83 FR 46230 - Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Rule 6.2, Interpretation and Policy .01 Concerning Strategy Orders
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 177 (September 12, 2018)
Federal Register Volume 83, Issue 177 (September 12, 2018)
| Page Range | 46230-46237 | |
| FR Document | 2018-19773 |
[Federal Register Volume 83, Number 177 (Wednesday, September 12, 2018)] [Notices] [Pages 46230-46237] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-19773] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-84045; File No. SR-CBOE-2018-062] Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Rule 6.2, Interpretation and Policy .01 Concerning Strategy Orders September 6, 2018. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on August 24, 2018, Cboe Exchange, Inc. (``Exchange'' or ``Cboe Options'') 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. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change Cboe Options proposes a rule change to amend and clarify the definition of a strategy order, clarify other definitions related to the modified HOSS procedure, and permit the entry of orders that offset imbalances after the strategy order cut-off time. (additions are italicized; deletions are [bracketed]) * * * * * Rules of Cboe Exchange, Inc. * * * * * Rule 6.2. Hybrid Opening (and Sometimes Closing) System (``HOSS'') (a)-(h) No change. . . . Interpretations and Policies: .01 Modified Opening Procedure for Series Used to Calculate the Exercise[/] or Final Settlement Value[s] of Expiring Volatility Index[es] Derivatives. (a) Definitions. For purposes of this Interpretation and Policy .01, the following terms have the meanings below: Volatility Index Derivatives The term ``volatility index derivatives'' means volatility index options listed for trading on the Exchange (as determined under Rule 24.9(a)(5) and (6)), (security) futures [[Page 46231]] listed for trading on an affiliated designated contract market, or over-the-counter derivatives overlying a volatility index whose exercise or final settlement values, as applicable, are calculated pursuant to, or by reference to, as applicable, the modified opening procedure described in this Interpretation and Policy .01. Exercise Settlement Value Determination Day The term ``exercise settlement value determination day'' means a day on which the Exchange determines the exercise or final settlement value, as applicable, of expiring volatility index derivatives. Constituent Option Series The term ``constituent option series'' means all option series listed on the Exchange that are used to calculate the exercise or final settlement value, as applicable, of expiring volatility index derivatives. Strategy Order The Exchange deems individual orders (considered collectively) a market participant submits for participation in the modified opening procedure to be a ``strategy order,'' based on related facts and circumstances considered by the Exchange, only if the orders: (1) Relate to the market participant's positions in expiring volatility index derivatives; (2) are for option series with the expiration that the Exchange will use to calculate the exercise or final settlement value, as applicable, of the applicable volatility index derivative; (3) are for option series with strike prices approximating the range of series that are later determined to constitute the constituent option series for the applicable expiration; (4) are for put (call) options with strike prices equal to or less (greater) than the ``at-the-money'' strike price; and (5) have quantities approximating the weighting formula used to determine the exercise or final settlement value, as applicable, in accordance with the applicable volatility index methodology. Non-Strategy Order The term ``non-strategy order'' means any order (including an order in a constituent option series) a market participant submits for participation in the modified opening procedure that is not a strategy order (or a change to or cancellation of a strategy order). Examples of non-strategy orders include, but are not limited to: (1) A buy (sell) order in a constituent options series if an EOI disseminated no more than two minutes prior to the time a market participant submitted the order included a sell (buy) imbalance and the size of the order is no larger than the size of the imbalance in the EOI, regardless of whether the market participant previously submitted a strategy order or has positions in expiring volatility index derivatives; or (2) a Market-Maker bid or offer in a constituent option series, as set forth in paragraph (e) below. (b) Use of Modified Opening Procedure. [All provisions set forth in Rule 6.2 remain in effect unless superseded or modified by this Interpretation and Policy .01.] On [the dates on which the] exercise [and final] settlement value determination days [are calculated for options (as determined under Rule 24.9(a)(5) or (6)) or (security) futures contracts on a volatility index (i.e., expiration and final settlement dates)], the Exchange [utilizes]uses the [modified] opening procedure described in Rule 6.2, as modified by this Interpretation and Policy .01, for constituent option series[below for all series used to calculate the exercise/final settlement value of the volatility index for expiring options and (security) futures contracts (these option series referred to as ``constituent options'')]. ([a]c) Strategy Order[s] Cut-Off Time. [All orders for participation in the modified opening procedure that are related to positions in, or a trading strategy involving, expiring volatility index options or (security) futures (``strategy orders'')]Market participants must submit strategy orders (which orders must be entered into the Exchange by a Trading Permit Holder), and [any] changes to or cancellations of [any such]strategy orders, prior to the strategy order cut-off time. Market participants[:] [(i) must be received prior to the applicable strategy order cut- off time for the constituent option series (as determined by the Exchange on a class-by-class basis), which may be no earlier than 8:00 a.m. and no later than the opening of trading in the series. The Exchange will announce all determinations regarding changes to the applicable strategy order cut-off time at least one day prior to implementation. (ii)] may not [be cancelled or changed]change or cancel strategy orders after the strategy order cut-off time, unless the market participant submits the change or cancellation: (1) [after the applicable strategy order cut-off time, unless the strategy order is not executed in the modified opening procedure and the cancellation or change is submitted] after the [modified opening procedure is concluded]series is open for trading; or (2) [(provided that any such strategy order may be changed or cancelled after the applicable strategy order cut-off time and] prior to the [applicable] non-strategy order cut-off time in order to correct a legitimate error, in which case the [Trading Permit Holder]market participant submitting the change or cancellation [will]must prepare and maintain a memorandum setting forth the circumstances that resulted in the change or cancellation and [will file]submit a copy of the memorandum [with]to the Exchange no later than the next business day in a form and manner prescribed by the Exchange[)]. The Exchange determines the strategy order cut-off time on a class- by-class basis, which may be no earlier than 8:00 a.m. Chicago time and no later than the opening of trading in a series. The Exchange will announce any changes to the strategy order cut-off time at least one day prior to implementation. [In general, the Exchange will consider orders to be strategy orders for purposes of this Rule 6.2.01 if the orders possess the following three characteristics: (A) The orders are for option series with the expiration that will be used to calculate the exercise or final settlement value of the applicable volatility index option or futures contract. (B) The orders are for option series spanning the full range of strike prices for the appropriate expiration for option series that will be used to calculate the exercise or final settlement value of the applicable volatility index option or futures contract, but not necessarily every available strike price. (C) The orders are for put options with strike prices less than the ``at-the-money'' strike price and for call options with strike prices greater than the ``at-the-money'' strike price. The orders may also be for put and call options with ``at-the-money'' strike prices. Whether orders are strategy orders for purposes of this Rule 6.2.01 depends upon specific facts and circumstances. The Exchange may also deem order types other than those provided above as strategy orders if the Exchange determines that to be the case based upon the applicable facts and circumstances.] ([b]d) Non-Strategy Order[s] Cut-Off Time. [All other orders for participation in the modified opening procedure (``non-strategy orders''), and any change to or cancellation of any such order, must be received]Market participants must submit non-strategy orders (which [[Page 46232]] orders must be entered into the Exchange by a Trading Permit Holder) prior to the [applicable]non-strategy order cut-off time. [(as determined by t]The Exchange determines the non-strategy order cut-off time on a class-by-class basis[) in order to participate at the opening price for the applicable series], which may be no earlier than 8:25 a.m. and no later than the opening of trading in [the option]a series. The Exchange will announce [all determinations regarding]any changes to the [applicable] non-strategy order cut-off time at least one day prior to implementation. ([c]e) Market-Makers. A Market-Maker with an appointment in a class with constituent option series may submit bids and offers in those series for bona fide market-making purposes in accordance with Rule 8.7 and the Exchange Act for its market-maker account prior to the open of trading for participation in the modified opening procedure. The Exchange will deem these bids and offers to be non-strategy orders, and will not deem them to be changes to or cancellations of previously submitted strategy orders, if: (i) the Trading Permit Holder with which the Market-Maker is affiliated has established, maintains, and enforces reasonably designed written policies and procedures (including information barriers, as applicable), taking into consideration the nature of the Trading Permit Holder's business and other facts and circumstances, to prevent the misuse of material nonpublic information (including the submission of strategy orders); and (ii) when submitting these bids and offers, the Market-Maker has no actual knowledge of any previously submitted strategy orders. * * * * * (b) Not applicable. (c) Not applicable. * * * * * 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 (a) Purpose Cboe Options and Cboe Futures Exchange, LLC (``CFE'') list options and futures, respectively, on different volatility indexes that are calculated using prices of options traded on Cboe Options.