83 FR 56113 - Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Extend the Operation of Its Flexible Exchange Options Pilot Program Regarding Permissible Exercise Settlement Values for Flexible Exchange Index Options
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 218 (November 9, 2018)
Federal Register Volume 83, Issue 218 (November 9, 2018)
| Page Range | 56113-56116 | |
| FR Document | 2018-24524 |
[Federal Register Volume 83, Number 218 (Friday, November 9, 2018)] [Notices] [Pages 56113-56116] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-24524] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-84537; File No. SR-CBOE-2018-071] Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Extend the Operation of Its Flexible Exchange Options Pilot Program Regarding Permissible Exercise Settlement Values for Flexible Exchange Index Options November 5, 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 November 2, 2018, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Exchange filed the proposal as a ``non-controversial'' proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b- 4(f)(6) thereunder.\4\ 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. \3\ 15 U.S.C. 78s(b)(3)(A)(iii). \4\ 17 CFR 240.19b-4(f)(6). --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change Cboe Options proposes to extend the operation of its Flexible Exchange Options (``FLEX Options'') pilot program regarding permissible exercise settlement values for FLEX Index Options.\5\ --------------------------------------------------------------------------- \5\ FLEX Options provide investors with the ability to customize basic option features including size, expiration date, exercise style, and certain exercise prices. FLEX Options can be FLEX Index Options or FLEX Equity Options. In addition, other products are permitted to be traded pursuant to the FLEX trading procedures. For example, credit options are eligible for trading as FLEX Options pursuant to the FLEX rules in Chapter XXIVA. See Cboe Options Rules 24A.1(e) and (f), 24A.4(b)(1) and (c)(1), and 29.18. The rules governing the trading of FLEX Options on the FLEX Hybrid Trading System platform are contained in Chapter XXIVA. --------------------------------------------------------------------------- (additions are italicized; deletions are [bracketed]) * * * * * Rules of Cboe Exchange, Inc. * * * * * Rule 24A.4. Terms of FLEX Options (a)-(c) (No change). . . . Interpretations and Policies: .01 FLEX Index Option PM Settlements Pilot Program: Notwithstanding subparagraph (a)(2)(iv) above, for a pilot period ending the earlier of [November 5, 2018] May 6, 2019 or the date on which the pilot program is approved on a permanent basis, a FLEX Index Option that expires on an Expiration Friday may have any exercise settlement value that is permissible pursuant to subparagraph (b)(3) above. .02 (No change). * * * * * 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 1. Purpose On January 28, 2010, the Exchange received approval of a rule change that, among other things, established a pilot program regarding permissible exercise settlement values for FLEX Index Options.\6\ The Exchange has extended the pilot period seven times, which is currently set to expire on the earlier of November 5, 2018 or the date on which the pilot program is approved on a permanent basis.\7\ The purpose of this rule change filing is to extend the pilot program through the earlier of May 6, 2019 or the date on which the pilot program is approved on a permanent basis. This filing simply seeks to extend the operation of the pilot program and [[Page 56114]] does not propose any substantive changes to the pilot program. --------------------------------------------------------------------------- \6\ Securities Exchange Act Release No. 61439 (January 28, 2010), 75 FR 5831 (February 4, 2010) (SR-CBOE-2009-087) (``Approval Order''). The initial pilot period was set to expire on March 28, 2011, which date was added to the rules in 2010. See Securities Exchange Act Release No. 61676 (March 9, 2010), 75 FR 13191 (March 18, 2010) (SR-CBOE-2010-026). \7\ See Securities Exchange Act Release Nos. 64110 (March 23, 2011), 76 FR 17463 (March 29, 2011) (SR-CBOE-2011-024) (extending the pilot program through the earlier of March 30, 2012 or the date on which the pilot program is approved on the permanent basis); 66701 (March 30, 2012), 77 FR 20673 (April 5, 2012) (SR-CBOE-2012- 027) (extending the pilot through the earlier of November 2, 2012 or the date on which the pilot program is approved on a permanent basis); 68145 (November 2, 2012), 77 FR 67044 (November 8, 2012) (SR-CBOE-2012-102) (extending the pilot program through the earlier of November 2, 2013 or the date on which the pilot program is approved on a permanent basis); 70752 (October 24, 2013), 78 FR 65023 (October 30, 2013) (SR-CBOE-2013-099) (extending the pilot program through the earlier of November 3, 2014 or the date on which the pilot program is approved on a permanent basis); 73460 (October 29, 2014), 79 FR 65464 (November 4, 2014) (SR-CBOE-2014-080) (extending the pilot program through the earlier of May 3, 2016 or the date on which the pilot program is approved on a permanent basis); 77742 (April 29, 2016), 81 FR 26857 (May 4, 2016) (SR-CBOE- 2016-032) (extending the pilot program through the earlier of May 3, 2017 or the date on which the pilot program is approved on a permanent basis); 80443 (April 12, 2017), 82 FR 18331 (April 18, 2017) (SR-CBOE-2017-032), 83 FR 21808 (May 10, 2018) (extending the pilot program through the earlier of May 3, 2018 or the date on which the pilot program is approved on a permanent basis); and 83175 (May 4, 2018), 83 FR 21808 (May 10, 2018) (SR-CBOE-2018-037). At the same time the permissible exercise settlement values pilot was established for FLEX Index Options, the Exchange also established a pilot program eliminating the minimum value size requirements for all FLEX Options. See Approval Order, supra note 6. The pilot program eliminating the minimum value size requirements was extended twice pursuant to the same rule filings that extended the permissible exercise settlement values (for the same extended periods) and was approved on a permanent basis in a separate rule change filing. See id. and Securities Exchange Act Release No. 67624 (August 8, 2012), 77 FR 48580 (August 14, 2012) (SR-CBOE-2012-040). --------------------------------------------------------------------------- Under Rule 24A.4, Terms of FLEX Options, a FLEX Option may expire on any business day specified as to day, month and year, not to exceed a maximum term of fifteen years. In addition, the exercise settlement value for a FLEX Index Option can be specified as the index value determined by reference to the reported level of the index as derived from the opening or closing prices of the component securities (``a.m. settlement'' or ``p.m. settlement,'' respectively) or as a specified average, provided that the average index value must conform to the averaging parameters established by the Exchange.