83 FR 54635 - Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Permit the Listing and Trading of P.M.-Settled Series on Certain Broad-Based Index Options on a Pilot Basis

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 210 (October 30, 2018)

Page Range		54635-54641
FR Document		2018-23624

Federal Register, Volume 83 Issue 210 (Tuesday, October 30, 2018)

[Federal Register Volume 83, Number 210 (Tuesday, October 30, 2018)]
[Notices]
[Pages 54635-54641]
From the Federal Register Online [www.thefederalregister.org]
[FR Doc No: 2018-23624]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84480; File No. SR-CboeBZX-2018-066]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Permit the Listing and Trading of
P.M.-Settled Series on Certain Broad-Based Index Options on a Pilot
Basis

October 24, 2018.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on October 11, 2018, Cboe BZX Exchange, Inc. filed with the
Securities and Exchange Commission (the ``Commission'' or ``SEC'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX Options'')
proposes to permit the listing and trading of P.M.-settled series on
certain broad-based index options on a pilot basis.
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

[[Page 54636]]

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 the
Statutory Basis for, the Proposed Rule Change

1. Purpose
The proposed rule change permits the listing and trading of P.M.-
settled series on certain broad-based index options on a pilot
basis.\3\ First, the proposed rule change would permit the listing and
trading of XSP options with third-Friday-of-the-month expiration dates,
whose exercise settlement value will be based on the closing index
value on the expiration day (``P.M.-settled'') for an initial period of
twelve months (the ``XSPPM Pilot Program'') from the date of approval
of this proposed rule change. Second, the proposed rule change would
permit the listing and trading of P.M.-settled options on broad-based
indexes with weekly expirations (``Weeklys'') and end-of-month
expirations (``EOMs'') for an initial period of 12 months (the
``Nonstandard Expirations Pilot Program'') from the date of approval of
this proposed rule change.
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\3\ The Exchange is authorized to list for trading options that
overlie the Mini-SPX Index (``XSP'') and the Russell 2000 Index
(``RUT''). See Rule 29.11(a).
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XSPPM Pilot Program
Proposed Rule 29.11(a)(6) permits the listing and trading, in
addition to A.M.-settled XSP options, of P.M.-settled XSP options with
third-Friday-of-the-month expiration dates on a pilot basis for an
initial period of 12 months from the date of approval of this proposed
rule change. XSP options are A.M.-settled pursuant to the generic
listing criteria in Rule 29.11(a)(5). The Exchange believes permitting
the trading of XSP options on a P.M.-settled basis will encourage
greater trading in XSP options.
Other than settlement and closing time on the last trading day (as
discussed below), contract terms for P.M.-settled XSP options will be
the same as the A.M.-settled XSP options. The proposed contract would
use a $100 multiplier. The minimum trading increments, strike price
intervals, and expirations would be the same as the A.M.-settled XSP
option series. P.M.-settled XSP options would have European-style
exercise. The Exchange will also have flexibility to open for trading
additional series in response to customer demand.
The proposed rule change amends Rule 29.10(a) to state that, on
their last trading day, transactions in P.M.-settled XSP options may be
effected on the Exchange between the hours of 9:30 a.m. and 4:00 p.m.
Eastern time (as opposed to the normal trading hours for non-expiring
P.M.-settled XSP options, which are from 9:30 a.m. to 4:15 p.m. Eastern
time). XSP options are typically priced in the market based on
corresponding futures values. The primary listing markets for the
component securities that comprise the S&P 500 Index close trading in
those securities at 4:00 p.m. The primary listing exchanges for the
component securities disseminate closing prices of the component
securities, which are used to calculate the exercise settlement value
of the S&P 500 Index. The Exchange believes that, under normal trading
circumstances, the primary listing markets have sufficient bandwidth to
prevent any data queuing that would cause any trades that are executed
prior to the closing time from being reported after 4:00 p.m. Despite
the fact that the exercise settlement value will be fixed at or soon
after 4:00 p.m., if the Exchange did not close trading in expiring
P.M.-settled XSP options at 4:00 p.m. on their last trading day,
trading in expiring P.M.-settled XSP options would continue for an
additional fifteen minutes until 4:15 p.m. and would not be able to be
priced on corresponding futures values, but rather the known cash
value. At the same time, the prices of non-expiring P.M.-settled XSP
option series would continue to move and be priced in response to
changes in corresponding futures prices.
A potential pricing divergence could occur between 4:00 p.m. and
4:15 p.m. on the final trading day in expiring P.M.-settled XSP options
(e.g. switch from pricing off of futures to cash). Further, the switch
from pricing off of futures to cash can be a difficult and risky
switchover for liquidity providers. As a result, without closing
expiring contracts at 4:00 p.m., it is foreseeable that Market-Makers
could react by widening spreads in order to compensate for the
additional risk. Therefore, the Exchange believes that, in order to
mitigate potential investor confusion and the potential for increased
costs to investors, it is appropriate to cease trading in the expiring
P.M.-settled XSP contracts at 4:00 p.m. The Exchange does not believe
the proposed change will impact volatility on the underlying cash
market at the close on third Fridays. Further, other options exchanges
close trading in certain options on the last trading day for certain
classes.\4\
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\4\ See Cboe Options Rule 24.6, Interpretations and Policies .01
(options with Quarterly Index Expirations), .03 (Cboe S&P 500 A.M./
P.M. Basis options), .04 (P.M.-settled SPX options with third
Friday-of-the-month expiration and P.M.-settled XSP options), and
.05 (MSCI EAFE Index options).
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If the Exchange were to propose an extension of the XSPPM Pilot
Program or should the Exchange propose to make the XSPPM Pilot Program
permanent, the Exchange would submit a filing proposing such amendments
to the XSPPM Pilot Program. Further, any positions established under
the XSPPM Pilot Program would not be impacted by the expiration of the
XSPPM Pilot Program. For example, if the Exchange lists a P.M.-settled
XSP option that expires after the XSPPM Pilot Program expires (and is
not extended), then those positions would continue to exist. If the
pilot were not extended, then the positions could continue to exist.
However, any further trading in those series would be restricted to
transactions where at least one side of the trade is a closing
transaction.
As part of the XSPPM Pilot Program, the Exchange will submit a
pilot report to the Commission at least two months prior to the
expiration date of the pilot. This annual report will contain an
analysis of volume, open interest, and trading patterns. The analysis
would examine trading in the proposed option product as well as trading
in the securities that comprise the S&P 500 Index. In addition, for
series that exceed certain minimum open interest parameters, the annual
report will provide analysis of index price volatility and, if needed,
share trading activity.
The annual report will contain the following volume and open
interest data:
(1) Monthly volume aggregated for all trades;
(2) monthly volume aggregated by expiration date;
(3) monthly volume for each individual series;
(4) month-end open interest aggregated for all series;
(5) month-end open interest aggregated by expiration date; and
(6) month-end open interest for each individual series.
The annual report will also contain the information noted above for
expiration Friday A.M.-settled XSP option series, if applicable, for
the period covered in the annual report. In addition to the annual
report, the Exchange will provide the Commission with interim reports
of the information listed in (1) through (6) above.

