[Federal Register Volume 85, Number 120 (Monday, June 22, 2020)]
[Notices]
[Pages 37479-37483]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13311]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89075; File No. SR-CBOE-2020-054]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Rule 5.4 To Conform the Rule to Section 3.1 of the Plan for the Purpose
of Developing and Implementing Procedures Designed To Facilitate the
Listing and Trading of Standardized Options and Add New Rule 5.4(d)
June 16, 2020.
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 June 11, 2020, 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 and
II, which Items have been prepared by the Exchange. The Exchange filed
the proposal as a ``non-controversial'' proposed rule change pursuant
to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6)
thereunder.\4\ The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
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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 Rule 5.4 to conform the rule to Section 3.1 of the Plan for
the Purpose of Developing and Implementing Procedures Designed to
Facilitate the Listing and Trading of Standardized Options (the
``OLPP'') and add new Rule 5.4(d). 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.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this rule change is to amend Rule 5.4 (Minimum
Increments for Bids and Offers) to align the rule with the recently
approved amendment to the OLPP.
Background
On January 23, 2007, the Commission approved on a limited basis a
Penny Pilot in option classes in certain issues (``Penny Pilot''). The
Penny Pilot was designed to determine whether investors would benefit
from options being quoted in penny increments, and in which classes the
benefits were most significant. The Penny Pilot was expanded and
extended numerous times over the last 13 years.\5\ In each instance,
[[Page 37480]]
these approvals relied upon the consideration of data periodically
provided by the Exchanges that analyzed how quoting options in penny
increments affects spreads, liquidity, quote traffic, and volume.
Today, the Penny Pilot includes 363 option classes, which are among the
most actively traded, multiply listed option classes. The Penny Pilot
is scheduled to expire by its own terms on June 30, 2020.\6\
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\5\ See Securities Exchange Act Release Nos. Securities Exchange
Act Release Nos. 55154 (January 23, 2007), 72 FR 4743 (February 1,
2007) (SR-CBOE-2006-92); 56565 (September 27, 2007), 72 FR 56403
(October 3, 2007) (SR-CBOE-2007-98); 60864 (October 22, 2009), 74 FR
55876 (October 29, 2009) (SR-CBOE-2009-076); 63386 (November 29,
2010), 75 FR 75713 (December 6, 2010) (SR-CBOE-2010-102); 65967
(December 15, 2011), 76 FR 79243 (December 21, 2011) (SR-CBOE-2011-
118); 67322 (June 29, 2012), 77 FR 40120 (July 6, 2012) (SR-CBOE-
2012-059); 68550 (December 31, 2012), 78 FR 971 (January 7, 2013)
(SR-CBOE-2012-127); 69775 (June 17, 2013), 78 FR 37642 (June 21,
2013) (SR-CBOE-2013-061); 71103 (December 17, 2013), 78 FR 77526
(December 23, 2013) (SR-CBOE-2013-124); 72277 (May 29, 2014), 79 FR
32347 (June 4, 2014) (SR-CBOE-2014-047); 73624 (November 18, 2014),
79 FR 69903 (November 24, 2014) (SR-CBOE-2014-086); 75287 (June 24,
2015), 80 FR 37337 (June 30, 2015) (SR-CBOE-2015-060); 78013 (June
8, 2016), 81 FR 38758 (June 14, 2016) (SR-CBOE-2016-048); 79442
(December 1, 2016), 81 FR 88293 (December 7, 2016) (SR-CBOE-2016-
083); 82375 (December 21, 2017), 82 FR 61615 (December 28, 2017)
(SR-CBOE-2017-078); 83567 (June 28, 2018), FR 83 31592 (July 6,
2018) (SR-CBOE-2018-047); 84940 (December 21, 2018), 83 FR 67759
(December 31, 2018) (SR-CBOE-2018-076); 86148 (June 19, 2019), 84 FR
29906 (June 25, 2019) (SR-CBOE-2019-028); and 87739 (December 13,
2019), 84 FR 69801 (December 19, 2019) (SR-CBOE-2019-119).
\6\ See Securities Exchange Act Release No. 87739 (December 13,
2019), 84 FR 69801 (December 19, 2019) (SR-CBOE-2019-119).
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In light of the imminent expiration of the Penny Pilot on June 30,
2020, the Exchange, together with other participating exchanges, filed,
on July 18, 2019 a proposal to amend the OLPP.\7\ On April 1, 2020 the
Commission approved the amendment to the OLPP to make permanent the
Pilot Program (the ``OLPP Program'').\8\
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\7\ See Securities Exchange Act Release No. 87681 (December 9,
2019), 84 FR 68960 (December 17, 2019) (``Notice'').
