[Federal Register Volume 85, Number 88 (Wednesday, May 6, 2020)]
[Notices]
[Pages 26998-27002]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-09638]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88786; File No. SR-CBOE-2020-042]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Rule 6.9 To Permit In-Kind Transfers of Positions Off of the Exchange
in Connection With Unit Investment Trusts (``UITs'')
April 30, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on April 28, 2020, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Exchange
filed the proposal as a ``non-controversial'' proposed rule change
pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend Rule 6.9 to permit in-kind transfers of positions off of the
Exchange in connection with unit investment trusts (``UITs''). The text
of the proposed rule change is provided below.
(additions are italicized; deletions are [bracketed])
* * * * *
Rules of Cboe Exchange, Inc.
* * * * *
Rule 6.9. In-Kind Exchange of Options Positions and ETF Shares and UIT
Units
Notwithstanding the prohibition set forth in Rule 5.12,
positions in options listed on the Exchange may be transferred off
the Exchange by a Trading Permit Holder in connection with
transactions (a) to purchase or redeem creation units of ETF shares
between an authorized participant and the issuer of such ETF shares
or (b) to create or redeem units of a unit investment trust
(``UIT'') between a broker-dealer and the issuer of such UIT units,
which transfers would occur at the price(s) used to calculate
[[Page 26999]]
the net asset value of such ETF shares or UIT units, respectively.
For purposes of this Rule:
(a) An ``authorized participant'' is an entity that has a
written agreement with the issuer of ETF shares or one of its
service providers, which allows the authorized participant to place
orders for the purchase and redemption of creation units (i.e.,
specified numbers of ETF shares); [and]
(b) an ``issuer of ETF shares'' is an entity registered with the
Commission as an open-end management investment company under the
Investment Company Act of 1940[.]; and
(c) an ``issuer of UIT units'' is a trust registered with the
Commission as a unit investment trust under the Investment Company
Act of 1940.
* * * * *
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 amend Rule 6.9, which permits off-
Exchange, in-kind transfers of options positions in connection with
ETFs organized as open-end management investment companies under the
Investment Company Act of 1940 (the ``1940 Act''), to also permit in-
kind transfers of options positions in connection with entities
registered as UITs under the 1940 Act.
Rule 6.9 is an exception to the Exchange's general requirement that
transfers of options contracts listed on the Exchange be effected on an
exchange, as set forth in Rule 5.12.\5\ Specifically, Rule 6.9 permits
positions in options listed on the Exchange to be transferred off the
Exchange by a Trading Permit Holder in connection with transactions to
purchase or redeem ``creation units'' of ETF shares between an
authorized participant and the issuer of such ETF shares. Such
transfers pursuant to Rule 6.9 occur between two different parties, off
the Exchange, and are considered position transfers, as opposed to
transactions.\6\ Each of these transfers occurs at the price used to
calculate the net asset value (``NAV'') of such ETF shares. Rule 6.9
also currently defines an ``authorized participant'' as an entity that
has a written agreement with the issuer of ETF shares or one of its
service providers, which allows the authorized participant to place
orders for the purchase and redemption of creation units (i.e.,
specified numbers of ETF shares), and an ``issuer of ETF shares'' as an
entity registered with the Commission as an open-end management
investment company under the 1940 Act. The ability to effect in-kind
transfers is a key component of the operational structure of an ETF and
the exception under Rule 6.9 allows options-based ETFs to be more tax-
efficient investment vehicles, to the benefit of their shareholders,
and potentially result in transaction cost savings, which may be passed
along to investors. The Exchange now proposes to expand Rule 6.9 to
provide the same exemption from Rule 5.12 to off-floor, in-kind
transfers in connection with the creation or redemption of units issued
by a UIT, another type of investment company registered under the 1940
Act. Although UITs operate differently than ETFs in certain respects,
as described below, the anticipated potential benefits to UIT investors
(i.e., greater tax efficiencies and transaction cost savings) from the
proposed exemption would be similar as discussed below.