\3\ The exercise settlement value for these volatility index derivatives is determined on the morning of their expiration date through a special opening quotation (``SOQ'') of the volatility index using the opening prices of a portfolio of options (for example, the exercise settlement value of VIX options and futures uses the opening prices of a portfolio of S&P 500 Index options (``SPX options'') that expire approximately 30 days later). On the days when the exercise settlement values for these volatility index derivatives are determined, Cboe Options opens the constituent options \4\ for these volatility indexes using the modified Hybrid Opening System (``HOSS'') procedure.\5\ The main feature of the modified HOSS procedure used to calculate the exercise settlement value for expiring volatility index options and (security) futures that distinguishes it from the normal opening procedure used on all other days is a cutoff time for the entry of strategy orders.\6\ By providing market participants with a mechanism to buy and sell constituent options at prices used to calculate the exercise settlement value of the volatility index derivatives, the volatility index settlement process is ``tradable.'' --------------------------------------------------------------------------- \3\ These volatility indexes include the Cboe Volatility Index (``VIX'') and the Russell 2000 Volatility Index (``RVX''). Options expire on an expiration date and settle to an exercise settlement value, and futures settle on a final settlement date to a final settlement value. For ease of reference, the Exchange will use the options terminology throughout this filing when referring to the ``expiration/final settlement date'' and ``expiration/final settlement value'' for volatility index derivatives. \4\ ``Constituent options'' are the series used to calculate the exercise/final settlement value of the volatility index for expiring options and (security) futures contracts. \5\ See Rule 6.2, Interpretation and Policy .01. \6\ Currently, strategy orders are defined as all orders (defined in Rule 1.1(ooo) as a firm commitment to buy or sell option contracts) for participation in the modified opening procedure that are related to positions in, or a trading strategy involving, volatility index options or (security) futures (as discussed below, the proposed rule change is adding ``expiring'' to this definition). In general, the Exchange currently considers orders to be strategy orders if they are for (a) option series with the expiration that will be used to calculate the exercise or final settlement value of the applicable volatility index option or futures contract; (b) option series spanning the full range of strike prices for the appropriate expiration for option series that will be used to calculate the exercise or final settlement value of the applicable volatility index option or futures contract (not necessarily every available strike price); and (c) put options with strike prices at or less than the ``at-the-money'' strike price and for call options with strike prices greater than or at the ``at-the-money'' strike price. Whether orders are strategy orders depends upon specific facts and circumstances. The Exchange may also deem order types other than those provided above as strategy orders if the Exchange determines that to be the case based upon the applicable facts and circumstances. The strategy order cut-off time may be no earlier than 8:00 a.m. and no later than the opening of trading in the series, and is currently 8:20 a.m. Chicago time. See Rule 6.2, Interpretation and Policy .01. --------------------------------------------------------------------------- The volatility index settlement process is patterned after the process used to calculate the exercise settlement value of SPX options. On the days SPX options expire, S&P calculates an SOQ of the S&P 500 Index using the opening prices of the component stocks in their primary markets. Market participants can replicate the exposure of their expiring SPX options by entering orders to buy and sell the component stocks of the S&P 500 Index at their opening prices. If they are successful, market participants can effectively construct a portfolio that matches the value of the SOQ. At this point, the derivatives and cash markets converge. In a very similar way, the exercise settlement value for volatility index derivatives is an SOQ of the volatility index using opening prices of the constituent options used to determine the value of the index. With respect to VIX, the VIX exercise settlement value is calculated using the opening prices of SPX options that expire approximately 30 days later. Analogous to the settlement process for SPX options, market participants can replicate the exposure of their expiring VIX derivatives by entering buy and sell orders in constituent SPX options. If they are successful, market participants can effectively construct a portfolio of SPX options whose value matches the value of the VIX SOQ. By doing so, market participants may make or take delivery of the SPX options that will be used to calculate the exercise settlement value of their VIX derivatives. A tradable settlement creates the opportunity to convert the exposure of an expiring VIX derivative into the portfolio of SPX options that will be used to calculate the exercise settlement [[Page 46233]] value of the expiring contract. Specifically, some market participants may desire to maintain the vega, or volatility, risk exposure of expiring VIX derivatives. Since VIX derivatives expire 30 days prior to the SPX options used to calculate their settlement value, a market participant may have a vega risk from its portfolio of index positions that the participant wants to continue to hedge after the participant's VIX derivatives expire. To continue that vega coverage following expiration of a VIX derivative, a market participant may determine to trade the portfolio of SPX options used to calculate the exercise settlement value of an expiring VIX derivative, since those SPX options still have 30 more days to expiration. This trade essentially replaces the uncovered vega exposure ``hole'' created by an expiring VIX derivative. Since the VIX settlement value converges with the value of the portfolio of SPX options used to calculate that VIX settlement value, trading this SPX option portfolio mitigates settlement risk.\7\ This is because, if done properly, the vega exposure obtained in the SPX option portfolio will replicate the vega exposure of the expiring VIX derivative. Because a market participant is converting vega exposure from one instrument (expiring VIX derivative) to another (portfolio of SPX options expiring in 30 days), the market participant is likely to be indifferent to the settlement price received for the expiring VIX derivative. Importantly, trading the next VIX derivative expiration (i.e., rolling) will not accomplish the conversion of vega exposure since that VIX derivative contract would necessarily cover a different period of expected volatility and would be based on an entirely different portfolio of SPX options. --------------------------------------------------------------------------- \7\ In the absence of a tradeable settlement, settlement risk refers to the difference between the exercise settlement value of the expiring volatility index derivatives and the value of the portfolio of the option series used to calculate the exercise settlement value. The potential disparity between the exercise settlement value for expiring volatility index derivatives and the value of the replicating portfolio of constituent options series is referred to as ``slippage.'' A tradeable settlement provides convergence between the value of the exercise settlement value and the value of the portfolio of option series used to calculate the exercise settlement value (i.e., eliminates slippage). With respect to expiring VIX derivatives, for example, while it is possible to construct a replicating portfolio of SPX options, it is highly unlikely that traders would be able to trade constituent SPX options at prices that would match the final settlement price. --------------------------------------------------------------------------- To replicate expiring volatility index derivatives on their expiration dates with portfolios of constituent options, market participants generally submit strategy orders to participate in the modified HOSS procedure on exercise settlement value determination dates. The Exchange understands that the entry of strategy orders may lead to order imbalances in the option series being used to determine the exercise settlement value. To the extent (1) market participants seeking to replicate an expiring VIX derivative position are on one side of the market (e.g., strategy order to buy SPX options) and (2) those market participants' orders predominate over other orders during the modified HOSS procedure, those trades may contribute to an order imbalance prior to the open. To provide market participants with time to enter additional orders and quotes to offset any such imbalances prior to the opening of these series, the Exchange established a strategy order cut-off time.\8\ The time period after this cut-off time also permits market participants to, among other things, update prices of orders and quotes (except, as discussed below, changes to or cancellations of non-strategy orders may not be submitted after this cut-off time) in response to changing market conditions until the open of trading.\9\ Generally, if a series (1) has a market order imbalance, or (2) is at a price that is outside the Exchange prescribed opening width (as described in Rule 6.2(d)), the series will not open for trading. Prior to the open, the Exchange disseminates messages to market participants indicating the expected opening price for a series or imbalance information for that series (as applicable) to further encourage market participants to enter orders and quotes to offset any imbalances and to promote a fair and orderly opening. --------------------------------------------------------------------------- \8\ See Securities Exchange Act Release Nos. 52367 (August 31, 2005), 70 FR 53401 (September 8, 2005) (SR-CBOE-2004-86) (established initially for rapid opening system procedure, which is no longer used). The Commission stated it believed that the proposed rule change may serve the intended benefits of the strategy order cut-off time without imposing an undue burden on market participants. Id. at 53402. \9\ Pursuant to Rule 6.2, Interpretation and Policy .01(b), the Exchange may determine a non-strategy order cut-off time, which may be no earlier than 8:25 a.m. and no later than the opening of trading. The current non-strategy order cut-off time is the opening of trading. --------------------------------------------------------------------------- The proposed rule change first moves all defined terms in Interpretation and Policy .01 to proposed paragraph (a), adds certain defined terms, and revises and clarifies existing defined terms as each is used in Interpretation and Policy .01. Cboe Options proposes to add and modify the following defined terms in Interpretation and Policy .01 with respect to the modified HOSS procedure:Volatility Index Derivatives: The proposed term ``volatility index derivatives'' means volatility index options listed for trading on the Exchange (as determined under Rule 24.9(a)(5) and (6)), (security) futures listed for trading on an affiliated designated contract market, or over-the-counter (``OTC'') derivatives overlying a volatility index whose exercise or final settlement values, as applicable, are calculated pursuant to, or by reference to, as applicable, the modified opening