[Federal Register Volume 89, Number 46 (Thursday, March 7, 2024)]
[Notices]
[Pages 16598-16601]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-04798]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99655; File No. SR-CBOE-2024-006]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change, as Modified by Amendment 
No. 1, To List and Trade Options That Overlie a Reduced Value of the 
MSCI World Index, the Full Value of the MSCI ACWI Index, and a Reduced 
Value of the MSCI USA Index

March 1, 2024

I. Introduction

    On January 10, 2024, Cboe Exchange, Inc. (``Exchange'') filed with 
the Securities and Exchange Commission (``SEC'' or ``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 
list and trade options that overlie a reduced value of the MSCI World 
Index, the full value of the MSCI ACWI Index, and a reduced value of 
the MSCI USA Index. On January 17, 2024, the Exchange filed Amendment 
No. 1 to the proposed rule change, which replaced the initial filing in 
its entirety. The proposed rule change, as modified by Amendment No. 1, 
was published for comment in the Federal Register on January 29, 
2024.\3\ The Commission did not receive any comments on the proposed 
rule change. As discussed further below, the Commission is approving 
the proposed rule change, as modified by Amendment No. 1.
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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. 99416 (January 23, 
2024), 89 FR 5589 (``Notice''). In Amendment No. 1, the Exchange 
revised its initial proposal such that the last trading day for MSCI 
USA Index options would be the expiration date of the specific 
series. See id. at 5589 n. 3.
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II. Description of the Proposal

    The Exchange proposes to list and trade options that overlie, 
respectively, a reduced value of the MSCI World Index (``MXWLD 
options''), the full value of the MSCI ACWI Index (``MXACW options''), 
and a reduced value of the MSCI USA Index (``MXUSA options''). Each of 
these indexes is a free float-adjusted market capitalization index 
designed to measure equity market performance. The Exchange states that 
these three indexes are calculated by MSCI, Inc. (``MSCI'') in U.S. 
dollars on a real-time basis from the open of the first market on which 
the components are traded to the closing of the last market on which 
the components are traded.\4\ According to the Exchange, the 
methodology used to calculate each index is similar to the methodology 
used to calculate the value of other benchmark market-capitalization 
weighted indexes, including the MSCI EAFE and EM Indexes, on which the 
Exchange currently may list options.\5\
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    \4\ See Notice, supra note 3, at 5589.
    \5\ See id. The Commission previously approved the listing and 
trading of options on the MSCI EAFE Index (``EAFE options'') and the 
MSCI EM Index (``EM options''). See Securities Exchange Act Release 
No. 74681 (April 8, 2015), 80 FR 20032 (April 14, 2015) (SR-CBOE-
2015-023).
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    The MSCI World Index is designed to measure the equity performance 
of developed markets; specifically, it consists of large- and mid-cap 
component stocks from 23 developed markets, has 1,509 constituents, and 
covers approximately 85% of the free float-adjusted market 
capitalization in each country.\6\ The MSCI ACWI Index is designed to 
measure the equity performance of developed markets and emerging 
markets; specifically, it consists of large- and mid-cap component 
stocks from 23 developed markets and 24 emerging markets, has 2,946 
constituents, and covers approximately 85% of the global investment 
opportunity set.\7\ The MSCI USA Index is designed to measure the 
equity performance of large-and mid-cap segments of the U.S. market, 
has 625 constituents, and covers approximately 85% of the free float-
adjusted market capitalization in the United States.\8\ There are 
exchange traded funds (``ETF(s)'') and futures contracts overlying each 
of these indexes, and there are options overlying the MSCI World and 
MSCI ACWI ETFs that are listed on the Exchange and actively traded.\9\
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    \6\ See Notice, supra note 3, at 5590.
    \7\ See id.
    \8\ See id.
    \9\ See id. For more detail regarding the calculation of the 
MSCI World, ACWI, and USA Indexes, see id. at 5589-90.
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    The Exchange proposes to list MXWLD and MXUSA options based on 1/
100th of the value of the respective underlying index. According to the 
Exchange, listing these proposed options on a reduced value of the 
underlying index will attract a greater source of customer business 
than if options were based on the full value of the index.\10\ The 
Exchange states that listing these proposed options on a reduced value 
of the index may enhance investors' opportunities to hedge, or 
speculate on, the market risk associated with the stocks comprising the 
index and, by reducing the value of the index, investors will be able 
to use this trading vehicle while extending a smaller outlay of 
capital.\11\ Moreover, the Exchange states that this may attract 
additional investors, and, in turn, create a more active and liquid 
trading environment.\12\
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    \10\ See id. at 5590.
    \11\ See id.
    \12\ See id.
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    The Exchange proposes to apply to each of the MSCI World, ACWI, and 
USA Index the same initial and maintenance listing criteria that 
currently apply to the MSCI EAFE and EM Indexes.\13\ The Exchange 
states that this is appropriate because each of the MSCI World, ACWI, 
and USA Index has

