83 FR 5668 - Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change Relating to Flexibly Structured Options

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 27 (February 8, 2018)

[Federal Register Volume 83, Number 27 (Thursday, February 8, 2018)]
[Notices]
[Pages 5668-5671]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-02482]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82622; File No. SR-CBOE-2018-008]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change Relating to Flexibly Structured 
Options

February 2, 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 January 19, 2018, Cboe Exchange, Inc. (``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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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

    The Exchange seeks to amend its rules related to flexibly 
structured options (``FLEX Options''). The text of the proposed rule 
change is 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
    The Exchange is proposing to make certain revisions to Rules 
24A.4.02, which contains certain requirements for a FLEX Option that 
has the exact same terms as a Non-FLEX Option.
    FLEX Options with quarterly expirations, short term expirations, 
weekly expirations,\3\ and End of Month (``EOM'') expirations are not 
currently fungible with Non-FLEX Options with identical terms. Such 
expirations were not originally intended to be fungible.\4\

[[Page 5669]]

The Exchange now proposes to add paragraph (a) to Interpretation and 
Policy .02 of Rule 24A.4 \5\ in order to make all FLEX Options fungible 
with Non-FLEX options with identical terms, including quarterly 
expirations, short term expirations, weekly expirations, and EOM 
expirations.
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    \3\ The Exchange notes that Rule 24.9(e) no longer uses the term 
End of Week (EOW) expirations. The Exchange added Monday and 
Wednesday expirations to Rule 24.9(e), and Monday, Wednesday, and 
Friday expirations are termed weekly expirations in Rule 24.9(e). 
See Rule 24.9(e).
    \4\ See e.g., Securities Exchange Act Release Nos. 59060 
(December 5, 2008), 73 FR 76075 (December 15, 2008)(SR-CBOE-2008-115 
proposal notice); 59417 (February 18, 2009), 74 FR 8591 (February 
25, 2009) (SR-CBOE-2008-115 approval order); and Securities Exchange 
Act Release 59675 (April 1, 2009), 74 FR 15794 (April 7, 2009) (SR-
OCC-2009-05). FLEX Options with non-Expiration Friday expiration 
dates that coincide with other Non-FLEX option expiration dates and 
with terms identical to those Non-FLEX Options were permitted 
before, and were not originally intended by the Exchange to become 
subject to, the fungibility provisions adopted through SR-CBOE-2008-
115 (e.g., a FLEX Option that expires on the last day of a quarter 
and that has terms identical to a Non-FLEX Option series is not 
fungible with that Non-FLEX Option series; however, certain position 
limit aggregation requirements apply under Rules 24A.7(d)(1)-(2) and 
24B.7(d)(1)-(2)). See also, e.g., Securities Exchange Release Act 
Nos. 62658 (August 5, 2010), 75 FR 49010 (August 12, 2010)(SR-CBOE-
2009-075 proposal notice) and 62911 (September 14, 2010), 75 FR 
57539 (September 21, 2010) (SR-CBOE-2009-075 approval 
order)(footnote 8 of the proposal notice indicates that FLEX Options 
do not become fungible with subsequently introduced Non-FLEX 
structured quarterly and short term options and that, because of the 
similarities between EOW and EOM expirations and existing Non-FLEX 
structured quarterly and short term options, FLEX Options will 
similarly not become fungible with EOW and EOM expirations listed 
for trading). As previously noted, Rule 24.9(e) was amended to 
include Monday and Wednesday expirations, and the term EOW was 
removed. All expirations listed pursuant to Rule 24.9(e) (i.e., 
Monday, Wednesday, Friday, and EOM expirations) are currently not 
fungible.
    \5\ Chapter XXIVA contains the rules governing the execution of 
FLEX Options on the Hybrid Trading System. Prior to SR-CBOE-2018-003 
Chapter XXIVA contained the rules governing the execution of FLEX 
Options in open outcry, and Chapter XXIVB contained the rules 
governing the execution of FLEX Options on the Hybrid Trading 
System. Pursuant to SR-CBOE-2018-003 Chapter XXIVB replaced Chapter 
XXIVA such that Chapter XXIVA now contains the rules governing the 
execution of FLEX Options on the Hybrid Trading System, and the 
rules governing the execution of FLEX Options in open outcry have 
been removed from the Exchange's rulebook.
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    The effect of the proposed rule change is that once an option 
series with identical terms is listed for trading as a Non-FLEX Option 
series, (i) all existing open positions established under the FLEX 
trading procedures will be fully fungible with transactions in the 
identical Non-FLEX Option series, and (ii) any further trading in the 
series would be as Non-FLEX Options subject to the Non-FLEX trading 
procedures and rules. The Exchange believes the proposed application of 
Rule 24A.4.02 to all FLEX Options will have the effect of more FLEX 
Options becoming fungible with Non-Flex Options, which will potentially 
increase the liquidity available to traders of FLEX Options.
    Second, the Exchange proposes to codify existing practice by 
including rule text in paragraph (a) to Rule 24A4.02 to specify the 
applicability of Interpretation and Policy .02 in the event the 
relevant expiration is an Exchange holiday. The proposed text is as 
follows:

    In the event the relevant expiration is an Exchange holiday, 
this Interpretation and Policy shall be applicable to options with 
an expiration date that is the business day immediately preceding 
the Exchange holiday. Except, in the case of Monday expiring Weekly 
Expirations (Rule 24.9(e)(1)), this Interpretation and Policy shall 
be applicable to options with an expiration date that is the 
business day immediately following the Exchange Holiday.

Generally, if an expiration were to fall on an Exchange holiday, the 
expiration becomes the business day immediately preceding the Exchange 
holiday--except in the case of Monday expiring Weekly Expirations 
pursuant to Rule 24.9(e)(1), whereby the expiration becomes the 
business day immediately following the Exchange holiday.\6\ Proposed 
paragraph (a) makes it clear that when the expiration of a Non-FLEX 
Option is moved to the immediately preceding (or following) business 
day the FLEX Option that also expires on the preceding (or following) 
business day will be fungible with the Non-FLEX Option (assuming all 
other terms are identical).
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    \6\ See e.g., Rule 24.9(e)(1) (stating that if the Exchange is 
not open for business on a respective Monday, the normally Monday 
expiring Weekly Expirations will expire on the following business 
day, and if the Exchange is not open for business on a respective 
Wednesday or Friday, the normally Wednesday or Friday expiring 
Weekly Expirations will expire on the previous business day).
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    Third, we are proposing to change the text to clarify that the 
existing intra-day add provision only applies to FLEX Options that have 
an American-style exercise. Limiting the application of the intra-day 
add provision to American-style exercises was the Exchange's original 
intent when this provision was originally adopted.\7\
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    \7\ See Securities Exchange Act Release No. 62870 (September 8, 
2010), 75 FR 56147 (September 15, 2010) (SR-CBOE-2010-078) (stating 
that there is assignment risk for American-style options only). In 
the event a Non-FLEX Option is listed with identical terms to an 
existing FLEX Option the Options Clearing Corporation (``OCC'') 
cannot net the positions in the contracts until the next business 
day. Thus, if the Non-FLEX Option were listed intra-day, and an 
investor with a position in the FLEX Option attempted to close the 
position using the Non-FLEX Option, the investor would be 
technically long in one contract and short in the other contract, 
exposing the investor to assignment risk until the next day despite 
having offsetting positions.
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    Finally, we are also proposing non-substantive, clarifying changes 
to simplify the text and make it easier to read. The changes are as 
follows:
[GRAPHIC] [TIFF OMITTED] TN08FE18.000

The Exchange believes these non-substantive changes more clearly 
provide that the fungibility provisions apply to FLEX Option series 
with terms that are identical to the terms of a Non-FLEX Option series.