procedure described in Interpretation and Policy .01. The current introductory paragraph to Interpretation and Policy .01 states the modified opening procedure is used on the dates on which the exercise and final settlement values are calculated for options (as determined under Rule 24.9(a)(5) or (6)) or (security) futures contracts on a volatility index (i.e., expiration and final settlement dates), which is consistent with the proposed definition. Additionally, the proposed definition includes OTC derivatives overlying a volatility index, as these derivatives often reference the exercise settlement value the Exchange determines using the modified HOSS procedure. Exercise Settlement Value Determination Day: The proposed term ``exercise settlement value determination day'' means a day on which the Exchange determines the exercise or final settlement value, as applicable, of expiring volatility index derivatives. This proposed definition is consistent with the current introductory paragraph in Interpretation and Policy .01, which refers to the date on which the exercise and final settlement values are calculated for options (as determined under Rule 24.9(a)(5) or (6)) or (security) futures contracts on a volatility index (i.e., expiration and final settlement dates) as the dates on which the Exchange uses the modified HOSS procedure set forth in Interpretation and Policy .01. Constituent Option Series: The proposed term ``constituent option series'' means all option series listed on the Exchange that are used to calculate the exercise or final settlement value, as applicable, of expiring volatility index derivatives. The current definition of ``constituent options'' in the current introductory paragraph to Interpretation and Policy .01 is all series used to calculate the exercise/final settlement value of the volatility index for expiring options and (security) futures contracts, which is consistent with the proposed definition. The proposed definition makes nonsubstantive changes to the definition and incorporates new defined terms. [[Page 46234]] Strategy Orders: Pursuant to the proposed rule change, the Exchange will deem individual orders (considered collectively) a market participant submits for participation in the modified opening procedure to be a ``strategy order,'' based on related facts and circumstances \10\ considered by the Exchange, only if the orders: --------------------------------------------------------------------------- \10\ The Exchange will evaluate facts and circumstances to determine whether the five criteria are satisfied. For example, the Exchange will consider whether orders are for option series with strike prices approximating the range of series that are later determined to constitute the constituent option series for the applicable expiration based on facts and circumstances. Approximate range includes not only the beginning and end points of the range, but also the population of strikes within the range. --------------------------------------------------------------------------- [cir] Relate to the market participant's positions in expiring volatility index derivatives; [cir] are for option series with the expiration that the Exchange will use to calculate the exercise or final settlement value, as applicable, of the applicable volatility index derivative; [cir] are for option series with strike prices approximating the range of series that are later determined to constitute the constituent option series for the applicable expiration; [cir] are for put (call) options with strike prices equal to or less (greater) than the ``at-the-money'' strike price; and [cir] have quantities approximating the weighting formula used to determine the exercise or final settlement value, as applicable, in accordance with the applicable volatility index methodology. Current paragraph (a) defines strategy orders as all orders for participation in the modified opening procedure that are related to positions in, or a trading strategy involving, expiring volatility index options or (security) futures. The current rule also says, in general, the Exchange will consider orders to be strategy orders for purposes of Rule 6.2, Interpretation and Policy .01 if the orders possess three characteristics: The orders are for option series with the expiration that will be used to calculate the exercise or final settlement value of the applicable volatility index option or futures contract; the orders are for option series spanning the full range of strike prices for the appropriate expiration for option series that will be used to calculate the exercise or final settlement value of the applicable volatility index option or futures contract, but not necessarily every available strike; and the orders are for put options with strike prices less than the ``at-the-money'' strike price and for call options with strike prices greater than the ``at-the-money'' strike price. The orders may also be for put and call options with ``at-the-money'' strike prices. The current rule also states whether orders are strategy orders for purposes of Rule 6.2, Interpretation and Policy .01 depends upon specific facts and circumstances. Currently, the Exchange may also deem order types other than those provided above as strategy orders if the Exchange determines that to be the case based upon the applicable facts and circumstances. When the definition of strategy order was adopted, volatility index derivatives had only just begun trading. The Exchange believed some flexibility within the rules regarding what constituted a strategy order was appropriate to permit market participants to submit strategy orders in a manner consistent with their businesses. Additionally, flexibility within the rule provided the Exchange with the ability to gain experience in monitoring trading in these products and evaluating the use of strategy orders.\11\ However, the Exchange understands this flexibility has created some confusion among market participants regarding what orders constitute a strategy order. As a result of this confusion, the Exchange understands certain market participants may hesitate to submit orders in the modified opening procedure out of concern that such orders could be deemed either a new strategy order or a modification to or cancellation of an existing strategy order. This perceived risk may lead to reduced liquidity and may increase the time it takes to open a series at a competitive price.\12\ --------------------------------------------------------------------------- \11\ See note 6. \12\ See Rule 6.2(d). --------------------------------------------------------------------------- The proposed definition of strategy order limits strategy orders to strips of orders in constituent options series submitted by a market participant that contain the characteristics of orders that would replicate the exposure of the market participant's expiring volatility index derivatives. This is consistent with how market participants use strategy orders, as discussed above, and is also consistent with the initial purpose of the strategy order cut-off time.\13\ The rule specifies that a group of orders must contain the five specific characteristics to be deemed a strategy order. The first characteristic in the proposed strategy order definition, which requires orders to be related to the market participant's positions in expiring volatility index derivatives, is a factor under the current rule for orders to be deemed a strategy order.\14\ Similarly, under the current rule, if orders possess the second through fourth characteristics in the proposed definition of strategy order, the Exchange will generally consider those orders to be strategy orders for purposes of Rule 6.2, Interpretation and Policy .01.\15\ The fifth characteristic in the proposed definition of strategy orders is not listed in the current rule as a requirement for orders to be deemed strategy orders. However, currently, the Exchange generally looks for orders to be in quantities that approximate the weighting formula used in the volatility index methodology when determining whether orders are strategy orders. In order for groups of orders in constituent options series to replicate the vega exposure of related expiring volatility index derivatives, the orders in constituent options series would need to possess these quantities. --------------------------------------------------------------------------- \13\ See Securities Exchange act Release No. 52367 (August 31, 2005), 70 FR 53401 (September 8, 2005) (SR-CBOE-2004-86) (order approving modified ROS opening procedure). \14\ See current Rule 6.2, Interpretation and Policy .01(a). The proposed rule change deletes the concept of being related to a trading strategy, as that is a broad term, and ultimately, as described in this rule filing, strategy orders relate specifically to positions in expiring volatility index derivatives, thus making the term ``trading strategy'' unnecessary. \15\ See current Rule 6.2, Interpretation and Policy .01(A)-(C). The Exchange notes the proposed rule change modifies the characteristic in current .01(B) to provide that the orders must approximate the range of series that later are determined to constitute the constituent option series rather than be for the full range. The purpose of this change is to account for the fact that, while many market participants can determine what the full range and population of strike prices will be, they may not be exact. Bids and offers of series may change in response to market conditions between the strategy order cut-off time and the opening of trading, which may impact which series ultimately constitute the constituent option series. For example, with respect to VIX, participants may not have certainty prior to the strategy order cut-off time regarding which series will have zero-bid prices and thus be excluded from the settlement calculation. See VIX methodology at http://www.cboe.com/micro/vix/vix-index-rules-and-methodology.pdf. Additionally, this will ensure that market participants cannot purposefully not enter an order for one strike within the range to avoid their orders being subject to the strategy order cut-off time. As the current rule provides the Exchange with significant flexibility to determine what constitutes a strategy order, this flexibility is consistent with the current rules. --------------------------------------------------------------------------- The proposed rule change deletes the provision stating that the Exchange may also deem order types other than those provided in the rule as strategy orders if the Exchange determines it to be the cased based upon the applicable facts and circumstances. Ultimately, based on the Exchange's experience of monitoring trading in volatility index derivatives and the modified opening procedure used on exercise settlement value determination days, orders intending to replicate the vega of expiring volatility index derivatives (or to liquidate a hedge) possess the five specified [[Page 46235]] characteristics,\16\ and thus orders intended to be strategy orders would possess the proposed characteristics.