[Federal Register Volume 86, Number 245 (Monday, December 27, 2021)]
[Notices]
[Pages 73353-73360]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-27924]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93831; File No. SR-CBOE-2021-075]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Increase Position Limits for
Options on the SPDR Gold Trust and iShares Silver Trust
December 20, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934,\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on
December 7, 2021, Cboe Exchange, Inc. filed with the Securities and
Exchange Commission (``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
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to increase position limits for options on the SPDR Gold Trust
(``GLD'') and iShares Silver Trust (``SLV''). The text of the proposed
rule change is provided in Exhibit 5.
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
[[Page 73354]]
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
Position limits are designed to address potential manipulative
schemes and adverse market impacts surrounding the use of options, such
as disrupting the market in the security underlying the options. While
position limits should address and discourage the potential for
manipulative schemes and adverse market impact, if such limits are set
too low, participation in the options market may be discouraged. The
Exchange believes that position limits must therefore be balanced
between mitigating concerns of any potential manipulation and the cost
of inhibiting potential hedging activity that could be used for
legitimate economic purposes.
The Exchange has observed an ongoing increase in demand, for both
trading and hedging purposes, in options on GLD and SLV (collectively,
the ``Underlying ETFs''). Though the demand for these options appears
to have increased, position limits for options on the Underlying ETFs
have remained the same. The Exchange believes these unchanged position
limits may have impeded, and may continue to impede, trading activity
and strategies of investors, such as use of effective hedging vehicles
or income generating strategies (e.g., buy-write or put-write), and the
ability of Market-Makers to make liquid markets with tighter spreads in
these options resulting in the transfer of volume to over-the-counter
(``OTC'') markets. OTC transactions occur through bilateral agreements,
the terms of which are not publicly disclosed to the marketplace. As
such, OTC transactions do not contribute to the price discovery process
on a public exchange or other lit markets. Therefore, the Exchange
believes that the proposed increases in position limits for options on
the Underlying ETFs may enable liquidity providers to provide
additional liquidity to the Exchange and other market participants to
transfer their liquidity demands from OTC markets to the Exchange. As
described in further detail below, the Exchange believes that the
continuously increasing market capitalization of the Underlying ETFs,
ETF components, as well as the highly liquid markets for each, reduces
the concerns for potential market manipulation and/or disruption in the
underlying markets upon increasing position limits, while the rising
demand for trading options on the Underlying ETFs for legitimate
economic purposes compels an increase in position limits.
Proposed Position Limits for Options on the Underlying ETFs
Position limits for options on ETFs are determined pursuant to Rule
8.30 and vary according to the number of outstanding shares and the
trading volumes of the underlying equity security (which includes ETFs)
over the past six months. Pursuant to Rule 8.30, the largest in
capitalization and the most frequently traded stocks and ETFs have an
option position limit of 250,000 contracts (with adjustments for
splits, re-capitalizations, etc.) on the same side of the market; and
smaller capitalization stocks and ETFs have position limits of 200,000,
75,000, 50,000 or 25,000 contracts (with adjustments for splits, re-
capitalizations, etc.) on the same side of the market. Options on GLD
and SLV are currently subject to the standard position limit of 250,000
contracts as set forth in Rule 8.30. Rule 8.30.07 sets forth separate,
higher position limits for specific equity options (including options
on specific ETFs).\3\ The Exchange proposes to amend Rule 8.30.07 to
increase the position limits and, as a result, exercise limits, for
options on GLD and options on SLV.\4\ Specifically, the proposed rule
change increases the current position limit of 250,000 contract for
options on GLD and SLV to 500,000 contracts.
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\3\ Adjusted option series, in which one option contract in the
series represents the delivery of other than 100 shares of the
underlying security as a result of a corporate action by the issuer
of the security underlying such option series, do not impact the
notional value of the underlying security represented by those
options. When an underlying security undergoes a corporate action
resulting in adjusted series, the Exchange lists new standard option
series across all appropriate expiration months the day after the
existing series are adjusted. The adjusted series are generally
actively traded for a short period of time following adjustment, but
orders to open options positions in the underlying security are
almost exclusively placed in the new standard option series
contracts.
\4\ By virtue of [sic] 8.42.02, which is not being amended by
this filing, the exercise limits for GLD and SLV options would be
similarly increased.
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The Exchange notes that the proposed position limit for options on
GLD and SLV are consistent with current position limits for options on
various other ETFs including the iShares MSCI Brazil Capped ETF
(``EWZ''), iShares 20+ Year Treasury Bond Fund ETF (``TLT''), iShares
MSCI Japan ETF (``EWJ''), iShares iBoxx High Yield Corporate Bond Fund
(``HYG'') and Financial Select Sector SPDR Fund (``XLF''). The Exchange
represents that both of the Underlying ETFs meet the Exchange's initial
listing criteria pursuant to Rule 4.3.06(b) and (c), as well as the
continued listing criteria in Rule 4.4 (for ETFs).