[[Page 54637]]

In the annual report, the annual report would contain the following
analysis of trading patterns in expiration Friday, P.M.-settled XSP
option series in the XSPPM Pilot Program:
(1) A time series analysis of open interest; and
(2) an analysis of the distribution of trade sizes.
Also, for series that exceed certain minimum parameters, the annual
report will also contain the following analysis related to index price
changes and, if needed, underlying share trading volume at the close on
expiration Fridays:
(1) A comparison of index price changes at the close of trading on
a given expiration Friday with comparable price changes from a control
sample. The data will include a calculation of percentage price changes
for various time intervals and compare that information to the
respective control sample. Raw percentage price change data as well as
percentage price change data normalized for prevailing market
volatility, as measured by an appropriate index as agreed by the
Commission and the Exchange, would be provided; and
(2) a calculation of share volume for a sample set of the component
securities representing an upper limit on share trading that could be
attributable to expiring in-the-money series. The data, if needed, will
include a comparison of the calculated share volume for securities in
the sample set to the average daily trading volumes of those securities
over a sample period.
The minimum open interest parameters, control sample, time
intervals, method for randomly selecting the component securities, and
sample periods would be determined by the Exchange and the Commission.
Additionally, the Exchange will provide the Commission with any
additional data or analyses the Commission requests because it deems
such data or analyses necessary to determine whether the XSPPM Pilot
Program is consistent with the Exchange Act. The Exchange will make
public all data and analyses it submits to the Commission under the
XSPPM Pilot Program.
Other exchanges currently have pilots that permit P.M.-settled
index options.\5\
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\5\ See Cboe Options Rule 24.9, Interpretation and Policy .14
and Phlx Rule 1101A, Commentary .05.
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Nonstandard Expirations Pilot Program
The proposed rule change permits the listing and trading, on a
pilot basis, of P.M.-settled options on broad-based indexes with
nonstandard expiration dates for an initial period of 12 months from
the date of approval of this proposed rule change. The Nonstandard
Expirations Pilot Program will permit both Weeklys and EOMs as
discussed below. Contract terms for the Weekly and EOM expirations will
be similar to those of the A.M.-settled broad-based index options,
except that the Weekly and EOM expirations will be P.M.-settled.
Proposed Rule 29.11(j)(1) permits the Exchange to open for trading
Weeklys on any broad-based index eligible for standard options trading
to expire on any Monday, Wednesday, or Friday (other than the third
Friday-of-the-month or days that coincide with an EOM). Weeklys will be
subject to all provisions of Rule 29.11 and will be treated the same as
options on the same underlying index that expire on the third Friday of
the expiration month. However, Weeklys will be P.M.-settled, and new
Weekly series may be added up to and including on the expiration date
for an expiring Weekly.
The maximum number of expirations that may be listed for each
Weekly (i.e., a Monday expiration, a Wednesday expiration, or Friday
expiration, as applicable) in a given class will be the same as the
maximum number of expirations permitted in Rule 29.11(a)(3) for
standard options on the same broad-based index.\6\ Weeklys would not
need to be for consecutive Monday, Wednesday, or Friday expirations, as
applicable. However, the expiration date of a non-consecutive
expiration would not be permitted beyond what would be considered the
last expiration date if the maximum number of expirations were listed
consecutively. Weeklys that are first listed in a given class could
expire up to four weeks from the actual listing date. If the last
trading day of a month is a Monday, Wednesday, or Friday and the
Exchange lists EOMs and Weeklys, as applicable, in a given class, the
Exchange will list an EOM instead of a Weekly in the given class. Other
expirations in the same class are not counted as part of the maximum
number of Weeklys for a broad-based index class. If the Exchange is not
open for business on a respective Monday, the normally Monday expiring
Weeklys would expire on the following business day. If the Exchange is
not open for business on a respective Wednesday or Friday, the normally
Wednesday or Friday expiring Weekly will expire on the previous
business day.
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\6\ Pursuant to Rule 29.11(a)(3), the Exchange may list up to
six expiration months at any one time. Therefore, pursuant to the
proposed rule change, the Exchange may list a maximum of six Weekly
expirations under the Nonstandard Expirations Pilot Program.
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Proposed Rule 29.11(a)(2) [sic] permits the Exchange to open for
trading EOMs on any broad-based index eligible for standard options
trading to expire on the last trading day of the month. EOMs will be
subject to all provisions of Rule 29.11 and treated the same as options
on the same underlying index that expire on the third Friday of the
expiration month. However, EOMs will be P.M.-settled, and new series of
EOMs may be added up to and including on the expiration date for an
expiring EOM.
The maximum number of expirations that may be listed for EOMs in a
given class is the same as the maximum number of expirations permitted
in Rule 29.11(a)(3) for standard options on the same broad-based
index.\7\ EOMs need not be for consecutive end-of-month expirations.
However, the expiration date of a non-consecutive expiration may not be
beyond what would be considered the last expiration date if the maximum
number of expirations were listed consecutively. EOMs that are first
listed in a given class may expire up to four weeks from the actual
listing date. Other expirations in the same class are not counted as
part of the maximum number of EOMs for a broad-based index class.
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\7\ Id.
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The proposed rule change amends Rule 29.11(c)(5)(C) to provide that
the lowest strike interval for series of XSP options listed under the
Nonstandard Expirations Pilot Program will be $0.50. With respect to
XSP, this is consistent with the minimum strike interval for XSP
options listed under the Short Term Series Program.\8\ Additionally,
this is consistent with the minimum strike interval for options on the
Standard & Poor's Depository Receipts Trust (SPY), which is an ETF that
like XSP tracks the performance of 1/10th the value of the S&P 500
Index, with weekly expirations.\9\
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\8\ See Rule 29.11(c)(5)(C).
\9\ See Rule 19.6, Interpretation and Policy .05(f).
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Weeklys and EOMs will be subject to the same rules that currently
govern the trading of standard monthly broad-based index options,
including sales practice rules, margin requirements, and floor trading
procedures. Contract terms for Weeklys and EOMs will be the same as
those for standard monthly broad-based index options. Since Weeklys and
EOMs will be new types of series, and not a new class, the Exchange
proposes that Weeklys and EOMs will be aggregated for any applicable
reporting

