[Federal Register Volume 85, Number 204 (Wednesday, October 21, 2020)]
[Notices]
[Pages 67037-67040]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23261]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90204; File No. SR-CBOE-2020-034]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Authorize for Trading Flexible Exchange Options 
on Full-Value Indexes With a Contract Multiplier of One

October 15, 2020.
    On June 30, 2020, Cboe Exchange, Inc. (``Exchange'' or ``CBOE'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to authorize for trading flexible exchange options (``FLEX 
Options'') on full-value indexes with a contract multiplier of one. The 
proposed rule change was published for comment in the Federal Register 
on July 20, 2020.\3\ On September 2, 2020, pursuant to Section 19(b)(2) 
of the Exchange Act,\4\ the Commission designated a longer period 
within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change.\5\ This order institutes 
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to 
determine whether to approve or disapprove the proposed rule change.
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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. 89308 (July 14, 
2020), 85 FR 43923 (``Notice''). Comments received on the proposed 
rule change are available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-034/srcboe2020034.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 89743, 85 FR 55717 
(September 9, 2020). The Commission designated October 18, 2020, as 
the date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Description of the Proposal and Comment Received \7\

    The Exchange has proposed to amend its rules to authorize for 
trading on the Exchange FLEX Options on full-value indexes (``FLEX 
Index Options'') with a contract multiplier of one. Currently, CBOE 
Rule 4.21(b)(1) states that the index multiplier for FLEX Index Options 
is 100. The Exchange proposes to provide that, in addition to the

[[Page 67038]]