Composition and Growth Analysis for Underlying ETFs
As stated above, position (and exercise) limits are intended to
prevent the establishment of options positions that can be used to or
potentially create incentives to manipulate the underlying market so as
to benefit options positions. The Securities and Exchange Commission
(the ``Commission'') has recognized that these limits are designed to
minimize the potential for mini-manipulations and for corners or
squeezes of the underlying market, as well as serve to reduce the
possibility for disruption of the options market itself, especially in
illiquid classes.\5\ The Underlying ETFs, as well as the ETF
components, are highly liquid and are based on a broad set of highly
liquid securities and other reference assets, as demonstrated through
the trading statistics presented in this proposal. To support the
proposed position limit increases, the Exchange considered the
liquidity of the Underlying ETFs, the value of the Underlying ETFs,
their components and the relevant marketplace, the share and option
volume for the Underlying ETFs, and, where applicable, the availability
or comparison of economically equivalent products to options on the
Underlying ETFs.
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\5\ See Securities Exchange Act Release No. 67672 (August 15,
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29).
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The Exchange has collected the following trading statistics
regarding shares of and options on the Underlying ETFs and the values
of the Underlying ETFs and their components:
[[Page 73355]]
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ADV \6\ (ETF Shares Fund Market
Product shares) ADV (option outstanding cap (USD) Share value \9\
(millions) contracts) (millions) \7\ (millions) \8\ (USD)
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GLD.......................... 12.3 257,700 354.30 70,195.7 161.71 (NAV)
SLV.......................... 33.1 376,700 619.3 14,228.4 22.57 (NAV)
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The Exchange has collected the same trading statistics, where
applicable, as above regarding a sample of other ETFs, as well as the
current position limits for options on such ETFs pursuant to Rule
8.30.07, to draw comparisons in support of proposed position limit
increases for options on the Underlying ETFs (see further discussion
below):
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\6\ Average daily volume (ADV) data for ETF shares and option
contracts, as well as for ETF shares and options on the comparative
ETFs presented below, are for all of 2020. Additionally, reference
to ADV in ETF shares and ETF options, and indexes herein this
proposal are for all of calendar year 2020, unless otherwise
indicated.
\7\ Shares Outstanding and Net Asset Values (``NAV''), as well
as for the comparative ETFs presented below, are as of April 5, 2021
for all ETFs.
\8\ Fund Market Capitalization data, as well as for the
comparative ETFs presented below, are as of January 14, 2021.
\9\ See supra note 7.
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ADV (ETF Shares Fund market
Product shares) ADV (option outstanding cap (USD) Share value (USD) Current position
(millions) contracts) (millions) (millions) limits
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EWZ............................................... 29.2 139,400 173.8 6,506.8 33.71 (NAV) 500,000
TLT............................................... 11.5 111,800 103.7 17,121.3 136.85 (NAV) 500,000
EWJ............................................... 8.2 15,500 185.3 13,860.7 69.72 (NAV) 500,000
HYG............................................... 30.5 261,600 254.5 24,067.5 86.86 (NAV) 500,000
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The Exchange believes that, overall, the liquidity in the shares of
the Underlying ETFs and in their overlying options, the larger market
capitalizations for each of the Underlying ETFs, and the overall market
landscape relevant to each of the Underlying ETFs support the proposal
to increase the position limits for each option class. Given the robust
liquidity in and value of the Underlying ETFs and their components, the
Exchange does not anticipate that the proposed increase in position
limits would create significant price movements as the relevant markets
are large enough to adequately absorb potential price movements that
may be caused by larger trades.
Specifically, the investment objective of GLD (or the ``Trust'') is
to track the performance of the price of gold bullion.\10\ GLD offers
investors an innovative, relatively cost efficient and secure way to
access the gold market, without the necessity of taking physical
delivery of gold, and to buy and sell that interest through the trading
of a security on a regulated stock exchange. The Trust issues SPDR Gold
Shares, which represent fractional, undivided beneficial ownership
interests in the Trust, the sole assets of which are gold bullion. The
spot price for gold is determined by market forces in the 24-hour
global unregulated OTC market for gold including spot, forwards, and
options and other derivatives, together with exchange-traded futures
and options. The Net Asset Value (``NAV'') of the Trust is calculated
based on the total ounces of gold owned by the Trust valued at the
London Bullion Market Association (``LBMA'') Gold Price PM of that day
(plus any cash held by the Trust less accrued expenses).\11\ The
Exchange has observed that the ADV in GLD shares has increased from
approximately 8.7 million shares in 2019 to 12.3 million shares by the
end of 2020. Similarly, the ADV in options on GLD has increased from
approximately 153,900 option contracts in 2019 to 257,700 option
contracts by the end of 2020. The Exchange also notes that in the first
quarter of 2021, GLD options experienced an ADV of approximately
395,100 option contracts. Additionally, comparing the statistics shown
in the tables above for GLD and the sample of other ETFs with a current
position limit of 500,000 contracts, the Exchange notes that the ADV
for GLD options (257,700 option contracts) are more, or just as, liquid
as that of the ADV for options on EWZ (139,300 option contracts), TLT
(111,800 option contracts), EWJ (15,500 option contracts) and HYG
(261,600 option contracts), each ETF of which already has a position
limit of 500,000 contracts. Additionally, the ADV for GLD shares (12.3
million shares) is more liquid than that of the ADV for shares of TLT
(11.5 million shares) and EWJ (8.2 million shares). Also, as indicated
in the table above, GLD's market capitalization (approximately $70.2
billion) is higher than all four of the sample ETFs, which currently
have a position limit of 500,000 contracts. In addition to this, the
Exchange notes that the NAV of GLD is higher than that of the NAV of
the four sample ETFs, which is indicative that the total value of its
underlying components is generally higher. The Exchange believes that
GLD's share and option volume, its market capitalization, and the
comparatively high value of its underlying components (as indicated by
its NAV, and as discussed in further detail below) are large enough to
absorb potential price movements caused by a large trade in GLD.