\8\ See Securities Exchange Act Release No. 88532 (April 1,
2020), 85 FR 19545 (April 7, 2020) (File No. 4-443) (``Approval
Order'').
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The OLPP Program replaces the Penny Pilot by instituting a
permanent program that would permit quoting in penny increments for
certain option classes. Under the terms of the OLPP Program, designated
option classes would continue to be quoted in $0.01 and $0.05
increments according to the same parameters for the Penny Pilot. In
addition, the OLPP Program would: (i) Establish an annual review
process to add option classes to, or to remove option classes from, the
OLPP Program; (ii) to allow an option class to be added to the OLPP
Program if it is a newly listed option class and it meets certain
criteria; (iii) to allow an option class to be added to the OLPP
Program if it is an option class that has seen a significant growth in
activity; (iv) to provide that if a corporate action involves one or
more option classes in the OLPP Program, all adjusted and unadjusted
series and classes emerging as a result of the corporate action will be
included in the OLPP Program; and (v) to provide that any series in an
option class participating in the OLPP Program that have been delisted,
or are identified by OCC as ineligible for opening Customer
transactions, will continue to trade pursuant to the OLPP Program until
they expire.
To conform its Rules to the OLPP Program, the Exchange proposes to
delete Interpretation and Policy .03 to Rule 5.4 (the ``Penny Pilot
Rule'') and replace it with new Rule 5.4(d) (Requirements for Penny
Interval Program), which is described below, and to replace references
to ``Penny Pilot'' in the Exchange rules with ``Penny Interval
Program.'' The Exchange also proposes to delete the superfluous
operational language in Interpretation and Policy .02 to Rule 5.4
regarding the a change to the minimum increment as a stated policy,
practice, or interpretation within the meaning of the Act and the
process for modifying trading differential by rule filing because such
meaning and requirement remains the case today, as the Exchange must
submit proposed rule changes--including for Rule 5.4--to the
Commission.\9\ The Exchange notes, too, that this proposal is based on
and substantially identical to a rule filing recently submitted by NYSE
Arca, Inc.\10\
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\9\ See current Interpretation and Policy .02 to Rule 5.4, which
provides that ``[w]hen the Exchange determines to change the minimum
increment for a class, the Exchange will designate such change as a
stated policy, practice, or interpretation with respect to the
administration of this Rule 5.4 within the meaning of subparagraph
(3)(A) of subsection 19(b) of the Act and will file a rule change
for effectiveness upon filing with the Commission.''
\10\ See Securities Exchange Act Release No. 88943 (May 26,
2020), 85 FR 33255 (June 1, 2020) (SR-NYSEArca-2020-50).
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Penny Interval Program
The Exchange proposes to codify the OLPP Program in new paragraph
(d) to Rule 5.4 (Requirements for Penny Interval Program) (the ``Penny
Program''), which will replace the Penny Pilot Rule and permanently
permit the Exchange to quote certain option classes in minimum
increments of one cents ($0.01) and five cents ($0.05) (``penny
increments''). The penny increments that currently apply under the
Penny Pilot will continue to apply for option classes included in the
Penny Program. Specifically, (i) the minimum quoting increment for all
series in the QQQ, SPY, and IWM would continue to be $0.01, regardless
of price; \11\ (ii) all series of an option class included in the Penny
Program with a price of less than $3.00 would be quoted in $0.01
increments; and (iii) all series of an option class included in the
Penny Program with a price of $3.00 or higher would be quoted in $0.05
increments.
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\11\ As well as Mini-SPX Index Options (XSP) (as long as SPDR
options (SPY) participate in the Penny Interval Program). See Rule
5.4(a).
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The Penny Program would initially apply to the 363 most actively
traded multiply listed option classes, based on National Cleared Volume
at The Options Clearing Corporation (``OCC'') in the six full calendar
months ending in the month of approval (i.e., November 2019-April 2020)
that currently quote in penny increments, or overlie securities priced
below $200, or any index at an index level below $200. Eligibility for
inclusion in the Penny Program will be determined at the close of
trading on the monthly Expiration Friday of the second full month
following April 1, 2020 (i.e., June 19, 2020).