[[Page 16599]]

a large number of component securities and is calculated based on the 
same methodology as the MSCI EAFE and EM Indexes.\14\ Consistent with 
the initial listing criteria, the Exchange proposes to list MXWLD, 
MXACW and MXUSA options on the Exchange as p.m.-settled contracts, and 
the Exchange also proposes that these options be cash-settled with 
European-style exercise, all of which is consistent with other broad-
based index options, including EAFE and EM options.\15\ The Exchange 
believes that it would be appropriate for MXWLD, MXACW, and MXUSA 
options to have the same settlement and exercise style as EAFE and EM 
options given that the indexes underlying all of these options are 
broad-based and calculated using the same methodology.\16\
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    \13\ See proposed Exchange Rule (``Rule'') 4.10(h) and (i); see 
also Notice, supra note 3, at 5590-91. The Exchange states that each 
of the MSCI World, ACWI, and USA Index satisfies the initial listing 
criteria set forth in Rule 4.10(h). See id. at 5590. The Commission 
previously approved this listing criteria when it approved the 
listing and trading of EAFE and EM options. See supra, note 5.
    \14\ See id. at 5591.
    \15\ See id. at 5589, 5592.
    \16\ See id. at 5592.
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    The Exchange also proposes to amend Rules 4.12 (Dissemination of 
Information), 4.13 (Series of Index Options), 5.1 (Trading Days and 
Hours), 5.6 (Order Types, Order Instructions, and Times-in-Force),\17\ 
8.31 (Position Limits for Broad-Based Index Options),\18\ and 8.35 
(Position Limits for FLEX Options) \19\ to add relevant references to 
the MSCI World, ACWI, and USA Indexes. The Exchange states that the 
proposed MXWLD, MXACW, and MXUSA options would be subject to the same 
rules regarding trading hours, trading increments, number of 
permissible expirations, strike intervals, settlement, exercise style 
and position limits that apply to currently-listed, broad-based index 
options, including EAFE and EM options.\20\
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    \17\ The Exchange states that Rule 5.6(c) permits Multi-Class 
Spread Orders, and that the Exchange proposes to add the MSCI World 
and ACWI Indexes, as well as corresponding ETFs and ETF option and 
index option combinations to the rule, as the Exchange has 
determined that these combinations create appropriate hedges. See 
id.
    \18\ The Exchange proposes to apply a position limit of 50,000 
contracts (with no restrictions) to MXWLD, MXACW, and MXUSA options, 
which is the same position limit that currently exists for many 
other broad-based index options, including EAFE and EM options. In 
addition, pursuant Rule 8.42(b), the exercise limit for these 
options would be equivalent to the proposed position limit. See id. 
at 5593.
    \19\ As proposed, the Exchange may authorize for trading FLEX 
options on the MSCI World, ACWI, and USA Indexes. See id. at 5592. 
The Exchange proposes to amend Rule 8.35(a)(6) to provide that, like 
FLEX options on the MSCI EAFE and EM Indexes, the position limits 
for FLEX options on the MSCI World, ACWI, and USA Indexes are equal 
to the position limits for the non-FLEX options on these indexes 
(which is 50,000 contracts, as proposed). In addition, pursuant to 
Rule 8.42(g), the exercise limit for FLEX options on the MSCI World, 
ACWI, and USA Indexes would be equivalent to the FLEX option 
position limit. See id. at 5593 n.38.
    \20\ See id. at 5591-93, 5594, n.51 (citing Rules 4.13(a)(2), 
(a)(3), (b), (c), (e), Interpretation and Policy .01, and 
Interpretation and Policy .06; 5.1(b)(2), 5.3(a), 5.4, and 8.31).
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    As proposed, the last trading day for expiring MXUSA options would 
be the day of expiration, and, as noted above, MXUSA options would be 
p.m.-settled. The MSCI USA Index is comprised of components solely from 
the United States, which trade from 9:30 a.m. to 4:00 p.m. (Eastern 
time), and which would trade during that time period on the expiration 
date of the proposed MXUSA options. The Exchange states that allowing 
options to trade on their day of expiration would provide investors 
with the ability to modify their positions in response to changes in 
the prices of the underlying index components that will impact the 
settlement values of those options. The Exchange further states that 
this is the case for other p.m.-settled options overlying broad-based 
