[Federal Register Volume 86, Number 166 (Tuesday, August 31, 2021)]
[Notices]
[Pages 48775-48778]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-18677]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92755; File No. SR-BOX-2021-18]


Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend IM-7240-
1

August 25, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 13, 2021, BOX Exchange LLC (the ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I and II below, which Items have been 
prepared by the self-regulatory organization. The Commission is 
publishing this notice to solicit comments on the proposed rule 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

    The Exchange proposes to amend IM-7240-1. The text of the proposed 
rule change is available from the principal office of the Exchange, at 
the Commission's Public Reference Room and also on the Exchange's 
internet website at http://boxoptions.com.

[[Page 48776]]

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
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 purpose of the proposed rule change is to amend IM-7240-1. In 
May 2018, the Securities and Exchange Commission (``SEC'') noticed for 
immediate effectiveness BOX's filing to adopt protections for Complex 
Orders.\3\ As background, the Exchange implemented its Debit/Credit 
Check which helps prevent the execution of Complex Orders at erroneous 
prices.\4\ Specifically, the system will reject a Complex Limit Order 
for a credit strategy with a net debit price or a Complex Limit Order 
for a debit strategy with a net credit price. The Debit/Credit Check 
mechanism is designed to value strategies using options pricing theory. 
At its simplest, options pricing theory refers to estimating the fair 
value of an options contract. Pricing models take into account 
variables such as current market price, strike price, and time to 
expiration. All else equal, longer-dated options are more valuable 
because of their greater time to expiration. Additionally, holding 
everything constant, including expiration date, a put option with a 
higher strike price will be more valuable than a put option with a 
lower strike price because the higher strike price allows the holder to 
sell the underlying security at a higher price. Conversely, a call 
option with a lower strike price is more expensive than a call option 
with a higher strike price because the lower strike price allows the 
holder to buy the underlying security at a lower price. Taking these 
principles into account, the Exchange designed the Debit/Credit Check 
as a way to identify strategies as credit or debit and only accept 
appropriate prices based on that determination.
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    \3\ See Securities Exchange Release No. 34-83163 (May 3, 2018), 
83 FR 21320 (May 9, 2018) (SR-BOX-2018-13 Noticed for Immediate 
Effectiveness).
    \4\ IM-7240-1(a).
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    The Exchange notes that it included text in its Debit/Credit Check 
rule that does not completely reflect how the price protection 
mechanism functions.\5\ In particular, IM-7240-1(a)(1) provides that 
``the trading system will attempt to identify a strategy as a debit or 
credit based on the potential profit or loss of the Complex Order. The 
system first groups the legs of a Complex Order by expiration date. The 
system then calculates the potential profit or loss of each group for a 
range of price levels of the underlying security. Specifically, the 
system calculates the profit or loss for each group at price levels 
equal to the strike price of each leg in the group.'' As such, the rule 
as it is currently reads, suggests that the system only calculates the 
profit or loss for each group of price levels equal to the strike price 
of each leg in the group for a particular strategy.
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    \5\ BOX IM-7240-1(a) Debit/Credit Check.
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    Through internal review, the Exchange came to the conclusion that 
the system's Debit/Credit Check does not only utilize price levels 
equal to the strike price of each leg in the groups of a Complex Order, 
but instead employs a broader range of prices for the underlying 
security to make a more accurate determination as to whether a 
particular strategy is a debit or credit. As such, the Exchange is 
proposing to delete the following language from the rule text: 
``Specifically, the system calculates the profit or loss for each group 
at price levels equal to the strike price of each leg in the group.'' 
The Exchange believes this removes the contradiction within its current 
rule text and accurately reflects the current operation of its Debit/
Credit Check mechanism by stating that the system will calculate a 
debit or credit strategy by using a ``range of price levels.''
    The following example illustrates the situation that the Exchange 
is remedying with this proposed rule change.
Example
    Assume a Complex Order to buy 2 JAN 2990 puts and sell 1 JAN 3000 
put. Evaluating the strategy at only the strike prices (i.e., 2990 and 
3000) would yield a result that the strategy is a credit strategy and 
therefore the system should not accept net debit prices. This is 
because if the underlying security had a price of 2990 or 3000 the 
potential profit or loss for the strategy would be:
     When the price of the underlying security is 2990, the 
first leg (buy 2 JAN 2990 puts) would yield an estimated profit or loss 
of $0 (i.e., break-even) and the second leg (sell 1 JAN 3000 put) would 
yield an estimated loss of $10.
     Alternatively, when the price of the underlying security 
is 3000, the first leg would yield an estimated profit or loss of $0, 
and the second leg would yield an estimated profit or loss of $0.
    If the system only evaluated underlying prices equal to the strike 
prices, then the profit or loss for the group would be break-even or 
loss because when the underlying price is 2990 the strategy has a 
potential loss of $10 and when the underlying price is 3000, the 
potential profit or loss is break-even. Therefore, the system would 
consider the strategy a credit strategy and reject any net debit 
prices.\6\ However, when you consider a wider range of prices for the 
underlying security, specifically those that are less than 2990 you 
conclude that the strategy has a tendency to be a debit strategy when 
the underlying price is less than 2990 and, in turn, net debit prices 
should be accepted for the strategy. As such, the strategy is neither a 
credit nor debit strategy and any price should be accepted.\7\ To 
illustrate this, using an underlying price of 2970, the system would 
evaluate the strategy as follows:
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    \6\ See IM-7240-1(a)(1)(ii).
    \7\ See IM-7240-1(a)(4).
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     The first leg would yield an estimated profit of $40, and 
the second leg would yield an estimated loss of $30.
     This would yield a net profit of $10 for the strategy 
meaning it is a debit strategy at this underlying price.\8\
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    \8\ See IM-7240-1(a)(1)(i).
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    This means that that depending on the underlying security price the 
strategy may be a credit or debit strategy so the system should accept 
credit and debit prices for the strategy.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\9\ in general, and Section 
6(b)(5) of the Act,\10\ in particular, the Exchange believes that the 
proposed rule change will remove impediments to and perfect the 
mechanisms of a free and open market by clarifying the operation of the 
Debit/Credit Check for Complex Orders, which would assist Participants 
in calibrating their systems with the Exchange's, and thereby enable 
Participants to make full use of the price protection mechanisms 
offered by the Exchange. The Exchange believes this proposal removes a 
potential