Once in the Penny Program, an option class will remain included
until it is no longer among the 425 most actively traded option classes
at the time the annual review is conducted (described below), at which
point it will be removed from the Penny Program. As described in more
detail below, the removed class will be replaced by the next most
actively traded multiply listed option class overlying securities
priced below $200 per share, or any index at an index level below $200,
and not yet in the Penny Program. Advanced notice regarding the option
classes included, added, or removed from the Penny Program will be
provided to the Exchange's Trading Permit Holders (``TPHs'') pursuant
to Rule 1.5 \12\ and published by the Exchange on its website.
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\12\ Rule 1.5 provides that the Exchange announces to Trading
Permit Holders all determinations it makes pursuant to the Rules
via: (1) Specifications, Notices, or Regulatory Circulars with
appropriate advanced notice, which are posted on the Exchange's
website, or as otherwise provided in the Rules; (2) electronic
message; or (3) other communication method as provided in the Rules.
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Annual Review
The Penny Program would include an annual review process that
applies objective criteria to determine option classes to be added to,
or removed from, the Penny Program. Specifically, on an annual basis
beginning in December 2020 and occurring ever December thereafter, the
Exchange will review and rank all multiply listed option classes based
on National Cleared Volume at OCC for the six full calendar months from
June 1st through November 30th for determination of the most actively
traded option classes. Any option classes not yet in the Penny Program
may be added to the Penny Program if the class is among the 300 most
actively traded multiply listed option classes and priced below $200
per share or any index at an index level below $200.
[[Page 37481]]
Following the annual review, option classes to be added to the
Penny Program would begin quoting in penny increments (i.e., $0.01 if
trading at less than $3; and $0.05 if trading at $3 and above) on the
first trading day of January.\13\ In addition, following the annual
review, any option class in the Penny Program that falls outside of the
425 most actively traded option classes would be removed from the Penny
Program. After the annual review, option classes that are removed from
the Penny Program will be subject to the minimum trading increments set
forth in Rule 5.4, effective on the first trading day of April.
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\13\ See supra note 11. (providing that the minimum quoting
increment for all series in the QQQ, SPY, and IWM would continue to
be $0.01, regardless of price).
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Changes to the Composition of the Penny Program Outside of the Annual
Review
Newly Listed Option Classes and Option Classes With Significant Growth
in Activity
The Penny Program would specify a process and parameters for
including option classes in the Program outside the annual review
process in two circumstances. These provisions are designed to provide
objective criteria to add to the Penny Program new option classes in
issues with the most demonstrated trading interest from market
participants and investors on an expedited basis prior to the annual
review, with the benefit that market participants and investors will
then be able to trade these new option classes based upon quotes
expressed in finer trading increments.
First, the Penny Program provides for certain newly listed option
classes to be added to the Penny Program outside of the annual review
process, provided that (i) the class is among the 300 most actively
traded, multiply listed option classes, as ranked by National Cleared
Volume at OCC, in its first full calendar month of trading; and (ii)
the underlying security is priced below $200 or the underlying index is
at an index level below $200. Such newly listed option classes added to
the Penny Program pursuant to this process would remain in the Penny
Program for one full calendar year and then would be subject to the
annual review process.
Second, the Penny Program would allow an option class to be added
to the Penny Program outside of the annual review process if it is an
option class that meets certain specific criteria. Specifically, new
option classes may be added to the Penny Program if: (i) The option
class is among the 75 most actively traded multiply listed option
classes, as ranked by National Cleared Volume at OCC, in the prior six
full calendar months of trading and (ii) the underlying security is
priced below $200 or the underlying index is at an index level below
$200. Any option class added under this provision will be added on the
first trading day of the second full month after it qualifies and will
remain in the Penny Program for the rest of the calendar year, after
which it will be subject to the annual review process.
Corporate Actions
The Penny Program would also specify a process to address option
classes in the Penny Program that undergo a corporate action and is
designed to ensure continuous liquidity in the affected option classes.
Specifically, if a corporate action involves one or more option classes
in the Penny Program, all adjusted and unadjusted series of an option
class would continue to be included in the Penny Program.\14\
Furthermore, neither the trading volume threshold, nor the initial
price test would apply to option classes added to the Penny Program as
a result of the corporate action. Finally, the newly added adjusted and
unadjusted series of the option class would remain in the Penny Program
for one full calendar year and then would become subject to the annual
review process.
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\14\ For example, if Company A acquires Company B and Company A
is not in the Penny Program but Company B is in the Penny Program,
once the merger is consummated and an options contract adjustment is
effective, then Company A would be added to the Penny Program and
remain in the Penny Program for one calendar year.
