[Federal Register Volume 82, Number 242 (Tuesday, December 19, 2017)]
[Notices]
[Pages 60259-60262]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27227]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82308; File No. SR-CBOE-2017-077]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
to the Fees Schedule

December 13, 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 December 8, 2017, Cboe Exchange, Inc. (the ``Exchange'' or 
``Cboe Options'') filed with the Securities and Exchange Commission 
(the ``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 Exchanges seeks to amend the Fees Schedule. 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Pursuant to Footnote 38 of the Fees Schedule, if a Lead Market-
Maker (``LMM'') in SPX options during extended trading hours (``ETH'') 
(1) provides continuous electronic quotes in at least the lesser of 99% 
of the non-adjusted series or 100% of the non-adjusted series minus one 
call-put pair in an ETH allocated class (excluding intra-day add-on 
series on the day during which such series are added for trading) and 
(2) enters opening quotes within five minutes 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)), provided that the LMM will 
not be required to enter opening quotes in more than the same 
percentage of series set forth in clause (1) for at least 90% of the 
trading days during ETH in a month, the LMM will receive a rebate for 
that month and will receive a pro-rata share of a compensation pool 
equal to $15,000 times the number of LMMs in that class (or pro-rated 
amount if an appointment begins after the first trading day of the 
month or ends prior to the last trading day of the month).
    The Exchange proposes \3\ to amend Footnote 38 to modify the 
standard an SPX LMM will need to satisfy in order to receive a rebate 
for its ETH activity, and increase the compensation pool for SPX LMMs 
to $30,000 per LMM.\4\ In addition to providing continuous electronic 
quotes and entering opening quotes, as described above, in order for an 
LMM in SPX to receive the monthly rebate, it must satisfy the following 
time-weighted average quote widths and bid/ask sizes for each moneyness 
category during the month: (A) Out of the money options (``OTM'') 
category, average quote width of $0.75 or less and average bid/ask size 
of 15 contracts or greater; (B) at the money options (``ATM'') 
category, average quote width of $3.00 or less and bid/ask size of 10 
contracts or more; and (C) in the money options (``ITM'') category, 
average quote width of $10.00 or less and bid/ask size of 5 contracts 
or more. In other words, the LMM will need to satisfy the following 
nine criteria during a month to receive the payment described above for 
that month.
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    \3\ The Exchange initially filed the proposed rule change on 
December 1, 2017 (SR-CBOE-2017-075). On December 8, 2017 the 
Exchange withdrew SR-CBOE-2017-075 and then subsequently submitted 
this filing (SR-CBOE-2017-077).
    \4\ The proposed rule change does not change the standard a VIX 
LMM will need to meet to receive a rebate.

[[Page 60260]]



----------------------------------------------------------------------------------------------------------------
               OTM                          ATM                                    ITM
----------------------------------------------------------------------------------------------------------------
1. Avg. Quote Width <=$0.75......  4. Avg. Quote Width   7. Avg. Quote Width <=$10.00.
                                    <=$3.00.
2. Avg. Bid Size >=15............  5. Avg. Bid Size      8. Avg. Bid Size >=5.
                                    >=10.
3. Avg. Ask Size >=15............  6. Avg. Ask Size      9. Avg. Ask Size >=5.
                                    >=10.
----------------------------------------------------------------------------------------------------------------

    The Exchange believes time-weighted averages are a good way to 
assess the overall quality of the market. The Exchange also believes 
having separate requirements per moneyness category will encourage 
tighter quote widths and larger sizes in each moneyness category.
    The Exchange will determine an SPX LMM's monthly time-weighted 
average widths and sizes by capturing each of the LMM's quote 
submission's width, bid size, ask size, and receipt time during the 
month. Also, the percentage of series quoted will be weighted for the 
time the series is available for quoting during a month. For example, 
if a series is only listed for three days during a month, the 
performance in that series is only weighted for those three days. 
Additionally, the Exchange will exclude 5% of the total quote time for 
all SPX series during the month in which the LMM was disseminating its 
widest quotes and smallest bid/ask sizes. This will allow the LMM to 
widen its quotes and decrease its bid/ask sizes consistent with its 
risk model in response to market events during ETH while retaining the 
opportunity to meet the quoting standard for the month.
    The below example demonstrates the manner in which the Exchange 
determines the time-weighted average quote widths.
     Assume Series A and B are the only OTM series in SPX 
during a month.
     If an LMM submits the below 6 quotes in Series A and B 
during the entire month, the resultant time-weighted average quote 
width in Series A for the month is as follows:

----------------------------------------------------------------------------------------------------------------
                                                                    Quote time
                                                                      weight                       Time-weighted
                                    Quote width    Time  (amount   (excludes 5%    Time-weighted  average  quote
                                    (difference      of time a      of the time     quote width    width  (time-
                                   between  the      quote is      during which   (quote width *     weighted
                                     bid-ask)       resting--in     the widest       quote time    quote width/
                                                   microseconds)    quotes were       weight)       quote time
                                                                   disseminated)                      weight)
----------------------------------------------------------------------------------------------------------------
Quote 1 (in A)..................            0.10          13,200          13,200           1,320  ..............
Quote 2 (in A)..................            0.10           3,600           3,600             360  ..............
Quote 3 (in B)..................            0.50           9,000           9,000           4,500  ..............
Quote 4 (in B)..................            0.90          14,400          14,400          12,960  ..............
Quote 5 (in B)..................            6.00           3,600           1,467           8,802  ..............
Quote 6 (in B)..................            8.75              60               0               0  ..............
                                 -------------------------------------------------------------------------------
    Total.......................  ..............          43,860          41,667          27,942
----------------------------------------------------------------------------------------------------------------
                                                                                                            0.67
----------------------------------------------------------------------------------------------------------------

    The time-weighted average quote width in OTM series for the month 
is 0.67; thus, the LMM in this example has met the OTM time-weighted 
average quote width to be eligible for the monthly payment, because its 
time-weighted average quote width is less than 0.75 for the month.
    The Exchange determines the time-weighted average bid size and ask 
size in a similar manner. For example:
     Assume Series A and B are the only OTM series in SPX 
during a month.
     If an LMM submits the below 6 quotes in Series A and B 
during the entire month, the resultant time-weighted average quote 
width in Series A for the month is as follows:

----------------------------------------------------------------------------------------------------------------
                                                                    Quote time
                                                                      weight                       Time-weighted
                                                   Time  (amount   (excludes 5%    Time-weighted    average bid
                                                     of time a      of the time   bid size  (bid   size  (time-
                                     Bid size        quote is      during which    size*  quote    weighted bid
                                                    resting--in    the smallest    time  weight)    size/quote
                                                   microseconds)    quotes were                    time weight)
                                                                   disseminated)
----------------------------------------------------------------------------------------------------------------
Quote 1 (in A)..................              25          13,200          13,200         330,000  ..............
Quote 2 (in A)..................              20           3,600           3,600          72,000  ..............
Quote 3 (in B)..................              10           9,000           9,000          90,000  ..............
Quote 4 (in B)..................              10          14,400          14,400         144,000  ..............
Quote 5 (in B)..................               5           3,600           1,467           7,335  ..............
Quote 6 (in B)..................               2              60               0               0  ..............
                                 -------------------------------------------------------------------------------
    Total.......................  ..............          43,860          41,667         643,335
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                                                                                                            15.4
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[[Page 60261]]

    The time-weighted average quote bid size in OTM series for the 
month is 15.4; thus, the LMM in this example has met the OTM time-
weighted average quote bid size to be eligible for the monthly payment 
because its time-weighted average quote bid size is greater than 15 
contracts for the month. The LMM would also need to satisfy the OTM 
average quote ask size, as well as the time-weighted average width, bid 
size, and ask size criteria in the ATM and ITM categories, determined 
in the same manner as described in the above example, to receive the 
monthly payment.
    Whether a series is OTM, ATM, or ITM will depend on how far away 
the series' strike price is from the S&P 500 Index's previous day's 
closing value, measured as a percentage. The OTM, ATM and ITM moneyness 
percentages will vary by time to expiration based on the table below. 
Expirations 1-6 are the nearest term expirations and expirations 37-
last are the farthest term expirations.

