41. Two commenters supported the proposed rule 
change, asserting that the proposed compression service procedure 
would provide an additional risk management tool that can be used by 
Cboe market makers to efficiently manage the capital and margin 
requirements of their portfolios. See Letters to Vanessa Countryman, 
Secretary, Commission, from Joanna Mallers, Secretary, FIA Principal 
Traders Group, dated May 3, 2021, at 2; and Michael Golding, Head of 
Trading, Optiver US LLC and Aldo van Audenaerde, Head of Trading, 
AMS Derivatives B.V., dated April 22, 2021, at 1.
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    The Commission believes that the Exchange's proposal will provide a 
narrowly-tailored, objective, and not unfairly discriminatory mechanism 
for TPHs to efficiently compress open SPX positions for the purpose of 
reducing required capital. As the Commission has previously observed, 
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.\27\ The ability to compress positions 
in an efficient, cost-effective manner can help liquidity providers and 
their clearing firms manage associated bank capital constraints. 
Tailored compression tools that are carefully designed to directly 
address the greatest need for compression, where portfolio holdings 
have a material impact on available capital, can have beneficial 
effects on the market and available liquidity especially during periods 
of volatile trading without impacting trading or conferring any 
inappropriate benefits on any market participant.
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    \27\ See, e.g., Securities Exchange Act Release No. 91079 
(October 14, 2020), 85 FR 66590 (October 20, 2020) (order granting 
approval of proposed rule change to adopt position compression cross 
orders in SPX options).
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    The proposal's focus on closing positions in SPX options 
appropriately recognizes the role SPX options play as major component 
of the capital impact felt by clearing broker-dealers and the TPHs for 
whom they clear, which results from the large notional value and 
popularity of SPX options as a frequently traded product with large 
open interest. Compression trades are unlike arm's length transactions 
as their sole purpose is to close open positions to compress SPX 
portfolio positions to reduce required capital charges. The Exchange's 
proposal is a narrowly-tailored means of doing so and, as a result, 
should facilitate the ability of compression participants to provide 
liquidity and trade, especially during volatile periods. As such, the 
Exchange's proposal removes impediments to and perfects the mechanism 
of a free and open market and a national market system, and, in 
general, protects investors and the public interest.
    Further, the mechanics of the compression service are reasonably 
designed to provide an objective process by which TPHs can avail 
themselves of the ability to potentially compress their open SPX 
positions for capital reduction purposes. The proposed process does not 
prioritize any TPH but rather aims to find the greatest aggregate 
capital reduction among the SPX options submitted for consideration, 
and honors each TPH's customized risk constraints in doing so. 
Ultimately, however, all TPHs selected for participation must approve 
of the compression transaction proposed by the Exchange and if any one 
TPH declines the proposed transaction then the compression transaction 
for all TPHs will not occur. If approved, transactions take place after 
the close of regular trading hours and the trades will be reported to 
OPRA with an indicator attached to note they are compression 
trades,\28\ thus providing public transparency of these compression 
trades.
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    \28\ See supra note 17.
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    Accordingly, for the reasons discussed above, the Commission finds 
that the proposed rule change, as modified by Amendment No. 1, is 
consistent with the Act, including Section 6(b)(5) of the Act \29\ and 
the rules and regulations thereunder applicable to a national 
securities exchange.
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    \29\ 15 U.S.C. 78f(b)(5).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 1, 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-2021-020 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-2021-020. 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

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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-2021-020, and should be submitted on or before August 4, 2021.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the 30th day after the 
date of publication of notice of the filing of Amendment No. 1 in the 
Federal Register. Amendment No. 1 narrowed the scope of parts of the 
proposed rule change and also provided additional rationale and support 
for the proposed rule change. Specifically, in Amendment No. 1, the 
Exchange: (1) Narrowed the list of index options that could be 
compressed to include only SPX options and limited the compression 
service to closing positions only, (2) expanded eligibility from only 
market makers to all TPHs, (3) added detail to the participation 
requirements to ensure that the proposed compression service is limited 
to legitimate compression purposes, (4) added further detail regarding 
the proposed compression service, and (5) added additional 
justification for the proposed rule change.
    The changes to the proposal and additional information provided in 
Amendment No. 1 focus the proposal on SPX and closing-only positions, 
expand eligibility to the compression service, and add necessary detail 
to the rule text to more fully and clearly reflect the applicable 
requirements and describe how the compression service will operate. 
Collectively, these changes, supported by the additional and clarified 
rationale, better calibrate the proposal to the greatest need for 
compression and remove potential ambiguity about how the service will 
work without introducing material new concepts over the original 
proposal. The changes in Amendment No. 1 assist the Commission in 
evaluating the Exchange's proposal and in determining that it is 
consistent with the Act. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Act,\30\ to approve the proposed 
rule change, as modified by Amendment No. 1, on an accelerated basis.
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    \30\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\31\ that the proposed rule change (SR-CBOE-2021-020), as modified 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
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    \31\ Id.
    \32\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-14901 Filed 7-13-21; 8:45 am]
BILLING CODE 8011-01-P