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Delisted or Ineligible Option Classes
Finally, the Penny Program would provide a mechanism to address
option classes that have been delisted or those that are no longer
eligible for listing. Specifically, any series in an option class
participating in the Penny Program in which the underlying has been
delisted, or is identified by OCC as ineligible for opening customer
transactions, would continue to quote pursuant to the terms of the
Penny Program until all options series have expired.
Technical Changes
The Exchange proposes to replace reference to the Penny Pilot with
reference to the Penny Interval Program in Rule 5.4(a) and
Interpretation and Policy .18 to Rule 4.5. The Exchange believes these
technical changes would add clarity, transparency and internal
consistency to Exchange rules making them easier to navigate.
Implementation
The Exchange proposes to implement the Penny Program on July 1,
2020, which is the first trading day of the third month following the
Approval Order issued on April 1, 2020--i.e., July 1, 2020.
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.\15\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \16\ 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) \17\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
\17\ Id.
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In particular, the proposed rule change, which conforms the
Exchange rules to the recently adopted OLPP Program, allows the
Exchange to provide market participants with a permanent Penny Program
for quoting options in penny increments, which maximizes the benefit of
quoting in a finer quoting increment to investors while minimizing the
burden that a finer quoting increment places on quote traffic.
Accordingly, the Exchange believes that the proposal is consistent
with the Act because, in conforming the Exchange rules to the OLPP
Program, the Penny Program would employ processes, based upon objective
criteria, that would rebalance the composition of the Penny Program,
thereby helping to ensure that the most actively traded option classes
are included in the Penny Program, which helps facilitate the
[[Page 37482]]
maintenance of a fair and orderly market.
Technical Changes
The Exchange notes that the proposed change to Rule 5.4(a) and
Interpretation and Policy .18 to Rule 4.5 to replace references to the
Penny Pilot with references to the Penny Interval Program would provide
clarity and transparency to the Exchange rules and would promote just
and equitable principles of trade and remove impediments to, and
perfect the mechanism of, a free and open market and a national market
system. The proposed rule changes would also provide internal
consistency within Exchange rules and operate to protect investors and
the investing public by making the Exchange rules easier to navigate
and comprehend.
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 proposed Penny Program,
which modifies the exchange's rules to align them with the Commission
approved OLPP Program, is not designed to be a competitive filing nor
does it impose an undue burden on intermarket competition as the
Exchange anticipates that the options exchanges will adopt
substantially identical rules. Moreover, the Exchange believes that by
conforming Exchange rules to the OLPP Program, the Exchange would
promote regulatory clarity and consistency, thereby reducing burdens on
the marketplace and facilitating investor protection. To the extent
that there is a competitive burden on those option classes that do not
qualify for the Penny Program, the Exchange believes that it is
appropriate because the proposal should benefit all market participants
and investors by maximizing the benefit of a finer quoting increment in
those option classes with the most trading interest while minimizing
the burden of greater quote traffic in option classes with less trading
interest. The Exchange believes that adopting rules, which have been
adopted by another options exchange \18\ and, as the Exchange
anticipates, will likewise be adopted by all option exchanges that are
participants in the OLPP, would allow for continued competition between
Exchange market participants trading similar products as their
counterparts on other exchanges, while at the same time allowing the
Exchange to continue to compete for order flow with other exchanges.
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\18\ See supra note 10.
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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 after the date of the filing, or such
shorter time as the Commission may designate, it has become effective
pursuant to 19(b)(3)(A) of the Act \19\ and Rule 19b-4(f)(6) \20\
thereunder. The Exchange has proposed to implement the Penny Program on
July 1, 2020 and has asked the Commission to waive the 30-day operative
delay for this filing. The Commission believes that waiving the 30-day
operative delay is consistent with the protection of investors and the
public interest because it will allow the Exchange to modify its rules
to conform to the OLPP Program and implement the Penny Program on July
1, 2020, consistent with the Commission's approval of the OLPP
Amendment. Accordingly, the Commission designates the proposed rule
change as operative upon filing with the Commission.\21\
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\19\ 15 U.S.C. 78s(b)(3)(A).
\20\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file 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.
\21\ For purposes only of waiving the operative delay for this
proposal, the Commission has considered the proposed rule's impact
on efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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 necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic 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-2020-54 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-2020-54. 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-2020-54 and should be submitted on
or before July 13, 2020.
[[Page 37483]]
For the Commission, by the Division of Trading and Markets, pursuant
to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-13311 Filed 6-19-20; 8:45 am]
BILLING CODE 8011-01-P