\8\ However, prior to the initiation of the exercise settlement values pilot, only a.m. settlements were permitted if a FLEX Index Option expired on, or within two business days of, a third Friday-of-the-month expiration (``Expiration Friday'').\9\ --------------------------------------------------------------------------- \8\ See Rule 24A.4(b)(3); see also Securities Exchange Act Release No. 31920 (February 24, 1993), 58 FR 12280 (March 3, 1993) (SR-CBOE-92-017). The Exchange has determined to limit the averaging parameters to three alternatives: The average of the opening and closing index values on the expiration date; the average of intra- day high and low index values on the expiration date; and the average of the opening, closing, and intra-day high and low index values on the expiration date. Any changes to the averaging parameters established by the Exchange would be announced to Trading Permit Holders via circular. \9\ For example, prior to the pilot, the exercise settlement value of a FLEX Index Option that expires on the Tuesday before Expiration Friday could have an a.m., p.m. or specified average settlement. However, the exercise settlement value of a FLEX Index Option that expires on the Wednesday before Expiration Friday could only have an a.m. settlement. --------------------------------------------------------------------------- Under the exercise settlement values pilot, this restriction on p.m. and specified average price settlements in FLEX Index Options was eliminated.\10\ The exercise settlement values pilot is currently set to expire on the earlier of November 5, 2018 or the date on which the pilot program is approved on a permanent basis. --------------------------------------------------------------------------- \10\ No change was necessary or requested with respect to FLEX Equity Options. Regardless of the expiration date, FLEX Equity Options are settled by physical delivery of the underlying. --------------------------------------------------------------------------- Cboe Options is proposing to extend the pilot program through the earlier of May 6, 2019 or the date on which the pilot program is approved on a permanent basis. Cboe Options believes the pilot program has been successful and well received by its Trading Permit Holders and the investing public for the period that it has been in operation as a pilot. In support of the proposed extension of the pilot program, and as required by the pilot program's Approval Order, the Exchange has submitted to the Securities and Exchange Commission (the ``Commission'') pilot program reports regarding the pilot, which detail the Exchange's experience with the program. Specifically, the Exchange provided the Commission with annual reports analyzing volume and open interest for each broad-based FLEX Index Options class overlying an Expiration Friday, p.m.-settled FLEX Index Options series.\11\ The annual reports also contained information and analysis of FLEX Index Options trading patterns. The Exchange also provided the Commission, on a periodic basis, interim reports of volume and open interest. In providing the pilot reports to the Commission, the Exchange has previously requested confidential treatment of the pilot reports under the Freedom of Information Act (``FOIA'').\12\ --------------------------------------------------------------------------- \11\ The annual reports also contained certain pilot period and pre-pilot period analyses of volume and open interest for Expiration Friday, a.m.-settled FLEX Index series and Expiration Friday Non- FLEX Index series overlying the same index as an Expiration Friday, p.m.-settled FLEX Index option. \12\ 5 U.S.C. 552. --------------------------------------------------------------------------- The Exchange believes there is sufficient investor interest and demand in the pilot program to warrant its extension. The Exchange believes that, for the period that the pilot has been in operation, the program has provided investors with additional means of managing their risk exposures and carrying out their investment objectives. Furthermore, the Exchange believes that it has not experienced any adverse market effects with respect to the pilot program, including any adverse market volatility effects that might occur as a result of large FLEX exercises in FLEX Option series that expire near Non-FLEX expirations and use a p.m. settlement (as discussed below). In that regard, based on the Exchange's experience in trading FLEX Options to date and over the pilot period, Cboe Options continues to believe that the restrictions on exercise settlement values are no longer necessary to insulate Non-FLEX expirations from the potential adverse market impacts of FLEX expirations.\13\ To the contrary, Cboe Options believes that the restriction actually places the Exchange at a competitive disadvantage to its OTC counterparts in the market for customized options, and unnecessarily limits market participants' ability to trade in an exchange environment that offers the added benefits of transparency, price discovery, liquidity, and financial stability. --------------------------------------------------------------------------- \13\ In further support, the Exchange also notes that the p.m. and specified average price settlements are already permitted for FLEX Index Options on any other business day except on, or within two business days of, Expiration Friday. The Exchange is not aware of any market disruptions or problems caused by the use of these settlement methodologies on these expiration dates (or on the expiration dates addressed under the pilot program). The Exchange is also not aware of any market disruptions or problems caused by the use of customized options in the over-the-counter (``OTC'') markets that expire on or near Expiration Friday and have a p.m. or specified average exercise settlement value. In addition, the Exchange believes the reasons for limiting expirations to a.m. settlement, which is something the SEC has imposed since the early 1990s for Non-FLEX Options, revolved around a concern about expiration pressure on the New York Stock Exchange (``NYSE'') at the close that are no longer relevant in today's market. Today, the Exchange believes stock exchanges are able to better handle volume. There are multiple primary listing and unlisted trading privilege (``UTP'') markets, and trading is dispersed among several exchanges and alternative trading systems. In addition, the Exchange believes that surveillance techniques are much more robust and automated. In the early 1990s, it was also thought by some that opening procedures allow more time to attract contra-side interest to reduce imbalances. The Exchange believes, however, that today, order flow is predominantly electronic and the ability to smooth out openings and closes is greatly reduced (e.g., market-on-close procedures work just as well as openings). Also, other markets, such as the NASDAQ Stock