[[Page 48777]]

impediment to, and would contribute to perfecting, the mechanism for a 
free and open market and a national market system, and, in general, 
would protect investors and the public interest.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change would remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system by ensuring that market participants can 
understand the Exchange's rulebook. The Exchange believes that the 
proposed rule change enables the Exchange to continue to enforce the 
Exchange's rules. The Exchange does not believe that the proposed 
change discussed herein alters the application of any rules, or how the 
trading system currently functions. The proposed change merely 
clarifies the operation of the Debit/Credit Check for Complex Orders. 
As such, the proposed rule change will foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities and would remove impediments to and perfect the mechanism of 
a free and open market and a national exchange system. Further, the 
Exchange believes that, by ensuring the rulebook accurately reflects 
the operation of the Exchange's rules, the proposed rule change reduces 
potential investor or market participant confusion.

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 not necessary or appropriate in 
furtherance of the purposes of the Act. In this regard and as indicated 
above, the Exchange notes that the proposed changes will not alter the 
substance or application of any of the Exchange's rules. Therefore, the 
proposed change will have no impact on competition as it is not 
designed to address any competitive issues but rather is designed to 
make clarifying changes to the existing BOX rules.

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

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

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \11\ and Rule 19b-4(f)(6) thereunder.\12\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6)(iii) thereunder.\14\
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    \11\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change, along with a 
brief description and text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \15\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\16\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing. The Exchange believes the 
proposed rule change adds clarity to the Exchange's rulebook. The 
Commission believes that waiver of the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because the proposal revises BOX's rules to more accurately describe 
the operation of the Debit/Credit Check for Complex Orders, which 
should help investors understand how BOX's Debit/Credit Check will 
apply to their orders. Accordingly, the Commission hereby waives the 
30-day operative delay and designates the proposal operative upon 
filing.\17\
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    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ 17 CFR 240.19b-4(f)(6)(iii).
    \17\ For purposed only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of this proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BOX-2021-18 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-BOX-2021-18. 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-BOX-2021-18, and should be submitted on 
or before September 21, 2021.


[[Page 48778]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-18677 Filed 8-30-21; 8:45 am]
BILLING CODE 8011-01-P


