[Federal Register Volume 90, Number 73 (Thursday, April 17, 2025)]
[Notices]
[Pages 16410-16418]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-06524]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102839; File No. SR-BOX-2025-07]
Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
of Proposed Rule Change To Amend Rule 5055 To Allow for Cash Settlement
of Certain FLEX Equity Options
April 11, 2025.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 7, 2025, BOX Exchange LLC (the ``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I and II below, which Items have been
prepared by the Exchange. 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. 78a.
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 5055 (FLEX Equity Options).
Specifically, the Exchange proposes to amend Rules 5055(e) and (i) to
allow for cash settlement of certain FLEX Equity Options. The text of
the proposed rule change is available from the principal office of the
Exchange, at the Commission's Public Reference Room and also on the
Exchange's internet website at https://rules.boxexchange.com/rulefilings.
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 self-regulatory organization
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 self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
[[Page 16411]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend BOX Rules 5055(e) and (i) related to
FLEX Equity Options. This is a competitive filing that is based on a
proposal recently submitted by Cboe Exchange, Inc. (``CBOE'').\3\
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\3\ See Securities Exchange Act Release No. 98044 (August 2,
2023), 88 FR 53548 (August 8, 2023) (SR-CBOE-2023-036) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change to
Allow Certain Flexible Exchange Equity Options To Be Cash Settled).
The Exchange notes that the CBOE proposal is based on a 2020
proposal from NYSE American LLC (``NYSE American''). See Securities
Exchange Act Release No. 88131 (February 5, 2020), 85 FR 7806
(February 11, 2020) (SR-NYSEAMER-2019-38) (Notice of Filing of
Amendment No. 1 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1, To Allow
Certain Flexible Equity Options To Be Cash Settled).
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FLEX Equity Options are customized equity contracts that allow
investors to tailor contract terms for exchange-listed equity options.
The Exchange proposes to amend Rule 5055(e) to allow for cash
settlement of certain FLEX Equity Options.\4\ Generally, FLEX Equity
Options are settled by physical delivery of the underlying security.\5\
As proposed, FLEX Equity Options where the underlying security is an
Exchange-Traded Fund (``FLEX ETF Options'') would be permitted to be
settled by delivery in cash if the underlying security meets prescribed
criteria. The Exchange notes that cash-settled FLEX ETF Options will be
subject to the same trading rules and procedures that currently govern
the trading of other FLEX Equity Options on BOX, with the exception of
the rules to accommodate the cash-settlement feature proposed in this
rule filing.
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\4\ A ``FLEX Equity Option'' is an option on a specified
underlying equity security that is subject to Rule 5055. See BOX
Rule 5055(b)(1).
\5\ See BOX Rule 5055(e)(3).
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To permit cash settlement of certain FLEX ETF Options, the Exchange
proposes to add paragraph (i) to Rule 5055(e)(3). Proposed Rule
5055(e)(3)(i) would provide that the exercise settlement for a FLEX ETF
Option may be by physical delivery of the underlying Exchange-Traded
Fund (``ETF'') or by delivery in cash if the underlying security,
measured over the prior six-month period, has an average daily notional
value of $500 million or more and a national average daily volume (ADV)
of at least 4,680,000 shares.
The Exchange also proposes to add the following language to Rule
5055(e)(1), ``For the avoidance of doubt, a FLEX Equity Option
overlying an ETF (cash- or physically settled) may not be the same type
(put or call) and may not have the same exercise style, expiration
date, and exercise price as a non-FLEX Equity Option overlying the same
ETF.'' \6\ In other words, regardless of whether a FLEX Equity Option
overlying an ETF is cash- or physically settled, at least one of the
exercise style (i.e. American-style or European-style), expiration
date, and exercise price of that FLEX Option must differ from those
terms of a non-FLEX Option overlying the same ETF in order to list such
a FLEX Equity Option. For example, suppose a non-FLEX SPY option (which
is physically settled and American-style) with a September expiration
and exercise price of 475 is listed for trading. A FLEX Trader could
not submit an order to trade a FLEX SPY option that is cash-settled (or
physically settled) and American-style with the same September
expiration date and exercise price of 475.