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\10\ See SPDR Gold Shares, available at https://www.ssga.com/us/en/intermediary/etfs/funds/spdr-gold-shares-gld (January 11, 2021).
\11\ See State Street Global Advisors, SPDR Gold Trust GLD, FAQ
(July 2020), available at https://www.ssga.com/library-content/products/fund-docs/etfs/us/tax-documents/gld-faq.pdf.
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Like that of GLD and spot gold, SLV seeks to reflect generally the
performance of the price of silver and represents a cost-efficient
alternative to investments in physical silver for investors not
otherwise in a position to participate directly in the market for
physical silver. The SLV's NAV is derived from its holdings in silver
valued on the basis of the daily LBMA Silver Price.\12\ SLV, too, has
experienced a significant increase in ADV in shares and options from
2019 through 2020. It grew from approximately 13.6 million shares in
2019 to 33.1 million shares by the end of 2020, and from approximately
118,800 option contracts
[[Page 73356]]
in 2019 to 376,700 option contracts by the end of 2020. The Exchange
also notes that SLV options experienced an ADV of approximately 1.1
million option contracts in the first quarter of 2021.\13\
Additionally, SLV generally experiences a significantly greater ADV in
shares (33.1 million share) and in options (376,700 option contracts)
than that of the ADV in shares and options for EWZ (29.2 million shares
and 139,300 option contracts), TLT (11.5 million shares and 111,800
option contracts), EWJ (8.2 million shares and 15,500 option contracts)
and HYG (30.5 million shares and 261,600 option contracts), and also
has a comparable, or higher, market capitalization (approximately $14.2
billion) than EWZ, TLT and EWJ. As per the table above, options on each
of these ETFs already have a position limit of 500,000 contracts--the
proposed position limit for SLV options. The Exchange believes that SLV
share and option volume and its market capitalization are large enough
to absorb potential price movements caused by a large trade in SLV.
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\12\ See iShares Silver Trust, Fact Sheet as of 9/20/2020,
available at https://www.ishares.com/us/literature/fact-sheet/slv-ishares-silver-trust-fund-fact-sheet-en-us.pdf.
\13\ While volume in SLV options in the first quarter of 2021
experienced significantly high volume as a result of unusual market
conditions, the Exchange believes that the existing possibility of
such significant increases supports the proposed position limit
increase.
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While the demand for options trading on GLD and SLV has evidently
increased, and continues to increase, the position limits have remained
the same, which the Exchange believes may be impacting the ability of
Trading Permit Holders (``TPHs'') to effectively hedge against exposure
to physical gold and silver. For example, a single TPH may manage
groups of mutual funds (i.e., a fund complex), each of which may have
different growth objectives. If one portfolio manager with a large
group of funds has a relatively small exposure to spot gold or spot
silver, they may hedge such exposure using GLD options or SLV options,
respectively. Though relatively small, this hedge (up to 250,000 option
contracts for GLD and for SLV) may utilize the TPH's entire capacity
against the position limit. As a result, the TPH's other portfolio
managers must look to use alternative vehicles to hedge gold or silver
exposure for the funds under their management. The Exchange understands
that, unlike GLD or SLV options, most of these alternatives hedging
vehicles are not a perfect hedge, which creates liquidity issues and
results in increased trading costs. As a result, the Exchange believes
that the proposed position limit increases for both GLD and SLV options
will allow TPHs to effectively hedge their total gold or silver
exposure without having to seek other, less precise hedging vehicles.
Also, as detailed above, while the Exchange believes that the ADV
share and option volume for and overall value of GLD and SLV,
particularly as compared across other ETF options with position limits
currently set at 500,000 contracts, are large enough to absorb
potential price movements caused by a large trade in GLD and SLV, the
Exchange also recognizes that the spot metal markets underlying SLV and
GLD differ from the equities markets underlying EWZ, EWJ, TLT and HYG.