index options comprised solely of U.S. components.\21\
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    \21\ See id. at 5591, 5594, n.50.
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    As proposed, and as is the case for EAFE and EM options, the last 
trading day for expiring MXWLD and MXACW options would be the business 
day prior to the expiration date of the specific series, and, as noted 
above, MXWLD and MXACW options would be p.m. settled. The Exchange 
states that, because the index components underlying these proposed 
options encompass multiple markets around the world, the components are 
subject to varying trading hours and trading in various components 
would end prior to the beginning of regular trading hours at 9:30 a.m. 
(Eastern time) for MXWLD and MXACW options.\22\ As a result, the 
closing prices of those components, which are used to determine the 
exercise settlement value, would be determined prior to the time when 
the expiring options may begin trading on the expiration date, which 
would increase the risk associated with providing liquidity in these 
products on the expiration date. Therefore, the Exchange believes it is 
appropriate to stop trading in expiring MXWLW and MXACW options on the 
business day prior to the expiration date. Further, as with p.m. 
settlement for MXUSA options, the Exchange believes that p.m. 
settlement is appropriate for MXWLD and MXACW options because investors 
prefer to be able to trade out of positions during the entire final day 
of trading.\23\
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    \22\ See id. at 5591. The Exchange states, by way of example, 
that some components end trading at 10:45 p.m. (Eastern time) on the 
prior trading day, and trading in other components ends at various 
times before and during the U.S. trading day. See id. at 5591 n.29. 
In addition, the Exchange states that the components of each of 
these indexes open with the start of trading in certain parts of 
Asia at approximately 4:00 p.m. (Eastern time) (prior day) and close 
with the end of trading in North America at approximately 4:00 p.m. 
(Eastern time) (next day), as closing prices from North American 
countries are accounted for in the closing calculation. See id. at 
5592.
    \23\ See id. at 5592.
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    According to the Exchange, the proposed MXWLD, MXACW, and MXUSA 
options would be subject to the Exchange rules governing reporting 
requirements, margin requirements, customer accounts, and trading halts 
that already apply to other index options traded on the Exchange, such 
as EAFE and EM options.\24\ With respect to reporting in particular, 
each Trading Permit Holder (``TPH'') or TPH organization that maintains 
positions in the options on the same side of the market, for its own 
account or for the account of a customer, must report certain 
information to the Exchange, including but not limited to the options' 
positions, whether such positions are hedged and, if so, a description 
of the hedge(s).\25\ In addition, the Exchange requires that TPHs file 
reports with the Exchange for any customer that held aggregate long or 
short positions on the same side of the market of 200 or more options 
contracts of any single class for the previous day.\26\ With respect to 
margin, MXWLD, MXACW, and MXUSA options would be margined as ``broad-
based index'' options.\27\
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    \24\ See id. at 5595.
    \25\ See id.
    \26\ See id.
    \27\ See id. at 5593; see also Rule 10.3(c)(5)(A).
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    The Exchange represents that it has an adequate surveillance 
program in place for MXWLD, MXACW, and MXUSA options, and that it 
intends to use the same surveillance procedures to monitor trading in 
these options as are currently utilized for the Exchange's other index 
options.\28\ The Exchange states that it is a member of the Intermarket 
Surveillance Group, along with numerous other self-regulatory bodies 
across the world, and also an affiliate member of the International 
Organization of Securities Commissions.\29\ The Exchange further states 
that it has entered into comprehensive surveillance agreements and/or 
Memoranda of Understanding with various stock exchanges.\30\ The 
Exchange also represents that it believes the Exchange and the Options 
Price Reporting Authority (``OPRA'') have the necessary systems 
capacity to handle

