[Federal Register Volume 84, Number 200 (Wednesday, October 16, 2019)]
[Notices]
[Pages 55366-55370]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22484]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87265; File No. SR-CBOE-2019-083]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
To Amend Its Financial Incentive Programs for Global Trading Hours Lead 
Market-Makers

October 9, 2019.
    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 October 2, 2019, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission (``SEC'' 
or ``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

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend its financial incentive programs for Global Trading Hours Lead 
Market-Makers. The text of the proposed rule change is provided in 
Exhibit 5.
    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.

[[Page 55367]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In 2016, the Exchange's parent company, Cboe Global Markets, Inc. 
(formerly named CBOE Holdings, Inc.) (``Cboe Global''), which is also 
the parent company of Cboe C2 Exchange, Inc. (``C2''), acquired Cboe 
EDGA Exchange, Inc. (``EDGA''), Cboe EDGX Exchange, Inc. (``EDGX'' or 
``EDGX Options''), Cboe BZX Exchange, Inc. (``BZX'' or ``BZX 
Options''), and Cboe BYX Exchange, Inc. (``BYX'' and, together with 
Cboe Options, C2, EDGX, EDGA, and BZX, the ``Cboe Affiliated 
Exchanges''). Cboe Options intends to migrate its trading platform to 
the same system used by the Cboe Affiliated Exchanges, and also migrate 
its current billing system to a new billing system, on October 7, 2019 
(the ``migration''). As part of the migration to the new billing 
system, the Exchange is seeking to simplify and harmonize certain 
programs and billing processes, including its financial incentive 
programs for Lead Market-Makers (``LMMs'') in VIX and SPX (including 
SPXW) during Global Trading Hours (``GTH''). Accordingly, the Exchange 
proposes to amend its GTH LMM financial programs, effective October 1, 
2019.
Background
    By way of background, pursuant to Footnote 38 of the Fees Schedule, 
a LMM in SPX will receive a rebate for that month in the amount of a 
pro-rata share of a compensation pool equal to $30,000 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) if the LMM: (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 
GTH allocated class (excluding intraday add-on series on the day during 
which such series are added for trading) during GTH in a given month; 
(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, 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 GTH in a given month; 
and (3) satisfies the following time-weighted average quote widths and 
bid/ask sizes for each moneyness category: (A) Out of the money options 
(``OTM''), average quote width of $0.90 or less and average bid/ask 
size of 15 contracts or greater; (B) at the money options (``ATM''), 
average quote width of $3.00 or less and bid/ask size of 10 contracts 
or greater; and (C) in the money options (``ITM''), average quote width 
of $10.00 or less and bid/ask size of 5 contracts or greater.
    Also pursuant to Footnote 38 of the Fees Schedule, a LMM in VIX 
options during GTH will receive a rebate for that month in the amount 
of a pro-rata share of a compensation pool equal to $20,000 times the 
number of LMMs in that class (or pro-rated if an appointment begins 
after the first trading day of the month or ends prior to the last 
trading day of the month) if the LMM: (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 
GTH 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, 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 GTH in a given month.
    GTH LMMs are not currently obligated to satisfy the heightened 
quoting standards described in the Fees Schedule. Rather, the LMMs are 
eligible to receive a rebate if they satisfy the heightened standards, 
which the Exchange believes encourage LMMs to provide liquidity during 
GTH. Additionally, the Exchange may consider other exceptions to this 
quoting standard based on demonstrated legal or regulatory requirements 
or other mitigating circumstances.
Proposed Change
    The Exchange now wishes to simplify its billing processes and 
harmonize its LMM incentive programs. To that end, the Exchange 
proposes to eliminate Footnote [sic] amend the above-mentioned 
incentive programs to align with the heightened quoting standard format 
currently required under the MSCI LMM Program.\3\ By way of background, 
any Market-Maker that is appointed as a LMM in MSCI EAFE Index 
(``MXEA'') options and/or MSCI Emerging Markets Index (``MXEF'') 
(``MSCI LMM'') and meets the heightened quoting standard described 
below, receives $20,000 per month/per product.\4\ Specifically, the LMM 
will receive the $20,000 per month/per class if it provides continuous 
electronic quotes that meet or exceed the following heightened quoting 
standards in at least 90% of the MXEA and/or MXEF series 80% of the 
time in a given month:
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    \3\ In amending the programs, the Exchange proposes to eliminate 
Footnote 38 in its entirety and replace it with separate tables 
describing the GTH SPX LMM program and the GTH VIX LMM program.
    \4\ MSCI LMMs serve as MSCI LMMs during the RTH session only.