However, the Exchange does not believe these differences warrant the
position limits for options on GLD and SLV to be half the size of the
position limits of these options, nor does it believe that a position
limit increase for options on GLD and SLV will have any adverse impact
on the underlying spot gold or silver market.\14\
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\14\ Amendment No. 2 [sic] adds additional support for
increasing position limits for options on GLD and SLV by providing
data and analysis regarding the sufficient size and capacity of the
related spot metals markets to absorb a potential increase in demand
of GLD and SLV options and delivery of the underlying.
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The Exchange reviewed the amount and value of the gold and silver
reserves estimated to be held across the globe,\15\ as well as the
amount and value held in the London vaults, compared with the amount
and value of open interest in SLV and GLD options. Currently, the
world's reserves hold approximately 1.7 billion troy ounces of gold (a
value of approximately $3 trillion) and 16.1 billion troy ounces of
silver (a value of approximately $398.7 billion).\16\ Reserves in this
context is the amount of gold and silver that is ``currently economic''
and could be developed to the point of business needs (e.g., could be
refined by accredited LBMA refiners into new London Good Delivery
(``LGD'') bars, which is the gold and silver that, respectively, is
held on behalf of the GLD and SLV trusts and underly GLD and SLV
shares). That is, the amount of gold and silver reserves is
notwithstanding the amount of gold and silver already refined and
currently in circulation or held by various entities (e.g.,
international dealers, mining companies, central banks, and financial
institutions).\17\ Given the constant mining, manufacturing and
circulation of gold and silver, the vast number and types of entities
that deal in and hold gold and silver across the globe,\18\ and the
lack of any universal framework for international reporting on or
accounting for gold or silver or other central source that tracks and
publishes a complete total of available gold and silver, the Exchange
has no way of knowing the total amount of LGD gold or silver bars
currently available worldwide. While LBMA publishes the gold and silver
amounts held in the London vaults \19\ in an effort to improve
transparency in the precious metals markets, the Exchange notes that,
for the same reasons above, it has no way of definitively knowing what
portion of the world's total gold and silver is currently held in the
London vaults. The London vaults hold \20\ approximately 312.1 million
troy ounces of gold (a value of approximately $541.8 billion) and 1.2
million troy ounces of silver (a value of approximately $29.1 billion).
The Exchange additionally notes that the total global mined silver
output is forecasted to grow by approximately 8% from 2020 through 2021
to a total output of approximately 848.5 million troy ounces
(approximately $19.1 billion in value),\21\ and that total global mined
gold output as of June 2021 was 104.4 million troy ounces
(approximately $183.6 billion in value).\22\
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\15\ See National Minerals Information Center, Gold Statistics
and Information, Mineral Commodity Summaries, Gold (January 2021)
available at https://pubs.usgs.gov/periodicals/mcs2021/mcs2021-gold.pdf; and Silver Statistics and Information, Mineral Commodity
Summaries, Silver (January 2021) available at https://pubs.usgs.gov/periodicals/mcs2021/mcs2021-silver.pdf.
\16\ One metric ton equals 32,150.7 troy ounces.
\17\ The amount of gold and silver reserves is also
notwithstanding LGD bars produced by LBMA-accredited refiners from
old gold scrap and non-accredited bars.
\18\ Many of which, for security reasons, do not publish
information regarding their holdings.
\19\ The custodians of the GLD and SLV trusts each maintain the
respective trust's holdings in the London vaults, among other
locations.
\20\ As of September 30, 2021.
\21\ See The Silver Institute, World Silver Survey (April 2021)
available at https://www.silverinstitute.org/wp-content/uploads/2021/04/World-Silver-Survey-2021.pdf.
\22\ See World Gold Council, Data, Demand and Supply, Gold mine
production (June 16, 2021) available at https://www.gold.org/goldhub/data/historical-mine-production.
