[Federal Register Volume 83, Number 164 (Thursday, August 23, 2018)]
[Notices]
[Pages 42725-42732]
[FR Doc No: 2018-18158]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83870; File No. SR-CBOE-2018-056]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Adopt Exchange Rule 6.57, Risk-
Weighted Assets (``RWA'') Transactions

August 17, 2018.
    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 8, 2018, 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

    The Exchange proposes to amend its rules to adopt Rule 6.57 to
facilitate the reduction of SPX options positions maintained by Cboe
Options Market-Makers.
    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 Rule 6.57 to facilitate the
reduction of SPX options positions maintained by Cboe Options Market-
Makers. Specifically, the Exchange proposes to allow Trading Permit
Holders (``TPHs'') to execute a risk-weighted asset package (``RWA
Package'') on the trading floor provided that the requirements set
forth in Rule 6.57 are satisfied.
    Market-Makers are the primary source of liquidity for listed
options; as such, Market-Maker liquidity is critically important to a
functioning options market. However, bank capital regulations that
govern bank-affiliated clearing firms are negatively impacting the
ability of Market-Makers clearing through bank-affiliated clearing
firms to provide liquidity. The Exchange believes reducing open SPX
options positions enables Market-Makers to continue to provide the
liquidity that is critical to the options markets because reducing open
SPX positions helps to reduce risk-weighted assets (RWA) attributable
to SPX options positions. The Exchange developed Rule 6.56 (Compression
Forums) to facilitate the reduction of open options positions in SPX
(and concomitant RWA). Although the compression forums have seen
limited success in reducing open SPX positions, the compression forums
do not provide an adequate mechanism for Market-Makers to reduce open
SPX positions across numerous options series in one large transaction,
and the Exchange believes the ability for Market-Makers to efficiently
and effectively reduce open SPX positions across numerous options
series in one large transaction will help to reduce the risk of market
dislocation, especially during periods of increased volume and
volatility.
    Compression forums are an inadequate, inefficient mechanism to
close open SPX positions across numerous options series in one
transaction partly because the files the Exchange generates pursuant to
Rule 6.56 only identify individual series, call spreads, put spreads,
and box spreads for which there is offsetting interest. This means that
the SPX positions identified by the Exchange pursuant to Rule 6.56
have, at most, four legs (by definition box spreads have four legs and
put/call spreads have two legs), whereas the proposed RWA Package will,
by definition, contain at least 50 legs, which alone demonstrates that
the proposed RWA Package is a more efficient mechanism for closing open
SPX positions across numerous options series in one large transaction.
Moreover, the process of executing the offsetting positions identified
by the Exchange pursuant to Rule 6.56 is much less efficient than the
instant RWA Package proposal. For example, under Rule 6.56 the Exchange
identifies offsetting positions for individual firms that submit their
SPX positions in accordance with Rule 6.56. Depending on the size of
the SPX portfolio submitted by the firm the Exchange may identify 100s
of different boxes, call spreads, put spreads, and individual series.
In addition, there will be multiple different potential counterparties
for the identified positions. In order to execute just one of the
identified positions the firm can seek out the potential counterparty
with offsetting interest (if the firm agrees to let their identities be
unmasked pursuant to Rule 6.56(a)(5)); represent the individual
position (whether it be one of the boxes, call spreads, put spreads, or
individual lines); negotiate a suitable execution price; and execute
the transaction. This process must then be repeated over and over again
in order to reduce open positions across a large portfolio of SPX
options positions. In contrast, as discussed in more detail below, an
RWA Package will, by definition, represent a large portfolio of SPX
options positions in one large transaction (at least 50 series, etc.)
as opposed to, for example, representing an individual box spread in a
compression forum that contains four legs.
    The Exchange believes that the ability for Market-Makers to
efficiently and effectively reduce open SPX positions across numerous
options series in one large transaction will help to reduce the risk of
market dislocation, especially during periods of increased volume and
volatility. The Exchange Market-Makers will be able to continue
providing liquidity during such times (increasing the RWA attributed to
the Market-Makers) because they will know that they will have the
opportunity to subsequently reduce their open SPX positions (and
concomitant RWA) across numerous options series in one large
transaction. Without such a mechanism a Market-Maker may be forced to
limit their market-making activity during periods of high volume and
volatility in order to prevent significant increases in RWA attributed
to the Market-Maker, which is a scenario that may lead to market
dislocation. In short, in order to help reduce the risk of market
dislocation the Exchange proposes to adopt Rule 6.57 to provide a
mechanism for Market-Makers to reduce open SPX options positions across
numerous SPX options series in one large transaction.