[[Page 5670]]

    The Exchange notes that when a FLEX Option is fungible with the 
Non-FLEX option OCC converts any open interest in the FLEX Option to 
the Non-FLEX option. However, OCC's By-laws currently provide that:

    Once a series of non-flexibly structured options (other than a 
series of quarterly options or short term options) is opened for 
trading on an Exchange, any existing flexibly structured option 
contracts that have identical variable terms shall be fully fungible 
with options in such series, and shall cease to be flexibly 
structured options.\8\
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    \8\ See definition of ``flexibly structured option'' in Article 
I of OCC By-laws.

The effect of ``other than a series of quarterly options or short term 
options'' in the above definition prevents OCC from carrying out the 
FLEX to Non-FLEX open interest conversion for options with quarterly 
expirations, short term expirations, weekly expirations, and EOM 
expirations. Thus, in order to give effect to the Cboe Options rule 
change, OCC will be amending its By-laws by removing ``other than a 
series of quarterly options or short term options'' from the 
definition. The Exchange notes that in situations where an OCC rule 
change is necessary to give effect to a Cboe Options rule change 
previous practice involved Cboe Options amending its rules and then OCC 
amending its rules.\9\
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    \9\ See e.g., Securities Exchange Act Release 59675 (April 1, 
2009), 74 FR 15794 (April 7, 2009) (SR-OCC-2009-05) and Securities 
Exchange Act Release 59417 (Feb. 18, 2009), 74 FR 8591 (Feb. 25, 
2009) (SR-CBOE-2008-115).
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Implementation Date
    In order to allow OCC the time necessary to amend its By-laws, the 
proposed rule text provides that the Exchange's current rule text will 
remain in effect until a date specified by the Exchange in a Regulatory 
Circular, which date shall be no later than July 31, 2018. The 
Regulatory Circular announcing the effective date shall be issued at 
least 30 days prior to the effective date. On the effective date 
specified by the Exchange in a Regulatory Circular, the rule text 
provisions amended by this filing will be in effect.
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.\10\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \11\ 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) \12\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ Id.
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    In particular, the Exchange believes the proposed application of 
Rule 24A.4.02 to all FLEX Options will have the effect of more FLEX 
Options becoming fungible with Non-Flex Options, which will potentially 
increase the liquidity available to traders of FLEX Options. The 
Exchange also believes the rule text regarding holidays will serve to 
make clear the Exchange's policies with regards to holidays. In 
addition, the Exchange believes that specifying that the intra-day add 
provision applies solely to American-style expirations will potentially 
provide more clarity regarding the manner in which the rules operate, 
which helps protect investors and the public interest. Finally, the 
non-substantive, clarifying changes of the proposed filing protect 
investors and the public interest by making the rule easier to read and 
understand.

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. Specifically, the Exchange 
does not believe that the proposed rule change will impose any burden 
on intramarket competition because the rules will be applicable to all 
TPHs. The Exchange does not believe the proposal will negatively impact 
market participants because, importantly, more FLEX Options becoming 
fungible with Non-Flex Options will potentially increase the liquidity 
available to traders of FLEX Options (e.g., there are more market 
participants transacting in Non-FLEX Options; thus, there is 
potentially more liquidity available to market participants with FLEX 
Options that will be able to, pursuant to this proposal, exit their 
FLEX Options positions by transacting in Non-FLEX Options). To the 
extent that the proposed rule change will cause market participants to 
choose Cboe Options over other trading venues, market participants on 
other exchanges are welcome to become TPHs and trade at Cboe Options if 
they determine that this proposed rule change has made Cboe Options 
more attractive or favorable.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2018-008 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-2018-008. 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

[[Page 5671]]

post all comments on the Commission's internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed rule 
change that are filed with the Commission, and all written 
communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for website viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE, Washington, DC 20549 on official 
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
the filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change. Persons submitting comments are cautioned that we do 
not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
CBOE-2018-008 and should be submitted on or before March 1, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-02482 Filed 2-7-18; 8:45 am]
BILLING CODE 8011-01-P