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GLD options have experienced an average daily open interest in 2021
\23\ of approximately 3 million contracts, which equates to
approximately 302.5 million GLD shares \24\ (an average daily total NAV
\25\ of approximately $60 billion). SLV options have experienced an
average daily open interest of approximately 6.3 million contracts,
which equates to approximately 628.3
[[Page 73357]]
million SLV shares \26\ (an average daily total NAV \27\ of
approximately $15 billion). Hypothetically, even if every open GLD and
SLV option contract was exercised at once to receive delivery of the
underlying shares and all such underlying shares were redeemed with the
issuer for the respective underlying physical metal, by taking the
average daily total NAV of the ETF shares equivalent to the average
daily open interest in GLD and SLV options over the spot price of gold
($1736.04) and silver ($24.80),\28\ the Exchange estimates that
redemption of all of the ETF shares (equivalent to the average daily
open interest in GLD and SLV options) would correspond to delivery of
approximately 29.4 million troy ounces of gold and 603.9 million troy
ounces of silver--that is, only approximately 1.7% and 3.8% of the
total gold and silver reserves, respectively, and approximately 9.4%
and 51.5% of the gold and silver holdings, respectively, in the London
vaults. As such, even if this hypothetical, unlikely event occurred, it
would impact only a negligible portion of the world's gold and silver
reserves, a fraction of the gold stored in the London vaults, and, in
an extreme worst-case scenario, half of the silver in the London
vaults; which, as stated, does not account for the total amount of LGD
bars available globally nor the amount of reserves readily at hand to
refine into LGD bars. The Exchange understands that market participants
by and large use GLD and SLV options to hold a leveraged position in
the market, taking a view of market performance over a defined period
of time, or use such options to hedge or reduce the risk exposure of
their portfolios, as described above. As such, most positions in GLD
and SLV options are not intended to be exercised to receive delivery of
the underlying shares, but instead, are closed out or rolled. The
Exchange also notes that most of the activity in the underlying GLD and
SLV shares takes place on the secondary market (e.g., on an exchange),
as opposed to the primary market (i.e., ETF creations and redemptions).
The Exchange believes that, given the typical use cases for GLD and SLV
options, an increase in the position limits for GLD and SLV options
would cause a de minimis increase, if any, in delivery or in creations
and redemptions of shares in the underlying ETFs. As a result of the
above-described review of the average daily open options interest
compared to the world's metal reserves and the holdings in the London
vaults, as well as the global mined gold and silver output, coupled
with the understanding that the principal use cases for taking
positions in the GLD and SLV options markets do not involve taking
delivery of the underlying, the Exchange believes that the current
supply of spot gold and silver is more than adequate to meet a
potential increase in demand and delivery of GLD's and SLV's underlying
metals components as a result of position limit increases for options
on GLD and SLV.
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\23\ Year-to-date daily average open interest through September
2021.
\24\ One GLD/SLV option contract equals 100 GLD/SLV shares.
\25\ Year-to-date daily average GLD share NAV through September
2021 is $168.47.
\26\ See supra note 22.
\27\ Year-to-date daily average GLD share NAV through September
2021 is $23.84.
\28\ Spot prices as of October 3, 2021.
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Indeed, the gold and silver markets have proven resilient in the
face of actual, extraordinary economic and market events that have
resulted in an increase in demand for physical gold and silver and in
holdings of such metal-based products. For example, beginning in March
2020, interest in gold and silver significantly increased as a result
of the COVID-19 pandemic, and gold and silver price momentum continued
through the year, peaking in August 2020.\29\ Gold-backed exchange-
traded products (``ETPs'') accounted for almost two-thirds of total
gold-related investment demand during the first three quarters of
2020,\30\ and inflows into silver-backed ETPs over the first three
quarters of 2020 nearly tripled the amount of inflow over the same
period of time in 2019.\31\ In particular, GLD experienced an inflow of
approximately $15.4 billion in assets (or approximately 7.3 million
troy ounces) in 2020; a 35% increase in AUM from 2019, and SLV
experienced an inflow of approximately $8.3 billion in assets (or
approximately 196 million troy ounces) in 2020; a 126% increase in AUM
from 2019. Open interest in GLD options from the onset of the pandemic
in March 2020 was approximately 3.7 million contracts and in SLV
options was approximately 4.2 million contracts, and in August 2020,
when prices peaked, open interest in GLD options was approximately 4.9
million contracts and in SLV options was approximately 8.2 million
contracts. Additionally, in late January and into early February 2021,
silver-backed inflows increased again, triggered by comments
coordinated across social media platforms in an attempt to push silver
higher, and silver-backed ETP holdings (including in SLV) jumped by
almost 120 million troy ounces \32\ and open interest in SLV options
was approximately 6.7 million contracts.
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\29\ See World Gold Council, Global gold-backed ETF flows, Full
Year 2020 (January 13, 2021) available at https://www.gold.org/goldhub/data/global-gold-backed-etf-holdings-and-flows/2020/december; and supra note 24 [sic] at 8.
\30\ See World Gold Council, Global gold-backed ETF flows, Full
Year 2020 (January 13, 2021) available at https://www.gold.org/goldhub/data/global-gold-backed-etf-holdings-and-flows/2020/december.
\31\ See The Silver Institute, Inflows into silver-backed
exchange-traded products nearly triple year-on-year over the first
three quarters of 2020 (October 15, 2020) available at https://www.silverinstitute.org/inflows-silver-backed-exchange-traded-products-nearly-triple-year-year-first-three-quarters-2020/.
\32\ See supra note 24 [sic] at 22.
