[Federal Register Volume 88, Number 141 (Tuesday, July 25, 2023)]
[Notices]
[Pages 47930-47932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-15654]



[[Page 47930]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97950; File No. SR-CBOE-2023-018]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Make Permanent the Operation of Its Flexible 
Exchange Options Pilot Program Regarding Permissible Exercise 
Settlement Values for FLEX Index Options

July 19, 2023.

I. Introduction

    On April 10, 2023, Cboe Exchange, Inc. (``Exchange'') 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 make permanent 
the operation of its Flexible Exchange Options (``FLEX Options'') pilot 
program that permits P.M.-settled Flexible Exchange Index Options 
(``FLEX Index Options'') to expire on or within two business days of 
the third-Friday-of-the-month expirations for non-FLEX Options (``Pilot 
Program'').\3\ The proposed rule change was published for comment in 
the Federal Register on April 28, 2023.\4\ On June 8, 2023, pursuant to 
Section 19(b)(2) of the Exchange Act,\5\ 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.\6\ The 
Commission has received no comment letters on the proposed rule change. 
The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \7\ to determine whether to approve or 
disapprove the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ A third-Friday-of-the month expiration is referred to as 
``Expiration Friday''. Prior to the Pilot Program, Exchange rules 
prohibited P.M.-settled FLEX Index Options to expire on any business 
day that falls on or within two business days of an Expiration 
Friday. During the Pilot Program, P.M.-settled FLEX Index Options 
are permitted on or within two business days of an Expiration 
Friday. See note 8, infra and accompanying text.
    \4\ See Securities Exchange Act Release No. 97368 (April 24, 
2023), 88 FR 26353 (``Notice'').
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 97672, 88 FR 38930 
(June 14, 2023). The Commission designated July 20, 2023, as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to approve or disapprove, 
the proposed rule change.
    \7\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    The Exchange proposes to make permanent the operation of its 
Flexible Exchange Options Pilot Program that permits the Exchange to 
list FLEX Index Options whose exercise settlement value is derived from 
closing prices of the component securities on the last trading day 
prior to expiration (``P.M. settlement'') that expire on or within two 
business days of a third Friday-of-the-month expiration day for a non-
FLEX Option (other than quarterly index expiration options).\8\ As 
stated above, prior to the Pilot Program P.M.-settled FLEX Index 
Options were prohibited from expiring on or within two business days of 
an Expiration Friday.\9\
---------------------------------------------------------------------------

    \8\ A ``Quarterly Index Expiration'' or ``QIX'' option is an 
index options contract that expires on the last business day of a 
calendar quarter. See CBOE Rule 4.11.
    \9\ See note 3, supra.
---------------------------------------------------------------------------

    In January 2010, the Commission approved the Exchange rule that 
established the Pilot Program.\10\ At the time, the Commission stated 
its continued concern about the adverse effects and impact of P.M. 
settlements upon market volatility and the operation of fair and 
orderly markets on the underlying cash market at or near the close of 
trading.\11\ However, the Commission also recognized that allowing P.M. 
settlement for FLEX Index Options that expire on, or within two 
business days of, Expiration Friday may allow more market participants 
to benefit from trading customized-type options on the Exchange rather 
than the OTC market.\12\ The Commission approved the Exchange's 
proposal on a pilot basis to allow the Exchange and the Commission to 
monitor and evaluate the Pilot Program for potential adverse market 
effects.\13\ In order to facilitate this assessment, the Exchange 
committed to provide the Commission with data and analysis in 
connection with the Pilot Program on an annual and interim basis.\14\ 
Although the pilot period was originally scheduled to end on March 28, 
2011, the Exchange filed to extend the operation of the pilot on 
multiple occasions, which, pursuant to current CBOE Rule 4.21(b)(5)(B), 
is currently set to expire on the earlier of November 6, 2023 or the 
date on which the Pilot Program is approved on a permanent basis.\15\
---------------------------------------------------------------------------