Exchange, do not have the same type of pre-opening imbalance disseminations as NYSE, so many stocks are not subject to the same procedures on Expiration Friday. In addition, the Exchange believes that NYSE has reduced the required time a specialist has to wait after disseminating a pre-opening indication. So, in this respect, the Exchange believes there is less time to react in the opening than in the close. Moreover, to the extent there may be a risk of adverse market effects attributable to p.m. settled options (or certain average price settled options related to the closing price) that would otherwise be traded in a non-transparent fashion in the OTC market, the Exchange continues to believe that such risk would be lessened by making these customized options eligible for trading in an exchange environment because of the added transparency, price discovery, liquidity, and financial stability available. --------------------------------------------------------------------------- The Exchange also notes that certain position limit, aggregation and exercise limit requirements continue to apply to FLEX Index Options in accordance with Rules 24A.7, Position Limits and Reporting Requirements and 24A.8, Exercise Limits. Additionally, all FLEX Options remain subject to the position reporting requirements in paragraph (a) of Cboe Options Rule 4.13, Reports Related to Position Limits.\14\ Moreover, [[Page 56115]] the Exchange and its Trading Permit Holder organizations each have the authority, pursuant to Cboe Options Rule 12.10, Margin Required is Minimum, to impose additional margin as deemed advisable. Cboe Options continues to believe these existing safeguards serve sufficiently to help monitor open interest in FLEX Option series and significantly reduce any risk of adverse market effects that might occur as a result of large FLEX exercises in FLEX Option series that expire near Non-FLEX expirations and use a p.m. settlement. --------------------------------------------------------------------------- \14\ Cboe Options Rule 4.13(a) provides that ``[i]n a manner and form prescribed by the Exchange, each Trading Permit Holder shall report to the Exchange, the name, address, and social security or tax identification number of any customer who, acting alone, or in concert with others, on the previous business day maintained aggregate long or short positions on the same side of the market of 200 or more contracts of any single class of option contracts dealt in on the Exchange. The report shall indicate for each such class of options, the number of option contracts comprising each such position and, in the case of short positions, whether covered or uncovered.'' For purposes of Rule 4.13, the term ``customer'' in respect of any Trading Permit Holder includes ``the Trading Permit Holder, any general or special partner of the Trading Permit Holder, any officer or director of the Trading Permit Holder, or any participant, as such, in any joint, group or syndicate account with the Trading Permit Holder or with any partner, officer or director thereof.'' Rule 4.13(d). --------------------------------------------------------------------------- Cboe Options is also cognizant of the OTC market, in which similar restrictions on exercise settlement values do not apply. Cboe Options continues to believe that the pilot program is appropriate and reasonable and provides market participants with additional flexibility in determining whether to execute their customized options in an exchange environment or in the OTC market. Cboe Options continues to believe that market participants benefit from being able to trade these customized options in an exchange environment in several ways, including, but not limited to, enhanced efficiency in initiating and closing out positions, increased market transparency, and heightened contra-party creditworthiness due to the role of the Options Clearing Corporation as issuer and guarantor of FLEX Options. If, in the future, the Exchange proposes an additional extension of the pilot program, or should the Exchange propose to make the pilot program permanent, the Exchange will submit, along with any filing proposing such amendments to the pilot program, an annual report (addressing the same areas referenced above and consistent with the pilot program's Approval Order) to the Commission at least two months prior to the expiration date of the program. The Exchange will also continue, on a periodic basis, to submit interim reports of volume and open interest consistent with the terms of the exercise settlement values pilot program as described in the pilot program's Approval Order. 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 pilot program is consistent with the Exchange Act. The Exchange is in the process of making public on its website data and analyses previously submitted to the Commission under the pilot program, which it expects to complete in the fourth quarter of 2018, and will make public any data and analyses it submits to the Commission under the pilot program in the future. As noted in the pilot program's Approval Order, any positions established under the pilot program would not be impacted by the expiration of the pilot program.\15\ --------------------------------------------------------------------------- \15\ For example, a position in a p.m.-settled FLEX Index Option series that expires on Expiration Friday in January 2019 could be established during the exercise settlement values pilot. If the pilot program were not extended (or made permanent), then the position could continue to exist. However, the Exchange notes that any further trading in the series would be restricted to transactions where at least one side of the trade is a closing transaction. See Approval Order at footnotes 9 and 10, supra note 6. --------------------------------------------------------------------------- 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. Additionally, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) \18\ requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. --------------------------------------------------------------------------- \16\ 15 U.S.C. 78f(b). \17\ 15 U.S.C. 78f(b)(5). \18\ Id. --------------------------------------------------------------------------- In particular, the Exchange believes that the proposed extension of the pilot program, which permits additional exercise settlement values, would provide greater opportunities for investors to manage risk through the use of FLEX Options. Further, the Exchange believes that it has not experienced any adverse effects from the operation of the pilot program, including any adverse market volatility effects that might occur as a result of large FLEX exercises in FLEX Option series that expire near Non-FLEX expirations and use a p.m. settlement. The Exchange also believes that the extension of the exercise settlement values pilot does not raise any unique regulatory concerns. In particular, although p.m. settlements may raise questions with the Commission, the Exchange believes that, based on the Exchange's experience in trading FLEX Options to date and over the pilot period, market impact and investor protection concerns will not be raised by this rule change. The Exchange also believes that the proposed rule change would continue to provide Trading Permit Holders and investors with additional opportunities to trade customized options in an exchange environment (which offers the added benefits of transparency, price discovery, liquidity, and financial stability as compared to the over-the-counter market) and subject to exchange-based rules, and investors would benefit as a result. 