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From March 2020 through August 2020, the amount of LGD bars held in
the London vaults averaged approximately 278.1 million troy ounces in
gold and approximately 1.13 billion troy ounces in silver month-to-
month. For the immediately preceding six-month period (September 2019
through February 2020), the average monthly amount of gold held in the
London vaults was approximately 267.3 million troy ounces and the
average monthly amount of silver held was 1.16 billion troy ounces,
thus demonstrating that, faced with such a significant increase in
demand for gold, silver and related products as experienced during the
onset and more economically turbulent period of the COVID-19 pandemic
and as demonstrated by the inflows into GLD and SLV, the London vaults
experienced no reduction in its gold holdings (in fact, the average
month vault holdings increased) and only a marginal reduction in its
silver holdings. Likewise, across January and February 2021, the silver
holdings in the London vaults averaged 1.11 billion troy ounces, while
over the two months prior to this time frame the London vaults averaged
1.08 billion troy ounces. As such, the Exchange believes that an
increase in gold and silver ETP and options holdings does not
necessarily impact physical gold and silver supplies and that such
supplies have sufficient capacity to meet potential increases in demand
for gold- and silver-related products, including GLD and SLV options.
The Exchange also reviewed the gold and silver futures markets, the
volume and value of which the Exchange believes indicate sufficient
size and liquidity in the underlying markets to absorb potential price
movements and large-sized trades as a result of position limit
increases for options on GLD and SLV. The Exchange notes that gold
futures currently have a value of approximately $93.2 billion in open
interest and have experienced an ADV of approximately 264,000 contracts
(equivalent to approximately 264 million GLD contracts) in 2021 to
[[Page 73358]]
date.\33\ Also, gold futures are currently subject to a position limit
of 6,000 contracts, which is notionally equivalent to 6,000,000 GLD
contracts. Additionally, the Exchange understands that its Market-
Makers use both GLD and gold futures to hedge their GLD options
positions, which the Exchange believes provides for a balance across
the gold-related marketplaces, mitigating potential concern that either
the underlying or the futures market might experience additional
pressure as a result of an increase in activity in the GLD options
space. Likewise, the Exchange notes that silver futures currently have
a value of approximately $25.7 billion in open interest, have
experienced an ADV of approximately 93,000 contracts (equivalent to
approximately 465 million SLV contracts) in 2021 to date,\34\ and are
currently subject to a position limit of 3,000 contracts, which is
notionally equivalent to 15,000,000 SLV contracts. The Exchange
believes the robust volume in and value of the gold and silver futures
markets indicates that the underlying markets are sufficiently large
and liquid enough to absorb potential price movements and large-sized
trades as a result of position limit increases for options on GLD and
SLV.
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\33\ Year-to-date ADV through May 2021.
\34\ See id.
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Additionally, the Exchange reviewed the volume-weighted average of
the absolute value \35\ of deltas for GLD and SLV options trades over
approximately the last two years (from March 2019 through June 2021).
Essentially, the delta compares the relationship between the change in
the price of an underlying and of an option. Absolute delta value
ranges from 0 to 1. The lower the absolute delta value, the less the
option price is sensitive to changes in the price of the underlying
(i.e., delta exposure). Conversely, the higher the absolute delta
value, the more the option price will change given a change in the
underlying price. The Exchange believes that volume-weighted average
delta over time is indicative as to whether an underlying market is
large enough to absorb increased activity in the related options
markets. That is, the more delta exposure per trade, the more options
exposure there is that necessitates a hedge trade in the underlying,
which may, in turn, potentially increase the impact on the underlying
markets. Review of the volume-weighted average delta in connection with
GLD and SLV options over the last two years showed that the average
absolute delta per trade for GLD options trades was approximately 0.34
and for SLV options trades was approximately 0.28. The Exchange notes
that both averages indicate relatively minimal amounts of average delta
exposure and, thus, minimal amounts of GLD and SLV options exposure
need to be hedged, on average. As a result, the Exchange believes that
increases in GLD and SLV options trading would have minimal impact on
the ability of the underlying metals markets to absorb any additional
volume related to increased position limits and hedging activity.
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\35\ Put deltas are always negative, therefore, absolute value
is used to view the average delta across calls and puts.
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Creation and Redemption for ETFs
The Exchange believes that the creation and redemption process for
the Underlying ETFs lessens the potential for manipulative activity
with options on the Underlying ETFs. When an ETF provider wants to
create more shares, it looks to an Authorized Participant (``AP'')
(generally a market maker or other large financial institution) to
acquire the underlying components the ETF is to hold. For instance,
when an ETF is designed to track the performance of an index, the AP
can purchase all the constituent securities in the exact same weight as
the index, then deliver those shares to the ETF provider. In exchange,
the ETF provider gives the AP a block of equally valued ETF shares, on
a one-for-one fair value basis. The price is based on the NAV, not the
market value at which the ETF is trading. The creation of new ETF units
can be conducted during an entire trading day and is not subject to
position limits. This process works in reverse where the ETF provider
seeks to decrease the number of shares that are available to trade. The
creation and redemption processes for the Underlying ETFs creates a
direct link to the underlying components of the ETF and serves to
mitigate potential price impact of the ETF shares that might otherwise
result from increased position limits for the options on the Underlying
ETFs.