current index multiplier of 100, the index multiplier for FLEX Index 
Options on full-value indexes may also be one.
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    \7\ For a complete description of the Exchange's proposal, see 
the Notice, supra note 3.
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    The Exchange's rules provide that, when submitting a FLEX Order, 
the submitting FLEX Trader \8\ must include all required terms of a 
FLEX Option series,\9\ including the underlying equity security or 
index (i.e., the FLEX Option class) on the FLEX Order. The proposed 
rule change would amend Rule 4.21(b)(1) to state that if a FLEX Trader 
specifies a full-value index on a FLEX Order, the FLEX Trader must also 
include whether the index option has an index multiplier of 100 or 1 
when identifying the class of FLEX Order. In the proposal, the Exchange 
stated that each FLEX Index Option series in a FLEX Index Option class 
with a multiplier of one will include the same flexible terms as any 
other FLEX Option series, including strike price, settlement, 
expiration date, and exercise style as required by Rule 4.21(b).\10\
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    \8\ A ``FLEX Trader'' is a Trading Permit Holder the Exchange 
has approved to trade FLEX Options on the Exchange.
    \9\ These terms include, in addition to the underlying equity 
security or index, the type of options (put or call), exercise 
style, expiration date, settlement type, and exercise price. See 
Rule 4.21(b). A ``FLEX Order'' is an order submitted in FLEX 
Options. The submission of a FLEX Order makes the FLEX Option series 
in that order eligible for trading. See Rule 5.72(b).
    \10\ The Exchange stated that because these are the terms 
designated by the Commission as those that constitute standardized 
options, therefore, the Exchange believes the proposed rule change 
is consistent with Section 9(b) of the Exchange Act. See Securities 
Exchange Act Release No. 31910 (February 23, 1993), 58 FR 12056 
(March 2, 1993) (Order Designating FLEX Options as Standardized 
Options under Rule 9b-1 of the Exchange Act) (``FLEX Rule 9b-1 
Order'').
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    The Exchange's rules permit trading in a put or call FLEX Option 
series only if it does not have the same exercise style, same 
expiration date, and same exercise price as a non-FLEX option series on 
the same underlying security or index that is already available for 
trading.\11\ Rule 1.1 defines the term ``series'' as all option 
contracts of the same class that are the same type of option and have 
the same exercise price and expiration date. The Exchange stated that 
it therefore believes that a FLEX Option series in one class may have 
the same exercise style, expiration date, settlement, and exercise 
price as a non-FLEX option series in a different class, even if they 
are on the same underlying security or index. The Exchange stated that 
it believes, for example, pursuant to the proposed rule change, a FLEX 
Option series overlying the S&P 500 with a multiplier of one may have 
the same exercise style, expiration date, settlement, and exercise 
price as a non-FLEX option series overlying the S&P 500 with a 
multiplier of 100, as they are series in different classes.
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    \11\ See Rule 4.21(a)(1). Non-FLEX options are standardized 
options traded on CBOE's non-FLEX options market. All terms of non-
FLEX options such as strike prices, exercise types, expiration 
dates, and settlement types are the same and standardized for all 
market participants trading non-FLEX options. This is in contrast to 
the Exchange's FLEX Options market where such terms can be 
``flexed'' by market participants.
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    The Exchange represented that FLEX Index Options with a multiplier 
of one will be traded in the same manner as all other FLEX Options 
pursuant to Chapter 5, Section F of the Exchange's rules. The proposed 
rule change would amend Rule 4.21(b)(6) to state that the exercise 
price for a FLEX Index Option series in a class with a multiplier of 
one is set at the same level as the exercise price for a FLEX Index 
Option series in a class with a multiplier of 100. The proposed rule 
change also would add to Rule 5.3(e)(3) that FLEX Index Options with a 
multiplier of one must be expressed in (a) U.S. dollars and decimals if 