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\5\ See Rule 5.12(a) (Transactions Off the Exchange), which
generally requires transactions of option contracts listed on the
Exchange for a premium in excess of $1.00 to be effected on the
floor of the Exchange or on another exchange.
\6\ While the prices of options transactions effected on the
Exchange are disseminated to OPRA, back-office transfers of options
positions in clearing accounts held at The Options Clearing
Corporation (``OCC'') (in accordance with OCC Rules) are not
disseminated to OPRA or otherwise publicly available, as they are
considered position transfers, rather than executions. OCC has
represented to the Exchange that it has the operational capabilities
to effect the position transfers and all transfers pursuant to Rule
6.9 are required to comply with OCC rules. See Rule 8.2 (which
requires all TPHs that are members of OCC to comply with OCC's
Rules).
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Specifically, under the 1940 Act,\7\ a UIT is an investment company
organized under a trust indenture or similar instrument that issues
redeemable securities, each of which represents an undivided interest
in a unit of specified securities.\8\ A UIT's investment portfolio is
relatively fixed, and, unlike an ETF, a UIT has a fixed life (a
termination date for the trust is established when the trust is
created). Similar to other types of investment companies (including
ETFs), UITs invest their assets in accordance with their investment
objectives and investment strategies, and UIT units represent interests
in a UIT's underlying assets. Like ETFs, UITs do not sell or redeem
individual shares, but instead, through the creation and redemption
process, a UIT's sponsor (a broker-dealer) may purchase and redeem
shares directly from the UIT's trustee in aggregations known as
``units.'' A broker-dealer purchases a unit of UIT shares from the
UIT's trustee by depositing a basket of securities and/or other assets
identified by the UIT. These transactions are largely effected by ``in-
kind'' transfers, or the exchange of securities, non-cash assets, and/
or other non-cash positions. The basket deposited by the broker-dealer
is generally expected to be representative of the UIT's units and will
be equal in value to the aggregate NAV of the shares of the UIT
comprising a unit. \9\ The UIT then issues units that are publicly
offered and sold. Unlike ETFs, UITs typically do not continuously offer
their shares for sale, but rather, make a one-time or limited public
offering of only a specific, fixed number of units like a closed-end
fund (i.e., the primary period, which may range from a single day to a
few months). Similar to the process for ETFs, UITs allow investor-
owners of units to redeem their units back to the UIT's trustee on a
daily basis and, upon redemption, such investor-owners are entitled to
receive the redemption price at the UIT's NAV. While UITs provide for
daily redemptions directly with the UIT's trustee, UIT sponsors
frequently maintain a secondary market for units,
[[Page 27000]]
also like that of ETFs, and will buy back units at the applicable
redemption price per unit. To satisfy redemptions, a UIT typically
sells securities and/or other assets, which results in negative tax
implications and an incurrence of trading costs borne by remaining unit
holders.
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\7\ 15 U.S.C. 80a-4(2).
\8\ The Exchange also notes that, though a majority of ETFs are
structured as open-ended funds (i.e., those ETFs currently covered
by Rule 6.9), some ETFs are structured as UITs, and currently
represent a significant amount of assets within the ETF industry.
These include, for example, SPDR S&P 500 ETF Trust (``SPY'') and
PowerShares QQQ Trust, Series 1 (``QQQ'').
\9\ The NAV is an investment company's total assets minus its
total liabilities. UITs must calculate their NAV at least once every
business day, typically after market close. See Sec. 270.2a-4(c),
which provides that any interim determination of current net asset
value between calculations made as of the close of the New York
Stock Exchange on the preceding business day and the current
business day may be estimated so as to reflect any change in current
net asset value since the closing calculation on the preceding
business day. This, however, is notwithstanding the requirements of
Sec. 270.2a-4(a), which provides for other events that would
trigger computation of a UIT's NAV.
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Although ETFs and UITs operate differently in certain respects, the
ability to effect in-kind transfers is significant to both types of
investment vehicles. Currently, in-kind transfers of options pursuant
to Rule 6.9 protect ETF shareholders from certain undesirable tax
consequences and improve the overall tax efficiency of the products.