\17\ The Exchange believes the proposed definition provides market participants with more clarity with respect to what constitutes strategy orders. The Exchange believes this added clarity may increase liquidity on volatility settlement dates, as it provides more certainty with respect to which orders they need to submit prior to the strategy order cut-off time and which orders they may submit after that time. --------------------------------------------------------------------------- \16\ For example, the VIX methodology describes how a portfolio of options may provide a constant exposure to the variance of an asset, which is what strategy orders attempt to do. See http://www.cboe.com/micro/vix/vix-index-rules-and-methodology.pdf. \17\ As discussed above, the proposed rule retains some flexibility pursuant to which the Exchange may consider facts and circumstances to determine whether orders possess the five proposed criteria for what constitutes a strategy order, and a modification of a strategy order. --------------------------------------------------------------------------- Non-Strategy Orders: The proposed term ``non-strategy order'' means any order (including an order in a constituent option series) a market participant submits for participation in the modified opening procedure that is not a strategy order (or a change to or cancellation of a strategy order). Examples of non-strategy orders include, but are not limited to: [cir] A buy (sell) order in a constituent options series if an expected opening information message (``EOI'') \18\ is disseminated no more than two minutes prior to the time a market participant submitted the order included a sell (buy) imbalance and the size of the order is no larger than the size of the imbalance in the EOI, regardless of whether the market participant previously submitted a strategy order or has positions in expiring volatility index derivatives; or --------------------------------------------------------------------------- \18\ See Rule 6.2(a)(ii). --------------------------------------------------------------------------- [cir] a Market-Maker bid or offer in a constituent option series, as set forth in proposed paragraph (e) (current paragraph (c)). As discussed above, the Exchange understands the entry of strategy orders may create imbalances in the constituent option series. To provide market participants with time to enter additional orders and quotes to offset any such imbalances prior to the opening of these series, the Exchange established a strategy order cut-off time.\19\ Imbalances may prevent a series from opening, such as if it is a market order imbalance (as described in Rule 6.2(d)). Prior to the open, the Exchange disseminates EOIs to market participants indicating, among other things, imbalance information for series to further encourage market participants to enter orders to offset any imbalances and promote a fair and orderly opening.\20\ However, Rule 6.2 currently does not permit market participants that submitted strategy orders prior to the cut-off time to submit orders that would address order imbalances after the strategy order cut-off time in series used to calculate the exercise settlement value. --------------------------------------------------------------------------- \19\ See Securities Exchange Act Release Nos. 52367 (August 31, 2005), 70 FR 53401 (September 8, 2005) (SR-CBOE-2004-86) (established initially for rapid opening system procedure, which his no longer used). \20\ See Rule 6.2(a)(ii). --------------------------------------------------------------------------- However, if a market participant enters a strategy order prior to the strategy order cut-off time, the Exchange understands such market participant may refrain from entering orders to offset imbalances because of the perceived risk that such an order may be deemed to be a new strategy order or a change to the existing strategy order, which is activity the current rule does not permit. This perceived risk may reduce liquidity at the opening on exercise settlement value determination days and may increase the risk that some series do not open because of an imbalance.\21\ --------------------------------------------------------------------------- \21\ See Rule 6.2(d). --------------------------------------------------------------------------- In order to promote a fair and orderly opening process, the Exchange seeks to encourage all market participants to enter orders following the strategy order cut-off time for the purpose of offsetting imbalances in constituent option series until the opening of trading., [sic] Accordingly, the Exchange proposes to add to the definition of non-strategy orders a buy (sell) order in a constituent options series if an EOI disseminated no more than two minutes prior to the time a market participant submitted the order included a sell (buy) imbalance and the size of the order is no larger than the size of the imbalance in the EOI,\22\ regardless of whether the market participant previously submitted a strategy order or has positions in expiring volatility derivatives. --------------------------------------------------------------------------- \22\ Currently, EOIs are disseminated every five seconds. Therefore, for example, if an EOI disseminated at 8:27:00 indicated a sell order imbalance of 500 contracts, a market participant's submission of a buy order of 100 contracts at 8:28 would not be a strategy order or modification of a previously submitted strategy order. The two-minute time period is intended to provide market participants with sufficient time to manually enter an order in response to an EOI message. --------------------------------------------------------------------------- The purpose of permitting market participants to enter orders to offset order imbalances is not to permit them to modify strategy orders, but rather to encourage them to respond to EOIs that indicate an imbalance in a series exists. The Exchange believes explicitly permitting market participants to offset order imbalances in response to EOIs, as set forth in the proposed definition of non-strategy orders, may increase liquidity in series, including in constituent option series, which would contribute to a fair and orderly opening in those series. The Exchange disseminates these messages for the purpose of encouraging submission of orders to address order imbalances. Therefore, the Exchange does not believe such orders are ``related to'' expiring volatility index derivatives, and thus would not constitute a strategy order under the current or proposed definition, as discussed above. The Exchange believes the proposed rule change is consistent with the definition of strategy order because the proposed rule explicitly excludes orders submitted for this imbalance offsetting purpose from falling within the strategy order definition. The remainder of the proposed definition, including subparagraphs (1) and (3), is consistent with the current definition of non-strategy orders in current paragraph (b), and just clarifies examples of non- strategy orders that exist in the current rule. The proposed definition also makes nonsubstantive changes and incorporates new defined terms. Proposed paragraph (b) provides that, on exercise settlement value determination days, the Exchange uses the opening procedure described in Rule 6.2, as modified by Interpretation and Policy .01, for constituent option series. This clarifies that the opening procedure the Exchange uses for constituent option series on exercise settlement value determination days is the same as the opening procedure used for all option series on all other days, except as set forth in Interpretation and Policy .01. This proposed provision is consistent with the current introductory paragraph, and makes nonsubstantive changes and incorporates new defined terms. Proposed paragraph (c) states market participants must submit strategy orders, and changes to or cancellations of strategy orders, prior to the strategy order cut-off time (which the Exchange has currently set as 8:20 a.m. Chicago time). Market participants may not change or cancel strategy orders after the strategy order cut-off time, unless the market participant submits the change or cancellation (1) after the modified opening procedure is concluded; or (2) to correct a legitimate error, in which case the market participant submitting the change or cancellation must prepare and maintain a memorandum setting forth the [[Page 46236]] circumstances that resulted in the change or cancellation and submit a copy of the memorandum to the Exchange no later than the next business day in a form and manner prescribed by the Exchange. The Exchange determines the strategy order cut-off time on a class-by-class basis, which may be no earlier than 8:00 a.m. Chicago time and no later than the opening of trading in a series. The Exchange has currently set the strategy order cut-off time as 8:20 a.m. Chicago time. The Exchange will announce any changes to the strategy order cut-off time at least one day prior to implementation. Proposed paragraph (c) is substantively the same as information in current paragraph (a), and makes nonsubstantive changes and incorporates defined terms. Proposed paragraph (c) also excludes the description of what constitutes a strategy order, which was included in current paragraph (a) and has been moved to proposed paragraph (a) as a defined term, as discussed above. Proposed paragraph (d) states market participants must submit non- strategy orders prior to the non-strategy order cut-off time. The Exchange determines the non-strategy order cut-off time on a class-by- class basis, and it may be no earlier than 8:25 a.m. Chicago time and no later than the opening of trading in a series. The Exchange has currently set the non-strategy order cut-off time to be the opening of trading. The Exchange will announce any changes to the non-strategy order cut-off time at least one day prior to implementation. Proposed paragraph (d) is substantively the same as current paragraph (b), and makes nonsubstantive changes and incorporates defined terms. Proposed paragraph (d) also excludes the description of what constitutes a non- strategy order, which is currently included in current paragraph (a) and has been moved to proposed paragraph (a) as a defined term, as discussed above. The proposed rule change makes additional nonsubstantive changes, including revising the heading for Interpretation and Policy .01 and updating the paragraph lettering. The Exchange notes the proposed rule change would not impact a Trading Permit Holder's requirements to abide by Exchange Rules 4.1 (Just and Equitable Principles of Trade), 4.7 (Manipulation), and 4.18 (Prevention of the Misuse of Material, Nonpublic Information). The Exchange believes the proposed rule change may contribute to additional liquidity during the modified HOSS procedure, and thus a fair and orderly opening on exercise settlement value determination days. A fair and orderly opening in these series benefits all market participants who trade in the volatility index derivatives and the constituent series. The Exchange will continue to conduct surveillance procedures to monitor trading in the constituent option series, including but not limited to compliance with the strategy order cut-off time (in accordance with the proposed rule change). 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.