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                     Premium                         Expiring        Near term       Mid term        Long term
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                                                     7 days or     8 days to 60   61 days to 270    271 days or
                                                       less            days            days           greater
                      Level                      ---------------------------------------------------------------
                                                   Width   Size    Width   Size    Width   Size    Width   Size
----------------------------------------------------------------------------------------------------------------
$0-$5.00........................................   $3.00       5   $1.50      20   $2.50      15   $5.00      10
$5.01-$15.00....................................    6.00       3    3.00      15    5.00      10   10.00       7
$15.01-$50.00...................................   15.00       2    7.50      10   10.00       7   20.00       5
$50.01-$100.00..................................   25.00       1   15.00       7   20.00       5   30.00       3
$100.01-$200.00.................................   40.00       1   25.00       3   35.00       3   48.00       2
Greater Than $200.01............................   60.00       1   40.00       1   50.00       1   72.00       1
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    The Exchange may also consider other exceptions to this quoting 
standard based on demonstrated legal or regulatory requirements or 
other mitigating circumstances. Like GTH LMMs, for purposes of the 
financial

[[Page 55368]]

benefit, MSCI LMM(s) are not be obligated to satisfy the heightened 
quoting standard shown above. Rather, the MSCI LMM(s) only receive the 
financial benefit if they satisfy the abovementioned heightened quoting 
standard. If a MSCI LMM does not meet the heightened quoting standard, 
then it simply will not receive the financial benefit for that month. 
Additionally, MSCI LMM(s), like GTH LMMs must still comply with the 
continuous quoting obligation and other obligations of Market-Makers 
and LMMs described in Cboe Options Rules.\5\
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    \5\ See e.g., Cboe Options Rule 8.7 and Rule 8.15.
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    The Exchange first proposes to amend the GTH SPX LMM program. 
First, the Exchange proposes to separate the available rebate and 
quoting standard for SPX and SPXW. More specifically, the Exchange 
proposes to provide that if the LMM meets the heightened quoting 
standard described below for SPX, the LMM will receive a pro-rata share 
of a compensation pool for SPX equal to 15,000 times the number of LMMs 
appointment in SPX and if the LMM meets the heightened quoting standard 
described below for SPXW, the LMM will receive an additional pro-rata 
share of a compensation pool for SPXW equal to $15,000 times the number 
of LMMs in that class (for a total of $30,000 per month for meeting the 
standard for both SPX and SPXW).\6\ The Exchange next proposes to amend 
the heighted quoting standard to provide that in order to receive the 
rebates under the program, the SPX LMM(s) must provide continuous 
electronic quotes that meet or exceed the following heightened quoting 
standards in at least 99% of each of SPX and SPXW series 90% of the 
time in a given month during GTH:
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    \6\ The Exchange proposes to continue to include in the Fees 
Schedule an example of how the compensation pools work. 
Specifically, the Exchange will provide the following example: if 
two LMMs are appointed in SPX a compensation pool will be 
established each month for (i) SPX totaling $30,000 and (ii) SPXW 
totaling $30,000. If each LMM meets the heightened continuous 
quoting standard in SPX and SPXW during a month, each will receive 
$30,000. If only one LMM meets the heightened continuous quoting 
standard in SPX and SPXW during a month, that LMM would receive 
$60,000 and the other one would receive nothing.

----------------------------------------------------------------------------------------------------------------
                     Premium                         Expiring        Near term       Mid term        Long term
----------------------------------------------------------------------------------------------------------------
                                                     7 days or     8 days to 60   61 days to 270    271 days or
                                                       less            days            days           greater
                      Level                      ---------------------------------------------------------------
                                                   Width   Size    Width   Size    Width   Size    Width   Size
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$0-$5.00........................................   $0.50      10   $0.40      25   $0.60      15   $1.00      10
$5.01-$15.00....................................    2.00       7    1.60      18    2.40      11    4.00       7
$15.01-$50.00...................................    5.00       5    4.00      13    6.00       8   10.00       5
$50.01-$100.00..................................   10.00       3    8.00       8   12.00       5   20.00       3
$100.01-$200.00.................................   20.00       2   16.00       5   24.00       3   40.00       2
Greater Than $200.00............................   30.00       1   24.00       3   36.00       1   60.00       1
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    The Exchange also proposes to similarly amend the GTH VIX LMM 
program. The Exchange first notes that it will maintain the current 
compensation pool and continue to provide that if a GTH VIX LMM meets 
the proposed heightened quoting standard described below, it will 
receive a pro-rata share of a compensation pool for VIX equal to 
$20,000 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) for that month.\7\ In order 
for an LMM to receive the rebate of $20,000 per month, the Exchange 
proposes to provide that the LMM(s) must provide continuous electronic 
quotes that meet or exceed the following heightened quoting standards 
in at least 99% of the VIX series 90% of the time in a given month: \8\
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    \7\ The Exchange proposes to continue to include in the Fees 
Schedule an example of how the compensation pools work. 
Specifically, the Exchange will provide the following example: If 
two LMMs are appointed in VIX a compensation pool will be 
established each month totaling $40,000. If each LMM meets the 
heightened continuous quoting standard in VIX during a month, each 
will receive $20,000. If only one LMM meets the heightened 
continuous quoting standard in VIX during a month, that LMM would 
receive $40,000 and the other one would receive nothing.
    \8\ For the month of October 2019, the Exchange proposes to 
apply the heightened quoting standard from October 7 to October 31, 
in light of the migration of the Exchange's billing system.

