[Federal Register Volume 85, Number 176 (Thursday, September 10, 2020)]
[Notices]
[Pages 55869-55872]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-20023]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89768; File No. SR-CBOE-2020-060]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Granting Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1 Thereto, To Permanently Adopt the Related Futures Cross 
Order Type

September 4, 2020.

I. Introduction

    On July 1, 2020, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to permanently adopt the Related Futures Cross 
(``RFC'') order type. The proposed rule change was published for 
comment in the Federal Register on July 21, 2020.\3\ On August 13, 
2020, the Exchange filed Amendment No. 1 to the proposed rule 
change.\4\ The Commission received one comment on the proposed rule 
change.\5\ This order approves the proposed rule change, as modified by 
Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 89325 (July 15, 
2020), 85 FR 44125.
    \4\ Amendment No. 1 is publicly available on the Commission's 
website at: https://www.sec.gov/comments/sr-cboe-2020-060/srcboe2020060-7640381-222308.pdf.
    \5\ See Letter from Joyana Pilquist, CFA, dated August 24, 2020. 
The Commission believes this comment, which relates to FLEX options, 
is outside the scope of this proposed rule change as CBOE is not 
proposing to change the substantive terms of FLEX options 
transactions. Accordingly, the Commission does not believe this 
comment can be appropriately addressed through this proposal.
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II. Summary of the Proposal, as Modified by Amendment No. 1

    From March 16 to June 12, 2020, the Exchange closed its trading 
floor in response to the coronavirus pandemic. As a result, the 
Exchange operated in an all-electronic configuration. Because the 
trading floor was closed during this time, floor brokers could not 
execute crosses of option combos (i.e., synthetic futures) on the 
trading floor on behalf of market participants who were exchanging 
futures contracts in either VIX or SPX for related options positions in 
order to swap related exposures,\6\ and

[[Page 55870]]

there was no means to electronically pair and execute the options legs 
of these transactions on the Exchange.
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    \6\ In the Notice, the Exchange provides the following example 
of such a transaction: If a market participant has positions in VIX 
options but would prefer to hold a corresponding position in VIX 
futures (such as, for example, to reduce margin or risk related to 
the option positions), that market participant may swap its VIX 
options positions with another market participant(s)'s VIX futures 
positions that have corresponding risk exposure. See Notice, supra 
note 3, at 44125. The Exchange explains that the transaction between 
the market participants for the futures positions occurs in 
accordance with the rules of the applicable designated contract 
market that lists the futures. See id., n.3 (citing Cboe Futures 
Exchange LLC Rule 414). The Exchange further explains that these are 
riskless transactions that carry no profit or loss for the market 
participants that are party to the transactions, but rather are 
intended to provide a seamless method for market participants to 
reduce margin and capital requirements while maintaining the same 
risk exposure within their portfolios. See Notice, supra note 3, at 
44125.
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    To enable Trading Permit Holders (``TPHs'') to execute the options 
part of these transactions when the floor was closed, the Exchange 
adopted the electronic RFC order type under Rule 5.24(e)(1)(D).\7\ RFCs 
under Rule 5.24(e)(1)(D) were automatically executed without exposure 
to open outcry due to the all-electronic environment at the time.\8\ 
These RFCs were also required to execute in accordance with the same 
priority principles that apply to all complex orders on CBOE.\9\ 
Specifically: (i) Each option leg must have executed at a price that 
complies with Rule 5.33(f)(2), provided that no option leg executes at 
the same price as a Priority Customer Order in the Simple Book; (ii) 
each option leg must have executed at a price at or between the 
national best bid or offer (``NBBO'') for the applicable series; and 
(iii) the execution price must have been better than the price of any 
complex order resting in the complex order book, unless the RFC Order 
was a Priority Customer Order and the resting complex order is a non-
Priority Customer Order, in which case the execution price may be the 
same as or better than the price of the resting complex order.\10\ If 
an RFC could not have executed in accordance with these requirements, 
the CBOE System would have cancelled the order.\11\ When the CBOE 
trading floor reopened on June 15, 2020, RFC Orders were no longer 
available,\12\ though, the RFC rule text in Rule 5.24(e)(1)(D) remains 
in the CBOE rulebook. Accordingly, under CBOE's current rules with an 
operable trading floor, TPHs no longer have the option to submit 
electronic RFC Orders for automatic execution.
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    \7\ See Securities Exchange Act Release No. 88447 (March 20, 
2020), 85 FR 17129 (March 26, 2020) (CBOE-2020-023).
    \8\ See id., at 17131.
    \9\ See id., at 17131.
    \10\ See id., at 17131.
    \11\ See id., at 17131.
    \12\ See Notice, supra note 3, at 44126.
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    In this proposal, the Exchange seeks to adopt electronic RFC Orders 
on a permanent basis.\13\ The Exchange explains that the need to reduce 
risk is prevalent in VIX and SPX, particularly when the markets are 
volatile, and that customers often have corresponding futures that 
could make these transactions possible.\14\ The Exchange further 
explains that it is necessary for both the option and future legs of 
the transactions that would be subject to RFC to occur between the same 
market participants in order to successfully swap the related 
exposures; while in-crowd market participants have the opportunity to 
bid or offer to participate on the trade on the floor (i.e., to break 
up the options cross between the two parties), the Exchange represents 
that other TPHs on the floor generally declined on a voluntary basis to 
do so upon hearing that the cross was part of an exchange of related 
futures contracts.\15\
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    \13\ See Notice, supra note 3, at 44126-27 for a more detailed 
description of the proposal.
    \14\ See Notice, supra note 3, at 44125.
    \15\ See id. at 44125-26.
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    To facilitate this proposed rule change, the Exchange first 
proposes to delete Rule 5.24(e)(1)(D). Second, the Exchange proposes to 
add RFC Orders to its list of complex orders under Rule 5.33(b)(5). For 
purposes of electronic trading, RFC Orders would be identical to the 
current definition in Rule 5.24(e)(1)(D) and defined as an SPX or VIX 
complex order comprised of an option combo order coupled with a contra-
side order or orders totaling an equal number of option combo orders. 
For purposes of open outcry trading, an RFC order is an SPX or VIX 
complex order comprised of an option combo that may execute against a 
contra-side RFC order or orders totaling an equal number of option 
combo orders. Furthermore, an RFC order must be identified to the 
Exchange as being part of an exchange of option contracts for related 
futures positions. Rule 5.33(m) would be adopted to add the same 
priority protection principles that were adopted under Rule 
5.24(e)(1)(D),\16\ and if an RFC Order under Rule 5.33 cannot be 
executed in accordance with these priority principles, it will be 
cancelled. Finally, the Exchange proposes to amend Rules 5.83 and 5.85 
to permit RFC Orders to be handled by a floor broker for execution on 
the floor without representation on the floor rather than submitted for 
automatic execution electronically.
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    \16\ See supra note 10 and accompanying text; see also Notice, 
supra note 3, 44126.
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III. Discussion and Commission Findings