\23\ Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) \24\ 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) \25\ requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. --------------------------------------------------------------------------- \23\ 15 U.S.C. 78f(b). \24\ 15 U.S.C. 78f(b)(5). \25\ Id. --------------------------------------------------------------------------- In particular, the proposed definition of a strategy order provides market participants with additional clarity regarding what orders constitute strategy orders, and the Exchange believes this added clarity benefits investors and promotes just and equitable principles of trades. The proposed rule change with respect to the definition of strategy orders is consistent with the current definition of strategy orders and the Exchange's view of what orders constitute a strategy order, as well as the legitimate purposes of strategy orders, because orders submitted for the purposes of constituting a strategy order generally possess the five specified characteristics (four of which are in current Rule 6.2, Interpretation and Policy .01(a)). Additionally, the proposed definition of non-strategy order provides market participants with additional clarity regarding orders that do not constitute strategy orders (and thus that may be submitted after the strategy-order cut-off time and prior to the non-strategy order cut-off time). The Exchange believes explicitly permitting market participants to enter orders to offset order imbalances in response to EOIs that indicate an imbalance in a series exists will encourage entry of orders when there is an imbalance in a series, even if market participants previously submitted strategy orders. This proposed rule change allows the maximum number of participants to address order imbalances during the opening process for the constituent option series while executing their investment and hedging strategies. The Exchange believes these changes may increase liquidity in series, including in constituent option series, to offset imbalances. This result would contribute to a fair and orderly opening process and would benefit all market participants who trade in the volatility index derivatives or the constituent option series. The Exchange also believes these changes are consistent with the original purpose of the strategy order cut-off time. The Exchange believes this additional clarity with respect to what is and is not a strategy order will provide market participants with more certainty with respect to which orders constitute strategy orders, and thus which orders need to be submitted prior to the strategy order cut-off time. It also clarifies for market participants the activity in which they may engage after the strategy order cut-off time. The Exchange believes the proposed reorganization of Interpretation and Policy .01, including defining all relevant terms at the beginning of Interpretation and Policy .01, also benefits market participants by providing additional clarity with respect to all defined terms for the modified HOSS procedure. The Exchange notes the proposed rule change would not impact a Trading Permit Holder's requirements to abide by Exchange Rules 4.1 (Just and Equitable Principles of Trade), 4.7 (Manipulation), and 4.18 (Prevention of the Misuse of Material, Nonpublic Information). The Exchange believes the proposed rule change may contribute to additional liquidity during the modified HOSS procedure, and thus to a fair and orderly opening in constituent option series on exercise settlement value determination days. A fair and orderly opening in these series benefits all market participants who trade in the volatility index derivatives and the [[Page 46237]] constituent series. The Exchange will continue to conduct surveillance procedures to monitor trading in the constituent option series, including but not limited to compliance with the strategy order cut-off time (in accordance with the proposed rule change). B. Self-Regulatory Organization's Statement on Burden on Competition Cboe Options does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The proposed rule change applies in the same manner to all market participants who submit orders to the Exchange in constituent option series on exercise settlement value determination days. The proposed rule change, and the proposed definition of strategy order in particular, provides market participants with clarity for market participants with respect to what constitutes a strategy order and is generally consistent with the current rules and the Exchange's view of what orders constitute a strategy order. Additionally, the proposed definition of non-strategy order, particularly the explicit permission to enter orders in response to EOIs that indicate an imbalance in a series, is consistent with the original intent of the strategy order cut-off time.\26\ The proposed rule change has no impact on intermarket competition, as it applies to orders submitted for participation in the Exchange's modified opening procedure used to calculate settlement values for expiring volatility index derivatives. The Exchange believes the proposed rule change provides market participants with more certainty with respect to which orders they need to submit prior to the strategy order cut-off time and which orders they may be submit after that time, which may increase liquidity in constituent option series on volatility settlement dates. --------------------------------------------------------------------------- \26\ See supra note 8. --------------------------------------------------------------------------- Cboe Options believes that the proposed rule change will relieve any burden on, or otherwise promote, competition. The Exchange believes the proposed rule change may contribute to liquidity in constituent option series during the modified HOSS procedure, and thus a fair and orderly opening on exercise settlement value determination days. A fair and orderly opening in these series benefits all market participants who trade in the volatility index derivatives and the constituent option series. 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 rule-comments@sec.gov. Please include File Number SR-CBOE-2018-062 on the subject line. Paper Comments Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number SR-CBOE-2018-062. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-CBOE-2018-062 and should be submitted on or before October 3, 2018. --------------------------------------------------------------------------- \27\ 17 CFR 200.30-3(a)(12). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\27\ Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018-19773 Filed 9-11-18; 8:45 am] BILLING CODE 8011-01-P
![46230 Federal Register / Vol. 83, No. 177 / Wednesday, September 12, 2018 / Notices
Rule 5.2–E(j)(3).16 The Commission Persons submitting comments are SECURITIES AND EXCHANGE
notes that the Exchange proposes no cautioned that we do not redact or edit COMMISSION
other changes to the Funds. personal identifying information from
[Release No. 34–84045; File No. SR–CBOE–
Accordingly, the Commission believes comment submissions. You should 2018–062]
that the proposed continued listing submit only information that you wish
requirements are adequately designed to to make available publicly. All Self-Regulatory Organizations; Cboe
help deter manipulation of the Shares. submissions should refer to File Exchange, Inc.; Notice of Filing of a
For the foregoing reasons, the Number SR–NYSEArca–2018–38 and Proposed Rule Change To Amend Rule
Commission finds that the proposed 6.2, Interpretation and Policy .01
should be submitted on or before
rule change, as modified by Amendment Concerning Strategy Orders
October 3, 2018.
No. 1, is consistent with Sections 6(b)(5)
and 11A of the Act and the rules and V. Accelerated Approval of Proposed September 6, 2018.
regulations thereunder applicable to a Rule Change, as Modified by Pursuant to Section 19(b)(1) of the
national securities exchange. Amendment No. 1 Securities Exchange Act of 1934
IV. Solicitation of Comments on (‘‘Act’’),1 and Rule 19b–4 thereunder,2
The Commission finds good cause to notice is hereby given that on August
Amendment No. 1
approve the proposed rule change, as 24, 2018, Cboe Exchange, Inc.
Interested persons are invited to modified by Amendment No. 1, prior to (‘‘Exchange’’ or ‘‘Cboe Options’’) filed
submit written data, views, and the 30th day after the date of with the Securities and Exchange
arguments concerning Amendment No. publication of notice of Amendment No. Commission (‘‘Commission’’) the
1. Comments may be submitted by any 1 in the Federal Register. Amendment proposed rule change as described in
of the following methods: No. 1 supplements the proposal by, Items I, II, and III below, which Items
Electronic Comments among other things, eliminating an have been prepared by the Exchange.
issuer concentration requirement from The Commission is publishing this
• Use the Commission’s internet
the proposed continued listing criteria notice to solicit comments on the
comment form (http://www.sec.gov/
applicable to the Shares and deleting proposed rule change from interested
rules/sro.shtml); or
• Send an email to rule-comments@ the condition that would require a persons.
sec.gov. Please include File Number SR– change to the index methodology before I. Self-Regulatory Organization’s
NYSEArca–2018–38 on the subject line. the proposed continued listing criteria Statement of the Terms of Substance of
would apply. The changes and the Proposed Rule Change
Paper Comments
additional information in Amendment
• Send paper comments in triplicate Cboe Options proposes a rule change
No. 1 raise no novel issues and assist
to Secretary, Securities and Exchange to amend and clarify the definition of a
the Commission in finding that the strategy order, clarify other definitions
Commission, 100 F Street NE, proposal is consistent with the Act.
Washington, DC 20549–1090. related to the modified HOSS
Accordingly, the Commission finds procedure, and permit the entry of
All submissions should refer to File good cause, pursuant to Section 19(b)(2)
Number SR–NYSEArca–2018–38. This orders that offset imbalances after the
of the Exchange Act,17 to approve the strategy order cut-off time.
file number should be included on the proposed rule change, as modified by
subject line if email is used. To help the (additions are italicized; deletions are
Amendment No. 1, on an accelerated [bracketed])
Commission process and review your
basis.
comments more efficiently, please use * * * * *
only one method. The Commission will VI. Conclusion
Rules of Cboe Exchange, Inc.
post all comments on the Commission’s
internet website (http://www.sec.gov/ It is therefore ordered, pursuant to * * * * *
rules/sro.shtml). Copies of the Section 19(b)(2) of the Act,18 that the
proposed rule change (SR–NYSEArca– Rule 6.2. Hybrid Opening (and
submission, all subsequent Sometimes Closing) System (‘‘HOSS’’)
amendments, all written statements 2018–38), as modified by Amendment
with respect to the proposed rule No. 1 thereto, be, and hereby is, (a)–(h) No change.
change that are filed with the approved on an accelerated basis. . . . Interpretations and Policies:
Commission, and all written For the Commission, by the Division of .01 Modified Opening Procedure
communications relating to the Trading and Markets, pursuant to delegated for Series Used to Calculate the
proposed rule change between the authority.19 Exercise[/] or Final Settlement Value[s]
Commission and any person, other than of Expiring Volatility Index[es]
Eduardo A. Aleman,
those that may be withheld from the Derivatives.
public in accordance with the Assistant Secretary.