    \10\ Securities Exchange Act Release No. 61439 (January 28, 
2010), 75 FR 5831 (February 4, 2010) (SR-CBOE-2009-087) (``FLEX P.M. 
Pilot Program Approval Order''). The initial pilot period was set to 
expire on March 28, 2011, which date was added to the rules in 2010. 
See Securities Exchange Act Release No. 61676 (March 9, 2010), 75 FR 
13191 (March 18, 2010) (SR-CBOE-2010-026).
    \11\ See FLEX P.M. Pilot Program Approval Order, 75 FR at 5832.
    \12\ Id.
    \13\ Id.
    \14\ Id.
    \15\ See Securities Exchange Act Release Nos. 64110 (March 23, 
2011), 76 FR 17463 (March 29, 2011) (SR-CBOE-2011-024); 66701 (March 
30, 2012), 77 FR 20673 (April 5, 2012) (SR-CBOE-2012-027); 68145 
(November 2, 2012), 77 FR 67044 (November 8, 2012) (SR-CBOE-2012-
102); 70752 (October 24, 2013), 78 FR 65023 (October 30, 2013) (SR-
CBOE-2013-099); 73460 (October 29, 2014), 79 FR 65464 (November 4, 
2014) (SR-CBOE-2014-080); 77742 (April 29, 2016), 81 FR 26857 (May 
4, 2016) (SR-CBOE-2016-032); 80443 (April 12, 2017), 82 FR 18331 
(April 18, 2017) (SR-CBOE-2017-032); 83175 (May 4, 2018), 83 FR 
21808 (May 10, 2018) (SR-CBOE-2018-037); 84537 (November 5, 2018), 
83 FR 56113 (November 9, 2018) (SR-CBOE-2018-071); 85707 (April 23, 
2019), 84 FR 18100 (April 29, 2019) (SR-CBOE-2019-021); 87515 
(November 13, 2020), 84 FR 63945 (November 19, 2019) (SR-CBOE-2019-
108); 88782 (April 30, 2020), 85 FR 27004 (May 6, 2020) (SR-CBOE-
2020-039); 90279 (October 28, 2020), 85 FR 69667 (November 3, 2020) 
(SR-CBOE-2020-103); 91782 (May 5, 2021), 86 FR 25915 (May 11, 2021) 
(SR-CBOE-2021-031); 93500 (November 1, 2021), 86 FR 61340 (November 
5, 2021) (SR-CBOE-2021-064); 94812 (April 28, 2022), 87 FR 26381 
(May 4, 2022) (SR-CBOE-2022-020); 96239 (November 4, 2022), 87 FR 
67985 (November 10, 2022) (SR-CBOE-2022-053); and 97452 (May 8, 
2023), 88 FR 30822 (May 12, 2023) (SR-CBOE-2023-025) (extending the 
pilot program through the earlier of November 6, 2023 or the date on 
which the pilot program is approved on a permanent basis).
---------------------------------------------------------------------------

    Since the Pilot Program's inception in 2010, the Exchange has 
submitted reports to the Commission regarding the Pilot Program that 
detail the Exchange's experience with the Pilot Program, pursuant to 
the FLEX PM Pilot Program Approval Order.\16\ Specifically, the 
Exchange states it has submitted annual reports to the Commission 
analyzing volume and open interest for each broad-based FLEX Index 
Options class overlying a third Friday-of-the-month expiration day, 
P.M.-settled FLEX Index Options series.\17\ The Exchange further states 
that the annual reports also contain certain pilot period and pre-pilot 
period analyses of volume and open interest for third Friday-of-the-
month expiration days, A.M.-settled FLEX Index series and third Friday-
of-the-month expiration day Non-FLEX Index series overlying the same 
index as a third Friday-of-the-month expiration day, P.M.-settled FLEX 
Index Option.\18\ The Exchange states the annual reports also contain 
information and analysis of FLEX Index Options trading patterns, and 
index price volatility and underlying share trading activity for each 
broad-based index class overlying an Expiration Friday, P.M.-settled 
FLEX

[[Page 47931]]