[[Page 54638]]

and other requirements.\10\ Pursuant to new proposed Rule 29.11(j)(4),
transactions in expiring Weeklys and EOMs may be effected on the
Exchange between the hours of 9:30 a.m. and 4:00 p.m. (Eastern time).
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\10\ Rule 29.5(a) requires Options Members to comply with the
applicable rules of Cboe Options with respect to position limits for
broad-based index options for options traded on Cboe Options. Cboe
Options Rule 24.4, Interpretation and Policy .03 sets forth the
reporting requirements for certain market indexes that do not have
position limits, including XSP and RUT, and would apply to XSP and
RUT options traded on the Exchange pursuant to Rule 29.5(a); see
also Cboe Options Rule 24.4(b), which provides that Weeklys and EOMs
will be aggregated with option contracts on the same broad-based
index and will be subject to the overall position limit, and would
apply to Weeklys/EOMs traded on the Exchange pursuant to Rule
29.5(a). The Exchange notes that the proposed aggregation is
consistent with the aggregation requirements or other types of
option series (e.g., quarterly expiring options) that may be listed
on the Exchange and that do not expire on the customary ``third
Friday'' (see Cboe Options Rule 24.4(e)).
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As stated above, this proposed rule change establishes a
Nonstandard Expirations Pilot Program for broad-based index options on
a pilot basis, for an initial period of 12 months from the date of
approval of this proposed rule change. If the Exchange were to propose
an extension of the Nonstandard Expirations Pilot Program or should the
Exchange propose to make it permanent, the Exchange would submit a
filing proposing such amendments. Further, any positions established
under the Nonstandard Expirations Pilot Program would not be impacted
by the expiration of the pilot. For example, if the Exchange lists a
Weekly or EOM that expires after the Nonstandard Expirations Pilot
Program expires (and is not extended), then those positions would
continue to exist. However, any further trading in those series would
be restricted to transactions where at least one side of the trade is a
closing transaction.
As part of the Nonstandard Expirations Pilot Program, the Exchange
will submit a pilot report to the Commission at least two months prior
to the expiration date of the pilot (the ``annual report''). The annual
report will contain an analysis of volume, open interest, and trading
patterns. In addition, for series that exceed certain minimum open
interest parameters, the annual report will provide analysis of the
index price volatility, and, if needed, share trading activity.
For all Weekly and EOM series, the annual report will contain the
following volume and open interest data for each broad-based index
overlying Weekly and EOM options:
(1) Monthly volume aggregated for all Weekly and EOM series;
(2) Volume in Weekly and EOM series aggregated by expiration date;
(3) Month-end open interest aggregated for all Weekly and EOM
series;
(4) Month-end open interest for EOM series aggregated by expiration
date and open interest for Weekly series aggregated by expiration date;
(5) Ratio of monthly aggregate volume in Weekly and EOM series to
total monthly class volume; and
(6) Ratio of month-end open interest in EOM series to total month-
end class open interest and ratio of open interest in each Weekly
series to total class open interest.
In addition, the annual report will contain the information noted
above for standard expiration Friday, A.M.-settled series, if
applicable, for the period covered in the annual report as well as for
the six-month period prior to the initiation of the pilot.
Upon request by the SEC, the Exchange will provide a data file
containing:
(1) Weekly and EOM option volume data aggregated by series, and
(2) Weekly open interest for each expiring series and EOM month-end
open interest for expiring series.
In the annual report, the Exchange also proposes to identify Weekly
and EOM trading patterns by undertaking a time series analysis of open
interest in Weekly and EOM series aggregated by expiration date
compared to open interest in near-term standard expiration Friday A.M.-
settled series in order to determine whether users are shifting
positions from standard series to Weekly and EOM series. In addition,
to the extent that data on other weekly or monthly P.M.-settled
products from other exchanges is publicly available, the report will
also compare open interest with these options in order to determine
whether users are shifting positions from other weekly or monthly P.M.-
settled products to the Weekly and EOM series. Declining open interest
in standard series or the weekly or monthly P.M.-settled products of
other exchanges accompanied by rising open interest in Weekly and EOM
series would suggest that users are shifting positions.
For each Weekly and EOM expiration that has open interest that
exceeds certain minimum thresholds, the annual report will contain the
following analysis related to index price changes and, if needed,
underlying share trading volume at the close on expiration dates:
(1) A comparison of index price changes at the close of trading on
a given expiration date with comparable price changes from a control
sample. The data will include a calculation of percentage price changes
for various time intervals and compare that information to the
respective control sample. Raw percentage price change data as well as
percentage price change data normalized for prevailing market
volatility, as measured by an appropriate index agreed to by the
Commission and the Exchange, will be provided; and
(2) If needed, a calculation of share volume for a sample set of
the component securities representing an upper limit on share trading
that could be attributable to expiring in-the-money Weekly and EOM
series. The data, if needed, will include a comparison of the
calculated share volume for securities in the sample set to the average
daily trading volumes of those securities over a sample period.
The minimum open interest parameters, control sample, time
intervals, method for selecting the component securities, and sample
periods will be determined by the Exchange and the Commission.
Additionally, the Exchange will provide the Commission with any
additional data or analyses the Commission requests because it deems
such data or analyses necessary to determine whether the Nonstandard
Expirations Pilot Program is consistent with the Exchange Act. The
Exchange will make public all data and analyses it submits to the
Commission under the Nonstandard Expirations Pilot Program. Other
exchanges currently have pilots that have weekly and end-of-month
expirations.\11\
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\11\ See Cboe Options Rule 24.9(e); and Phlx Rule 1101A(b)(vii).
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Additional Information
Precedent exists for P.M.-settled broad-based index options, as
other options exchanges list P.M.-settled broad-based index
options.\12\ The Exchange does not believe that any market disruptions
will be encountered with the introduction of listing P.M.-settled
options on the Exchange. The Exchange will monitor for any such
disruptions or the development of any factors that would cause such
disruptions.
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\12\ See, e.g., Cboe Options Rule 24.9(a)(4) (OEX not listed as
A.M.-settled) and Interpretation and Policy .14 (permits listing of
P.M.-settled SPX and XSP options); and PHLX Rule 1101A, Commentary
.05 (permits listing of P.M.-settled NDX options).
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The Exchange notes that P.M.-settled options predominate in the
over-the-counter (``OTC'') market, and the Exchange is not aware of any
adverse effects in the stock market attributable to the P.M.-settlement
feature. The