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 Exchange believes there is sufficient investor interest and demand in the pilot program to warrant its extension. The Exchange believes that, for the period that the pilot has been in operation, the program has provided investors with additional means of managing their risk exposures and carrying out their investment objectives. Furthermore, the Exchange believes that it has not experienced any adverse market effects with respect to the pilot program, including any adverse market volatility effects that might occur as a result of large FLEX exercises in FLEX Option series that expire near Non-Flex expirations and use a p.m. settlement. Cboe Options believes that the restriction actually places the Exchange at a competitive disadvantage to its OTC counterparts in the market for customized options, and unnecessarily limits market participants' ability to trade in an exchange environment that offers the added benefits of transparency, price discovery, liquidity, and financial stability. Therefore, the Exchange does not believe that the proposed rule change will impose any burden on competition. [[Page 56116]] 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 Because the proposed rule change does not (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act \19\ and Rule 19b-4(f)(6) thereunder.\20\ --------------------------------------------------------------------------- \19\ 15 U.S.C. 78s(b)(3)(A). \20\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) requires the Exchange to give the Commission written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. --------------------------------------------------------------------------- A proposed rule change filed under Rule 19b-4(f)(6) \21\ normally does not become operative for 30 days after the date of filing. However, pursuant to Rule 19b-4(f)(6)(iii),\22\ the Commission may designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay so that the proposal may become operative immediately upon filing. The Exchange states that such waiver will allow the Exchange to extend the pilot program prior to its expiration on November 5, 2018, and maintain the status quo, thereby reducing market disruption. --------------------------------------------------------------------------- \21\ 17 CFR 240.19b-4(f)(6). \22\ 17 CFR 240.19b-4(f)(6)(iii). --------------------------------------------------------------------------- The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest, as it will allow the pilot program to continue uninterrupted, thereby avoiding investor confusion that could result from a temporary interruption in the pilot program. For this reason, the Commission designates the proposed rule change to be operative upon filing.\23\ --------------------------------------------------------------------------- \23\ For purposes only of waiving the operative delay for this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). --------------------------------------------------------------------------- At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or 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 CommentsUse the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-CBOE-2018-071 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-2018-071. 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 a.m. and 3 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-2018-071 and should be submitted on or before November 30, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\24\ --------------------------------------------------------------------------- \24\ 17 CFR 200.30-3(a)(12) and (59). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018-24524 Filed 11-8-18; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 83, No. 218 / Friday, November 9, 2018 / Notices 56113
exemption is consistent with the public Options (‘‘FLEX Options’’) pilot A. Self-Regulatory Organization’s
interest and the protection of investors. program regarding permissible exercise Statement of the Purpose of, and
Section 17(b) of the Act authorizes the settlement values for FLEX Index Statutory Basis for, the Proposed Rule
Commission to grant an order Options.5 Change
permitting a transaction otherwise
(additions are italicized; deletions are 1. Purpose
prohibited by section 17(a) if it finds
that (a) the terms of the proposed [bracketed]) On January 28, 2010, the Exchange
transaction are fair and reasonable and * * * * * received approval of a rule change that,
do not involve overreaching on the part among other things, established a pilot
Rules of Cboe Exchange, Inc. program regarding permissible exercise
of any person concerned; (b) the
proposed transaction is consistent with * * * * * settlement values for FLEX Index
the policies of each registered Options.6 The Exchange has extended
Rule 24A.4. Terms of FLEX Options the pilot period seven times, which is
investment company involved; and (c)
the proposed transaction is consistent (a)–(c) (No change). currently set to expire on the earlier of
with the general purposes of the Act. November 5, 2018 or the date on which
. . . Interpretations and Policies: the pilot program is approved on a
For the Commission, by the Division of
Investment Management, under delegated .01 FLEX Index Option PM permanent basis.7 The purpose of this
authority. Settlements Pilot Program: rule change filing is to extend the pilot
Eduardo A. Aleman, Notwithstanding subparagraph (a)(2)(iv) program through the earlier of May 6,
Assistant Secretary. above, for a pilot period ending the 2019 or the date on which the pilot
earlier of [November 5, 2018] May 6, program is approved on a permanent
[FR Doc. 2018–24509 Filed 11–8–18; 8:45 am]
2019 or the date on which the pilot basis. This filing simply seeks to extend
BILLING CODE 8011–01–P
program is approved on a permanent the operation of the pilot program and
basis, a FLEX Index Option that expires
6 Securities Exchange Act Release No. 61439
SECURITIES AND EXCHANGE on an Expiration Friday may have any
(January 28, 2010), 75 FR 5831 (February 4, 2010)
COMMISSION exercise settlement value that is (SR–CBOE–2009–087) (‘‘Approval Order’’). The
permissible pursuant to subparagraph initial pilot period was set to expire on March 28,
[Release No. 34–84537; File No. SR–CBOE– 2011, which date was added to the rules in 2010.