    The Exchange proposes to define an RWA Package as a set of SPX
options positions with at least: 50 options series; 10 contracts per
options series; and 10,000 total contracts.\3\ The Exchange believes
that in addition to the other requirements of Proposed Rule 6.57
(described in detail below), requiring an RWA Package to contain at
least 50 options series; at least 10 contracts per options series; and
at least 10,000 total contracts will help to ensure that these
transactions are executed for the purpose of reducing RWA attributable
to open positions and will result in a significant net reduction of
RWA. The Exchange believes limiting RWA Packages to SPX options
positions will similarly help to ensure that these transactions are
executed for the purpose of reducing RWA because an SPX options
contract has a large notional value, which exacerbates the negative
impact of bank capital regulations.
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    \3\ See Proposed Rule 6.57(a).
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    Proposed Rule 6.57(b) provides that Trading Permit Holders
(``TPHs'') may execute an RWA Package (an ``RWA transaction'') in the
SPX crowd on the trading floor in accordance with paragraph (c) if: (1)
The RWA transaction is initiated for the account(s) of a Cboe Options
Market-Maker, provided that an RWA Package consisting of SPX options
from multiple Market-Maker accounts may not be in separate aggregation
units or otherwise subject to information barrier or account
segregation requirements; \4\ (2) the RWA transaction results in a
change in beneficial ownership (i.e., an RWA transaction between a Cboe
Options Market-Maker and an entity unaffiliated with the Cboe Options
Market-Maker); and (3) the Cboe Options Market-Maker certifies that as
of the beginning of the extended trading hours session (i.e., 2:00 a.m.
Chicago time) on the trade date in which the RWA Package is received by
the Exchange under

paragraph (c) the Cboe Options Market-Maker held the positions
identified in the RWA Package and that the RWA Package represents a net
reduction of RWA attributed to the Market-Maker based on the positions
held prior to the beginning of extended trading hours. The purpose of
this filing is to facilitate the closing of open positions in order to
reduce RWA attributed to Market-Maker positions, which is negatively
impacting liquidity provision by Market-Makers. Thus, the Exchange
believes it's reasonable to limit the types of accounts for which an
RWA transaction may be initiated to the account(s) of Market-Makers
because, as previously noted, Market-Makers are the primary source of
liquidity in the listed options market. In addition, the requirement
that the RWA transaction be initiated for the ``account(s)'' of a Cboe
Options Market-Maker is designed to, for example, allow a Cboe Options
Market-Maker to represent positions for the market-making firm's
universal account or represent positions for individual (or multiple)
Cboe Market-Maker accounts.
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    \4\ This prohibits positions in accounts among different trading
units for which accounts are otherwise required to be maintained
separately to be represented as an RWA Package. Various rules (for
example, Regulation SHO in certain circumstances) require accounts
to be maintained separately, and the proposed rule change is
consistent with those rules.
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    In addition, the change in beneficial ownership and certification
requirements help to ensure that RWA transactions will reduce a Market-
Maker's RWA. With regards to the certification requirement it's
necessary to identify a point in time at which the Market-Maker holds
positions that are to be closed. The Exchange proposes that the point
in time be prior to the opening of extended trading hours (i.e., 2:00
a.m. Chicago time) on the Exchange because this will enable Cboe
Options Market-Makers to identify their settled options positions
(i.e., positions they hold after the close of regular trading hours and
prior to the open of extended trading hours).
    Provided that paragraph (b) is satisfied the Exchange proposes to
allow RWA Packages to be executed in accordance with the procedure set
forth in paragraph (c). Proposed paragraph (c) provides that: (1) After
the opening of regular trading hours and prior to 10:00 a.m. Chicago
time, the Cboe Options Market-Maker (or broker) must submit the RWA
Package to the Exchange in a form and manner prescribed by the
Exchange. The submission must contain: (i) A list of individual SPX
options series and the size of each options series; (ii) the contact
information for the individual that will represent the position on the
trading floor; and (iii) if prior to submitting an RWA Package to the
Exchange the Market-Maker (or broker) has received a bid or offer for
the RWA Package, the proposed net debit or credit price for the RWA
Package.\5\ The Exchange believes requiring RWA Packages to be received
by the Exchange after the opening of regular trading hours and prior to
10:00 a.m. Chicago time will help to ensure that RWA transactions can
be executed during regular trading hours, given that proposed
requirement of a two hour request for quotes (``RFQ'') period, which is
described more fully below. In addition, requiring the RWA Package
submission to contain a list of individual SPX options series, the size
of each options series, and the contact information for the individual
representing the RWA Package will enable market participants to bid/
offer for the RWA Package on the trading floor.