    After careful review and consideration, the Commission finds that 
the proposed rule change, as modified by Amendment No. 1, is consistent 
with the requirements of the Act and the rules and regulations 
thereunder that are applicable to a national securities exchange.\17\ 
In particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\18\ which requires, among 
other things, that the rules of a national securities exchange be 
designed to promote just and equitable principles of trade, 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, and that the rules of a national securities exchange 
not be designed to permit unfair discrimination between customers, 
issuers, brokers or dealers.
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    \17\ In approving this proposed rule change, as amended, the 
Commission notes that it has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \18\ 15 U.S.C. 78f(b)(5).
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    This proposal has two components. First, the Exchange seeks to make 
electronic RFC Orders permanent, even when the trading floor of the 
Exchange is operable. The electronic RFC order type is designed to 
allow market participants trading SPX and VIX options to more 
efficiently execute risk mitigating transactions on the Exchange, as 
explained above.\19\ The Exchange represents that it received feedback 
from customers regarding the benefits of electronic RFC Orders when its 
floor was closed--including the efficiency this order type provided 
with respect to the execution of these crosses--which is what prompted 
it to file this proposal.\20\ Second, when the trading floor is 
operative, amended Rules 5.83 and 5.85 would permit RFC Orders to be 
handled by a floor broker for execution without representation on the 
trading floor as an alternative to automatic electronic execution.
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    \19\ See also Notice, supra note 3, at 44125-26, 44127-28.
    \20\ See Notice, supra note 3, at 44126.
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    In Amendment No. 1, the Exchange further reiterates that there is a 
mutual understanding among TPHs on the floor to not break up the 
options leg of transactions that would qualify for the proposed RFC 
order type due to the necessity of keeping the terms of the