(b)(3) above.
2018–071] See Securities Exchange Act Release No. 61676
.02 (No change). (March 9, 2010), 75 FR 13191 (March 18, 2010) (SR–
Self-Regulatory Organizations; Cboe * * * * * CBOE–2010–026).
7 See Securities Exchange Act Release Nos. 64110
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed The text of the proposed rule change (March 23, 2011), 76 FR 17463 (March 29, 2011)
is also available on the Exchange’s (SR–CBOE–2011–024) (extending the pilot program
Rule Change To Extend the Operation through the earlier of March 30, 2012 or the date
of Its Flexible Exchange Options Pilot website (http://www.cboe.com/ on which the pilot program is approved on the
Program Regarding Permissible AboutCBOE/CBOELegal permanent basis); 66701 (March 30, 2012), 77 FR
RegulatoryHome.aspx), at the 20673 (April 5, 2012) (SR–CBOE–2012–027)
Exercise Settlement Values for Flexible (extending the pilot through the earlier of
Exchange Index Options Exchange’s Office of the Secretary, and November 2, 2012 or the date on which the pilot
at the Commission’s Public Reference program is approved on a permanent basis); 68145
November 5, 2018. Room. (November 2, 2012), 77 FR 67044 (November 8,
Pursuant to Section 19(b)(1) of the 2012) (SR–CBOE–2012–102) (extending the pilot
Securities Exchange Act of 1934 II. Self-Regulatory Organization’s program through the earlier of November 2, 2013 or
Statement of the Purpose of, and the date on which the pilot program is approved on
(‘‘Act’’),1 and Rule 19b–4 thereunder,2 a permanent basis); 70752 (October 24, 2013), 78 FR
notice is hereby given that on November Statutory Basis for, the Proposed Rule 65023 (October 30, 2013) (SR–CBOE–2013–099)
2, 2018, Cboe Exchange, Inc. (the Change (extending the pilot program through the earlier of
‘‘Exchange’’ or ‘‘Cboe Options’’) filed November 3, 2014 or the date on which the pilot
with the Securities and Exchange In its filing with the Commission, the program is approved on a permanent basis); 73460
Exchange included statements (October 29, 2014), 79 FR 65464 (November 4, 2014)
Commission (‘‘Commission’’) the (SR–CBOE–2014–080) (extending the pilot program
proposed rule change as described in concerning the purpose of and basis for through the earlier of May 3, 2016 or the date on
Items I and II below, which Items have the proposed rule change and discussed which the pilot program is approved on a
any comments it received on the permanent basis); 77742 (April 29, 2016), 81 FR
been prepared by the Exchange. The 26857 (May 4, 2016) (SR–CBOE–2016–032)
Exchange filed the proposal as a ‘‘non- proposed rule change. The text of these (extending the pilot program through the earlier of
controversial’’ proposed rule change statements may be examined at the May 3, 2017 or the date on which the pilot program
pursuant to Section 19(b)(3)(A)(iii) of places specified in Item IV below. The is approved on a permanent basis); 80443 (April 12,
2017), 82 FR 18331 (April 18, 2017) (SR–CBOE–
the Act 3 and Rule 19b–4(f)(6) Exchange has prepared summaries, set 2017–032), 83 FR 21808 (May 10, 2018) (extending
thereunder.4 The Commission is forth in sections A, B, and C below, of the pilot program through the earlier of May 3, 2018
publishing this notice to solicit the most significant aspects of such or the date on which the pilot program is approved
statements. on a permanent basis); and 83175 (May 4, 2018), 83
comments on the proposed rule change FR 21808 (May 10, 2018) (SR–CBOE–2018–037). At
from interested persons. the same time the permissible exercise settlement
5 FLEX Options provide investors with the ability values pilot was established for FLEX Index
I. Self-Regulatory Organization’s to customize basic option features including size, Options, the Exchange also established a pilot
Statement of the Terms of Substance of expiration date, exercise style, and certain exercise program eliminating the minimum value size
the Proposed Rule Change prices. FLEX Options can be FLEX Index Options requirements for all FLEX Options. See Approval
khammond on DSK30JT082PROD with NOTICES
or FLEX Equity Options. In addition, other products Order, supra note 6. The pilot program eliminating
Cboe Options proposes to extend the are permitted to be traded pursuant to the FLEX the minimum value size requirements was extended
operation of its Flexible Exchange trading procedures. For example, credit options are twice pursuant to the same rule filings that
eligible for trading as FLEX Options pursuant to the extended the permissible exercise settlement values
1 15
FLEX rules in Chapter XXIVA. See Cboe Options (for the same extended periods) and was approved
U.S.C. 78s(b)(1). Rules 24A.1(e) and (f), 24A.4(b)(1) and (c)(1), and on a permanent basis in a separate rule change
2 17 CFR 240.19b–4. 29.18. The rules governing the trading of FLEX filing. See id. and Securities Exchange Act Release
3 15 U.S.C. 78s(b)(3)(A)(iii).