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    \5\ See Proposed Rule 6.57(c)(1).
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    Upon the Exchange's receipt of the RWA Package, the Exchange will
(i) electronically notify TPHs (electronically and via trading floor
loudspeaker) as soon as practicable of the identity of the individual
representing the RWA Package in the SPX trading crowd, which can be
either a Market-Maker or Floor Broker, provided the individuals are
available to accept bids/offers for the RWA Package; (ii) post in an
electronic format on a TPH-accessible site the list of individual
components of the RWA Package, the net Package price, and the contact
information for the individual representing the RWA Package on the
floor, which post will not include the identity of the Market-Maker for
whom the RWA transaction is initiated (unless the Market-Maker is
representing the RWA Package on the trading floor); and (iii) notify
TPHs that the RWA Package has been posted and the time at which the
two-hour request-for-quote (``RFQ'') period concludes.\6\ The Exchange
believes providing the RWA Package on a TPH accessible website will
give TPHs sufficient information to price RWA packages. In addition,
identifying the individual representing the RWA Package on the trading
floor and providing a two hour RFQ period will enable TPHs to respond
to RWA Packages. The Exchange believes masking the identity of the
Market-Maker for whom the RWA transaction is initiated (unless the
Market-Maker is representing the RWA Package on the trading floor) will
encourage Market-Makers to initiate RWA transactions.
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    \6\ See Proposed Rule 6.57(c)(2).
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    The Exchange proposes that the two-hour RFQ Period commence upon on
[sic] the Exchange's notification to the SPX trading crowd of the
identity of the individual representing the RWA Package on the
floor.\7\ The Exchange believes the two-hour period is sufficient to
allow TPHs to review, price, and bid/offer for the RWA Package because
the RWA Package will be available in an electronic format on a TPH-
accessible website, which enables TPHs to more readily examine and
price the positions in the RWA Package. Furthermore, the Exchange
understands that firms have access to electronic systems that will aid
them in evaluating the SPX positions contained in an RWA Package and to
make a reasonable assessment of the price at which the firm is will to
execute the RWA Package. The Exchange also proposes that upon the
conclusion of the RFQ period, the individual representing the RWA
Package in the SPX trading crowd may (but is not required to) accept a
bid or offer for the RWA Package, and the RFQ response that represents
the best bid or offer on a net debit or credit basis for the RWA
Package has priority. The Exchange also proposes in the event equal
bids or offers are received, the first RFQ response at the best bid or
offer on a net debit or credit basis for the RWA Package has
priority.\8\ The Exchange notes that the contemplated priority is
simply price/time priority, which is a common priority mechanism in the
options industry. For example, Rule 6.45(i)(A) describes price-time
priority in the context of resting orders and quotes in the electronic
book. The best bid/offer for the RWA Package during the two hour RFQ
period has priority over inferior prices, and if two bid/offers are
made at the same price, the bid/offer that is made first then has
priority--all of which is consistent with the price-time priority
described in Rule 6.45(i)(A).\9\ The Exchange notes that an individual
responding to an RWA Package with a better bid/offer than a previous
bid/offer is necessarily improving the bid/offer price for at least
part of the RWA Package (i.e., at least one individual options series
in the RWA Package) because an improved net debit/credit price
necessarily means at least one individual options series has received a
better price.
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    \7\ See Proposed Rule 6.57(c)(3).
    \8\ See id.
    \9\ The Exchange notes that if the RWA Package submission
contains a bid/offer as contemplated by paragraph (c) to Rule 6.57
and a matching bid/off is made for the RWA Package in the SPX
trading crowd, the bid/offer contained in the original submission
has priority.
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    The Exchange also notes that an RWA Package is similar to a complex
order in that a market participant cannot seek to trade against only
certain components of the RWA Package (e.g., respond with a

bid/offer for half of the options series instead of all of the options
series in the RWA Package). Complex orders similarly cannot be split up
into individual options series by an individual responding to a complex
order. For example, if a complex order has three legs (i.e., three
separate series), a market participant responding to the complex order
cannot respond with a bid/offer for leg #1, but not legs #2 or #3.
Instead, the complex order is bid/offered upon based on a net debit/
credit basis for the complex order as is contemplated for RWA Packages.
For example, if an RWA Package is for 50 legs, a market participant
responding to the RWA Package cannot respond with a bid/offer for legs
#1 through #25, but not legs #26 through #50.