(a) Definitions. For purposes of this
provisions of 5 U.S.C. 552, will be [FR Doc. 2018–19772 Filed 9–11–18; 8:45 am]
Interpretation and Policy .01, the
available for website viewing and BILLING CODE 8011–01–P following terms have the meanings
printing in the Commission’s Public below:
Reference Room, 100 F Street NE,
Washington, DC 20549, on official Volatility Index Derivatives
business days between the hours of The term ‘‘volatility index
daltland on DSKBBV9HB2PROD with NOTICES
10:00 a.m. and 3:00 p.m. Copies of this derivatives’’ means volatility index
filing will also be available for options listed for trading on the
inspection and copying at the principal Exchange (as determined under Rule
office of the Exchange. All comments 24.9(a)(5) and (6)), (security) futures
received will be posted without change. 17 15 U.S.C. 78s(b)(2).
18 15 U.S.C. 78f(b)(2). 1 15 U.S.C. 78s(b)(1).
16 See supra note 12 and accompanying text. 19 17 CFR 200.30–3(a)(12). 2 17 CFR 240.19b–4.
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![Federal Register / Vol. 83, No. 177 / Wednesday, September 12, 2018 / Notices 46231
listed for trading on an affiliated (1) A buy (sell) order in a constituent procedure and the cancellation or
designated contract market, or over-the- options series if an EOI disseminated no change is submitted] after the [modified
counter derivatives overlying a volatility more than two minutes prior to the time opening procedure is concluded]series
index whose exercise or final settlement a market participant submitted the is open for trading; or
values, as applicable, are calculated order included a sell (buy) imbalance (2) [(provided that any such strategy
pursuant to, or by reference to, as and the size of the order is no larger order may be changed or cancelled after
applicable, the modified opening than the size of the imbalance in the the applicable strategy order cut-off time
procedure described in this EOI, regardless of whether the market and] prior to the [applicable] non-
Interpretation and Policy .01. participant previously submitted a strategy order cut-off time in order to
strategy order or has positions in correct a legitimate error, in which case
Exercise Settlement Value expiring volatility index derivatives; or the [Trading Permit Holder]market
Determination Day (2) a Market-Maker bid or offer in a participant submitting the change or
The term ‘‘exercise settlement value constituent option series, as set forth in cancellation [will]must prepare and
determination day’’ means a day on paragraph (e) below. maintain a memorandum setting forth
which the Exchange determines the (b) Use of Modified Opening the circumstances that resulted in the
exercise or final settlement value, as Procedure. [All provisions set forth in change or cancellation and [will
applicable, of expiring volatility index Rule 6.2 remain in effect unless file]submit a copy of the memorandum
derivatives. superseded or modified by this [with]to the Exchange no later than the
Interpretation and Policy .01.] On [the next business day in a form and manner
Constituent Option Series dates on which the] exercise [and final] prescribed by the Exchange[)].
The term ‘‘constituent option series’’ settlement value determination days The Exchange determines the strategy
means all option series listed on the [are calculated for options (as order cut-off time on a class-by-class
Exchange that are used to calculate the determined under Rule 24.9(a)(5) or (6)) basis, which may be no earlier than 8:00
exercise or final settlement value, as or (security) futures contracts on a a.m. Chicago time and no later than the
applicable, of expiring volatility index volatility index (i.e., expiration and opening of trading in a series. The
derivatives. final settlement dates)], the Exchange Exchange will announce any changes to
[utilizes]uses the [modified] opening the strategy order cut-off time at least
Strategy Order procedure described in Rule 6.2, as one day prior to implementation.
The Exchange deems individual modified by this Interpretation and [In general, the Exchange will
orders (considered collectively) a market Policy .01, for constituent option consider orders to be strategy orders for
participant submits for participation in series[below for all series used to purposes of this Rule 6.2.01 if the orders
the modified opening procedure to be a calculate the exercise/final settlement possess the following three
‘‘strategy order,’’ based on related facts value of the volatility index for expiring characteristics:
and circumstances considered by the options and (security) futures contracts (A) The orders are for option series
Exchange, only if the orders: (these option series referred to as with the expiration that will be used to
‘‘constituent options’’)]. calculate the exercise or final settlement
(1) Relate to the market participant’s
([a]c) Strategy Order[s] Cut-Off Time. value of the applicable volatility index
positions in expiring volatility index
[All orders for participation in the option or futures contract.
derivatives;
modified opening procedure that are (B) The orders are for option series
(2) are for option series with the related to positions in, or a trading spanning the full range of strike prices
expiration that the Exchange will use to strategy involving, expiring volatility for the appropriate expiration for option
calculate the exercise or final settlement index options or (security) futures series that will be used to calculate the
value, as applicable, of the applicable (‘‘strategy orders’’)]Market participants exercise or final settlement value of the
volatility index derivative; must submit strategy orders (which applicable volatility index option or
(3) are for option series with strike orders must be entered into the futures contract, but not necessarily
prices approximating the range of series Exchange by a Trading Permit Holder), every available strike price.
that are later determined to constitute and [any] changes to or cancellations of (C) The orders are for put options
the constituent option series for the [any such]strategy orders, prior to the with strike prices less than the ‘‘at-the-
applicable expiration; strategy order cut-off time. Market money’’ strike price and for call options
(4) are for put (call) options with participants[:] with strike prices greater than the ‘‘at-
strike prices equal to or less (greater) [(i) must be received prior to the the-money’’ strike price. The orders may
than the ‘‘at-the-money’’ strike price; applicable strategy order cut-off time for also be for put and call options with ‘‘at-
and the constituent option series (as the-money’’ strike prices.
(5) have quantities approximating the determined by the Exchange on a class- Whether orders are strategy orders for
weighting formula used to determine the by-class basis), which may be no earlier purposes of this Rule 6.2.01 depends
exercise or final settlement value, as than 8:00 a.m. and no later than the upon specific facts and circumstances.
applicable, in accordance with the opening of trading in the series. The The Exchange may also deem order
applicable volatility index methodology. Exchange will announce all types other than those provided above
determinations regarding changes to the as strategy orders if the Exchange
Non-Strategy Order
applicable strategy order cut-off time at determines that to be the case based
The term ‘‘non-strategy order’’ means least one day prior to implementation. upon the applicable facts and
any order (including an order in a (ii)] may not [be cancelled or circumstances.]
daltland on DSKBBV9HB2PROD with NOTICES
constituent option series) a market changed]change or cancel strategy ([b]d) Non-Strategy Order[s] Cut-Off
participant submits for participation in orders after the strategy order cut-off Time. [All other orders for participation
the modified opening procedure that is time, unless the market participant in the modified opening procedure
not a strategy order (or a change to or submits the change or cancellation: (‘‘non-strategy orders’’), and any change
cancellation of a strategy order). (1) [after the applicable strategy order to or cancellation of any such order,
Examples of non-strategy orders cut-off time, unless the strategy order is must be received]Market participants
include, but are not limited to: not executed in the modified opening must submit non-strategy orders (which
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![46232 Federal Register / Vol. 83, No. 177 / Wednesday, September 12, 2018 / Notices
orders must be entered into the proposed rule change. The text of these providing market participants with a
Exchange by a Trading Permit Holder) statements may be examined at the mechanism to buy and sell constituent
prior to the [applicable]non-strategy places specified in Item IV below. The options at prices used to calculate the
order cut-off time. [(as determined by Exchange has prepared summaries, set exercise settlement value of the
t]The Exchange determines the non- forth in sections A, B, and C below, of volatility index derivatives, the
strategy order cut-off time on a class-by- the most significant aspects of such volatility index settlement process is
class basis[) in order to participate at the statements. ‘‘tradable.’’
opening price for the applicable series], The volatility index settlement
A. Self-Regulatory Organization’s process is patterned after the process
which may be no earlier than 8:25 a.m.