Options on the FLEX Hybrid Trading System No. 67624 (August 8, 2012), 77 FR 48580 (August
4 17 CFR 240.19b–4(f)(6). platform are contained in Chapter XXIVA. 14, 2012) (SR–CBOE–2012–040).
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![56114 Federal Register / Vol. 83, No. 218 / Friday, November 9, 2018 / Notices
does not propose any substantive submitted to the Securities and To the contrary, Cboe Options believes
changes to the pilot program. Exchange Commission (the that the restriction actually places the
Under Rule 24A.4, Terms of FLEX ‘‘Commission’’) pilot program reports Exchange at a competitive disadvantage
Options, a FLEX Option may expire on regarding the pilot, which detail the to its OTC counterparts in the market for
any business day specified as to day, Exchange’s experience with the customized options, and unnecessarily
month and year, not to exceed a program. Specifically, the Exchange limits market participants’ ability to
maximum term of fifteen years. In provided the Commission with annual trade in an exchange environment that
addition, the exercise settlement value reports analyzing volume and open offers the added benefits of
for a FLEX Index Option can be interest for each broad-based FLEX transparency, price discovery, liquidity,
specified as the index value determined Index Options class overlying an and financial stability.
by reference to the reported level of the Expiration Friday, p.m.-settled FLEX The Exchange also notes that certain
index as derived from the opening or Index Options series.11 The annual position limit, aggregation and exercise
closing prices of the component reports also contained information and limit requirements continue to apply to
securities (‘‘a.m. settlement’’ or ‘‘p.m. analysis of FLEX Index Options trading FLEX Index Options in accordance with
settlement,’’ respectively) or as a patterns. The Exchange also provided Rules 24A.7, Position Limits and
specified average, provided that the the Commission, on a periodic basis, Reporting Requirements and 24A.8,
average index value must conform to the interim reports of volume and open Exercise Limits. Additionally, all FLEX
averaging parameters established by the interest. In providing the pilot reports to Options remain subject to the position
Exchange.8 However, prior to the the Commission, the Exchange has reporting requirements in paragraph (a)
initiation of the exercise settlement previously requested confidential of Cboe Options Rule 4.13, Reports
values pilot, only a.m. settlements were treatment of the pilot reports under the Related to Position Limits.14 Moreover,
permitted if a FLEX Index Option Freedom of Information Act (‘‘FOIA’’).12
expired on, or within two business days The Exchange believes there is something the SEC has imposed since the early
sufficient investor interest and demand 1990s for Non-FLEX Options, revolved around a
of, a third Friday-of-the-month concern about expiration pressure on the New York
expiration (‘‘Expiration Friday’’).9 in the pilot program to warrant its Stock Exchange (‘‘NYSE’’) at the close that are no
Under the exercise settlement values extension. The Exchange believes that, longer relevant in today’s market. Today, the
pilot, this restriction on p.m. and for the period that the pilot has been in Exchange believes stock exchanges are able to better
operation, the program has provided handle volume. There are multiple primary listing
specified average price settlements in and unlisted trading privilege (‘‘UTP’’) markets, and
FLEX Index Options was eliminated.10 investors with additional means of trading is dispersed among several exchanges and
The exercise settlement values pilot is managing their risk exposures and alternative trading systems. In addition, the
currently set to expire on the earlier of carrying out their investment objectives. Exchange believes that surveillance techniques are
Furthermore, the Exchange believes that much more robust and automated. In the early
November 5, 2018 or the date on which 1990s, it was also thought by some that opening
the pilot program is approved on a it has not experienced any adverse procedures allow more time to attract contra-side
permanent basis. market effects with respect to the pilot interest to reduce imbalances. The Exchange
Cboe Options is proposing to extend program, including any adverse market believes, however, that today, order flow is
volatility effects that might occur as a predominantly electronic and the ability to smooth
the pilot program through the earlier of out openings and closes is greatly reduced (e.g.,
May 6, 2019 or the date on which the result of large FLEX exercises in FLEX market-on-close procedures work just as well as
pilot program is approved on a Option series that expire near Non- openings). Also, other markets, such as the
permanent basis. Cboe Options believes FLEX expirations and use a p.m. NASDAQ Stock Exchange, do not have the same
settlement (as discussed below). type of pre-opening imbalance disseminations as
the pilot program has been successful NYSE, so many stocks are not subject to the same
and well received by its Trading Permit In that regard, based on the procedures on Expiration Friday. In addition, the
Holders and the investing public for the Exchange’s experience in trading FLEX Exchange believes that NYSE has reduced the
period that it has been in operation as Options to date and over the pilot required time a specialist has to wait after