Index Option that exceeds certain minimum open interest parameters.\19\ 
The Exchange also provided, on a periodic basis, interim reports of 
volume and open interest.\20\ The Exchange states, in its proposal, 
that, during the course of the Pilot Program, it has provided the 
Commission with any additional data or analyses the Commission 
requested if it deemed such data or analyses necessary to determine 
whether the Pilot Program was consistent with the Exchange Act.\21\ The 
Exchange states it has made public on its website all data and analyses 
previously submitted to the Commission under the Pilot Program,\22\ and 
will continue to make public any data and analyses it submits to the 
Commission while the Pilot Program is still in effect.\23\
---------------------------------------------------------------------------

    \16\ See Notice, 88 FR at 26354.
    \17\ Id.
    \18\ Id at 26354-55.
    \19\ Id at 26355.
    \20\ Id.
    \21\ Id.
    \22\ Available at https://www.cboe.com/us/options/regulation/pm_settlement_pilot/flex/.
    \23\ See Notice, 88 FR at 26355.
---------------------------------------------------------------------------

    As set forth more fully in the Notice, the Exchange concludes that 
the Pilot Program does not negatively impact market quality or raise 
any unique or prohibitive regulatory concerns.\24\ The Exchange states 
it has not identified any evidence from the pilot data indicating that 
the trading of P.M.-settled FLEX Options has any adverse impact on fair 
and orderly markets on Expiration Fridays for broad-based indexes or 
the underlying securities comprising those indexes, nor have there been 
any observations of abnormal market movements attributable to P.M.-
settled FLEX Options from any market participants that have come to the 
attention of the Exchange.\25\ In order to support its overall 
assessment of the Pilot Program, the Exchange includes both an 
assessment of a study conducted at the direction of the staff of the 
Commission's Division of Economic and Risk Analysis (``DERA'') and the 
Exchange's review and analysis of pilot data.\26\ Among other things, 
the Notice includes the Exchange's analysis of end of day volatility as 
well as a comparison of the impact of quarterly index rebalancing 
versus P.M.-settled expirations.\27\
---------------------------------------------------------------------------

    \24\ Id.
    \25\ Id.
    \26\ Id at 26354-58. The Exchange states that while the DERA 
staff study and corresponding Exchange study specifically evaluated 
SPX options, the Exchange believes it is appropriate to extrapolate 
the data to apply to FLEX P.M. options. Id at 26358.
    \27\ Id at 26356.
---------------------------------------------------------------------------

    The Exchange states that it completed an analysis intended to 
evaluate whether the introduction of P.M.-settled options impacted the 
quality of the A.M.-settled options market.\28\ Specifically, the 
Exchange compared values of key market quality indicators 
(specifically, the bid-ask spread \29\ and effective spread \30\) in 
SPXW options both before and after the introduction of Tuesday 
expirations and Thursday expirations for SPXW options on April 18 and 
May 11, 2022, respectively.\31\ The Exchange states it believes 
analyzing whether the introduction of new SPXW P.M.-settled expirations 
(i.e., SPXW options with Tuesday and Thursday expirations) impacted the 
market quality of then-existing SPXW P.M.-settled expirations (i.e., 
SPXW options with Monday, Wednesday, and Friday expirations) provides a 
reasonable substitute to evaluate whether the introduction of P.M.-
settled index options impacted the market quality of the underlying 
cash markets when the Pilot Program began.\32\ The Exchange also states 
that FLEX Options are nearly identical to non-FLEX Options and overly 
the same indexes.\33\ Therefore, the Exchange believes analyzing the 
impact of new SPXW options on then-existing SPXW options permit the 
Exchange to extrapolate that it is unlikely the introduction of P.M.-
settled FLEX Options significantly impacted the market quality of A.M.-
settled options when the Pilot Program began.\34\ The full analysis was 
submitted with the Exchange's proposal in Exhibit 3.\35\
---------------------------------------------------------------------------