    In addition, like complex orders, market participants may bid/offer
for an RWA Package in whole or in a permissible ratio if the package
can be divided into a proportional share. For example, if a complex
order consisting of one leg for two contracts and another leg for two
contracts is represented on the floor, a counterparty may bid/offer for
100% of the order (i.e., two contracts for each leg) or the
counterparty may bid/offer for a proportional share of the complex
order in the 1:1 ratio of the order (i.e., one contract for each leg in
this example). Similarly, if an RWA Package has 50 SPX options series
and 200 contracts per options series, a market participant may bid/
offer for 100 contracts per leg or some other proportional share of the
RWA Package in the ratio of the package. However, as with complex
orders, if the RWA Package cannot be divided into a proportional share,
market participants must bid/offer for the entire RWA Package. For
example, if a complex order consists of one leg for one contract and
another leg for two contracts, the complex order cannot be
proportionally subdivided to permit a partial trade in the ratio of the
order (i.e. 1:2); thus, market participants must bid/offer for the full
size of the complex order (i.e., one contract on leg #1 and two
contracts on leg #2). With regards to RWA Packages, if, for example,
one leg is for 11 contracts and 49 other legs are for 200 contracts,
the leg for 11 contracts cannot be proportionally subdivided to permit
a partial trade in the ratio of the order (i.e., 11:200); thus, market
participants would be required to bid/offer for the entire RWA package
in this example.
    As previously noted, the Exchange believes that providing a two-
hour RFQ period will enable TPHs to respond to RWA Packages. In
addition, the Exchange believes it's appropriate for the best bid or
offer made in response to the representation of an RWA Package to have
priority; however, recognizing that the best bid or offer may not
satisfy the initiator of the RWA transaction, the Exchange believes its
appropriate to explicitly provide in subparagraph (3) that individuals
representing RWA Packages do not have to accept a bid or offer at the
conclusion of the RFQ period, which simply makes it clear that the
responses received during an RFQ period are indeed quotes with which
the individual representing the RWA Package may execute the RWA
Package. In addition, the Exchange believes it's important not to
obligate individuals representing RWA Packages to split executions
among TPHs that bid or offer at the same price; rather, the Exchange
believes the proposal will incentivize TPHs to provide bids or offers
that better existing bids or offers because the first in time best bid
or offer will have priority. As previously noted, this is consistent
with the price-time priority that is common in the options
industry.\10\
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    \10\ Cboe Options Rule 6.45 permits price-time priority in
certain classes.
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    For example, suppose a market participant submits to the Exchange
an RWA Package to buy for 50 SPX series and 200 contracts on each leg,
which the Exchange announces to the trading floor and posts to the
website. During the RFQ Period, which lasts from 1:00 p.m. to 3:00
p.m., the following offers to buy the RWA Package are represented on
the floor:

     1:10 p.m.: Floor Broker A offers to sell 100 contracts on
each leg for a total of $50,000.
     1:15 p.m.: Floor Broker B offers to sell 100 contracts on
each leg for a total of $49,000.
     2:00 p.m.: Floor Broker C offers to sell 100 contracts on
each leg for a total of $50,000.
    Pursuant to price-time priority, Floor Broker B made the best
offer, and will trade 100 contracts on each leg with the RWA Package
for $49,000, leaving 100 contracts on each leg remaining in the RWA
Package. Floor Brokers A and C offered the same price for the same
amount. Pursuant to price-time priority Floor Broker A made its offer
first, and thus will trade 100 contracts on each leg with the remaining
portion of the RWA Package for $50,000. Floor Broker C will not
participate in the trade.
    Furthermore, the RWA Package is considered executed (and a contract
formed) upon the acceptance of a bid or offer by the individual
representing the RWA Package following the conclusion of the RFQ
Period. The Exchange proposes that if the individual representing the
RWA Package accepts a bid or offer for the RWA Package, the individual
representing the RWA Package on the trading floor must, prior to the
close of regular trading hours, cause a report to be submitted to the
Exchange in a form and manner prescribed by the Exchange which sets
forth the time of the execution of the RWA Package, the net execution
price for the RWA Package, and the execution prices for the individual
components of the RWA Package.\11\ The Exchange believes the reporting
requirements will enable the Exchange to maintain an adequate audit
trail and, if necessary, review individual RWA transactions.
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    \11\ See Proposed Rule 6.57(c)(4).