period, Cboe Options continues to disseminating a pre-opening indication. So, in this
a pilot. In support of the proposed respect, the Exchange believes there is less time to
extension of the pilot program, and as believe that the restrictions on exercise react in the opening than in the close. Moreover, to
required by the pilot program’s settlement values are no longer the extent there may be a risk of adverse market
Approval Order, the Exchange has necessary to insulate Non-FLEX effects attributable to p.m. settled options (or
expirations from the potential adverse certain average price settled options related to the
closing price) that would otherwise be traded in a
8 See Rule 24A.4(b)(3); see also Securities market impacts of FLEX expirations.13 non-transparent fashion in the OTC market, the
Exchange Act Release No. 31920 (February 24, Exchange continues to believe that such risk would
1993), 58 FR 12280 (March 3, 1993) (SR–CBOE–92– 11 The annual reports also contained certain pilot
be lessened by making these customized options
017). The Exchange has determined to limit the period and pre-pilot period analyses of volume and eligible for trading in an exchange environment
averaging parameters to three alternatives: The open interest for Expiration Friday, a.m.-settled because of the added transparency, price discovery,
average of the opening and closing index values on FLEX Index series and Expiration Friday Non-FLEX liquidity, and financial stability available.
the expiration date; the average of intra-day high Index series overlying the same index as an 14 Cboe Options Rule 4.13(a) provides that ‘‘[i]n
and low index values on the expiration date; and Expiration Friday, p.m.-settled FLEX Index option. a manner and form prescribed by the Exchange,
the average of the opening, closing, and intra-day 12 5 U.S.C. 552.
each Trading Permit Holder shall report to the
high and low index values on the expiration date. 13 In further support, the Exchange also notes that Exchange, the name, address, and social security or
Any changes to the averaging parameters the p.m. and specified average price settlements are tax identification number of any customer who,
established by the Exchange would be announced already permitted for FLEX Index Options on any acting alone, or in concert with others, on the
to Trading Permit Holders via circular. other business day except on, or within two previous business day maintained aggregate long or
9 For example, prior to the pilot, the exercise
business days of, Expiration Friday. The Exchange short positions on the same side of the market of
settlement value of a FLEX Index Option that is not aware of any market disruptions or problems 200 or more contracts of any single class of option
expires on the Tuesday before Expiration Friday caused by the use of these settlement methodologies contracts dealt in on the Exchange. The report shall
khammond on DSK30JT082PROD with NOTICES
could have an a.m., p.m. or specified average on these expiration dates (or on the expiration dates indicate for each such class of options, the number
settlement. However, the exercise settlement value addressed under the pilot program). The Exchange of option contracts comprising each such position
of a FLEX Index Option that expires on the is also not aware of any market disruptions or and, in the case of short positions, whether covered
Wednesday before Expiration Friday could only problems caused by the use of customized options or uncovered.’’ For purposes of Rule 4.13, the term
have an a.m. settlement. in the over-the-counter (‘‘OTC’’) markets that expire ‘‘customer’’ in respect of any Trading Permit Holder
10 No change was necessary or requested with on or near Expiration Friday and have a p.m. or includes ‘‘the Trading Permit Holder, any general
respect to FLEX Equity Options. Regardless of the specified average exercise settlement value. In or special partner of the Trading Permit Holder, any
expiration date, FLEX Equity Options are settled by addition, the Exchange believes the reasons for officer or director of the Trading Permit Holder, or
physical delivery of the underlying. limiting expirations to a.m. settlement, which is any participant, as such, in any joint, group or
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![56116 Federal Register / Vol. 83, No. 218 / Friday, November 9, 2018 / Notices
C. Self-Regulatory Organization’s At any time within 60 days of the be posted without change. Persons
Statement on Comments on the filing of the proposed rule change, the submitting comments are cautioned that
Proposed Rule Change Received From Commission summarily may we do not redact or edit personal
Members, Participants, or Others temporarily suspend such rule change if identifying information from comment
it appears to the Commission that such submissions. You should submit only
The Exchange neither solicited nor
action is necessary or appropriate in the information that you wish to make
received comments on the proposed
public interest, for the protection of available publicly. All submissions
rule change.
investors, or otherwise in furtherance of should refer to File Number SR–CBOE–
III. Date of Effectiveness of the the purposes of the Act. If the 2018–071 and should be submitted on
Proposed Rule Change and Timing for Commission takes such action, the or before November 30, 2018.