[[Page 16600]]

the additional message traffic associated with the listing of new 
series that would result from the introduction of MXWLD, MXACW, and 
MXUSA options.\31\ Further, the Exchange states that any additional 
message traffic that would be generated from the introduction of the 
MSCI World, ACWI, and USA Index options would be manageable because the 
proposal is limited to three classes.\32\ The Exchange also represents 
that it has observed no trading or capacity issues in EAFE or EM 
options.\33\
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    \28\ See Notice, supra note 3, at 5593.
    \29\ See id.
    \30\ See id.
    \31\ See id.
    \32\ See id.
    \33\ See id. at 5594.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with Section 6 of 
the Act.\34\ Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(1) of the Act,\35\ which 
requires, among other things, that the Exchange to be so organized and 
have the capacity to be able to carry out the purposes of the Act and 
to enforce compliance by its members and persons associated with its 
members with the provisions of the Act, Commission rules and 
regulations thereunder, and its own rules. The Commission also finds 
that the proposed rule change is consistent with Section 6(b)(5) of the 
Act \36\ in that the proposal is designed to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, to promote just and equitable principles of trade, and, in 
general, to protect investors and the public interest.
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    \34\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \35\ 15 U.S.C. 78f(b)(1).
    \36\ 15 U.S.C. 78f(b)(5).
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    Permitting the trading of options on an index of securities enables 
investors to participate in the price movements of the index's 
underlying securities and allows investors holding positions in some or 
all such securities to hedge the risks associated with their 
portfolios. The Commission believes that the Exchange's proposal to 
permit the listing and trading of MXWLD, MXACW, and MXUSA options could 
benefit investors by providing them with additional investment and 
hedging alternatives. These three proposed products will provide 
investors with options instruments on broad-based indexes that are 
composed of actively traded, well-capitalized stocks, and that are 
designed to measure the performances of developed, emerging, and 
domestic U.S. equity markets. Further, offering options on a reduced 
value of each of the MSCI World and USA Index could benefit investors, 
as it may attract a greater source of customer business than if these 
options were based on the full value of those indexes.\37\
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    \37\ The Commission notes that the Exchange already lists 
certain options on reduced index values. See Rule 4.10.
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    Moreover, the listing and trading of the proposed MXWLD, MXACW, and 
MXUSA options does not raise unique regulatory concerns. Options on 
broad-based, MSCI indexes are not novel. The Exchange currently lists 
options on the MSCI EAFE and EM Indexes, which, like the indexes 
underlying the options proposed here, are broad-based and composed of 
actively traded, well-capitalized stocks.\38\ The proposed MXWLD, 
MXACW, and MXUSA options will be subject to the same initial and 
maintenance listing criteria that already have been approved for EAFE 
and EM options as well as other broad-based index options. In addition, 
these proposed options will be subject to the same rules regarding, 
among other things, margin, sales practices, reporting, trading hours, 
trading increments, number of permissible expirations, strike 
intervals, settlement, exercise style, and position and exercise limits 
that apply to other currently-listed broad-based index options, 
including EAFE and EM options.\39\ Further, there are ETFs and futures 
contracts overlying the same indexes that underlie the options proposed 
here, and options overlying two of those ETFs are listed on the 
Exchange and actively traded.
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    \38\ See supra, note 5.
    \39\ As with EAFE and EM options, MXWLD and MXACW options' last 