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    Additionally, the Exchange proposes to adopt Interpretation and
Policy .01 to provide that to the extent applicable, all other Rules of
the Exchange, including Rule 6.9(e), apply to the procedure set forth
in proposed Rule 6.57. The Exchange also proposes to provide in
Interpretation and Policy .01 that the following Rules are either
superseded by proposed Rule 6.57 or do not apply to the above
procedures: 6.9(a) through(d) and (f), 6.41, 6.44, 6.45, 6.47, and
6.74) [sic] and that there may be other rules of the Exchange that do
not, by their terms, apply to the transfer procedure set forth in this
Rule 6.57. As previously noted, proposed Rule 6.57 is a special
procedure designed to provide a mechanism which allows Cboe Market-
Makers to reduce open SPX options positions across numerous options
series in one large transaction, and in order to give the effect to the
procedures set forth in Rule 6.57 it is necessary for Rule 6.57 to
supersede rules that provide for potentially conflicting procedures
(e.g., Rules 6.9(a) through (d) and (f), 6.41, 6.44, 6.45, 6.47, and
6.74). The Exchange notes that this is patterned from Rule 6.49A, which
also provided that Rule 6.49A supersede Rules 6.41, 6.44, 6.45, 6.47,
and 6.74.
    Specifically, the Exchange proposes to explicitly provide that Rule
6.9(e) applies to the procedures set forth in Rule 6.57. This reference
to Rule 6.9 is patterned from Rule 6.49A, which explicitly referenced
Rule 6.9 in its entirety as applying to Rule 6.49A. Contrary to Rule
6.49A, however, the Exchange proposes that only paragraph (e) of Rule
6.9 apply to Rule 6.57 instead of Rule 6.9 in its entirety. Rule 6.9(e)
governs trading based on knowledge of imminent undisclosed solicited
transactions, and the Exchange believes it's important for such rules
to apply to Rule 6.57. The Exchange believes Rule

6.9(a) through (d) and (f) are sufficiently superseded by the
procedures set forth in Rule 6.57(c). Specifically, Rule 6.9(a) through
(d) sets forth the priority for several different scenarios in which an
order and solicited order on the opposite side of that order may be
represented on the floor, and the priority that will apply in each
scenario. Rule 6.9(a) governs solicited transactions involving a
disclosed original order and matching solicited order that improves the
market; Rule 6.9(b) governs solicited transactions involving a
disclosed original order that is later modified to meet a solicited
order improving the market; Rule 6.9(c) governs solicited transactions
involving disclosed original order that is later modified to meet a
solicited order not improving the market; and Rule 6.9(d) involves
solicited transactions involving an undisclosed original order.
Additionally, Rule 6.9(f), which requires solicited orders to be
marked, would not be necessary, as it would be known that an order was
solicited for an RWA Package at the time they were provided to the
Exchange in accordance with proposed Rule 6.57.
    Pursuant to proposed Rule 6.57, an RWA Package, including any
solicited orders to trade against the RWA Package, must be represented
in a single way (by notification to the Exchange, which then announces
the package to the trading floor). As a result, an RWA Package and
corresponding solicited order could never be undisclosed. Additionally,
pursuant to the proposed process, if the Market-Maker receives a bid or
offer for the RWA Package prior to submitting it to the Exchange (as it
would if it had a solicited order), the proposed price must be
disclosed. As a result, for every RWA Package with a solicited order,
the Exchange will announce them and the proposed price to the crowd at
the same time, and thus the solicitation would have occurred before the
RWA Package was disclosed to the crowd. Therefore, Rule 6.9(a) would
not apply, as that paragraph covers a situation in which an order is
disclosed prior to solicitation. There is also no method in the
proposed process for modifying the RWA Package or any solicited order.
Rule 6.9(b) and (c) address situations in which a represented order is
later modified to meet a solicited order, and thus would not apply to
RWA Packages. Lastly, Rule 6.9(f) is inapplicable to Rule 6.57 because
following the procedures set forth in Rule 6.57 will provide all
necessary information for Exchange purposes.
    Proposed Rule 6.57(c) also sets forth the specific priority of RWA
Transactions, and thus no other priority rules would apply. The
Exchange believes it is consistent with Exchange Act and helps to
remove impediments to and perfect the mechanism of a free and open
market and, in general, helps protect investors and the public interest
to explicitly identify the priority applicable to RWA Packages in Rule
6.57(c) because it will help to avoid confusion as to the priority
applicable to RWA Packages. More importantly, the priority set forth in
Rule 6.57(c) is consistent with Exchange Act because the proposed
priority is simply price-time priority, which is common in the options
industry.
