[Federal Register Volume 82, Number 179 (Monday, September 18, 2017)]
[Notices]
[Pages 43629-43633]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-19712]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81586; File No. SR-CBOE-2017-059]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the On-Floor Lead Market-Maker Program

September 12, 2017.
    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 August 31, 2017, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I and II 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 proposes to amend the On-Floor Lead Market-Maker 
(``LMM'') program. The text of the proposed rule change is provided 
below.

(additions are italicized; deletions are [bracketed])
* * * * *

Chicago Board Options Exchange, Incorporated

Rules

* * * * *

Rule 8.15. Lead Market-Makers

    (a) No change.
    (b) LMM Obligations: Each LMM must fulfill all the obligations of a 
Market-Maker under the Rules and satisfy each of the following 
requirements:
    (i) Provide continuous electronic quotes (as defined in Rule 1.1 
(ccc)) in at least the lesser of 99% of the non-adjusted option series 
or 100% of the non-adjusted option series minus one call-put pair, with 
the term ``call-put pair'' referring to one call and one put that cover 
the same underlying instrument and have the same expiration date and 
exercise price. This obligation does not apply to intra-day add-on 
series on the day during which such series are added for trading. 
Compliance with this quoting obligation applies to all of an LMM's 
appointed classes on each platform collectively. The Exchange will 
determine compliance by an LMM with this quoting obligation on a 
monthly basis. However, determining compliance with this obligation on 
a monthly basis does not relieve an LMM from meeting this obligation on 
a daily basis, nor does it prohibit the Exchange from taking 
disciplinary action against an LMM for failing to meet this obligation 
each trading day. In option classes in which both an On-Floor LMM and 
an Off-Floor DPM or Off-Floor LMM have been appointed, the On-Floor LMM 
will not be obligated to comply with this paragraph (b)(i) and instead 
will be obligated to comply with the obligations of Market-Makers in 
Rule 8.7(d). In an option class in which the Exchange appointed an On-
Floor LMM that has open-outcry obligations only, that On-Floor LMM will 
not be obligated to comply with this paragraph (b)(i) and instead will 
be obligated to comply with the obligations of Market-Makers in Rule 
8.7(d) and have a designee in the class's crowd on the trading floor 
for the entire trading day (except for a de minimis amount of time);
    (ii)-(iv) No change.
    (v) enter opening quotes within one minute of the initiation of an 
opening rotation in any series that is not open due to the lack of a 
quote (see Rule 6.2B(d)(i)(A) or (ii)(A)) and participate in other 
rotations described in Rule 6.2B (including the modified opening 
rotation set forth in Interpretation and Policy .01) or 24.13, as 
applicable. In option classes in which both an On-Floor LMM and an Off-
Floor DPM or

[[Page 43630]]

Off-Floor LMM have been appointed, the obligation set forth in this 
paragraph (b)(v) will be that of the Off-Floor DPM or Off-Floor LMM and 
not the On-Floor LMM. In an option class in which the Exchange 
appointed an On-Floor LMM that has open-outcry obligations only, that 
On-Floor LMM will not be obligated to comply with this paragraph 
(b)(v);
    (vi)-(viii) No change.
    (c)-(d) No change.

. . . Interpretations and Policies:

    .01 An LMM generally will operate on CBOE's trading floor (``On-
Floor LMM''). However, as provided below, an LMM can request that the 
Exchange authorize the LMM to function remotely away from CBOE's 
trading floor (``Off-Floor LMM'') on a class-by-class basis.
    (a)-(b) No change.
    (c) Notwithstanding Rule 8.15(a)[,]: (i) in an option class in 
which an Off-Floor LMM or Off-Floor DPM has been appointed in 
accordance with this Rule 8.15 or Rule 8.83, as applicable, the 
Exchange in its discretion may also appoint an On-Floor LMM, which will 
be eligible to receive a participation entitlement under this Rule 8.15 
with respect to orders represented in open outcry; and (ii) in a class 
in which the Exchange does not grant an electronic participation 
entitlement pursuant to Rule 6.45(a)(ii) and in which the Exchange did 
not appoint an Off-Floor LMM or Off-Floor DPM, the Exchange may appoint 
an On-Floor LMM that has open-outcry obligations only. If the Exchange 
in its discretion determines to reallocate a class in which an Off-
Floor LMM or Off-Floor DPM has been appointed, the On-Floor LMM 
appointment will automatically terminate.
    .02-.04 No change.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's Web site (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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend the On-Floor LMM program. Currently, 
Rule 8.15, Interpretation and Policy .01 permits an LMM that is 
approved to operate as an Off-Floor LMM in one or more classes can 
request the Exchange authorize it to operate as an On-Floor LMM in 
those classes. Additionally, in an option class in which an Off-Floor 
LMM or Off-Floor Designated Primary Market-Maker (``DPM'') has been 
appointed in accordance with Rule 8.15 or Rule 8.83, respectively, the 
Exchange in its discretion may appoint an On-Floor LMM (which may be 
the same firm or different firm serving as the Off-Floor LMM or Off-
Floor DPM), which will be eligible to receive a participation 
entitlement under Rule 8.15 with respect to orders represented in open 
outcry. Pursuant to Rule 8.15(b), in an option class in which both an 
On-Floor LMM and an Off-Floor DPM or Off-Floor LMM have been appointed, 
the On-Floor LMM will not be obligated to comply with the continuous 
electronic quoting obligation in subparagraph (i) or opening quoting 
obligation in subparagraph (v) (the Off-Floor LMM or Off-Floor DPM 
would be required to comply with those quoting obligations).
    Pursuant to Rule 6.45(a)(ii), which permits the exchange to 
determine, on a class-by-class basis, certain priority overlays, 
including participation entitlements to LMMs (as well as DPMs and 
Preferred Market-Makers). The Exchange may grant an LMM a participation 
entitlement only if it has applied the priority customer overlay. LMMs 
operating on the trading floor may also receive a participation 
entitlement.\3\ In exchange for eligibility to receive a participation 
entitlement, LMMs must, among other things, satisfy a heightened 
quoting obligation.\4\ If the Exchange does not grant an electronic 
participation entitlement to a class, currently an LMM that operates 
off the floor is required to continue to satisfy the heightened 
electronic quoting obligation under the rules, even though it does not 
receive the benefit of an electronic participation entitlement 
(although it would continue to receive an open outcry participation 
entitlement if it also operates on the floor).
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    \3\ See Rule 8.15(d).
    \4\ Generally, LMMs and DPMs must provide continuous electronic 
quotes (for 90% of the time) in at least the lesser of 99% of the 
non-adjusted series or 100% of the non-adjusted series minus one 
call-put pair, while Market-Makers must provide continuous 
electronic quotes (for 90% of the time) in at least 60% of the 
series in their appointed classes.
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    Therefore, under current Rules, the Exchange may appoint an On-
Floor LMM in a class if there is also an Off-Floor LMM or Off-Floor DPM 
in that class (which, as noted above, the same firm or different firms 
may be operating as the On-Floor LMM and Off-Floor LMM or Off-Floor 
DPM). Additionally, the Rules provide an On-Floor LMM does not have to 
satisfy heightened electronic quoting standards if there is also an 
Off-Floor LMM or Off-Floor DPM in that class, who must satisfy those 
standards. However, the Rules do not expressly contemplate the Exchange 
appointing an On-Floor LMM in a class if it has not appointed an Off-
Floor DPM or Off-Floor LMM in that class. Additionally, current Rules 
do not explicitly permit the Exchange to not impose a heightened 
electronic quoting obligation on an On-Floor LMM if there is no Off-
Floor LMM or Off-Floor DPM (in other words, if the Exchange were to 
appoint an On-Floor LMM who operates only on the floor, and no Off-
Floor LMM or Off-Floor DPM, the On-Floor LMM would still be required to 
satisfy heightened quoting standards). The proposed rule change 
explicitly states the Exchange may appoint an On-Floor LMM in a class, 
under specific circumstances (as further discussed below), even if 
there is no Off-Floor LMM or Off-Floor DPM in that class, which On-
Floor LMM must satisfy certain floor-based obligations and is eligible 
for an open outcry participation entitlement, but will not have to 
satisfy heightened electronic quoting obligations and will not be 
eligible for an electronic participation entitlement. The proposed rule 
change merely expands the Exchange's flexibility with respect to 
appointing On-Floor LMMs in a circumstance not currently contemplated 
in the Rules--in classes in which it has not appointed an Off-Floor DPM 
or Off-Floor LMM--and specifies the obligations and entitlement in such 
a circumstance.
    Specifically, the Exchange proposes to amend Rule 8.15, 
Interpretation and Policy .01 to permit the Exchange to appoint an On-
Floor LMM to operate only on the trading floor with open-outcry 
obligations only in a class in which the Exchange appointed no Off-
Floor LMM or Off-Floor DPM and does not grant an electronic 
participation entitlement pursuant to Rule 6.45(a)(ii) (in addition to 
classes in which the Exchange has appointed an Off-Floor