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\6\ See proposed Rule 5055(e)(1). The Exchange reiterates that
regardless of whether a FLEX Equity Option is cash- or physically
settled, each will be subject to the same trading rules and
procedures that currently govern the trading of FLEX Equity Options
on BOX, with the exception of the rules to accommodate the cash-
settlement feature proposed in this rule filing.
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The Exchange also proposes new sub-paragraph (a) to Rule
5055(e)(3)(i), which would provide that the Exchange will determine bi-
annually the underlying securities that satisfy the notional value and
trading volume requirements in proposed Rule 5055(e)(3)(i) by using
trading statistics for the previous six-months.\7\ The proposed rule
would further provide that the Exchange will permit cash settlement as
a contract term on no more than 50 underlying ETFs that meet the
criteria in Rule 5055(e)(3)(i), and that if more than 50 underlying
ETFs satisfy the notional value and trading volume requirements, the
Exchange would select the top 50 ETFs that have the highest average
daily volume.\8\ Proposed new sub-paragraph (b) to Rule 5055(e)(3)(i)
would further provide that if the Exchange determines pursuant to the
bi-annual review that an underlying ETF ceases to satisfy the
requirements under Rule 5055(e)(3)(i), any new position overlying such
ETF entered into will be required to have exercise settlement by
physical delivery and any open cash-settled FLEX ETF Option positions
may be traded only to close the position.\9\ The Exchange believes it
is appropriate to introduce cash settlement as an alternative contract
term to the select group of ETFs because they are among the most highly
liquid and actively-traded securities. As described more fully below,
the Exchange believes that the deep liquidity and robust trading
activity in the ETFs identified by the Exchange as meeting the criteria
mitigate against historic concerns regarding susceptibility to
manipulation.
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\7\ See proposed Rule 5055(e)(3)(i). The Exchange plans to
conduct the bi-annual review on January 1 and July 1 of each year.
The results of the bi-annual review will be announced via a Notice
and any new securities that qualify would be permitted to have cash
settlement as a contract term beginning on February 1 and August 1
of each year.
\8\ See proposed Rule 5055(e)(3)(i)(a). The Exchange notes that,
according to Rule 5055(e)(2)(i), it will not authorize for trading a
FLEX Equity Option class (either cash-settled or physically-settled)
on the iShares Bitcoin Trust, the Grayscale Bitcoin Trust, the
Grayscale Bitcoin Mini Trust, the Bitwise Bitcoin ETF, the Fidelity
Wise Origin Bitcoin Fund, or the ARK 21Shares Bitcoin ETF. If the
Exchange determines to allow FLEX trading on such options at a later
date, it will do so by submitting a 19b-4 rule filing with the
Commission.
\9\ See proposed Rule 5055(e)(3)(i)(b). A Participant that is
acting as a Market Maker may enter into an opening transaction in
order to facilitate closing transactions of another market
participant in option series that are restricted to closing-only
transactions. Consistent with a Market Maker's duty to maintain fair
and orderly markets under Rule 8040, a Market Maker in cash-settled
FLEX ETF Options can enter into an opening transaction to facilitate
closing only transactions of another market participant in cash-
settled FLEX ETF Option series that are restricted to closing-only
transactions.
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Characteristics of ETFs
ETFs are funds that have their value derived from assets owned. The
net asset value (``NAV'') of an ETF is a daily calculation that is
based off the most recent closing prices of the assets in the fund and
an actual accounting of the total cash in the fund at the time of
calculation. The NAV of an ETF is calculated by taking the sum of the
assets in the fund, including any securities and cash, subtracting out
any liabilities, and dividing that by the number of shares outstanding.