the exercise price for the FLEX Option series is a fixed price, or (b) 
a percentage, if the exercise price for the FLEX Option series is a 
percentage of the closing value of the underlying equity security or 
index on the trade date, per 1/100th unit. In addition, the proposed 
rule change would state that the Exchange's system rounds bids and 
offers of FLEX Options to the nearest minimum increment following 
application of the designated percentage to the closing value of the 
underlying security or index. The Exchange stated that it believes that 
this is consistent with current functionality and is merely a 
clarification in the Exchange's rules.
    The Exchange stated that it believes a FLEX Option position with a 
multiplier of one would not be fungible with any non-FLEX index option. 
Pursuant to Rule 4.22(a), a FLEX Option position becomes fungible with 
a non-FLEX option that becomes listed with identical terms. The 
Exchange stated that it does not list for trading any non-FLEX index 
option class with a multiplier of one, and that, therefore, in its 
view, no FLEX Index Option series with a multiplier of 100 could be 
identical to, and fungible with, any non-FLEX option pursuant to Rule 
4.22(a) despite the fact that all the other terms of the FLEX Index 
Option could be identical to a non-FLEX index option. The Exchange 
stated that if it determines to list non-FLEX index options with a one 
multiplier in the future, then a FLEX Index Option with a multiplier of 
one would become fungible with any non-FLEX index option with a 
multiplier of one with the same terms pursuant to Rule 4.22(a).
    The proposed rule change would amend Rule 8.35(a) regarding 
position limits for FLEX Options to describe how FLEX Index Options 
with a multiplier of one will be counted for purposes of determining 
compliance with position limits. Because 100 FLEX Index Options with a 
multiplier of one are equivalent to one FLEX Index Option with a 
multiplier of 100 overlying the same index due to the difference in 
contract multipliers, proposed Rule 8.35(a)(7) states that for purposes 
of determining compliance with the position limits under Rule 8.35, 100 
FLEX Index Option contracts with a multiplier of one equal one FLEX 
Index Option contract with a multiplier of 100 with the same underlying 
index.\12\ The Exchange stated that it believes that this is consistent 
with the current treatment of other reduced-value FLEX Index Options 
with respect to position limits. The proposed rule change also would 
amend Rule 8.42 to make a corresponding statement regarding the 
application of exercise limits to FLEX Index Options with a multiplier 
of one. The Exchange stated that the margin requirements set forth in 
Chapter 10 of the Exchange's rules would apply to FLEX Index Options 
with a multiplier of one (as they currently do to all FLEX 
Options).\13\
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    \12\ According to the Exchange, the proposed rule change would 
make a corresponding change to Rule 8.35(b) to clarify that, like 
reduced-value FLEX contracts, FLEX Index Option contracts with a 
multiplier of one will be aggregated with full-value contracts and 
counted by the amount by which they equal a full-value contract for 
purposes of the reporting obligation in that provision (i.e., 100 
FLEX Index Options with a multiplier of one will equal one FLEX 
Index Option contract with a multiplier of 100 overlying the same 
index).
    \13\ The Exchange stated that, pursuant to Rule 8.43(j), FLEX 
Index Options with a multiplier of one will be aggregated with non-
FLEX index options on the same underlying index in the same manner 
as all other FLEX Index Options.
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    The Exchange stated that it believes that permitting investors to 
trade FLEX Index Option contracts on full-value indexes with an index 
multiplier of one will provide investors with additional granularity in 
the prices at which they may execute and exercise their FLEX Options on 
the Exchange, and thus provide investors with an additional tool to 
manage the positions and associated risk in their portfolios based on 
notional value, which currently may equal a fraction of a standard 
contract.
    The Exchange represented that, with regard to the impact of this 
proposal on system capacity, the Exchange has analyzed its capacity and 
represents that it and the Options Price Reporting Authority have the 
necessary systems