[[Page 43631]]

DPM or LMM).\5\ The proposed rule change also amends Rule 8.15(b)(i) 
and (v) to provide an On-Floor LMM with open-outcry obligations only 
will not be obligated to comply with the continuous electronic quoting 
obligation in subparagraph (i) or opening quoting obligation in 
subparagraph (v), but must comply with the obligations of Market-Makers 
in Rule 8.7(d) and have a designee in the class's crowd on the trading 
floor for the entire trading day (except for a de minimis amount of 
time).\6\
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    \5\ The Exchange may remove an On-Floor LMM in accordance with 
Rule 8.15 in the same manner as it may remove any other LMM 
appointed pursuant to Rule 8.15, including current On-Floor LMMs.
    \6\ For example, a de minimis time period may be the brief time 
during which a designee leaves the trading floor to purchase a 
beverage.
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    The Exchange believes it is reasonable for an On-Floor LMM with 
open-outcry obligations only to be eligible for an open outcry 
entitlement, because priority customer orders in the book always 
receive priority over in-crowd market participants, including LMMs who 
may be eligible for an open outcry entitlement. Additionally, as 
proposed, the On-Floor LMM must satisfy the proposed heightened 
standard to be in the crowd for the entire trading day to be eligible 
for the open outcry entitlement.\7\ The Exchange believes this standard 
is reasonable, as it understands On-Floor LMMs currently have designees 
present on the floor during the entire trading, because a designee must 
be present to participate in open outcry trades and receive open outcry 
participation entitlements on trades.\8\
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    \7\ See Rule 6.45(b)(i).
    \8\ If an On-Floor LMM has no designee on the trading floor at 
any time during the trading day, it could not receive an 
entitlement, as there is no one present to participate on any trade 
during that time. On-Floor LMMs may have multiple designees in the 
trading crowd.
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    If the Exchange eliminates an electronic participation entitlement 
from a class, the Exchange believes there is no incentive for a Market-
Maker to satisfy a heightened electronic quoting standard in that class 
due to the allocation algorithm determined by the Exchange. The 
Exchange does not believe the open outcry participation entitlement is 
a sufficient benefit to balance the requirement to satisfy the 
heightened electronic quoting obligation (due to the significant 
electronic trading volume) if an LMM or DPM is not also receiving an 
electronic participation entitlement. However, the Exchange believes it 
will benefit price discovery in the trading crowd for an LMM to be 
present in that class if it is eligible to receive a participation 
entitlement, even though there may be no LMM streaming quotes remotely. 
The proposed rule change will permit the Exchange to appoint an LMM to 
a trading crowd in this circumstance with an appropriate balance of 
floor-based benefits and obligations, consistent with the LMM's on-
floor role.
    The proposed rule change permits the Exchange to appoint an On-
Floor LMM as it already can do pursuant to current Rules, which is 
appoint an On-Floor LMM that must satisfy regular market-maker quoting 
obligations rather than heightened LMM quoting obligations and only 
receive an open outcry participation entitlement (with the expectation 
a designee of the LMM will have a presence on the trading floor for the 
entire trading day). The proposed rule change merely provides the 
Exchange with discretion to make such an appointment in a different 
circumstance not currently contemplated in the Rules--in a class with 
no Off-Floor DPM or Off-Floor LMM. The Exchange may make such an 
appointment in the limited circumstance of classes in which it does not 
grant an electronic participation entitlement, and it will consider, 
among other factors, electronic liquidity in the class prior to making 
such an appointment. An On-Floor LMM in such a class will be subject to 
the same obligations and receive the same benefits as current On-Floor 
LMMs in other classes, subject to a different heightened quoting 
standard of maintaining a floor presence all day (subject to a de 
minimis exception) (which is expected of current On-Floor LMMs). Any 
violation of the proposed heightened quoting standard will be subject 
to potential discipline under Chapter XVII.\9\
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    \9\ Exchange regulatory staff are present on the trading floor 
and may detect violations of this obligation. Additionally, pursuant 
to Rule 17.2(a), Trading Permit Holders (including those in a 
trading crowd) may submit complaints to the Regulatory Division 
alleging violations of this obligation.
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    The Exchange notes current On-Floor LMMs in classes in which there 
is a different Off-Floor DPM or Off-Floor LMM, as well as On-Floor LMMs 
in classes with no Off-Floor DPM or Off-Floor LMM pursuant to the 
proposed rule change, are not subject to the heightened electronic 
quoting obligation or opening quoting obligation in Rule 8.15(b), but 
receive the participation entitlement in Rule 8.15(d). While there is 
no current obligation in the rules requiring an On-Floor LMM to have a 
designee on the floor during the entire trading day, the Exchange 
expects current On-Floor LMMs to do so and may consider trading floor 
presence when determining whether to renew an On-Floor LMM's term.\10\
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    \10\ See Rule 8.15(a)(i) (a factor to be considered by the 
Exchange when selecting LMMs includes presence in the trading 
crowd).
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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.\11\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \12\ 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) \13\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ Id.
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    In particular, the proposed rule change promotes just and equitable 
principles of trade by creating a balance between the obligations 
imposed on and benefits provided to On-Floor LMMs that only operate on 
the trading floor and only have open-outcry obligations. The Exchange 
believes if an On-Floor LMM was obligated to satisfy a heightened 
continuous electronic quoting standard in a class in which there was no 
electronic participation entitlement, the obligations would outweigh 
the benefit of an open outcry entitlement. The proposed rule change 
imposes a more reasonable heightened open outcry obligation that 
balances the eligibility of the open outcry benefit, as the proposed 
rule change imposes an on-floor requirement to be eligible for the on-
floor entitlement rather than an electronic quoting obligation 
unrelated to the corresponding potential entitlement.
    The proposed rule change permits the Exchange to appoint an On-
Floor LMM as it does pursuant to current Rules; it merely provides the 
Exchange with discretion to appoint an On-Floor LMM