Additionally, each ETF is subject to a creation and redemption
mechanism to ensure the price of the ETF does not fluctuate too far
away from its NAV, which mechanisms reduce the potential for
manipulative activity. Each business day, ETFs are required to make
publicly available a portfolio composition file that describes the
makeup of their creation and redemption ``baskets'' (i.e., a specific
list of names and quantities of securities or other assets designed to
track the performance of the portfolio as a whole). ETF shares are
created when an Authorized Participant, typically a market maker or
other large institutional investor, deposits the daily creation basket
or cash with the ETF issuer. In return for the creation basket or cash
(or
[[Page 16412]]
both), the ETF issues to the Authorized Participant a ``creation unit''
that consists of a specified number of ETF shares. For instance, IWM is
designed to track the performance of the Russell 2000 Index. An
Authorized Participant will purchase all the Russell 2000 constituent
securities in the exact same weight as the index prescribes, then
deliver those shares to the ETF issuer. In exchange, the ETF issuer
gives the Authorized Participant a block of equally valued ETF shares,
on a one-for-one fair value basis. This process can also work in
reverse. A redemption is achieved when the Authorized Participant
accumulates a sufficient number of shares of the ETF to constitute a
creation unit and then exchanges these ETF shares with the ETF issuer,
thereby decreasing the supply of ETF shares in the market.
The principal, and perhaps most important, feature of ETFs is their
reliance on an ``arbitrage function'' performed by market participants
that influences the supply and demand of ETF shares and, thus, trading
prices relative to NAV. As noted above, new ETF shares can be created
and existing shares redeemed based on investor demand; thus, ETF supply
is open-ended. This arbitrage function helps to keep an ETF's price in
line with the value of its underlying portfolio, i.e., it minimizes
deviation from NAV. Generally, in the Exchange's view, the higher the
liquidity and trading volume of an ETF, the more likely the price of
the ETF will not deviate from the value of its underlying portfolio,
making such ETFs less susceptible to price manipulation.
Trading Data for the ETFs Proposed for Cash Settlement
The Exchange believes that average daily notional value is an
appropriate proxy for selecting underlying securities that are not
readily susceptible to manipulation for purposes of establishing a
settlement price. Average daily notional value considers both the
trading activity and the price of an underlying security. As a general
matter, the more expensive an underlying security's price, the less
cost-effective manipulation could become. Further, manipulation of the
price of a security encounters greater difficulty the more volume that
is traded. To calculate average daily notional value (provided in the
table below), the Exchange summed the notional value of each trade for
each symbol (i.e., the number of shares times the price for each
execution in the security) and divided that total by the number of
trading days in the six-month period (from July 1, 2024 through
December 31, 2024) reviewed by the Exchange.
Further, the Exchange proposes that qualifying ETFs also meet an
ADV standard. The purpose for this second criteria is to prevent
unusually expensive underlying securities from qualifying under the
average daily notional value standard while not being one of the most
actively traded securities. The Exchange believes an ADV requirement of
4,680,000 shares a day is appropriate because it represents average
trading in the underlying ETF of 200 shares per second. While no
security is immune from all manipulation, the Exchange believes that
the combination of average daily notional value and ADV as prerequisite
requirements would limit cash settlement of FLEX ETF Options to those
underlying ETFs that would be less susceptible to manipulation in order
to establish a settlement price. The Exchange believes that the
proposed objective criteria would ensure that only the most robustly
traded and deeply liquid ETFs would qualify to have cash settlement as
a contract term. As provided in the table below, as of February 1,
2025, the Exchange would be able to provide cash settlement as a
contract term for FLEX ETF Options on 43 underlying ETFs, as only this
group of securities would currently meet the requirement of $500
million or more average daily notional value and a minimum ADV of
4,680,000 shares. The table below provides the list of the 43 ETFs
that, as of February 1, 2025, would be eligible to have cash settlement
as a contract term.\10\
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\10\ See also https://www.nyse.com/trader-update/history#110000946628 (NYSE American Options: Cash-Settled FLEX ETF
Options Changes Beginning February 2025). The Exchange notes that
for the period covering July 1, 2024, through December 31, 2024, the
iShares Bitcoin Trust ETF met the requirements of $500 million or
more average daily notional value and a minimum ADV of 4,680,000
shares. This ETF is not listed in the above table because as
discussed above, the Exchange is prohibiting FLEX trading in options
on iShares Bitcoin Trust.