The Exchange understands that the ETF creation and redemption
processes seek to keep an ETF's share price trading in line with the
product's underlying net asset value. Because an ETF trades like a
stock, its share price will fluctuate during the trading day, due to
simple supply and demand. If demand to buy an ETF is high, for
instance, an ETF's share price might rise above the value of its
underlying components. When this happens, the AP or issuer believes the
ETF may now be overpriced, so it may buy shares of the component assets
and then sell ETF shares in the open market. This may drive the ETF's
share price back toward the underlying net asset value. Likewise, if an
ETF share price starts trading at a discount to the component assets it
holds, the AP or issuer can buy shares of the ETF and redeem them for
the underlying components. Buying undervalued ETF shares may drive the
share price of an ETF back toward fair value. This arbitrage process
helps to keep an ETF's share price in line with the value of its
underlying portfolio.
Surveillance and Reporting Requirements
The Exchange believes that increasing the position limits for the
options on the Underlying ETFs would lead to a more liquid and
competitive market environment for these options, which will benefit
customers interested in trading these products. The reporting
requirement for the options on the Underlying ETFs would remain
unchanged. Thus, the Exchange would still require that each TPH or TPH
organization that maintains positions in the options on the same side
of the market, for its own account or for the account of a customer,
report certain information to the Exchange. This information would
include, but would not be limited to, the options' positions, whether
such positions are hedged and, if so, a description of the hedge(s).
Market-Makers \36\ (including Designated Primary Market-Makers
(``DPMs'')) \37\ would continue to be exempt from this reporting
requirement, however, the Exchange may access Market-Maker position
information.\38\ Moreover, the Exchange's requirement that TPHs file
reports with the Exchange for any customer who held aggregate large
long or short positions on the same side of the market of 200 or more
option contracts of any single class for the
[[Page 73359]]
previous day will remain at this level for the options subject to this
proposal and will continue to serve as an important part of the
Exchange's surveillance efforts.\39\
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\36\ A Market-Maker [sic] ``Trading Permit Holder registered
with the Exchange pursuant to Rule 3.52 for the purpose of making
markets in option contracts traded on the Exchange and that has the
rights and responsibilities set forth in Chapter 5, Section D of the
Rules.'' See Rule 1.1.
\37\ A Designated Primary Market-Maker ``is TPH organization
that is approved by the Exchange to function in allocated securities
as a Market-Maker (as defined in Rule 8.1) and is subject to the
obligations under Rule 5.54 or as otherwise provided under the rules
of the Exchange.'' See Rule 1.1.
\38\ The Options Clearing Corporation (``OCC'') through the
Large option Position Reporting (``LOPR'') system acts as a
centralized service provider for TPH compliance with position
reporting requirements by collecting data from each TPH or TPH
organization, consolidating the information, and ultimately
providing detailed listings of each TPH's report to the Exchange, as
well as Financial Industry Regulatory Authority, Inc. (``FINRA''),
acting as its agent pursuant to a regulatory services agreement
(``RSA'').
\39\ See Rule 8.43 for reporting requirements.
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The Exchange believes that the existing surveillance procedures and
reporting requirements at the Exchange and other SROs are capable of
properly identifying disruptive and/or manipulative trading activity.
The Exchange also represents that it has adequate surveillances in
place to detect potential manipulation, as well as reviews in place to
identify potential changes in composition of the Underlying ETFs and
continued compliance with the Exchange's listing standards. These
procedures utilize daily monitoring of market activity via automated
surveillance techniques to identify unusual activity in both options
and the underlyings, as applicable.\40\ The Exchange also notes that
large stock holdings must be disclosed to the Commission by way of
Schedules 13D or 13G,\41\ which are used to report ownership of stock
which exceeds 5% of a company's total stock issue and may assist in
providing information in monitoring for any potential manipulative
schemes.
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\40\ The Exchange believes these procedures have been effective
for the surveillance of trading the options subject to this proposal
and will continue to employ them.
\41\ 17 CFR 240.13d-1.
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The Exchange believes that the current financial requirements
imposed by the Exchange and by the Commission adequately address
concerns regarding potentially large, unhedged positions in the options
on the Underlying ETFs. Current margin and risk-based haircut
methodologies serve to limit the size of positions maintained by any
one account by increasing the margin and/or capital that a TPH must
maintain for a large position held by itself or by its customer.\42\ In
addition, Rule 15c3-1 \43\ imposes a capital charge on TPHs to the
extent of any margin deficiency resulting from the higher margin
requirement.
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\42\ See Rule 10.3 for a description of margin requirements.
\43\ 17 CFR 240.15c3-1.
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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.\44\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \45\ 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) \46\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\44\ 15 U.S.C. 78f(b).
\45\ 15 U.S.C. 78f(b)(5).
\46\ Id.