[[Page 54639]]

Exchange is merely proposing to offer a P.M.-settled product in an
exchange environment that offers the benefit of added transparency,
price discovery, and stability. In response to any potential concerns
that disruptive trading conduct could occur as a result of the
concurrent listing and trading of two index option products based on
the same index but for which different settlement methodologies exist
(i.e., one is A.M.-settled and one is P.M.-settled), the Exchange notes
that Cboe Options lists and trades both A.M.-settled and P.M.-settled
SPX options, and Phlx lists and trades both A.M.-settled and P.M.-
settled NDX options. The Exchange is not aware of any market
disruptions occurring as a result of these exchanges offering both
products.
The adoption of P.M.-settled options on an exchange that lists
A.M.-settled options in the same class would provide greater spread
opportunities. This manner of trading in different products allows a
market participant to take advantage of the different expiration times,
providing expanded trading opportunities. In the options market
currently, market participants regularly trade similar or related
products in conjunction with each other, which contributes to overall
market liquidity.
The Exchange represents it has an adequate surveillance program in
place for index options. The Exchange is a member of the Intermarket
Surveillance Group (``ISG''), which is comprised of an international
group of exchanges, market centers, and market regulators. The purpose
of ISG is to provide a framework for the sharing of information and the
coordination of regulatory efforts among exchanges trading securities
and related products to address potential intermarket manipulations and
trading abuses. ISG plays a crucial role in information sharing among
markets that trade securities, options on securities, security futures
products, and futures and options on broad-based security indexes. A
list of identifying current ISG members is available at https://www.isgportal.org/isgPortal/public/members.htm.
The Exchange has analyzed its capacity and represents that it
believes the Exchange and OPRA have the necessary systems capacity to
handle the additional traffic associated with the listing of P.M.-
settled XSP and Weekly/EOM option series up to the proposed number of
possible expirations and strike prices. The Exchange believes any
additional traffic that would be generated from the introduction of
P.M.-settled XSP and Weekly/EOM options series will be manageable. The
Exchange believes its Members will not have a capacity issue as a
result of this proposed rule change. The Exchange also represents that
it does not believe this expansion will cause fragmentation of
liquidity. The Exchange will monitor the trading volume associated with
the additional options series listed as a result of this proposed rule
change and the effect (if any) of these additional series on market
fragmentation and on the capacity of the Exchange's automated systems.
P.M.-settled options would be subject to all provisions of Rule
29.11. P.M.-settled options would be subject to the same rules that
govern the trading of A.M.-settled options overlying the same indexes,
including sales practice rules, margin requirements, and floor trading
procedures. P.M.-settled options will be subject to the margin
requirements set forth in Chapter 28 and the position limits set forth
in Rule 29.5. Chapter 28 imposes the margin requirements of either Cboe
Options or the New York Stock Exchange on Exchange Options Members.
Similarly, Rule 29.5 imposes position (and exercise) limits for broad-
based index options of Cboe Options on Exchange Options Members. Since
P.M.-settled options will be a new type of series, and not a new class,
the Exchange proposes that the P.M.-settled options will be aggregated
for any applicable reporting and other requirements.\13\ Currently,
there are no position limits on RUT and XSP options.\14\ Therefore,
there will be no position limits on P.M.-settled RUT and XSP options.
P.M.-settled XSP options and Weekly/EOM broad-based index options are
currently authorized for listing on Cboe Options,\15\ and thus the same
margin requirements and position and exercise limits that apply to
these products as listed and traded on Cboe Options will apply to these
products when listed and traded on the Exchange. The proposed rule
change will also result in similar regulatory treatment for similar
option products.
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\13\ See Rule 29.5(a), which requires Options Members to comply
with the applicable rules of Cboe Options with respect to position
limits for broad-based index options for options traded on Cboe
Options. Cboe Options Rule 24.4(b), which applies to index options
traded on the Exchange pursuant to Rule 29.5(a), provides that
Nonstandard Expirations will be aggregated with option contracts on
the same broad-based index and subject to the overall position
limit. Additionally, Cboe Options Rule 24.4(d), which applies to
index options traded on the Exchange pursuant to Rule 29.5(a),
positions in reduced-value index options will be aggregated with
positions in full-value indices. The Exchange notes that the
proposed aggregation is consistent with the aggregation requirements
for other types of option series (e.g. quarterly expiring options)
that are listed on the Exchange and that do not expire on the
customary ``third Friday.'' See Cboe Options Rule 24.4 (which
applies to the Exchange pursuant to Rule 29.5(a)).
\14\ See Cboe Options Rule 24.4(a) (which applies to the
Exchange pursuant to Rule 29.5(a)).
\15\ Similarly, pursuant to Cboe Options Chapter 12, Cboe
Options Trading Permit Holders may request to have New York Stock
Exchange margin requirements apply to their trading.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\16\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \17\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
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The Exchange believes the proposed rule change will attract order
flow to the Exchange, increase the variety of listed options to
investors, and provide a valuable hedge tool to investors. The Exchange
believes the proposed rule change will also remove impediments to and
perfect the mechanism of a free and open market, and in general protect
investors by expanding the ability of investors to hedge risks against
market movements stemming from economic releases or market events that
occur during the month and at the end of the month. Accordingly, the
Exchange believes that P.M.-settled options will create greater trading
and hedging opportunities and flexibility, and provide customers with
the ability to more closely tailor their investment objectives.
The Commission has previously stated that when cash-settled index
options were first introduced in the 1980s, they generally utilized
closing-price settlement procedures (i.e., P.M. settlement). The
Commission stated it became concerned about the impact of P.M.
settlement on cash-settled index options on the markets for the
underlying stocks at the close on expiration Fridays, especially during
the quarterly expirations of the third Friday of March, June,
September, and December when options, index futures,