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Average daily Average daily
notional value volume (in
Symbol Security name (in dollars) (7/1/ shares) (7/1/24-
24-12/31/24) 12/31/24)
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AGG..................................... iShares Core U.S. Aggregate Bond $808,220,262 8,159,745
ETF.
BIL..................................... SPDR Bloomberg 1-3 Month T-Bill 668,203,827 7,295,621
ETF.
EEM..................................... iShares MSCI Emerging Markets 1,196,024,008 27,259,214
ETF.
EFA..................................... iShares MSCI EAFE ETF........... 913,096,285 11,503,196
EMB..................................... iShares J.P. Morgan USD Emerging 519,974,363 5,703,325
Markets Bond ETF.
EWZ..................................... iShares MSCI Brazil ETF......... 574,345,566 20,807,973
FXI..................................... iShares China Large-Cap ETF..... 1,539,214,623 50,493,373
GDX..................................... VanEck Gold Miners ETF.......... 746,385,541 19,509,726
GLD..................................... SPDR Gold Shares................ 1,541,762,884 6,490,082
HYG..................................... iShares iBoxx $ High Yield 2,723,382,829 34,489,566
Corporate Bond ETF.
IEF..................................... iShares 7-10 Year Treasury Bond 693,172,798 7,236,293
ETF.
IEFA*................................... iShares Core MSCI EAFE ETF...... 548,012,194 7,418,223
IVV..................................... iShares Core S&P 500 ETF........ 3,187,805,763 5,519,115
IWM..................................... iShares Russell 2000 ETF........ 6,488,405,961 29,367,233
IYR..................................... iShares U.S. Real Estate ETF.... 517,305,688 5,312,072
KRE..................................... SPDR S&P Regional Banking ETF... 848,054,666 14,491,828
KWEB.................................... KraneShares CSI China Internet 662,017,572 21,406,472
ETF.
[[Page 16413]]
LQD..................................... iShares iBoxx $ Investment Grade 2,742,773,613 24,887,128
Corporate Bond ETF.
MSTU.................................... T-Rex 2X Long MSTR Daily Target 682,380,233 55,483,821
ETF.
NVDL.................................... GraniteShares 2x Long NVDA Daily 1,324,611,353 20,697,044
ETF.
QQQ..................................... Invesco QQQ Trust............... 16,158,297,875 33,284,939
RSP..................................... Invesco S&P 500 Equal Weight ETF 1,079,579,663 6,151,579
SGOV *.................................. iShares 0-3 Month Treasury Bond 521,477,947 5,190,381
ETF.
SLV..................................... iShares Silver Trust............ 548,247,483 19,612,186
SMH..................................... VanEck Semiconductor ETF........ 1,753,390,895 7,207,553
SOXL.................................... Direxion Daily Semiconductor 3,005,211,281 85,315,965
Bull 3x Shares.
SOXS.................................... Direxion Daily Semiconductor 1,227,042,121 52,816,849
Bear 3x Shares.
SPY..................................... SPDR S&P 500 ETF Trust.......... 27,835,471,406 48,952,050
SQQQ.................................... ProShares UltraPro Short QQQ.... 1,353,454,852 35,703,643
TLT..................................... iShares 20+ Year Treasury Bond 3,684,005,055 39,147,976
ETF.
TNA..................................... Direxion Daily Small Cap Bull 3X 740,036,853 16,703,440
Shares.
TQQQ.................................... ProShares UltraPro QQQ.......... 3,658,099,414 50,944,211
TSLL.................................... Direxion Daily TSLA Bull 2X 1,034,541,077 62,340,588
Shares.
VCIT *.................................. Vanguard Intermediate-Term 514,518,195 6,272,369
Corporate Bond ETF.
VOO..................................... Vanguard S&P 500 ETF............ 2,975,501,039 5,659,792
XBI..................................... SPDR S&P Biotech ETF............ 787,310,952 8,079,838
XLE..................................... Energy Select Sector SPDR Fund.. 1,229,602,416 13,670,997
XLF..................................... Financial Select Sector SPDR 1,774,374,547 38,499,533
Fund.