    With regards to the instant proposal Rule 6.41--Meaning of Premium
Bids and Offers--is inapplicable because Rule 6.41 is already
inapplicable to index options such as SPX options. Thus, an RWA
Package, which by definition can only contain SPX options, will not be
subject to Rule 6.41. The Exchange believes it is consistent with
Exchange Act and helps to remove impediments to and perfect the
mechanism of a free and open market and, in general, helps protect
investors and the public interest to explicitly provide that Rule 6.57
supersedes Rule 6.41 to avoid any possible confusion regarding the
applicability of Rule 6.41 to RWA Package execution.\12\
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    \12\ The Exchange notes that Rule 24.8--Meaning of Premium Bids
and Offers--applies to index options.
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    In addition, Rule 6.44--Bids and Offers in Relation to Units of
Trading--is inapplicable to the instant proposal. Rule 6.44 sets forth
the meaning of bids and offers for one contract where RWA Packages must
be for more than one contract. The Exchange believes it is consistent
with Exchange Act and helps to remove impediments to and perfect the
mechanism of a free and open market and, in general, helps protect
investors and the public interest to explicitly provide that Rule 6.57
supersedes Rule 6.44 to avoid any possible confusion regarding the
applicability of Rule 6.44 to RWA Package execution.
    Furthermore, Rule 6.45--Order and Quote Priority and Allocation;
Rule 6.47--Priority on Split-Price Transactions Occurring in Open
Outcry; and Rule 6.74--Crossing Orders--are superseded by Rule 6.57.
Rules 6.45, 6.47, and 6.74 set forth priority in various scenarios,
which is superseded by Rule 6.57 because the priority of bids and
offers for RWA Packages is set forth in Rule 6.57(c)(3). In the same
manner that Rule 6.47 describes the priority for a particular scenario
(i.e., split-price) instead of describing that priority in Rule 6.45,
the Exchange believes it best to describe priority for this particular
scenario (i.e., RWA Packages) in a separate rule. Additionally, as
previously noted, the priority set forth in Rule 6.57 is based on
price-time priority, which is a longstanding priority method in the
options industry. Moreover, the Exchange believes it is consistent with
Exchange Act for the priority of bids/offers in the context of RWA
Packages to be based on price-time priority as price-time priority is a
common standard in the options industry.
    Importantly, it is critical that RWA Packages be executed without
regard to the specific priority set forth in Rule 6.45, 6.47, or 6.74.
RWA Packages are, by design, very large and very complicated orders
that are specifically intended to help SPX Market-Makers reduce the RWA
associated with open SPX positions. Rules 6.45, 6.47, and 6.74,
including provisions in those rules that require orders to cede
priority to individual legs in the electronic book, are not designed to
accommodate the execution of such large, complicated, uniquely purposed
orders. Thus, the Exchange believes the significantly large size and
complexity of RWA packages make it necessary to deviate from Rules
6.45, 6.47, 6.74.
    Additionally, the limited purpose of RWA Packages and the temporary
nature of the proposed rule further support the need to permit
executions of RWA Packages without regard to the priority in current
rules. As discussed above, the purpose of RWA Packages is to reduce the
risk-weighted assets attributable to Market-Makers' SPX options
positions. Requiring trades against the leg markets may interfere with
the desired reduction in RWA associated with the package, and may cause
execution of the package to be less efficient. Efficient reductions in
RWA pursuant to the proposed rule change may free up capital, which
will to enable Market-Makers to continue to provide liquidity to the
SPX market, which liquidity benefits all market participants. The
Exchange believes the narrow scope of the proposed rule change and the
limited, beneficial purpose of RWA Packages make allowing RWA Packages
to execute without interacting with pre-existing interest on the
electronic book appropriate and important to support the provision of
liquidity in the SPX market.\13\
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    \13\ S&P 500 Option Variance Basket Trades, a particular basket
of SPX options with a limited purpose, may execute without
interacting with pre-existing interest on the electronic book. See
Rule 6.53B(c).

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    Moreover, the Exchange expects many potential counterparties to be
solicited prior to the RWA Package being sent to the Exchange or
announced in the SPX trading crowd. These solicitations will likely
result in a net package price at which the counterparty is willing to
execute the RWA Package. If parties representing RWA Packages were
required to cede priority to individual legs in the electronic order
book many RWA Packages would likely go unexecuted as the execution of
one leg of an RWA Package would disrupt the net execution price and the
weighting/risk profile of the RWA package. Additionally, the size and
complexity of RWA Packages make it functionally difficult for RWA
Packages to interact with the electronic book under normal
circumstances. To the extent one leg of an RWA Package could execute
with an order in the electronic book, the remaining orders on the
electronic book (complex order book or simple order book) are unlikely
to have the necessary size and depth across a large portfolio of
options to satisfy the terms of an RWA Package. Thus, requiring RWA
Packages to follow the priority in Rule 6.45, 6.47, or 6.74 would
effectively prevent RWA Packages from being executed.