Indeed, by effecting redemptions on an in-kind basis, as permitted by
Rule 6.9, there is no need for an ETF to sell assets and potentially
realize capital gains that would be distributed to shareholders.
Additionally, by transacting on an in-kind basis, ETFs may currently
avoid certain transaction costs they would otherwise incur in
connection with purchases and sales of securities and other assets
(including options). As stated, Rule 6.9 does not currently permit
these in-kind transfers for UITs, as they are still generally required
to sell options on an exchange to obtain the requisite cash when
effecting redemption transactions with broker-dealers. Thus, the
Exchange proposes to extend the Rule 6.9 exemption to UITs. As
described above, UITs and ETFs are situated in substantially the same
manner; the key differences being a UIT's fixed duration, and that a
UIT generally makes a one-time public offering of only a specific,
fixed number of units. Negative tax implication and trading costs for
remaining unit holders would be mitigated by allowing a UIT sponsor or
another broker-dealer to receive an in-kind distribution of options
upon redemption. Therefore, permitting off-exchange in-kind transfers
for UITs would benefit investors by potentially providing tax
efficiencies and transaction cost savings similar to those that
investors in ETFs may enjoy today. The Exchange does not believe the
proposed extension of Rule 6.9 to UITs will adversely impact investors
or the maintenance of a fair and orderly market as it does not
circumvent the prohibition under Rule 5.12(a) nor does it compromise
price discovery or transparency. To note, Rule 6.9 is already
applicable to options in connection with ETF creations and redemptions,
previously approved by the Commission.\10\ Although options positions
in connection with ETF and UIT (as proposed) creations and redemptions
are transferred off of the Exchange, they are not closed or ``traded'',
and instead, merely reside in a different clearing account until closed
in a trade on the Exchange or until they expire. The Exchange also
notes that Rule 6.9 will continue to be clearly delineated and limited
in scope, given that the exception will continue to apply only to
transfers of options effected in connection with the creation and
redemption process, and for certain investment companies registered
under the 1940 Act. Moreover, the Exchange notes that transfers of
options in connection with the creation or redemption of open-end fund
ETFs constitute a minimal percentage of the total average daily volume
(``ADV'') of options and the Exchange expects options transfers in
connection with UITs to comprise a similar minimal percentage of ADV.
Additionally the options transfers that would be permitted by the
exemption are generally expected to include corresponding transactions
by a broker-dealer that would occur on an exchange and would be
reported to OPRA.\11\
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\10\ See Securities Exchange Act Release No. 87340 (October 17,
2019), 84 FR 56877 (October 23, 2019) Order Approving on an
Accelerated Basis a Proposed Rule Change, as Modified by Amendment
Nos. 2 and 3, To Adopt Rule 6.9 (In-Kind Exchange of Options
Positions and ETF Shares)) (SR-CBOE-2019-048).
\11\ The Exchange notes that in conjunction with depositing
options with a UIT's trustee and creating units, the necessary
options positions will be acquired in an on-exchange transaction
that is reported to OPRA. In conjunction with redemptions, the
sponsor or other broker-dealer will generally acquire both the units
redeemed by a redeeming unit holder and an options position to
offset the position that it will receive as proceeds for the
redemption. Such an options position is likely acquired in an on-
exchange transaction that would be reported to OPRA. Thus, while the
transfer of options positions between the sponsor or other broker-
dealer and the UIT would not necessarily be reported, there are
generally corresponding transactions that would be reported,
providing transparency into the transactions.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\12\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \13\ 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.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that permitting off-floor transfers in
connection with the in-kind UIT creation and redemption process
promotes just and equitable principles of trade and helps remove
impediments to and perfect the mechanism of a free and open market and
a national market system, as it would permit UITs that invest in
options traded on the Exchange to transfer options off of the Exchange
in connection with their in-kind creation and redemption process as
ETFs are currently able to do under Rule 6.9, as previously approved by
the Commission.\14\ Further, the Exchange believes that permitting a
comparable investment vehicle, also registered as an investment company
under the 1940 Act, to be included in the Rule 6.9 exemption, removes
impediments to and perfect the mechanism of a free and open market and
national market system as it would enable UITs to compete more
effectively with other investment vehicles that, based on their
portfolio holdings, may effect in-kind creations and redemptions
without restriction. The Exchange notes that the ability to effect in-
kind transfers is significant to both ETFs and UITs as investment