XLI..................................... Industrial Select Sector SPDR 1,046,350,609 7,937,500
Fund.
XLK..................................... Technology Select Sector SPDR 1,057,040,276 4,719,573
Fund.
XLP..................................... Consumer Staples Select Sector 791,220,748 9,807,344
SPDR Fund.
XLU..................................... Utilities Select Sector SPDR 786,224,023 10,225,419
Fund.
XLV..................................... Health Care Select Sector SPDR 1,052,679,132 7,088,605
Fund.
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* BOX does not currently list options on VCIT, SGOV, and IEFA.
The Exchange believes that permitting cash settlement as a contract
term for FLEX ETF Options for the ETFs in the above table would broaden
the base of investors that use FLEX Equity Options to manage their
trading and investment risk, including investors that currently trade
in the over-the-counter (``OTC'') market for customized options, where
settlement restrictions do not apply.
Today, equity options are settled physically at The Options
Clearing Corporation (``OCC''), i.e., upon exercise, shares of the
underlying security must be assumed or delivered. Physical settlement
may possess certain risks with respect to volatility and movement of
the underlying security at expiration against which market participants
may need to hedge. The Exchange believes cash settlement may be
preferable to physical delivery in some circumstances as it does not
present the same risk. If an issue with the delivery of the underlying
security arises, it may become more expensive (and time consuming) to
reverse the delivery because the price of the underlying security would
almost certainly have changed. Reversing a cash payment, on the other
hand, would not involve any such issue because reversing a cash
delivery would simply involve the exchange of cash. Additionally, with
physical settlement, market participants that have a need to generate
cash would have to sell the underlying security while incurring the
costs associated with liquidating their position as well as the risk of
an adverse movement in the price of the underlying security.
The Exchange notes that the Securities and Exchange Commission (the
``Commission'') has previously approved or noticed as immediately
effective rule filings of other exchanges that allowed for the trading
of cash-settled options \11\ and, specifically, cash-settled FLEX ETF
Options.\12\
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\11\ See, e.g., PHLX FX Options traded on Nasdaq PHLX LLC and
S&P 500[supreg] Index Options traded on CBOE. The Commission noticed
as immediately effective, on a pilot basis, the listing and trading
of RealDayTM Options on the SPDR S&P 500 Trust on BOX.
See Securities Exchange Act Release No. 79936 (February 2, 2017), 82
FR 9886 (February 8, 2017) (``RealDay Pilot Program''). The RealDay
Pilot Program was extended until February 2, 2019. See Securities
Exchange Act Release No. 82414 (December 28, 2017), 83 FR 577
(January 4, 2018) (SR-BOX-2017-38). The RealDay Pilot Program was
never implemented and RealDayTM Options on the SPDR S&P
500 Trust never traded on BOX. See also Securities Exchange Act
Release Nos. 56251 (August 14, 2007), 72 FR 46523 (August 20, 2007)
(SR Amex 2004-27) (Order approving listing of cash-settled Fixed
Return Options (``FROs'')); and 71957 (April 16, 2014), 79 FR 22563
(April 22, 2014) (SR-NYSEMKT-2014-06) (Order approving name change
from FROs to ByRDs and re-launch of these products, with certain
modifications).
\12\ See Securities Exchange Act Release No. 98044 (August 2,
2023), 88 FR 53548 (August 8, 2023) (SR-CBOE-2023-036) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change to
Allow Certain Flexible Exchange Equity Options To Be Cash Settled)
and Securities Exchange Act Release No. 101720 (November 22, 2024),
89 FR 94986 (November 29, 2024) (SR-ISE-2024-12) (Notice of
Amendment No. 1 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1, To Adopt Rules
To List and Trade FLEX Options). See also Securities Exchange Act
Release Nos. 88131 (February 5, 2020), 85 FR 7806 (February 11,
2020) (SR-NYSEAMER-2019-38) (Order Approving a Proposed Rule Change,
as Modified by Amendment No. 1, to Allow Certain Flexible Equity
Options To Be Cash Settled); and 97231 (March 31, 2023), 88 FR 20587
(April 6, 2023) (SR-NYSEAMER-2023-22) (Notice of Filing and
Immediate Effectiveness of Proposed Change to Make a Clarifying
Change to the Term Settlement Style Applicable to Flexible Exchange
Options).