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                                                               OTM                                      ATM                                  ITM
                                                --------------------------------------------------------------------------------------------------------
                  Expirations                                                                                                                       Puts
                                                    Calls  %         Puts  %                  Calls  %                  Puts  %        Calls  %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Expiration 1-6.................................            >102             <98  <=102 and >=98...................  <=102 and >=98             <98  >102
Expiration 7-12................................            >103             <97  <=103 and >=97...................  <=103 and >=97             <97  >103
Expiration 13-18...............................            >104             <96  <=104 and >=96...................  <=104 and >=96             <96  >104
Expiration 19-24...............................            >105             <95  <=105 and >=95...................  <=105 and >=95             <95  >105
Expiration 25-30...............................            >106             <94  <=106 and >=94...................  <=106 and >=94             <94  >106
Expiration 31-36...............................            >107             <93  <=107 and >=93...................  <=107 and >=93             <93  >107
Expiration 37-last.............................            >108             <92  <=108 and >=92...................  <=108 and >=92             <92  >108
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For example, if the S&P 500 Index closes at 2200, all call options 
with a near-term expiration (i.e., Expiration 1-6) that have a strike 
price greater than 2244 are considered OTM calls because 102% of 2200 
is 2244. Similarly, all put options with a near-term expiration that 
have a strike price of less than 2156 are considered OTM puts because 
98% of 2200 is 2156. Which series are considered OTM, ATM, or ITM will 
be readjusted on a daily basis. For example, series A may be OTM on 
trading day 1-5 of the month, and the S&P 500 Index may appreciate to 
make series A an ATM series on day 6 and so on.
    LMMs are not obligated to satisfy the heightened quoting standards 
described in the Fees Schedule or in Rule 8.15 during ETH. LMMs are 
eligible to receive a rebate if they satisfy the heightened standards 
described in the Fees Schedule, which the Exchange believes will 
encourage LMMs to provide liquidity during ETH. Additionally, the 
Exchange notes that LMMs may have to undertake other expenses to be 
able to quote at the heightened standard during ETH, such as purchase 
additional bandwidth.
    The Exchange also seeks to amend Footnote 38 of the Fees Schedule 
to clarify that the rebate described in Footnote 38 is the pro-rata 
share of the compensation pool. Footnote 38 provides, in relevant part 
that ``. . . the LMM will receive a rebate for that month and will 
receive a pro-rata share of a compensation pool equal . . .'' which 
could suggest there is a rebate and a payment from the compensation 
pool. However, the rebate is the payment from the compensation pool. 
The Exchange believes replacing ``and will receive'' with ``in the 
amount of'' will provide more clarity.
    Lastly, the LMM rebate program is currently described in Rule 
6.1A(e)(iii)(C) and the Fees Schedule. The Exchange believes 
consolidating information related to the LMM rebate program in the Fees 
Schedule, and deleting the language in that rule that is redundant of 
language in the Fees Schedule, will prevent potential confusion that 
arises from having the rebate program described in multiple places. 
Specifically, the Exchange proposes to remove subparagraph (e)(iii)(C) 
and move the following language from subparagraph (e)(iii)(C) to 
Footnote 38 of the Fees Schedule:
    Notwithstanding Rule 1.1(ccc), for purposes of Footnote 38, an LMM 
is deemed to have provided ``continuous electronic quotes'' if the LMM 
provides electronic two-sided quotes for 90% of the time during ETH in 
a given month. If a technical failure or limitation of a system of the 
Exchange prevents the LMM from maintaining, or prevents the LMM from 
communicating to the Exchange, timely and accurate electronic quotes in 
a class, the duration of such failure shall not be considered in 
determining whether the LMM has satisfied the 90% quoting standard with 
respect to that option class. The Exchange may consider other 
exceptions to this quoting standard based on demonstrated legal or 
regulatory requirements or other mitigating circumstances.
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.\5\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \6\ 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) \7\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
    \7\ Id.
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    In particular, the Exchange believes it is reasonable, equitable 
and not unfairly discriminatory to offer LMMs in SPX during ETH a 
rebate if they meet a certain heightened quoting standard (described 
above) to encourage LMMs in SPX to provide increased liquidity. More 
specifically, the Exchange believes the amount of the amended rebate 
($30,000) is reasonable because it takes into consideration certain 
additional costs an LMM may incur and the Exchange believes the 
proposed amount is such that it will incentivize LMMs to meet the ETH 
quoting standards for SPX that are further heightened by this proposal. 
Additionally, if a LMM does not satisfy the heightened quoting

[[Page 60262]]

standard, then it will not receive the rebate. The Exchange believes it 
is equitable and not unfairly discriminatory to only offer the rebate 
to LMMs because it benefits all market participants in ETH to encourage 
LMMs to satisfy the heightened quoting standards, which may increase 
liquidity during those hours and provide more trading opportunities and 
tighter spreads. Also, the Exchange believes consolidating information 
related to the LMM rebate program in the Fees Schedule will prevent 
potential confusion that arises from having the rebate program 
described in multiple places, which, in general, helps protect 
customers and the public interest. Finally, the Exchange believes 
clarifying language in the Fees Schedule will also prevent potential 
confusion, which, in general, helps protect customers and the public 
interest.

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. The Exchange does not 
believe that the proposed rule change will impose any burden on 
intramarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, because the amended rebate for 
ETH is intended to encourage market participants to bring liquidity in 
SPX during ETH (which benefits all market participants), while still 
covering Exchange costs (including those associated with the upgrading 
and maintenance of Exchange systems). Furthermore, the Exchange does 
not believe that the proposed rule changes will impose any burden on 
intermarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act because SPX is a proprietary 
product that will only be traded on Cboe Options. To the extent that 
the proposed changes make Cboe Options a more attractive marketplace 
for market participants at other exchanges, such market participants 
are welcome to become Cboe Options market participants.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \8\ and paragraph (f) of Rule 19b-4 \9\ 
thereunder. 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 will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f).
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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-2017-077 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-2017-077. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2017-077, and should be submitted 
on or before January 9, 2018.
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    \10\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-27227 Filed 12-18-17; 8:45 am]
 BILLING CODE 8011-01-P