Statement of the Purpose of, and used to calculate the exercise settlement
and no later than the opening of trading
Statutory Basis for, the Proposed Rule value of SPX options. On the days SPX
in [the option]a series. The Exchange
Change options expire, S&P calculates an SOQ
will announce [all determinations
regarding]any changes to the (a) Purpose of the S&P 500 Index using the opening
[applicable] non-strategy order cut-off prices of the component stocks in their
Cboe Options and Cboe Futures primary markets. Market participants
time at least one day prior to Exchange, LLC (‘‘CFE’’) list options and
implementation. can replicate the exposure of their
futures, respectively, on different expiring SPX options by entering orders
([c]e) Market-Makers. A Market-Maker volatility indexes that are calculated
with an appointment in a class with to buy and sell the component stocks of
using prices of options traded on Cboe the S&P 500 Index at their opening
constituent option series may submit Options.3 The exercise settlement value
bids and offers in those series for bona prices. If they are successful, market
for these volatility index derivatives is participants can effectively construct a
fide market-making purposes in determined on the morning of their
accordance with Rule 8.7 and the portfolio that matches the value of the
expiration date through a special SOQ. At this point, the derivatives and
Exchange Act for its market-maker opening quotation (‘‘SOQ’’) of the
account prior to the open of trading for cash markets converge.
volatility index using the opening prices In a very similar way, the exercise
participation in the modified opening of a portfolio of options (for example,
procedure. The Exchange will deem settlement value for volatility index
the exercise settlement value of VIX derivatives is an SOQ of the volatility
these bids and offers to be non-strategy options and futures uses the opening
orders, and will not deem them to be index using opening prices of the
prices of a portfolio of S&P 500 Index constituent options used to determine
changes to or cancellations of options (‘‘SPX options’’) that expire
previously submitted strategy orders, if: the value of the index. With respect to
approximately 30 days later). On the VIX, the VIX exercise settlement value
(i) the Trading Permit Holder with days when the exercise settlement
which the Market-Maker is affiliated has is calculated using the opening prices of
values for these volatility index SPX options that expire approximately
established, maintains, and enforces derivatives are determined, Cboe
reasonably designed written policies 30 days later. Analogous to the
Options opens the constituent options 4 settlement process for SPX options,
and procedures (including information for these volatility indexes using the
barriers, as applicable), taking into market participants can replicate the
modified Hybrid Opening System exposure of their expiring VIX
consideration the nature of the Trading (‘‘HOSS’’) procedure.5 The main feature derivatives by entering buy and sell
Permit Holder’s business and other facts of the modified HOSS procedure used to orders in constituent SPX options. If
and circumstances, to prevent the calculate the exercise settlement value they are successful, market participants
misuse of material nonpublic for expiring volatility index options and can effectively construct a portfolio of
information (including the submission (security) futures that distinguishes it SPX options whose value matches the
of strategy orders); and from the normal opening procedure value of the VIX SOQ. By doing so,
(ii) when submitting these bids and
used on all other days is a cutoff time market participants may make or take
offers, the Market-Maker has no actual
for the entry of strategy orders.6 By delivery of the SPX options that will be
knowledge of any previously submitted
used to calculate the exercise settlement
strategy orders. 3 These volatility indexes include the Cboe
value of their VIX derivatives.
* * * * * Volatility Index (‘‘VIX’’) and the Russell 2000 A tradable settlement creates the
(b) Not applicable. Volatility Index (‘‘RVX’’). Options expire on an
expiration date and settle to an exercise settlement
opportunity to convert the exposure of
(c) Not applicable. value, and futures settle on a final settlement date an expiring VIX derivative into the
* * * * * to a final settlement value. For ease of reference, the portfolio of SPX options that will be
The text of the proposed rule change Exchange will use the options terminology used to calculate the exercise settlement
throughout this filing when referring to the
is also available on the Exchange’s ‘‘expiration/final settlement date’’ and ‘‘expiration/
website (http://www.cboe.com/ final settlement value’’ for volatility index applicable volatility index option or futures
AboutCBOE/ derivatives. contract; (b) option series spanning the full range
of strike prices for the appropriate expiration for
CBOELegalRegulatoryHome.aspx), at 4 ‘‘Constituent options’’ are the series used to
option series that will be used to calculate the
the Exchange’s Office of the Secretary, calculate the exercise/final settlement value of the exercise or final settlement value of the applicable
volatility index for expiring options and (security) volatility index option or futures contract (not
and at the Commission’s Public futures contracts. necessarily every available strike price); and (c) put
Reference Room. 5 See Rule 6.2, Interpretation and Policy .01.
options with strike prices at or less than the ‘‘at-
6 Currently, strategy orders are defined as all
II. Self-Regulatory Organization’s the-money’’ strike price and for call options with
orders (defined in Rule 1.1(ooo) as a firm strike prices greater than or at the ‘‘at-the-money’’
Statement of the Purpose of, and commitment to buy or sell option contracts) for strike price. Whether orders are strategy orders
daltland on DSKBBV9HB2PROD with NOTICES
Statutory Basis for, the Proposed Rule participation in the modified opening procedure depends upon specific facts and circumstances. The
Change that are related to positions in, or a trading strategy Exchange may also deem order types other than
involving, volatility index options or (security) those provided above as strategy orders if the
In its filing with the Commission, the futures (as discussed below, the proposed rule Exchange determines that to be the case based upon
Exchange included statements change is adding ‘‘expiring’’ to this definition). In the applicable facts and circumstances. The strategy
general, the Exchange currently considers orders to order cut-off time may be no earlier than 8:00 a.m.
concerning the purpose of and basis for be strategy orders if they are for (a) option series and no later than the opening of trading in the
the proposed rule change and discussed with the expiration that will be used to calculate series, and is currently 8:20 a.m. Chicago time. See
any comments it received on the the exercise or final settlement value of the Rule 6.2, Interpretation and Policy .01.
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![Federal Register / Vol. 83, No. 177 / Wednesday, September 12, 2018 / Notices 46235
characteristics,16 and thus orders 6.2(d)). Prior to the open, the Exchange permitting market participants to offset
intended to be strategy orders would disseminates EOIs to market order imbalances in response to EOIs, as
possess the proposed characteristics.17 participants indicating, among other set forth in the proposed definition of
The Exchange believes the proposed things, imbalance information for series non-strategy orders, may increase
definition provides market participants to further encourage market participants liquidity in series, including in
with more clarity with respect to what to enter orders to offset any imbalances constituent option series, which would
constitutes strategy orders. The and promote a fair and orderly contribute to a fair and orderly opening
Exchange believes this added clarity opening.20 However, Rule 6.2 currently in those series. The Exchange
may increase liquidity on volatility does not permit market participants that disseminates these messages for the
settlement dates, as it provides more submitted strategy orders prior to the purpose of encouraging submission of
certainty with respect to which orders cut-off time to submit orders that would orders to address order imbalances.
they need to submit prior to the strategy address order imbalances after the Therefore, the Exchange does not
order cut-off time and which orders they strategy order cut-off time in series used believe such orders are ‘‘related to’’
may submit after that time. to calculate the exercise settlement expiring volatility index derivatives,
• Non-Strategy Orders: The proposed value. and thus would not constitute a strategy
term ‘‘non-strategy order’’ means any However, if a market participant order under the current or proposed
order (including an order in a enters a strategy order prior to the definition, as discussed above. The
constituent option series) a market strategy order cut-off time, the Exchange Exchange believes the proposed rule
participant submits for participation in understands such market participant change is consistent with the definition
the modified opening procedure that is may refrain from entering orders to of strategy order because the proposed
not a strategy order (or a change to or offset imbalances because of the rule explicitly excludes orders
cancellation of a strategy order). perceived risk that such an order may be submitted for this imbalance offsetting
Examples of non-strategy orders deemed to be a new strategy order or a purpose from falling within the strategy
include, but are not limited to: change to the existing strategy order, order definition.