[[Page 54640]]

and options on index futures all expire simultaneously. The Commission
expressed concerns that P.M. settlement was believed to have
contributed to above-average volume and added market volatility on
those days, which sometimes led to sharp price movements during the
last hour of trading, as a consequence of which the close of trading on
the quarterly expiration Friday became known as the ``triple witching
hour.'' The Commission observed that besides contributing to investor
anxiety, heightened volatility during the expiration periods created
the opportunity for manipulation and other abusive trading practices in
anticipation of the liquidity constraints.\18\
---------------------------------------------------------------------------

\18\ See Securities Exchange Act Release No. 65256 (September 2,
2011), 76 FR 55569 (September 9, 2011) (SR-C2-2011-008) (order
approving listing of SPXPM options on C2); see also Securities
Exchange Act Release No. 81293 (August 2, 2017), 82 FR 151 (August
8, 2017) (SR-Phlx-2017-04) (or approving listing of NDXPM options on
Phlx).
---------------------------------------------------------------------------

However, the Exchange believes that the above concerns that have
led to the transition to A.M. settlement for index derivatives have
been largely mitigated. It believes that expiration pressure in the
underlying cash markets at the close has been greatly reduced with the
advent of multiple primary listing and unlisted trading privilege
markets, and that trading is now widely dispersed among many market
centers. Additionally, the Exchange notes that opening procedures in
the 1990s were deemed acceptable to mitigate one-sided order flow
driven by index option expiration and that the New York Stock Exchange
and Nasdaq Stock Market, LLC each use an automated closing cross
procedures and has a closing order type that facilitates orderly
closings. These closing procedures on the exchanges on which the
components of the S&P 500 Index trade are well-equipped to mitigate
imbalance pressure at the close. In addition, after-hours trading now
provides market participants with an alternative to help offset market-
on-close imbalances.\19\
---------------------------------------------------------------------------

\19\ See id.
---------------------------------------------------------------------------

Other exchanges currently have pilots that permit P.M.-settled
index options \20\ and Weekly/EOM options.\21\
---------------------------------------------------------------------------

\20\ See Cboe Options Rule 24.9, Interpretation and Policy .14;
and Phlx Rule 1101A, Commentary .05.
\21\ See Cboe Options Rule 24.9(e); and Phlx Rule 1101A(b)(vii).
---------------------------------------------------------------------------