[[Page 55871]]

hedging transactions unchanged through execution. The Exchange asserts 
that this understanding among TPHs contributes to smoother operations 
on the trading floor. The Exchange further argues that while the 
electronic RFC order type would preclude the options component of these 
hedging transactions to be broken up going forward, the benefits of 
permitting RFC Orders to execute as clean crosses greatly outweigh any 
detriments, if there are even any, that may result from exposing these 
orders for potential break up. The Exchange believes that the benefits 
of requiring a broker to expose an order on the trading floor generally 
flow to that order, which include the potential of price improvement 
for the order and to locate liquidity against which to execute the 
order. In the case of orders that would qualify to use the RFC order 
type, the Exchange asserts that the representing broker has already 
located the necessary liquidity to execute the order, as that is 
necessary given the nature of these transactions.
    Based on the foregoing, the Commission finds that the proposed rule 
change is designed to promote just and equitable principles of trade, 
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. In addition to the above assertions 
and representations by the Exchange, the Commission notes that the 
proposed electronic RFC order type contains the same priority 
protection principles that were adopted under Rule 5.24(e)(1)(D) when 
the Exchange permitted electronic RFC Orders as clean crosses due to 
the closure of its trading floor. Furthermore, Rule 5.33(m) provides 
that: (i) An RFC order may only be entered in the standard increment 
applicable to the class; (ii) the execution of an RFC order must happen 
contemporaneously with the execution of the related futures position 
portion of the exchange; and (iii) the transaction involving the 
related futures position of the exchange must comply with all 
applicable rules of the designated contract market on which the futures 
are listed for trading. With regard to the proposed changes to Rules 
5.83 and 5.85, RFC Orders handled by floor brokers would be covered by 
the same protections.
    For the above reasons, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act.

IV. Solicitation of Comments on Amendment No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
to the proposed rule change is consistent with the Exchange 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-2020-060 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-2020-060. 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 this filing will also 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-2020-060 and should be submitted on 
or before October 1, 2020.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the 30th day after the 
date of publication of notice of Amendment No. 1 in the Federal 
Register.
    Amendment No. 1 has two main aspects. First, in Amendment No. 1, 
the Exchange makes certain technical edits to the Exhibit 5 that was 
initially filed.\21\ Second, as stated above, the Exchange expands its 
statutory basis analysis in Amendment No. 1 to provide additional 
arguments and representations to support its position that allowing RFC 
Orders to execute automatically without exposure is consistent with the 
Act. Furthermore, the Exchange also expands the analysis in its request 
that this filing be approved on an accelerated basis, and it adds an 
analysis to Item 8 of the filing to assert that the proposed CBOE RFC 
order type is ``virtually identical'' to a recently approved RFC order 
type on Miami International Securities Exchange, LLC.\22\
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    \21\ Specifically, Amendment No. 1: Deletes the closing bracket 
and period from the end of Rule 5.24(e)(1)(C); deletes the opening 
bracket before Rule 5.24(e)(1)(D); inserts a closing bracket before 
the semi-colon at the end of Rule 5.24(e)(1)(D)(7), and deletes the 
closing bracket following the ``and'' at the end of Rule 
5.24(e)(1)(D)(7); proposes to change current Rule 5.24(e)(1)(E) to 
Rule 5.24(e)(1)(D), and includes the introductory paragraph (with no 
other proposed changes) of that subparagraph in the Exhibit; and 
adds the current definition of a ``Post Only'' order in Rule 5.33(b) 
(with no proposed changes) to demonstrate where in that paragraph 
the proposed definition of an RFC order will be located.
    \22\ See Securities Exchange Act Release No. 89213 (July 1, 
2020), 85 FR 41077 (July 8, 2020) (MIAX-2020-11).
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    Amendment No. 1 does not change any substantive provisions of the 
proposed rule change that were noticed for public comment. It contains 
only minor, technical revisions to the proposed rule text, and it 
provides additional justification that the proposal is consistent with 
the Act. Accordingly, the Commission finds good cause, pursuant to 
Section 19(b)(2) of the Act,\23\ to approve the proposed rule change, 
as modified by Amendment No. 1, on an accelerated basis.
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    \23\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered that, pursuant to Section 19(b)(2) of the 
Act,\24\ the proposed rule change, as modified by Amendment No. 1, (SR-
CBOE-2020-060) be, and hereby is, approved on an accelerated basis.
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    \24\ 15 U.S.C. 78s(b)(2).


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.

[FR Doc. 2020-20023 Filed 9-9-20; 8:45 am]
BILLING CODE 8011-01-P