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Federal Register / Vol. 86, No. 132 / Wednesday, July 14, 2021 / Notices 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.
In support of its proposal, the Exchange states that compression transactions under Cboe Rule 6.10 will have a narrow scope and are intended and designed to achieve the limited purpose of capital reduction.21 The Exchange further explains that it understands that TPHs have no need for price discovery or price improvement for compression transactions, because the purpose of the transfer is to reduce capital requirements attributable to the TPHs positions and the price of the compression transaction is a secondary concern.22 The Exchange further states that its proposal is needed because liquidity providers accumulate SPX
positions to accommodate executions of customer orders, and do so at increasing levels during times of market volatility.23 While TPHs hold these positions prior to expiration, many may have little to no value and closure of these positions may have little impact on the risk exposure of the TPHs portfolio.24 Yet, maintenance of these positions requires ongoing risk management and capital, which can impact the capital the TPHs have available to trade.25 The Exchange asserts that its proposal will limit the use of the compression service to legitimate compression purposes and provide an objective process to allow TPHs to manage capital and margin requirements so that they have sufficient capital available to provide to the markets, which will benefit all market participants.26
The Commission believes that the Exchanges proposal will provide a narrowly-tailored, objective, and not unfairly discriminatory mechanism for TPHs to efficiently compress open SPX
positions for the purpose of reducing required capital. As the Commission has previously observed, the affiliation of clearing brokers with bank holding 21 See
Amendment No. 1, at 37.
id.
23 See id. at 38.
24 See id.
25 See id.
26 See id. at 41. Two commenters supported the proposed rule change, asserting that the proposed compression service procedure would provide an additional risk management tool that can be used by Cboe market makers to efficiently manage the capital and margin requirements of their portfolios.
See Letters to Vanessa Countryman, Secretary, Commission, from Joanna Mallers, Secretary, FIA
Principal Traders Group, dated May 3, 2021, at 2;
and Michael Golding, Head of Trading, Optiver US
LLC and Aldo van Audenaerde, Head of Trading, AMS Derivatives B.V., dated April 22, 2021, at 1.

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companies has introduced the need for liquidity providers and their clearing firms to more conservatively manage holdings to comply with applicable bank regulatory capital requirements.27
The ability to compress positions in an efficient, cost-effective manner can help liquidity providers and their clearing firms manage associated bank capital constraints. Tailored compression tools that are carefully designed to directly address the greatest need for compression, where portfolio holdings have a material impact on available capital, can have beneficial effects on the market and available liquidity especially during periods of volatile trading without impacting trading or conferring any inappropriate benefits on any market participant.
The proposals focus on closing positions in SPX options appropriately recognizes the role SPX options play as major component of the capital impact felt by clearing broker-dealers and the TPHs for whom they clear, which results from the large notional value and popularity of SPX options as a frequently traded product with large open interest. Compression trades are unlike arms length transactions as their sole purpose is to close open positions to compress SPX portfolio positions to reduce required capital charges. The Exchanges proposal is a narrowlytailored means of doing so and, as a result, should facilitate the ability of compression participants to provide liquidity and trade, especially during volatile periods. As such, the Exchanges proposal removes impediments to and perfects the mechanism of a free and open market and a national market system, and, in general, protects investors and the public interest.
Further, the mechanics of the compression service are reasonably designed to provide an objective process by which TPHs can avail themselves of the ability to potentially compress their open SPX positions for capital reduction purposes. The proposed process does not prioritize any TPH but rather aims to find the greatest aggregate capital reduction among the SPX options submitted for consideration, and honors each TPHs customized risk constraints in doing so. Ultimately, however, all TPHs selected for participation must approve of the compression transaction proposed by the Exchange and if any one TPH declines the proposed transaction then the compression 27 See, e.g., Securities Exchange Act Release No.
91079 October 14, 2020, 85 FR 66590 October 20, 2020 order granting approval of proposed rule change to adopt position compression cross orders in SPX options.

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transaction for all TPHs will not occur.
If approved, transactions take place after the close of regular trading hours and the trades will be reported to OPRA
with an indicator attached to note they are compression trades,28 thus providing public transparency of these compression trades.
Accordingly, for the reasons discussed above, the Commission finds that the proposed rule change, as modified by Amendment No. 1, is consistent with the Act, including Section 6b5 of the Act 29 and the rules and regulations thereunder applicable to a national securities exchange.
IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as modified by Amendment No.
1, is consistent with the Act. Comments may be submitted by any of the following methods:
Electronic Comments Use the Commissions internet comment form http www.sec.gov/
rules/sro.shtml; or Send an email to rule-comments@
sec.gov. Please include File Number SR
CBOE2021020 on the subject line.
Paper Comments Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 205491090.
All submissions should refer to File Number SRCBOE2021020. 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 Commissions 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 Commissions Public Reference Room, 100 F Street NE, Washington, DC 20549 on official 28 See 29 15

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supra note 17.
U.S.C. 78fb5.

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