vehicles. By permitting UITs that invest in options traded on the
Exchange to benefit from potential tax efficiencies and transaction
cost savings similar to those that ETFs may currently enjoy, the
proposed rule change would protect investors and the public interest by
passing along such potential benefits to investors that participate in
UITs. The Exchange does not believe that the proposed rule change
affects the protection of investors or the maintenance of a fair and
orderly market because the Rule 6.9 exception would continue to be
clearly delineated and limited in scope. Rule 6.9 already applies to
ETFs, which operate in a similar manner as UITs, and the proposed rule
change to make the transfer exemption available to UITs is based on a
similar rationale and does not raise any new or novel issues. In this
regard, as with in-kind, off-exchange transfers of options in
connection with ETFs, those transfers in connection with UITs would
also occur at a price related to the NAV of the applicable UIT units,
which removes the need for price discovery on an
[[Page 27001]]
exchange. As stated above, the Exchange expects that off-exchange
options transfers in connection with the creation and redemption
process for UITs will comprise a minimal percentage of ADV, just as
such transfers currently permissible in connection with ETFs comprise a
minimal percentage of ADV. Further, the general price at which UIT-
related transfers are effected will be publicly available as they are
based on the disseminated closing prices and are generally expected to
include corresponding, transactions by a broker-dealer that would occur
on an exchange and be reported to OPRA.\15\
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\14\ See supra note 10.
\15\ See supra note 11.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe the proposed rule change will impose any burden on intramarket
competition that is not necessary or appropriate in furtherance of the
purposes of the Act because invoking the exception under Rule 6.9 in
connection with UITs is voluntary and the proposed exception for UITs
is not intended as a competitive trading tool. Instead, it is intended
as an alternative to the normal auction process to provide market
participants with an efficient and effective means to transfer option
positions as part of the UIT creation and redemption process under the
same specified circumstances currently applicable to ETFs in connection
with creating and redeeming units of UITs. The proposed expansion of
the Rule 6.9 exception to UITs would enable this investment vehicle,
which is comparable to ETFs, to enjoy the potential benefits of off-
exchange, in-kind transfers of option positions in connection with
creating and redeeming, and to pass these benefits along to investors.
Use of the in-kind, off-exchange transfer process in connection with
creating UIT units and the redemption process would be voluntary and
would apply in the same manner to all broker-dealers choosing to invoke
such process.
The Exchange does not believe the proposed rule change will impose
any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act, because the in-
kind transfer rule would continue to provide a clearly delineated and
limited exception to the requirement that options positions in
connection with certain entities registered as a type of investment
company under the 1940 Act be transferred on the floor of an exchange.
The proposed rule change merely extends the Rule 6.9 exemption (and any
potential benefits) to UITs. The Exchange again notes that Rule 6.9 was
previously approved by the Commission \16\ and is currently applicable
to ETFs that are similarly situated and also in invest in options.
Also, as indicated above, in light of the significant benefits provided
(e.g., potential tax efficiencies and transaction cost savings), the
proposed exception may lead to further development of UITs that invest
in options, thereby fostering competition and resulting in additional
choices for investors, which ultimately benefits the marketplace and
the public. Other options exchanges in their discretion may pursue the
adoption of similar exceptions.
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\16\ See supra note 10.
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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 written comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
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 for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate, it has become effective pursuant to Section
19(b)(3)(A) of the Act \17\ and subparagraph (f)(6) of Rule 19b-4
thereunder.\18\
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f)(6). In addition, Rule19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its 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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At any time within 60 days of the filing of the 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 shall 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 [email protected]. Please include
File Number SR-CBOE-2020-042 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2020-042. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2020-042, and should be submitted
on or before May 27, 2020.
[[Page 27002]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-09638 Filed 5-5-20; 8:45 am]
BILLING CODE 8011-01-P