The proposed rule change to permit transactions on the Exchange in
P.M.-settled XSP and Weekly/EOM options on their last trading day
between the hours of 9:30 a.m. and 4:00 p.m. Eastern time (as opposed
to the normal trading hours for non-expiring P.M.-settled XSP and
Weekly/EOM options, which are from 9:30 a.m. to 4:15 p.m. Eastern time)
will prevent potential pricing divergence that could occur between 4:00
p.m. and 4:15 p.m. on the final trading day in expiring P.M.-settled
XSP options. Without closing expiring contracts at 4:00 p.m., it is
foreseeable that Market-Makers would react by widening spreads in order
to compensate for the additional risk. Therefore, the Exchange believes
that, in order to mitigate potential investor confusion and the
potential for increased costs to investors, it is appropriate to cease
trading in the expiring P.M.-settled XSP and Weekly/EOM contracts at
4:00 p.m. The Exchange does not believe the proposed change will impact
volatility on the underlying cash market at the close on third Fridays.
Further, the other options exchanges close trading in certain options
on the last trading day for certain classes.\22\
---------------------------------------------------------------------------

\22\ See Cboe Options Rule 24.6, Interpretations and Policies
.01 (options with Quarterly Index Expirations), .03 (Cboe S&P 500
AM/PM Basis options), .04 (P.M.-settled SPX options with third
Friday-of-the-month expiration and P.M.-settled XSP options), and
.05 (MSCI EAFE Index options).
---------------------------------------------------------------------------

The Exchange has analyzed its capacity and represents that it
believes the Exchange and OPRA have the necessary systems capacity to
handle the additional traffic associated with the listing of P.M.-
settled options. The Exchange believes any additional traffic that may
be generated from the introduction of P.M.-settled options will be
manageable. The Exchange represents that it has in place adequate
surveillance procedures to monitor trading in these options thereby
helping to ensure the maintenance of a fair and orderly market.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. P.M.-settled options would
be available for trading on the Exchange to all market participants.
The Exchange believes the proposed rule change will increase the
variety of listed options to investors, and provide valuable hedge
tools to investors. The listing of P.M.-settled options will enhance
competition by providing investors with an additional investment
vehicle, through which investors can gain and hedge exposure to the
stocks that compose the applicable broad-based indexes. Additionally,
markets participants are welcome to become Members and trade at the
Exchange if they determine this proposed rule change has made the
Exchange more attractive or favorable. Further, this product could
offer a competitive alternative to other existing investment products
that seek to allow Members to gain broad market exposure. Finally, all
options exchanges are free to compete by listing and trading index
options that are P.M.-settled. Other exchanges currently have pilots
that permit P.M.-settled index options \23\ or Weeklys/EOMs.\24\
---------------------------------------------------------------------------

\23\ See Cboe Options Rule 24.9, Interpretation and Policy .14
and Phlx Rule 1101A, Interpretation and Policy .05.
\24\ See Cboe Options Rule 24.9(e); and Phlx Rule 1101A(b)(vii).
---------------------------------------------------------------------------

The proposed rule change to permit transactions on the Exchange in
P.M.-settled XSP and Weekly/EOM options on their last trading day
between the hours of 9:30 a.m. and 4:00 p.m. Eastern time (as opposed
to the normal trading hours for non-expiring P.M.-settled XSP and
Weekly/EOM options, which are from 9:30 a.m. to 4:15 p.m. Eastern time)
will prevent potential pricing divergence that could occur between 4:00
p.m. and 4:15 p.m. on the final trading day in expiring P.M.-settled
XSP and Weekly/EOM options. Without closing expiring contracts at 4:00
p.m., it is foreseeable that Market-Makers would react by widening
spreads in order to compensate for the additional risk. Therefore, the
Exchange believes that, in order to mitigate potential investor
confusion and the potential for increased costs to investors, it is
appropriate to cease trading in the expiring P.M.-settled XSP and
Weekly/EOM contracts at 4:00 p.m. The Exchange does not believe the
proposed change will impact volatility on the underlying cash market at
the close on third Fridays. Further, the other options exchanges close
trading in certain options on the last trading day for certain
classes.\25\
---------------------------------------------------------------------------

\25\ See Cboe Options Rule 24.6, Interpretations and Policies
.01 (options with Quarterly Index Expirations), .03 (Cboe S&P 500
AM/PM Basis options), .04 (P.M.-settled SPX options with third
Friday-of-the-month expiration and P.M.-settled XSP options), and
.05 (MSCI EAFE Index options).
---------------------------------------------------------------------------

The Exchange believes that the proposed rule change will relieve
any burden on, or otherwise promote, competition, as the rules are
substantially the same as those of other options exchanges, as noted
above.

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.

[[Page 54641]]

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-CboeBZX-2018-066 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-CboeBZX-2018-066. 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-CboeBZX-2018-066, and should be
submitted on or before November 20, 2018.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
Eduardo A. Aleman,
Assistant Secretary.
---------------------------------------------------------------------------

\26\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. 2018-23624 Filed 10-29-18; 8:45 am]
BILLING CODE 8011-01-P

Federal Register / Vol. 83, No. 210 / Tuesday, October 30, 2018 / Notices 54635

with those of the Affiliated Exchanges to determine whether the proposed rule For the Commission, by the Division of
and to make the Exchange’s Rulebook should be approved or disapproved. Trading and Markets, pursuant to delegated
easier to read and more accessible to its authority.12
Members. The Exchange believes that IV. Solicitation of Comments Eduardo A. Aleman,
the adoption and harmonization of the Assistant Secretary.
Interested persons are invited to
arbitration rules and cross-reference submit written data, views, and [FR Doc. 2018–23623 Filed 10–29–18; 8:45 am]
updates are of a non-substantive nature. arguments concerning the foregoing, BILLING CODE 8011–01–P