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                     Premium                         Expiring        Near term       Mid term        Long term
----------------------------------------------------------------------------------------------------------------
                                                     7 days or     8 days to 60   61 days to 270    271 days or
                                                       less            days            days           greater
                      Level                      ---------------------------------------------------------------
                                                   Width   Size    Width   Size    Width   Size    Width   Size
----------------------------------------------------------------------------------------------------------------
$0-$3.00........................................   $0.50      25   $0.40      50   $0.50      25   $1.00      10
$3.01-$5.00.....................................    0.75      15    0.60      30    0.75      15    1.50       7
$5.01-$10.00....................................   $1.00      10    0.80      20    1.00      10    2.00       5
$10.01-$30.00...................................    3.00       5    1.00      10    3.00       5    5.00       3
$30.01-$30.00...................................    5.00       3    3.00       5    5.00       3    7.00       2
Greater Than $100.00............................   10.00       1    5.00       1   10.00       1   12.00       1
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    The Exchange believes the proposed rebates provided under the GTH 
LMM programs, as amended, continues to encourage GTH LMMs to provide 
significant liquidity in SPX, SPXW and VIX options during GTH, just as 
the standards and rebate under the current MSCI financial incentive 
program similarly incentivizes MSCI LMMs to provide significant 
liquidity in MSCI products. Additionally, the Exchange notes that both 
GTH LMMs and MSCI LMMs may need to undertake expenses to be able to 
quote at a significantly heightened standard in these classes, such as 
purchase more logical connectivity based on their increased capacity 
needs. The Exchange notes that

[[Page 55369]]

the proposed amendments to the GTH LMM program provides a harmonized 
approach to financial incentive programs for LMMs. The programs, as 
proposed, continue to offer financial benefits for meeting heightened 
quoting standards.
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.\9\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \10\ 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 
Section 6(b)(4) of the Act,\11\ which requires that Exchange rules 
provide for the equitable allocation of reasonable dues, fees, and 
other charges among its Trading Permit Holders and other persons using 
its facilities.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ 15 U.S.C. 78f(b)(4).
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    First, the Exchange believes the proposed changes to the GTH LMM 
financial benefit programs are reasonable as the Exchange believes the 
proposed amendments provide for a simpler and more streamlined 
heightened quoting standard, is easier to administer on the new billing 
platform and provides harmonization across LMM financial benefit 
programs (e.g., conforms with the format of the MSCI LMM program). The 
Exchange also believes the proposed amended rebates are reasonable as 
the proposed rebates are similar to the rebates offered currently. 
Particularly, the Exchange proposes to maintain the current 
compensation pools and rebate amounts, with the only change being that 
SPX and SPXW will have separate compensation pools. (i.e., GTH SPX LMMs 
are currently eligible for a compensation pool equal to $30,000 times 
the number of LMMs in SPX, and post-migration they will be eligible for 
two compensation pools, one for SPX at $15,000 times the number of LMMs 
in SPX and another for SPXW at $15,000 times the number of LMMs in 
SPX). The Exchange also believes the GTH LMM financial incentive 
programs are reasonable, equitable and not unfairly discriminatory 
because the Exchange wants to ensure it continues incentivizing the 
LMMs to provide liquid and active markets in these products during GTH. 
The Exchange believes it is equitable and not unfairly discriminatory 
to only offer this financial incentive to the GTH LMMs because it 
benefits all market participants trading SPX, SPXW and VIX during GTH 
to encourage the LMMs to satisfy the heightened quoting standards, 
which may increase liquidity and provide more trading opportunities and 
tighter spreads. Indeed, the Exchange notes that the GTH LMMs provide a 
crucial role in providing quotes and the opportunity for market 
participants to trade during GTH, which can lead to increased volume, 
thereby providing a robust market. The Exchange also notes that the GTH 
LMM may have added costs each month that it needs to undertake in order 
to satisfy that heightened quoting standard (e.g., having to purchase 
additional logical connectivity).
    The Exchange ultimately wishes to ensure a GTH LMM is adequately 
incentivized to provide liquid and active markets in SPX, SPXW and VIX 
during GTH to encourage liquidity. The Exchange believes that the 
program, even as amended, will continue to encourage increased quoting 
to add liquidity in SPX, SPXW and VIX products, thereby protecting 
investors and the public interest. Additionally, if a GTH LMM does not 
satisfy the heightened quoting standards for the duration of the 
required time, then it simply will not receive the offered per class 
payment for that month.

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

    The Exchange does not believe that the proposed rule changes will 
impose any burden on competition that are 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 it applies uniformly to 
similarly situated GTH LMMs, which market participants play a crucial 
role in providing active and liquid markets during GTH. The Exchange 
does not believe that the proposed rule change will impose any burden 
on intermarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act because SPX, SPXW and VIX 
options are proprietary products 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 \12\ and paragraph (f) of Rule 19b-4 \13\ 
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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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 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-2019-083 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.


[[Page 55370]]


All submissions should refer to File Number SR-CBOE-2019-083. 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 offices 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-2019-083, and should be submitted 
on or before November 6, 2019.
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    \14\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-22484 Filed 10-15-19; 8:45 am]
 BILLING CODE 8011-01-P