    The Exchange believes it is consistent with Exchange Act and helps
to remove impediments to and perfect the mechanism of a free and open
market and, in general, helps protect investors and the public interest
to deviate from existing priority rules because doing so will allow RWA
Packages to be executed, which, in turn, will help reduce the RWA
associated with a Market-Maker's SPX Position, and, in turn, will
reduce the risk of market dislocation, especially during periods of
increased volume and volatility [sic].
    In addition, the Exchange proposes to adopt Interpretation and
Policy .02 to provide that nothing in paragraph (a) of Rule 6.57
prevents a Market-Maker from executing transactions (opening or
closing) during the RFQ period in the normal operation of the Market-
Maker's business. Market-Makers have affirmative obligations, and the
Exchange believes the adoption of Interpretation and Policy .02 helps
ensure that Rule 6.57 does not prevent Cboe Options Market-Makers from
satisfying their affirmative obligations by, for example, buying and
selling options series during the RFQ period in the normal course of
their operations.
    Finally, the Exchange proposes to adopt Interpretation and Policy
.03 to implement Rule 6.57 for a limited term ending two years from the
approval date of this rule filing.
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.\14\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \15\ 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) \16\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes the proposed rule will help
facilitate the reduction of open SPX options positions (and concomitant
RWA), which helps to protect investors and the public interest by
enabling Market-Makers to continue to provide liquidity that is
critical to the SPX options markets. Although the Exchange is seeking
to limit RWA transactions to those initiated by Cboe Options Market-
Makers, the proposal is not designed to permit discrimination between
customers, issuers, brokers, or dealers; rather, the proposal seeks to
alleviate the negative impact of bank capital requirements on the
primary liquidity providers in the listed options market (i.e., Market-
Makers), who are disproportionately impacted by bank capital
requirements governing bank-affiliated clearing firms. The Exchange
believes the ability for Market-Makers to efficiently and effectively
reduce open positions across numerous options series in one large
transaction will help to reduce the risk of market dislocation,
especially during periods of increased volume and volatility. Market-
Makers will be able to continue providing liquidity during such times
(increasing the RWA attributed to the Market-Makers) because they will
know that they can subsequently reduce their open positions (and
concomitant RWA) across numerous options series in one large
transaction.
    Furthermore, the Rule 6.57 is patterned on Rule 6.49A, which sets
forth similar procedures for on-floor transfers. In addition,
generally, Rule 6.57 is an exception to various Exchange trading rules
because RWA Packages are designed to carry out the important purpose of
reducing RWA, and the construction and procedures set forth in Rule
6.57 are necessary to carry out that purpose. RWA Packages are large in
size (at least 10,000 options) and broad in construction (at least 50
separate options series) and must be closing transactions because the
purpose of RWA Packages is to significantly reduce RWA associated with
Market-Maker positions to enable Market-Makers to continue to provide
critical liquidity to SPX options. In order to functionally execute
such a large portfolio of SPX options the Exchange believes it is
necessary for the procedures to deviate from certain current exchange
trading rules. The Exchange believes the narrow scope of the proposed
rule change and the limited, beneficial purpose of RWA Packages make
allowing RWA Packages to execute without interacting with pre-existing
interest on the electronic book appropriate and important to support
the provision of liquidity in the SPX market.\17\ Specifically, the
Exchange believes it is necessary and proper for interpretation and
policy .01 to specify that Rules 6.9(a) through (d) and (f), 6.41,
6.44, 6.45, 6.47, and 6.74 are either supersede [sic] by, or do not
apply to, Rule 6.57.
---------------------------------------------------------------------------

    \17\ S&P 500 Option Variance Basket Trades, a particular basket
of SPX options with a limited purpose, may execute without
interacting with pre-existing interest on the electronic book. See
Rule 6.53B(c).
---------------------------------------------------------------------------

    As previously noted above, the proposed procedure for RWA Packages
sets forth the specific manner in which RWA Packages and any solicited
orders must be represented, and thus the situations described in Rule
6.9(a) through (d) and (f) would never occur. The proposed rule makes
clear that these provisions are superseded by the proposed rule.