trading day will be the business day prior to expiration. The 
components of the MSCI World and ACWI Indexes encompass non-U.S. 
markets with varying trading hours that are not coterminous with 
U.S. market trading hours. As a result, index component securities 
may not trade on the MXWLD and MXACW options' expiration date, which 
could introduce pricing risk for option liquidity providers on the 
expiration date. See Notice, supra note 3, at 5591, 5594 and n. 52; 
see also Rule 5.1(b)(2)(E). As with most broad-based, p.m.-settled 
index options listed on the Exchange, MXUSA options' last trading 
day will be the day of expiration. All of the MSCI USA Index 
components trade on U.S. markets, and permitting MXUSA options to 
trade on their expiration date would allow liquidity providers to 
update the prices of expiring options in response to expiration date 
changes in the prices of the index components. See Notice, supra 
note 3, at 5591, 5594 and n. 53; see also Rule 5.1(b)(2)(C).
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    The Exchange's listing standards require the Exchange to reasonably 
believe that it has adequate system capacity to support the trading of 
MXWLD, MXACW, and MXUSA options. As noted above, the Exchange 
represents that it believes it and the OPRA have the necessary systems 
capacity to handle the additional message traffic associated with the 
listing of new series that would result from the introduction of MXWLD, 
MXACW, and MXUSA options. In addition, the Exchange has observed no 
trading or capacity issues in EAFE or EM option trading.\40\
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    \40\ See Notice, supra note 3, at 5594.
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    In light of the foregoing, the Commission believes that the 
proposal is consistent with Section 6(b)(5) of the Act in that the 
proposal is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, and, in 
general, to protect investors and the public interest.
    Finally, as a national securities exchange, the Exchange is 
required, under Section 6(b)(1) of the Act,\41\ to be organized and 
have the capacity to be able to carry out the purposes of the Act and 
to enforce compliance by its members and persons associated with its 
members with the provisions of the Act, Commission rules and 
regulations thereunder, and its own rules. As noted above, the Exchange 
represents that it has an adequate surveillance program in place for 
MXWLD, MXACW, and MXUSA options and intends to monitor their trading 
using the same surveillance procedures currently utilized for the 
Exchange's other index options.\42\ The Exchange also represents that 
the existing surveillance procedures and reporting requirements at the 
Exchange and other self-regulatory organizations are capable of 
properly identifying disruptive and/or manipulative trading activity 
that may arise from listing and trading MXWLD, MXACW, and MXUSA 
options.\43\ Further, the Exchange represents that it conducts reviews 
to identify potential changes in composition of the underlying indexes 
and continued compliance with the Exchange's listing standards, that it 
conducts daily monitoring of market activity via automated surveillance 
techniques to identify unusual activity in both options and the 
underlying indexes, as applicable, and that it believes these 
procedures--which it will employ for MXWLD, MXACW and MXUSA options--
have been effective for the surveillance of trading of other broad-

[[Page 16601]]

based index options, including EAFE and EM options.\44\
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    \41\ 15 U.S.C. 78f(b)(1).
    \42\ See Notice, supra note 3, at 5593.
    \43\ See supra, notes 28-32 and accompanying text.
    \44\ See Notice, supra note 3, at 5595.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\45\ that the proposed rule change (SR-CBOE-2024-006), as modified 
by Amendment No. 1, be, and hereby is, approved.
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    \45\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
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    \46\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-04798 Filed 3-6-24; 8:45 am]
BILLING CODE 8011-01-P