    \28\ Id at 26357.
    \29\ The Exchange calculated for each of SPXW options (with 
Monday, Wednesday, and Friday expirations) and SPY Weekly options 
(with Monday, Wednesday, and Friday expirations) the daily time-
weighted bid-ask spread on the Exchange during its regular trading 
hours session, adjusted for the difference in size between SPXW 
options and SPY options (SPXW options are approximately ten times 
the value of SPY options).
    \30\ The Exchange calculated the volume-weighted average daily 
effective spread for simple trades for each of SPXW options (with 
Monday, Wednesday, and Friday expirations) and SPY Weekly options 
(with Monday, Wednesday, and Friday expirations) as twice the amount 
of the absolute value of the difference between an order execution 
price and the midpoint of the national best bid and offer at the 
time of execution, adjusted for the difference in size between SPXW 
options and SPY options.
    \31\ See Notice, 88 FR at 26357. For purposes of comparison, the 
Exchange paired SPXW options and SPY options with the same moneyness 
and same days to expiration.
    \32\ Id.
    \33\ Id. at 26358.
    \34\ Id.
    \35\ Id at 26357.
---------------------------------------------------------------------------

    Finally, the Exchange states that the significant changes in the 
closing procedures of the primary markets in recent decades, including 
considerable advances in trading systems and technology, has 
significantly minimized risks of any potential impact of P.M.-, cash-
settled FLEX Options on the underlying cash markets.\36\
---------------------------------------------------------------------------

    \36\ Id at 26358.
---------------------------------------------------------------------------

III. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2023-018 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \37\ 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. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide 
additional comment on the proposed rule change to inform the 
Commission's analysis of whether to approve or disapprove the proposed 
rule change.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\38\ the Commission is 
providing notice of the grounds for disapproval under consideration. As 
described above, the Exchange has proposed to make permanent the 
operation of its Pilot Program that permits FLEX Index Options to use 
P.M. settlement values on or within two business days of a third 
Friday-of the month expiration day for a non-FLEX Option. The 
Commission is instituting proceedings to allow for additional analysis 
of, and input from commenters with respect to, the proposed rule 
change's consistency with the Act, and in particular, Section 6(b)(5) 
of the 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.\39\
---------------------------------------------------------------------------

    \38\ Id.
    \39\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Specifically, it is not clear if the Exchange's proposal contains 
sufficient analysis and data as it relates to FLEX Index Options and 
the Pilot Program. The Commission therefore believes that there are 
questions raised as to whether the analysis and data provided by the 
Exchange provides sufficient support to determine that the proposal is

[[Page 47932]]

consistent with Section 6(b)(5) of the Act.\40\
---------------------------------------------------------------------------

    \40\ Id.
---------------------------------------------------------------------------

    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 issued thereunder . . . is on the 
self-regulatory organization [`SRO'] that proposed the rule change.'' 
\41\ 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,\42\ and any failure of an 
SRO to provide this information may result in the Commission not having 
a sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\43\
---------------------------------------------------------------------------

    \41\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \42\ Id.
    \43\ Id.
---------------------------------------------------------------------------

    For these reasons, the Commission believes it is appropriate to 
institute proceedings pursuant to Section 19(b)(2)(B) of the Exchange 
Act \44\ to determine whether the proposal should be approved or 
disapproved.
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their data, views, 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 proposed rule change 
is consistent with Sections 6(b)(5) or any other provision of the Act, 
or the rules and regulations thereunder. Although there do not appear 
to be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of data, views, and arguments, the 
Commission will consider, pursuant to Rule 19b-4 under the Act,\45\ any 
request for an opportunity to make an oral presentation.\46\
---------------------------------------------------------------------------

    \45\ 17 CFR 240.19b-4.
    \46\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (Jun. 4, 1975), grants to 
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 Acts Amendments of 1975, 
Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 
94th Cong., 1st Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by August 15, 2023. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
August 29, 2023. The Commission asks that commenters address the 
sufficiency of the Exchange's statements in support of the proposal, in 
addition to any other comments they may wish to submit about the 
proposed rule change.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2023-018 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-2023-018. 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 (https://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 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number to File Number SR-CBOE-2023-018 
and should be submitted by August 15, 2023.
    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\47\
---------------------------------------------------------------------------

    \47\ 17 CFR 200.30-3(a)(57).

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-15654 Filed 7-24-23; 8:45 am]
BILLING CODE 8011-01-P