[[Page 43632]]

in a different circumstance--in a class with no Off-Floor DPM or Off-
Floor LMM. Current rules do not contemplate an On-Floor LMM in a class 
with no Off-Floor DPM or Off-Floor LMM. An On-Floor LMM in such a class 
will be subject to the same obligations and receive the same benefits 
as current On-Floor LMMs in other classes, subject to a different 
heightened quoting standard of maintaining a floor presence for the 
entire trading day (subject to a de minimis exception), although 
current On-Floor LMMs are similarly expected have a designee present on 
the trading floor for the entire trading day. The proposed rule change 
removes impediments to and perfects the mechanism of a free and open 
market by providing flexibility to have an LMM in the trading crowd, 
which enhances price discovery and provides potential price 
improvement, in a class in which there is no incentive for a Market-
Maker to satisfy a heightened electronic quoting standard due to the 
allocation algorithm determined by the Exchange in that class.

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

    CBOE 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 it is 
appropriate to limit its ability to appoint an On-Floor LMM with open-
outcry obligations only in classes in which it determines to have no 
electronic participation entitlement, as it wants to incentivize firms 
to remain LMMs (and provide liquidity) in the trading crowd when there 
is no incentive for firms to satisfy heightened electronic quoting 
standards. The Exchange will, among other factors, consider electronic 
liquidity in the class prior to making such an appointment. The 
Exchange believes the continued presence of an LMM in the trading crowd 
enhances price discovery and provides potential price improvement, and 
such requirement creates a balance with eligibility for an open outcry 
participation entitlement. The Exchange believes requiring an On-Floor 
LMM that operates only on the trading floor to satisfy heightened 
electronic quoting standards would outweigh the benefit of an open 
outcry only entitlement. The proposed rule change has no impact on 
intermarket competition, as it relates solely to the presence of an LMM 
on CBOE's trading floor.

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 foregoing 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, it has become 
effective pursuant to Section 19(b)(3)(A) \14\ of the Act and Rule 19b-
4(f)(6) thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and the 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.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \16\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \17\ permits the 
Commission to 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 waiver of the 30-day operative delay would permit the 
Exchange to appoint an On-Floor LMM as of September 1, 2017, which in 
turn would permit the market to benefit sooner from enhanced price 
discovery and the potential for price improvement. Based on the 
foregoing, the Commission believes the waiver of the operative delay is 
consistent with the protection of investors and the public interest. 
Therefore, the Commission hereby waives the operative delay and 
designates the proposal operative upon filing.\18\
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    \16\ 17 CFR 240.19b-4(f)(6).
    \17\ 17 CFR 240.19b-4(f)(6)(iii).
    \18\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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 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-2017-059 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-2017-059. 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 Web site (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 Web site 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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-

[[Page 43633]]

2017-059, and should be submitted on or before October 10, 2017.
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    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-19712 Filed 9-15-17; 8:45 am]
 BILLING CODE 8011-01-P