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Federal Register / Vol. 86, No. 132 / Wednesday, July 14, 2021 / Notices
modified by Amendment No. 1, on an accelerated basis.

lotter on DSK11XQN23PROD with NOTICES1

II. Description of the Proposed Rule Change, as Modified by Amendment No. 1
The Exchange proposes to adopt new Cboe Rule 6.10 to provide Trading Permit Holders TPHs with an additional voluntary compression tool that they can use to reduce required capital attributable to their S&P 500
Index SPX options holdings.6 The Exchanges proposal is designed to address the impact on liquidity providers of the limited amount of capital available from clearing brokerdealers that is a consequence of, among other things, the fact that a number of clearing TPHs are now subsidiaries of U.S. bank holding companies that must, as a result of this affiliation, comply with additional bank capital regulatory requirements. In particular, bank capital rules do not currently permit deductions for hedged securities or offsetting options positions to the same extent that the federal securities laws and self-regulatory organization rules do for securities. The impact of this dynamic most acutely impacts SPX
options due to the popularity of SPX
options and the significant number of open index options positions combined with their large notional value.
In its filing, the Exchange explains that it has observed that these bank capital rules have caused clearing broker-dealers to impose stricter position limits on their clearing members, which can impact the liquidity that TPHs, notably market makers who are frequently the counterparties to a significant portion of SPX option trades, might be able to supply.7 This impact would be most pronounced when markets are volatile, precisely at the time when the market would benefit from increased liquidity provision.
The bank regulatory agencies have approved replacing the Current Exposure Method CEM with the Standardized Approach to Counterparty Credit Risk SACCR in the near future, and the Exchange believes SA
CCR will be less punitive to clearing broker-dealers because SACCR will help correct many of CEMs flaws by incorporating risk-sensitive principles, 6 Currently, the Exchange offers other methods by which TPHs can compress certain types of options holdings, including 1 Cboe Rule 5.6, which allows for compression orders in SPX options and 2 Cboe Rule 6.8, which allows TPHs to transfer positions off-exchange if the transfer does not result in a change of ownership and reduced the risk-weighted assets associated with those positions.
7 See Amendment No. 1, at 810.

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such as delta weighting options positions and more beneficial netting of derivative contracts that have economically meaningful relationships. 8 Nevertheless, the Exchange believes that SACCR will not eliminate TPHs need for compression as the ability to compress SPX positions can enable them to provide more meaningful liquidity to the market, particularly during times of volatility when the market needs this liquidity most. 9 The Exchange further asserts that this additional liquidity may result in tighter spreads and more execution opportunities, which benefits all investors. 10
As described more fully in the Notice, as modified by Amendment No. 1, in order to be able to participate in the new multilateral compression service, a TPH
must request access to the service and complete a standard test to demonstrate its capacity to participate. While the Exchange initially proposed that only registered market makers would be eligible to participate and a larger number of index options would be eligible for inclusion, the Exchange has modified its proposal to allow any TPH
to request access and to limit the service to SPX options only, where the need for compression is most present.11
The Exchange will offer multilateral compression periodically, initially twice per month, in order to allow TPHs to respond to intra-month reviews of regulatory capital for their positions by their clearing broker-dealers.12 To participate, a TPH must submit a position list after the close of trading on the specified day that details all of the open SPX positions it would like to close out and compress. The list must specify the amount of capital reduction associated with each closing position, the theoretical value of each position, the maximum cost the TPH is willing to accept to compress all of the positions in the aggregate, the maximum cost per unit of capital reduction the TPH is willing to accept, and at least one risk constraint of the TPHs choosing including a minimum and maximum value. TPHs have flexibility in choosing these values as specified in the proposed rule.13
After the deadline for submission of the position lists, the Exchange runs an automated process to match offsetting id. at 10.
id. at 11.
10 See id.
11 See generally Amendment No. 1.
12 See Amendment No. 1, at 17.
13 See, e.g., proposed Cboe Rule 6.10b2
concerning a theoretical value calculated in a manner of the compression participants choosing.

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8 See 9 See
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positions in an anonymized manner.
The process identifies the outcome that would result in the maximum aggregate capital reduction among all participating TPHs picking at random from among equal outcomes. The Exchange determines the compression price for each option, which will be as close as possible to the midpoint of the national best bid and offer at the close of the trading day or the daily marking time, subject to adjustment using generally accepted volatility and options pricing models in the event of wide markets, market volatility, or other unusual circumstances. 14
The Exchange then notifies the TPH
participants of each TPHs individual compression proposal.15 Each TPH with at least one offsetting position must notify the Exchange whether it accepts its individual proposal.16 If all compression participants accept their individual proposals, then the Exchange effects the transactions at the specified prices off the exchange.17 If one compression participant declines, then no compression transactions are effected.18
III. Discussion and Commission Findings After careful review of the proposal and the comments received, all of which supported the proposal and recommended that the Commission approve it, the Commission finds that the proposed rule change, as modified by Amendment No. 1, is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange.19 In particular, the Commission finds that the proposed rule change, as modified by Amendment No. 1, is consistent with Section 6b5
of the Act,20 which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove 14 Proposed
Cboe Rule 6.10c2.
id.
16 See proposed Cboe Rule 6.10d.
17 See id. In Amendment No. 1, the Exchange represented that it will disseminate compression transaction information to OPRA. The Exchange further states that it has completed system work to apply an indicator to such information and is working with OPRA so that OPRA is able to incorporate that indicator. The Exchange expects OPRA to complete its work in 2021, but notes that the indicator may not be available upon implementation of the compression service. See Amendment No. 1, at 27.
18 See id.
19 In approving this proposed rule change, the Commission has considered the proposed rules impact on efficiency, competition, and capital formation. See 15 U.S.C. 78cf.
20 15 U.S.C. 78fb5.
15 See
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