B. Self-Regulatory Organization’s including whether the proposed rule
Statement on Burden on Competition change is consistent with the Act.
SECURITIES AND EXCHANGE
Comments may be submitted by any of
The Exchange does not believe that COMMISSION
the following methods:
the proposed rule change will impose
[Release No. 34–84480; File No. SR–
any burden on competition not Electronic Comments CboeBZX–2018–066]
necessary or appropriate in furtherance
of the purposes of the Act. The • Use the Commission’s internet Self-Regulatory Organizations; Cboe
proposed changes do not impose a comment form (http://www.sec.gov/ BZX Exchange, Inc.; Notice of Filing of
burden on competition because, as rules/sro.shtml); or a Proposed Rule Change To Permit the
previously stated, they are (i) of a non- • Send an email to rule-comments@ Listing and Trading of P.M.-Settled
substantive nature, (ii) intended to sec.gov. Please include File Number SR– Series on Certain Broad-Based Index
harmonize the structure of the MRX–2018–32 on the subject line. Options on a Pilot Basis
Exchange’s rules with those of its
Affiliated Exchanges, and (iii) intended Paper Comments October 24, 2018.
to organize the Rulebook in a way that Pursuant to Section 19(b)(1) of the
• Send paper comments in triplicate Securities Exchange Act of 1934 (the
it will ease the Members’ navigation and
reading of the rules across the Affiliated to Secretary, Securities and Exchange ‘‘Act’’),1 and Rule 19b–4 thereunder,2
Exchanges. Commission, 100 F Street NE, notice is hereby given that on October
Washington, DC 20549–1090. 11, 2018, Cboe BZX Exchange, Inc. filed
C. Self-Regulatory Organization’s with the Securities and Exchange
Statement on Comments on the All submissions should refer to File
Number SR–MRX–2018–32. This file Commission (the ‘‘Commission’’ or
Proposed Rule Change Received From ‘‘SEC’’) the proposed rule change as
Members, Participants, or Others number should be included on the
subject line if email is used. To help the described in Items I, II, and III below,
No written comments were either Commission process and review your which Items have been prepared by the
solicited or received. comments more efficiently, please use Exchange. The Commission is
only one method. The Commission will publishing this notice to solicit
III. Date of Effectiveness of the comments on the proposed rule change
Proposed Rule Change and Timing for post all comments on the Commission’s
internet website (http://www.sec.gov/ from interested persons.
Commission Action
rules/sro.shtml). I. Self-Regulatory Organization’s
Because the foregoing proposed rule
Copies of the submission, all Statement of the Terms of Substance of
change does not: (i) Significantly affect
subsequent amendments, all written the Proposed Rule Change
the protection of investors or the public
interest; (ii) impose any significant statements with respect to the proposed Cboe BZX Exchange, Inc. (the
burden on competition; and (iii) become rule change that are filed with the ‘‘Exchange’’ or ‘‘BZX Options’’)
operative for 30 days from the date on Commission, and all written proposes to permit the listing and
which it was filed, or such shorter time communications relating to the trading of P.M.-settled series on certain
as the Commission may designate, it has proposed rule change between the broad-based index options on a pilot
become effective pursuant to Section Commission and any person, other than basis.
19(b)(3)(A)(iii) of the Act 10 and those that may be withheld from the The text of the proposed rule change
subparagraph (f)(6) of Rule 19b–4 public in accordance with the is also available on the Exchange’s
thereunder.11 provisions of 5 U.S.C. 552, will be website (http://www.cboe.com/
At any time within 60 days of the available for website viewing and AboutCBOE/CBOELegal
filing of the proposed rule change, the printing in the Commission’s Public RegulatoryHome.aspx), at the
Commission summarily may Reference Room, 100 F Street NE, Exchange’s Office of the Secretary, and
temporarily suspend such rule change if Washington, DC 20549, on official at the Commission’s Public Reference
it appears to the Commission that such business days between the hours of 10 Room.
action is necessary or appropriate in the a.m. and 3 p.m. Copies of the filing also II. Self-Regulatory Organization’s
public interest, for the protection of will be available for inspection and Statement of the Purpose of, and
investors, or otherwise in furtherance of copying at the principal office of the Statutory Basis for, the Proposed Rule
the purposes of the Act. If the Exchange. All comments received will Change
Commission takes such action, the be posted without change. Persons
Commission shall institute proceedings In its filing with the Commission, the
submitting comments are cautioned that
Exchange included statements
we do not redact or edit personal
khammond on DSK30JT082PROD with NOTICES

10 15 U.S.C. 78s(b)(3)(A)(iii). concerning the purpose of and basis for
identifying information from comment
11 17 CFR 240.19b–4(f)(6). In addition, Rule 19b– the proposed rule change and discussed
submissions. You should submit only
4(f)(6) requires a self-regulatory organization to give any comments it received on the
the Commission written notice of its intent to file information that you wish to make
proposed rule change. The text of these
the proposed rule change at least five business days available publicly. All submissions
prior to the date of filing of the proposed rule should refer to File Number SR–MRX– 12 17 CFR 200.30–3(a)(12).
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
2018–32 and should be submitted on or 1 15 U.S.C. 78s(b)(1).
requirement. before November 20, 2018. 2 17 CFR 240.19b–4.