Commission Action Commission shall institute proceedings
For the Commission, by the Division of
to determine whether the proposed rule
Because the proposed rule change Trading and Markets, pursuant to delegated
should be approved or disapproved.
does not (i) significantly affect the authority.24
protection of investors or the public IV. Solicitation of Comments
interest; (ii) impose any significant Interested persons are invited to Eduardo A. Aleman,
burden on competition; and (iii) become submit written data, views and Assistant Secretary.
operative for 30 days from the date on arguments concerning the foregoing, [FR Doc. 2018–24524 Filed 11–8–18; 8:45 am]
which it was filed, or such shorter time including whether the proposed rule BILLING CODE 8011–01–P
as the Commission may designate if change is consistent with the Act.
consistent with the protection of Comments may be submitted by any of
investors and the public interest, the the following methods:
proposed rule change has become SECURITIES AND EXCHANGE
effective pursuant to Section 19(b)(3)(A) Electronic Comments COMMISSION
of the Act 19 and Rule 19b–4(f)(6) • Use the Commission’s internet
thereunder.20 comment form (http://www.sec.gov/ [Release No. 34–84540; File No. SR–BX–
A proposed rule change filed under rules/sro.shtml); or 2018–049]
Rule 19b–4(f)(6) 21 normally does not • Send an email to rule-comments@
become operative for 30 days after the sec.gov. Please include File Number SR– Self-Regulatory Organizations; Nasdaq
date of filing. However, pursuant to CBOE–2018–071 on the subject line. BX, Inc.; Notice of Filing and
Rule 19b–4(f)(6)(iii),22 the Commission Immediate Effectiveness of Proposed
Paper Comments Rule Change To Amend Chapter XIV,
may designate a shorter time if such
action is consistent with the protection • Send paper comments in triplicate Index Rules, Section 10(g), Pricing
of investors and the public interest. The to Secretary, Securities and Exchange When Primary Market Does Not Open
Exchange has asked the Commission to Commission, 100 F Street NE,
Washington, DC 20549–1090. November 5, 2018.
waive the 30-day operative delay so that
the proposal may become operative All submissions should refer to File Pursuant to Section 19(b)(1) of the
immediately upon filing. The Exchange Number SR–CBOE–2018–071. This file Securities Exchange Act of 1934
states that such waiver will allow the number should be included on the (‘‘Act’’) 1 and Rule 19b–4 thereunder,2
Exchange to extend the pilot program subject line if email is used. To help the notice is hereby given that on October
prior to its expiration on November 5, Commission process and review your 30, 2018, Nasdaq BX, Inc. (‘‘BX’’ or the
2018, and maintain the status quo, comments more efficiently, please use ‘‘Exchange’’) filed with the Securities
thereby reducing market disruption. only one method. The Commission will and Exchange Commission (‘‘SEC’’ or
The Commission believes that post all comments on the Commission’s ‘‘Commission’’) the proposed rule
waiving the 30-day operative delay is internet website (http://www.sec.gov/ change as described in Items I and II
consistent with the protection of rules/sro.shtml). Copies of the below, which Items have been prepared
investors and the public interest, as it submission, all subsequent by the Exchange. The Commission is
will allow the pilot program to continue amendments, all written statements publishing this notice to solicit
uninterrupted, thereby avoiding with respect to the proposed rule comments on the proposed rule change
investor confusion that could result change that are filed with the from interested persons.
from a temporary interruption in the Commission, and all written
communications relating to the I. Self-Regulatory Organization’s
pilot program. For this reason, the
proposed rule change between the Statement of the Terms of Substance of
Commission designates the proposed
Commission and any person, other than the Proposed Rule Change
rule change to be operative upon
filing.23 those that may be withheld from the
The Exchange proposes to amend
public in accordance with the
Chapter XIV, Index Rules, Section 10(g),
19 15 U.S.C. 78s(b)(3)(A). provisions of 5 U.S.C. 552, will be
Pricing When Primary Market Does Not
20 17 CFR 240.19b–4(f)(6). In addition, Rule 19b– available for website viewing and
4(f)(6) requires the Exchange to give the
Open.
printing in the Commission’s Public
Commission written notice of its intent to file the The text of the proposed rule change
proposed rule change, along with a brief description
Reference Room, 100 F Street NE,
and text of the proposed rule change, at least five Washington, DC 20549, on official is available on the Exchange’s website at
khammond on DSK30JT082PROD with NOTICES
business days prior to the date of filing of the business days between the hours of 10 http://nasdaqbx.cchwallstreet.com/, at
proposed rule change, or such shorter time as a.m. and 3 p.m. Copies of the filing also the principal office of the Exchange, and
designated by the Commission. The Exchange has at the Commission’s Public Reference
satisfied this requirement.
will be available for inspection and
21 17 CFR 240.19b–4(f)(6). copying at the principal office of the Room.
22 17 CFR 240.19b–4(f)(6)(iii). Exchange. All comments received will
23 For purposes only of waiving the operative 24 17 CFR 200.30–3(a)(12) and (59).
1 15 U.S.C. 78s(b)(1).
delay for this proposal, the Commission has efficiency, competition, and capital formation. See
considered the proposed rule’s impact on 15 U.S.C. 78c(f). 2 17 CFR 240.19b–4.
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Document Created: 2018-11-09 03:34:04
Document Modified: 2018-11-09 03:34:04
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| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
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| FR Citation | 83 FR 56113 |
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