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The Exchange believes that the proposed increase in position limits
for options on GLD and SLV will remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, protect investors and the public interest, because it will
provide market participants with the ability to more effectively
execute their trading and hedging activities. The proposed increases
will allow market participants to more fully implement hedging
strategies in related derivative products and to further use options to
achieve investment strategies (e.g., there are other ETPs that use
options on GLD and SLV as part of their investment strategy, and the
applicable position limits as they stand today may inhibit these other
ETPs in achieving their investment objectives, to the detriment of
investors). Also, increasing the applicable position limits may allow
Market-Makers to provide the markets for these options with more
liquidity in amounts commensurate with increased consumer demand in
such markets. The proposed position limit increases may also encourage
other liquidity providers to shift liquidity, as well as encourage
consumers to shift demand, from OTC markets onto the Exchange, which
will enhance the process of price discovery conducted on the Exchange
through increased order flow.
In addition, the Exchange believes that the structure of the
Underlying ETFs, the considerable market capitalization of the funds,
capacity of the underlying component assets, and liquidity of the
markets for the applicable options and underlying shares will mitigate
concerns regarding potential manipulation of the products and/or
disruption of the underlying markets upon increasing the relevant
position limits. As a general principle, increases in market
capitalizations, active trading volume, and deep liquidity of the
underlying markets do not lead to manipulation and/or disruption. This
general principle applies to the recently observed increased levels of
market capitalization and trading volume and liquidity in shares of and
options on the Underlying ETFs (as described above). As a result, the
Exchange does not believe that the options markets or underlying
markets would become susceptible to manipulation and/or disruption as a
result of the proposed position limit increases. Indeed, the Commission
has previously expressed the belief that not just increasing, but
removing, position and exercise limits may bring additional depth and
liquidity to the options markets without increasing concerns regarding
intermarket manipulation or disruption of the options or the underlying
securities.\47\
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\47\ See Securities Exchange Act Release No. 62147 [sic]
(October 28 [sic], 2005) (SR-CBOE-2005-41), at 62149.
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Further, the Exchange notes that the proposed rule change to
increase position limits for select actively traded options is not
novel and the Commission has approved similar proposed rule changes by
the Exchange to increase position limits for options on similar, highly
liquid and actively traded ETPs.\48\ Furthermore, the Exchange again
notes that that the proposed position limits for options on GLD and SLV
are consistent with existing position limits for options on other ETFs
in Rule 8.30.07, including options on ETFs that experience similar, or
even less, volume than GLD and SLV options, as demonstrated above.
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\48\ See Securities Exchange Act Release Nos. 88768 (April 29,
2020), 85 FR 26736 (May 5, 2020) (SR-CBOE-2020-015); 83415 (June 12,
2018), 83 FR 28274 (June 18, 2018) (SR-CBOE-2018-042); and 68086
(October 23, 2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-
066).
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The Exchange's surveillance and reporting safeguards continue to be
designed to deter and detect possible manipulative behavior that might
arise from increasing or eliminating position and exercise limits in
certain classes. The Exchange believes that the current financial
requirements imposed by the Exchange and by the Commission adequately
address concerns regarding potentially large, unhedged position in the
options on the Underlying ETFs, further promoting just and equitable
principles of trading, the maintenance of a fair and orderly market,
and the protection of investors.
[[Page 73360]]
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 the increased position limits (and exercise
limits) will be available to all market participants and apply to each
in the same manner. The Exchange believes that the proposed rule change
will provide additional opportunities for market participants to more
efficiently achieve their investment and trading objectives of market
participants. The proposed rule change would also align the position
limits for GLD and SLV options with the position limits for other ETF
options, which, as demonstrated herein, experience similar, or even
less, volume than options on GLD and SLV.
The Exchange does not believe that the proposed rule change will
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the Act. On the contrary, the Exchange
believes the proposal promotes competition because it may attract
additional order flow from the OTC market to exchanges, which would in
turn compete amongst each other for those orders.\49\ The Exchange
believes market participants would benefit from being able to trade
options with increased position limits in an exchange environment in
several ways, including but not limited to the following: (1) Enhanced
efficiency in initiating and closing out position; (2) increased market
transparency; and (3) heightened contra-party creditworthiness due to
the role of OCC as issuer and guarantor. The Exchange notes that other
options exchanges may choose to file similar proposals with the
Commission to increase position limits on options on the Underlying
ETFs.
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\49\ Additionally, several other options exchanges have the same
position limits as the Exchange, as they incorporate by reference to
the Exchange's position limits, and as a result the position limits
for options on the Underlying ETFs will increase at those exchanges.
For example, Nasdaq Options position limits are determined by the
position limits established by the Exchange. See Nasdaq Stock Market
LLC Rules, Options 9, Sec. 13 (Position Limits).
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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 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-2021-075 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2021-075. 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-2021-075 and should be submitted on
or before January 18, 2022.
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\50\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\50\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-27924 Filed 12-23-21; 8:45 am]
BILLING CODE 8011-01-P