[[Page 67039]]

capacity to handle the potential additional traffic associated with the 
listing and trading of FLEX Index Options with a multiplier of one. The 
Exchange also stated that it understands that the Options Clearing 
Corporation will be able to accommodate the listing and trading of FLEX 
Index Options with a multiplier of one. The Exchange stated that, to 
reduce any potential confusion, FLEX Index Options with a multiplier of 
one would be listed with different trading symbols than FLEX Index 
Options with a multiplier of 100.
    To date the Commission has received one comment letter, which 
supports the proposed rule change.\14\ The commenter stated that, as a 
customer of CBOE, the proposal would ``dramatically increase the ease 
of use FLEX options'' in its hedging process.\15\
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    \14\ See letter from Joyana Pilquist, CFA, dated August 24, 
2020.
    \15\ See id.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2020-034 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act \16\ to determine whether the proposed 
rule change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change, as discussed below. 
Institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, as stated below, the Commission seeks and encourages interested 
persons to provide comments on the proposed rule change to inform the 
Commission's analysis of whether to approve or disapprove the proposal.
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    \16\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\17\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. The Commission is instituting proceedings to allow for 
additional analysis of the proposed rule change's consistency with the 
Exchange Act, and, in particular, with Section 6(b)(5) of the Exchange 
Act, which requires, among other things, that the rules of a national 
securities exchange be designed to prevent fraudulent and manipulative 
acts and practices, 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.\18\
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    \17\ Id.
    \18\ 15 U.S.C. 78f(b)(5).
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    The proposal would permit the trading of FLEX Index Options with a 
contract multiplier of one, which could have the exact same, or 
similar, terms as non-FLEX options \19\ on the same index with a 
multiplier of 100.\20\ The trading of FLEX Index Options with a 
contract multiplier of one under the proposal presents issues related 
to price protection in currently-existing non-FLEX index options on the 
same underlying index. Specifically, permitting two options with 
different contract multipliers on the same underlying interest could 
have the effect of allowing FLEX Options with a multiplier of one to 
gain priority over customer orders on the book for the similar non-FLEX 
index options overlying the same index and also allow bypassing or 
trading through the national best bid or offer (``NBBO'') in non-FLEX 
index options. Furthermore, the proposal could lead to market 
fragmentation by allowing FLEX Index Options to trade with a multiplier 
of one and index options on the same index to trade in the non-FLEX 
market with a multiplier of 100. Accordingly, the Commission believes 
there are questions as to whether the proposal is consistent with 
Section 6(b)(5) of the Exchange Act and the requirements that the rules 
of the exchange be designed to prevent fraudulent and manipulative acts 
and practices, promote just and equitable principles of trade, and in 
general, to protect investors and the public interest, and whether the 
proposal is consistent with the maintenance of fair and orderly markets 
under the Exchange Act.
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    \19\ See supra note 11.
    \20\ Under the proposal, 100 FLEX Index Options with a 
multiplier of one would be economically equivalent to one non-FLEX 
index option with the same exact terms.
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    The FLEX Rule 9b-1 Order deemed FLEX Options to be standardized 
options for purposes of the options disclosure framework established 
under Exchange Act Rule 9b-1, which applies solely to standardized 
options.\21\ The FLEX Rule 9b-1 Order specifically discussed the 
ability to flex strike prices, settlement, expiration dates, and 
exercise style, and states that all of the other terms of FLEX Options 
are standardized.\22\ In addition, the Original FLEX Order specifically 
stated that the index multiplier, among other terms, is the same for 
FLEX as for non-FLEX index options.\23\ Accordingly, the Commission 
believes there are questions as to whether the Exchange's proposal is 
consistent with the FLEX Rule 9b-1 Order and Original FLEX Order and 
the policies underlying those orders, and whether the proposal is 
consistent with Section 6(b)(5) of the Exchange Act.
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    \21\ See FLEX Rule 9b-1 Order, supra note 10.
    \22\ See id.
    \23\ See Securities Exchange Act Release No. 31920 (February 24, 
1993), 58 FR 12280 at 12282 (March 3, 1993) (original order 
approving a CBOE proposal to list and trade FLEX Options on the S&P 
100 and 500 Index options (``Original FLEX Order'')). The Original 
FLEX Order stated, among other things, that except for flexing 
certain terms different from a standardized option (i.e., (1) strike 
prices; (2) exercise types; (3) expiration date; and (4) form of 
settlement), ``[o]ther terms, such as the level of the index 
multiplier and the nature of the rights and obligations FLEX Option 
purchasers and sellers, are the same for FLEX as for non-FLEX index 
options.'' The Commission notes that the Exchange does not currently 
allow trading of options with a multiplier of one on either FLEX or 
non-FLEX index options.
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    The Commission notes that, under the Commission's Rules of 
Practice, the ``burden to demonstrate that a proposed rule change is 
consistent with the Exchange Act and the rules and regulations 
thereunder . . . is on the self-regulatory organization [``SRO''] that 
proposed the rule change.\24\ The description of a proposed rule 
change, its purpose and operation, its effect, and a legal analysis of 
its consistency with applicable requirements must all be sufficiently 
detailed and specific to support an affirmative Commission finding,\25\ 
and any failure of an SRO to provide this information may result in the 
Commission not having sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Exchange Act and the 
applicable rule and regulations.\26\
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    \24\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \25\ See id.
    \26\ See id.
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    For these reasons, the Commission believes it is appropriate to 
institute proceedings pursuant to Section 19(b)(2)(B) of the Exchange 
Act \27\ to determine whether the proposal should be approved or 
disapproved.
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    \27\ 15 U.S.C. 78s(b)(2)(B).
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III. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Exchange 
Act, or the rules and regulations thereunder. Although there do not 
appear to be any issues relevant to approval or disapproval that would

[[Page 67040]]

be facilitated by an oral presentation of views, data, and arguments, 
the Commission will consider, pursuant to Rule 19b-4, any request for 
an opportunity to make an oral presentation.\28\
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    \28\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Act Amendments of 
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 
75, 94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by November 12, 2020. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
November 25, 2020.
    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in the Notice,\29\ in addition to any other comments they may wish to 
submit about the proposed rule change.
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    \29\ See supra note 3.
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    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-2020-034 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-2020-034. 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-2020-034 and should be submitted on 
or before November 12, 2020. Rebuttal comments should be submitted by 
November 25, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23261 Filed 10-20-20; 8:45 am]
BILLING CODE 8011-01-P