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Federal Register / Vol. 83, No. 210 / Tuesday, October 30, 2018 / Notices 54641

III. Date of Effectiveness of the inspection and copying at the principal The text of the proposed rule change
Proposed Rule Change and Timing for office of the Exchange. All comments is available on the Exchange’s website at
Commission Action received will be posted without change. http://nasdaqphlx.cchwallstreet.com/,
Within 45 days of the date of Persons submitting comments are at the principal office of the Exchange,
publication of this notice in the Federal cautioned that we do not redact or edit and at the Commission’s Public
Register or within such longer period personal identifying information from Reference Room.
up to 90 days (i) as the Commission may comment submissions. You should
II. Self-Regulatory Organization’s
designate if it finds such longer period submit only information that you wish
Statement of the Purpose of, and
to be appropriate and publishes its to make available publicly. All
Statutory Basis for, the Proposed Rule
reasons for so finding or (ii) as to which submissions should refer to File
Change
the Exchange consents, the Commission Number SR–CboeBZX–2018–066, and
will: should be submitted on or before In its filing with the Commission, the
A. By order approve or disapprove November 20, 2018. Exchange included statements
such proposed rule change, or For the Commission, by the Division of concerning the purpose of and basis for
B. institute proceedings to determine Trading and Markets, pursuant to delegated the proposed rule change and discussed
whether the proposed rule change authority.26 any comments it received on the
should be disapproved. Eduardo A. Aleman, proposed rule change. The text of these
Assistant Secretary. statements may be examined at the
IV. Solicitation of Comments places specified in Item IV below. The
[FR Doc. 2018–23624 Filed 10–29–18; 8:45 am]
Interested persons are invited to Exchange has prepared summaries, set
BILLING CODE 8011–01–P
submit written data, views, and forth in sections A, B, and C below, of
arguments concerning the foregoing, the most significant aspects of such
including whether the proposed rule SECURITIES AND EXCHANGE statements.
change is consistent with the Act. COMMISSION A. Self-Regulatory Organization’s
Comments may be submitted by any of Statement of the Purpose of, and
the following methods: [Release No. 34–84477; File No. SR–Phlx–
2018–62] Statutory Basis for, the Proposed Rule
Electronic Comments Change
Self-Regulatory Organizations; Nasdaq
• Use the Commission’s internet 1. Purpose
PHLX LLC; Notice of Filing and
comment form (http://www.sec.gov/ The Exchange proposes to delete the
Immediate Effectiveness of Proposed
rules/sro.shtml); or rules on arbitration, currently under
Rule Change To Delete Current Rules
• Send an email to rule-comments@ Rule 950, and incorporate by reference
on Arbitration
sec.gov. Please include File Number SR– the Nasdaq rules on arbitration at
CboeBZX–2018–066 on the subject line. October 24, 2018. General 6 of Nasdaq’s rulebook into
Paper Comments Pursuant to Section 19(b)(1) of the General 6 of the Exchange’s Rulebook.
Securities Exchange Act of 1934 The Exchange adopted the Current
• Send paper comments in triplicate (‘‘Act’’),1 and Rule 19b–4 thereunder,2
to Secretary, Securities and Exchange Arbitration Rules to ensure a fair and
notice is hereby given that on October efficient manner in which to handle any
Commission, 100 F Street NE, 9, 2018, Nasdaq PHLX LLC (‘‘Phlx’’ or
Washington, DC 20549–1090. dispute, claim or controversy arising out
‘‘Exchange’’) filed with the Securities of, or in connection with, the business
All submissions should refer to File and Exchange Commission (‘‘SEC’’ or of any Member of the Exchange. To help
Number SR-CboeBZX–2018–066. This ‘‘Commission’’) the proposed rule administer the process of dispute
file number should be included on the change as described in Items I, II, and resolution, the Exchange and FINRA are
subject line if email is used. To help the III, below, which Items have been parties to a Regulatory Contract,
Commission process and review your prepared by the Exchange. The pursuant to which FINRA has agreed to
comments more efficiently, please use Commission is publishing this notice to perform certain functions and provide
only one method. The Commission will solicit comments on the proposed rule access to certain services, including:
post all comments on the Commission’s change from interested persons. Member regulation and registration;
internet website (http://www.sec.gov/ non-real time market surveillance;
rules/sro.shtml). Copies of the I. Self-Regulatory Organization’s
Statement of the Terms of Substance of examinations and investigations; and
submission, all subsequent dispute resolution. FINRA currently
amendments, all written statements the Proposed Rule Change
operates the largest securities dispute
with respect to the proposed rule The Exchange proposes to delete the resolution forum in the United States,4
change that are filed with the current rules on arbitration (‘‘Current and has given the Exchange access to
Commission, and all written Arbitration Rules’’), under Rule 950, these services. Under the Current
communications relating to the and incorporate by reference The Arbitration Rules, Members and
proposed rule change between the Nasdaq Stock Market LLC’s (‘‘Nasdaq’’) associated persons of a Member are
Commission and any person, other than rules on arbitration at General 6 subject to the FINRA Code of
those that may be withheld from the (‘‘Proposed Arbitration Rules’’), into Arbitration Procedure.
public in accordance with the General 6 of the Exchange’s rulebook’s
provisions of 5 U.S.C. 552, will be (‘‘Rulebook’’) shell structure.3
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Nasdaq Stock Market LLC; Nasdaq BX, Inc.; Nasdaq
available for website viewing and ISE, LLC; Nasdaq GEMX, LLC; and Nasdaq MRX,
printing in the Commission’s Public 26 17 CFR 200.30–3(a)(12). LLC (‘‘Affiliated Exchanges’’). The shell structure
1 15 U.S.C. 78s(b)(1).
Reference Room, 100 F Street NE, currently contains eight (8) Chapters which, once
2 17 CFR 240.19b–4. complete, will apply a common set of rules to the
Washington, DC 20549, on official 3 Recently, the Exchange added a shell structure Affiliated Exchanges. See Securities Exchange Act
business days between the hours of to its Rulebook with the purpose of improving Release No. 82169 (November 29, 2017), 82 FR
10:00 a.m. and 3:00 p.m. Copies of the efficiency and readability and to align its rules 57508 (December 5, 2017) (SR–PHLX–2017–97).
filing also will be available for closer to those of its five sister exchanges, The 4 http://www.finra.org/arbitration-and-mediation.

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Document Created: 2018-10-30 00:43:03
Document Modified: 2018-10-30 00:43:03

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 54635