    In addition, Rule 6.41 is inapplicable to RWA Packages because Rule
6.41 is inapplicable to index options such as SPX options. Thus, an RWA
Package, which by definition can only contain SPX options, will not be
subject to Rule 6.41. Furthermore, Rule 6.44 sets forth the meaning of
bids and offers for one contract where RWA Packages must be for more
than one contract; thus, Rule

6.44 is similarly inapplicable to RWA Packages. The Exchange believes
it is consistent with Exchange Act and helps to remove impediments to
and perfect the mechanism of a free and open market and, in general,
helps protect investors and the public interest to explicitly provide
that Rule 6.57 supersedes Ruls [sic] 6.41 and 6.44 to avoid any
possible confusion regarding the applicability of Rules 6.41 and 6.44
to RWA Package execution.
    In particular, the Exchange believes it is critical that RWA
Packages be executed without regard to the specific priority set forth
in Rule 6.45, 6.47, or 6.74 because the size of the RWA Packages (at
least 50 SPX options series, 10 options per series, and at least 10,000
options) makes it functionally impossible for RWA Packages to interact
with the electronic book as orders on the electronic book (complex
order book or simple order book) do not have the necessary size and
depth across a large portfolio of options to satisfy the terms of an
RWA Package. Thus, requiring RWA Packages to follow the priority in
Rule 6.45, 6.47, or 6.74 would prevent RWA Packages from being
executed. Given the limited purpose and significant size and complexity
of RWA Packages, the Exchange believes it is consistent with Exchange
Act and helps remove impediments to and perfect the mechanism of a free
and open market and, in general, helps protect investors and the public
interest to permit RWA transactions to deviate from existing priority
rules. This will permit [sic] because doing so will allow RWA Packages
to be executed in an efficient manner, which, in turn, will help reduce
the RWA associated with a Market-Maker's SPX positions, and, in turn,
will reduce the risk of market dislocation, especially during periods
of increased volume and volatility.
    To the extent Cboe Market-Makers cannot reduce options positions in
an efficient and effective manner their ability to continue to provide
liquidity may be impaired. As noted, the procedures set forth in Rule
6.57 are similar to the procedures set forth in Rule 6.49A. The
Exchange believes the procedures set forth in Rule 6.57 improve on the
procedures set forth in Rule 6.49A as Rule 6.57, among other things,
provides for the publication of RWA Packages in an electronic format,
which allows for a fair process by which TPHs may review, price, and
bid/offer for an RWA Package.
    In addition, the Exchange believes proposed Interpretation and
Policy .02, which provides that nothing in paragraph (a) of Rule 6.57
prevents a Market-Maker from executing transactions (opening or
closing) during the RFQ period in the normal operation of the Market-
Maker's business, is consistent with Exchange Act and helps to remove
impediments to and perfect the mechanism of a free and open market and,
in general, helps protect investors and the public interest by helping
to ensure Market-Makers continue to perform their affirmative
obligations during the trading day.
    Finally, the Exchange believes proposed Interpretation and Policy
.03, which indicates that Rule 6.57 is to be adopted for a limited term
ending two years from the approval date of this rule filing, is
consistent with Exchange Act and helps to remove impediments to and
perfect the mechanism of a free and open market and, in general, helps
protect investors and the public interest by allowing the Exchange to
evaluate at the end of the two-year period whether Rule 6.57 continues
to be a useful tool to reduce RWA associated with SPX options
positions.

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

    Cboe Options 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. Although the Exchange is
seeking to limit RWA transactions to those initiated by Cboe Options
Market-Makers, the Exchange does not believe the proposed rule change
will impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act because the
proposal seeks to alleviate the negative impact of bank capital
requirements on the primary liquidity providers in the listed options
market (i.e., Market-Makers), who are disproportionately impacted by
bank capital requirements governing bank-affiliated clearing firms. Use
of the proposed process is voluntary, and all Market-Makers with SPX
positions may engage in RWA transactions. The proposed rule change
proposes a process that may be carried out only [sic] the Exchange's
trading floor in a product that trades solely on the Exchange. RWA
Transactions have a limited purpose, which is to reduce RWA
attributable to Market-Makers' SPX open positions in order to free up
capital and enable Market-Makers to continue to provide the liquidity
to the SPX market, which liquidity benefits all market participants.
This is not intended to be a competitive trading tool.

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 [email protected]. Please include
File Number SR-CBOE-2018-056 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-2018-056. 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-2018-056 and should be
submitted on or before September 7, 2018.

    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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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18158 Filed 8-22-18; 8:45 am]
 BILLING CODE 8011-01-P