Æ A buy (sell) order in a constituent which is activity the current rule does The remainder of the proposed
options series if an expected opening not permit. This perceived risk may definition, including subparagraphs (1)
information message (‘‘EOI’’) 18 is reduce liquidity at the opening on and (3), is consistent with the current
disseminated no more than two minutes exercise settlement value determination definition of non-strategy orders in
prior to the time a market participant days and may increase the risk that current paragraph (b), and just clarifies
submitted the order included a sell some series do not open because of an examples of non-strategy orders that
(buy) imbalance and the size of the imbalance.21 exist in the current rule. The proposed
order is no larger than the size of the In order to promote a fair and orderly definition also makes nonsubstantive
imbalance in the EOI, regardless of opening process, the Exchange seeks to changes and incorporates new defined
whether the market participant encourage all market participants to terms.
previously submitted a strategy order or enter orders following the strategy order Proposed paragraph (b) provides that,
has positions in expiring volatility cut-off time for the purpose of offsetting on exercise settlement value
index derivatives; or imbalances in constituent option series determination days, the Exchange uses
Æ a Market-Maker bid or offer in a until the opening of trading., [sic] the opening procedure described in
constituent option series, as set forth in Accordingly, the Exchange proposes to Rule 6.2, as modified by Interpretation
proposed paragraph (e) (current add to the definition of non-strategy and Policy .01, for constituent option
paragraph (c)). orders a buy (sell) order in a constituent series. This clarifies that the opening
As discussed above, the Exchange options series if an EOI disseminated no procedure the Exchange uses for
understands the entry of strategy orders more than two minutes prior to the time constituent option series on exercise
may create imbalances in the a market participant submitted the order settlement value determination days is
constituent option series. To provide included a sell (buy) imbalance and the the same as the opening procedure used
market participants with time to enter size of the order is no larger than the for all option series on all other days,
additional orders and quotes to offset size of the imbalance in the EOI,22 except as set forth in Interpretation and
any such imbalances prior to the regardless of whether the market Policy .01. This proposed provision is
opening of these series, the Exchange participant previously submitted a consistent with the current introductory
established a strategy order cut-off strategy order or has positions in paragraph, and makes nonsubstantive
time.19 Imbalances may prevent a series expiring volatility derivatives. changes and incorporates new defined
from opening, such as if it is a market The purpose of permitting market terms.
order imbalance (as described in Rule participants to enter orders to offset Proposed paragraph (c) states market
order imbalances is not to permit them participants must submit strategy
16 For example, the VIX methodology describes to modify strategy orders, but rather to orders, and changes to or cancellations
how a portfolio of options may provide a constant encourage them to respond to EOIs that of strategy orders, prior to the strategy
exposure to the variance of an asset, which is what order cut-off time (which the Exchange
strategy orders attempt to do. See http://
indicate an imbalance in a series exists.
www.cboe.com/micro/vix/vix-index-rules-and- The Exchange believes explicitly has currently set as 8:20 a.m. Chicago
methodology.pdf. time). Market participants may not
17 As discussed above, the proposed rule retains 20 See Rule 6.2(a)(ii). change or cancel strategy orders after
some flexibility pursuant to which the Exchange 21 See Rule 6.2(d). the strategy order cut-off time, unless
may consider facts and circumstances to determine 22 Currently, EOIs are disseminated every five
the market participant submits the
daltland on DSKBBV9HB2PROD with NOTICES
whether orders possess the five proposed criteria seconds. Therefore, for example, if an EOI
for what constitutes a strategy order, and a disseminated at 8:27:00 indicated a sell order
change or cancellation (1) after the
modification of a strategy order. imbalance of 500 contracts, a market participant’s modified opening procedure is
18 See Rule 6.2(a)(ii).
submission of a buy order of 100 contracts at 8:28 concluded; or (2) to correct a legitimate
19 See Securities Exchange Act Release Nos. would not be a strategy order or modification of a error, in which case the market
52367 (August 31, 2005), 70 FR 53401 (September previously submitted strategy order. The two-
8, 2005) (SR–CBOE–2004–86) (established initially minute time period is intended to provide market
participant submitting the change or
for rapid opening system procedure, which his no participants with sufficient time to manually enter cancellation must prepare and maintain
longer used). an order in response to an EOI message. a memorandum setting forth the
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![Federal Register / Vol. 83, No. 177 / Wednesday, September 12, 2018 / Notices 46237
constituent series. The Exchange will C. Self-Regulatory Organization’s provisions of 5 U.S.C. 552, will be
continue to conduct surveillance Statement on Comments on the available for website viewing and
procedures to monitor trading in the Proposed Rule Change Received From printing in the Commission’s Public
constituent option series, including but Members, Participants, or Others Reference Room, 100 F Street NE,
not limited to compliance with the The Exchange neither solicited nor Washington, DC 20549, on official
strategy order cut-off time (in received comments on the proposed business days between the hours of
accordance with the proposed rule rule change. 10:00 a.m. and 3:00 p.m. Copies of the
change). filing also will be available for
III. Date of Effectiveness of the inspection and copying at the principal
B. Self-Regulatory Organization’s Proposed Rule Change and Timing for office of the Exchange. All comments
Statement on Burden on Competition Commission Action received will be posted without change.
Cboe Options does not believe that Within 45 days of the date of Persons submitting comments are
the proposed rule change will impose publication of this notice in the Federal cautioned that we do not redact or edit
any burden on competition that is not Register or within such longer period personal identifying information from
necessary or appropriate in furtherance up to 90 days (i) as the Commission may comment submissions. You should
of the purposes of the Act. The designate if it finds such longer period submit only information that you wish
proposed rule change applies in the to be appropriate and publishes its to make available publicly. All
same manner to all market participants reasons for so finding or (ii) as to which submissions should refer to File
the Exchange consents, the Commission Number SR–CBOE–2018–062 and
who submit orders to the Exchange in
will: should be submitted on or before
constituent option series on exercise
A. By order approve or disapprove October 3, 2018.
settlement value determination days.
The proposed rule change, and the such proposed rule change, or For the Commission, by the Division of
proposed definition of strategy order in B. institute proceedings to determine Trading and Markets, pursuant to delegated
particular, provides market participants whether the proposed rule change authority.27
with clarity for market participants with should be disapproved. Eduardo A. Aleman,
respect to what constitutes a strategy Assistant Secretary.
IV. Solicitation of Comments
order and is generally consistent with [FR Doc. 2018–19773 Filed 9–11–18; 8:45 am]
the current rules and the Exchange’s Interested persons are invited to BILLING CODE 8011–01–P
view of what orders constitute a strategy submit written data, views, and
order. Additionally, the proposed arguments concerning the foregoing,
definition of non-strategy order, including whether the proposed rule
change is consistent with the Act. SMALL BUSINESS ADMINISTRATION
particularly the explicit permission to
enter orders in response to EOIs that Comments may be submitted by any of [Docket No. SBA–2018–0008]
indicate an imbalance in a series, is the following methods:
consistent with the original intent of the Electronic Comments Community Advantage Pilot Program
strategy order cut-off time.26 The
• Use the Commission’s internet AGENCY: U.S. Small Business
proposed rule change has no impact on Administration.
comment form (http://www.sec.gov/
intermarket competition, as it applies to
rules/sro.shtml); or ACTION: Notice of extension of and
orders submitted for participation in the • Send an email to rule-comments@ changes to Community Advantage Pilot
Exchange’s modified opening procedure sec.gov. Please include File Number SR– Program; and request for comments.
used to calculate settlement values for CBOE–2018–062 on the subject line.
expiring volatility index derivatives. SUMMARY: The Community Advantage
The Exchange believes the proposed Paper Comments (‘‘CA’’) Pilot Program is a pilot program
rule change provides market • Send paper comments in triplicate to increase SBA-guaranteed loans to
participants with more certainty with to Secretary, Securities and Exchange small businesses in underserved areas.
respect to which orders they need to Commission, 100 F Street NE, The Small Business Administration
submit prior to the strategy order cut-off Washington, DC 20549–1090. (‘‘SBA’’) continues to refine and
time and which orders they may be improve the design of the Community
All submissions should refer to File
submit after that time, which may Number SR–CBOE–2018–062. This file Advantage Pilot Program. To support
increase liquidity in constituent option number should be included on the SBA’s commitment to expanding access
series on volatility settlement dates. subject line if email is used. To help the to capital for small businesses and
Cboe Options believes that the Commission process and review your entrepreneurs in underserved markets,
proposed rule change will relieve any comments more efficiently, please use SBA is issuing this Notice to extend the
burden on, or otherwise promote, only one method. The Commission will term of the CA Pilot Program, to
competition. The Exchange believes the post all comments on the Commission’s mitigate risks of the program by placing
proposed rule change may contribute to internet website (http://www.sec.gov/ a moratorium on accepting new CA
liquidity in constituent option series rules/sro.shtml). Copies of the Lender applications, to limit fees that
during the modified HOSS procedure, submission, all subsequent can be collected from an applicant for
and thus a fair and orderly opening on amendments, all written statements a CA loan, and to revise other program
exercise settlement value determination with respect to the proposed rule requirements.
daltland on DSKBBV9HB2PROD with NOTICES
days. A fair and orderly opening in change that are filed with the DATES: The moratorium on accepting
these series benefits all market Commission, and all written applications from lenders for
participants who trade in the volatility communications relating to the participation in the CA Pilot Program
index derivatives and the constituent proposed rule change between the and all other changes identified in this
option series. Commission and any person, other than Notice will be effective on October 1,
those that may be withheld from the
26 See supra note 8. public in accordance with the 27 17 CFR 200.30–3(a)(12).
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Document Created: 2018-09-12 02:06:56
Document Modified: 2018-09-12 02:06:56
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 83 FR 46230 |
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