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With respect to position and exercise limits, cash-settled FLEX ETF
Options would be subject to the position limits set forth in Rule 3120.
Accordingly, the Exchange proposes new Rule 5055(i)(3), which would
provide that a position in FLEX Equity Options where the underlying
security is an ETF and that is settled in cash pursuant to Rule
5055(e)(3) would be subject to the position limits set forth in Rule
3120, and subject to the exercise limits set forth in Rule 3140. The
proposed rule further states that positions in such cash-settled FLEX
Equity Options shall be aggregated with positions in physically settled
options on the same underlying ETF for the purpose of calculating the
position limits set forth in Rule 3120, and the exercise limits set
[[Page 16414]]
forth in Rule 3140.\13\ Given that each of the underlying ETFs that
would currently be eligible to have cash-settlement as a contract term
have established position and exercise limits applicable to physically
settled options, the Exchange believes it is appropriate for the same
position and exercise limits to also apply to cash-settled options.
Accordingly, of the 43 underlying securities that would currently be
eligible to have cash settlement as a FLEX contract term, 28 would have
a position limit of 250,000 contracts pursuant to Rule 3120(d).\14\
Further, pursuant to IM-3120-2, seven would have a position limit of
500,000 contracts; four (EEM, FXI, IWM, and EFA) would have a position
limit of 1,000,000 contracts; one (QQQ) would have a position limit of
1,800,000 contracts; and one (SPY) would have a position limit of
3,600,000.\15\
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\13\ See proposed Rule 5055(i)(3). The aggregation of position
and exercise limits would include all positions on physically
settled FLEX Equity Options and Non-FLEX Equity Options on the same
underlying ETFs.
\14\ BOX Rule 3120(d)(5) provides that the position limit shall
be 250,000 contracts for options: (i) on an underlying security that
had trading volume of at least 100,000,000 shares during the most
recent six-month trading period; or (ii) on an underlying security
that had trading volume of at least 75,000,000 shares during the
most recent six-month trading period and has at least 300,000,000
shares currently outstanding. Twenty-eight of the forty-three
underlying ETFs currently meet the requirements under Rule
3120(d)(5). The Exchange notes that SMH position limits are
temporarily 500,000 due to a stock split and will revert to 250,000
on June 20, 2025, and MSTU position limits are temporarily 2,500,000
due to a stock split and will revert to 250,000 on June 20, 2025,
according to OCC. The Exchange also notes that SGOV is not currently
available for trading in options.
\15\ These were based on position limits as of January 30, 2025.
Position limits are available at OCC--Position Limits (theocc.com).
Position limits for ETFs are determined in accordance with the
Exchange's Rules regarding position limits.
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The Exchange understands that cash-settled ETF options are
currently traded in the OTC market by a variety of market participants,
e.g., hedge funds, proprietary trading firms, and pension funds.\16\
These options are not fungible with the exchange listed options. The
Exchange believes some of these market participants would prefer to
trade comparable instruments on an exchange, where they would be
cleared and settled through a regulated clearing agency. The Exchange
expects that users of these OTC products would be among the primary
users of exchange-traded cash-settled FLEX ETF Options. The Exchange
also believes that the trading of cash-settled FLEX ETF Options would
allow these same market participants to better manage the risk
associated with the volatility of underlying equity positions given the
enhanced liquidity that an exchange-traded product would bring.
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\16\ As noted above, another options exchange recently received
approval to list certain cash-settled FLEX ETF Options. See supra
note 3.
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In the Exchange's view, cash-settled FLEX ETF Options traded on BOX
would have three important advantages over the contracts that are
traded in the OTC market. First, as a result of greater standardization
of contract terms, exchange-traded contracts should develop more
liquidity. Second, counter-party credit risk would be mitigated by the
fact that the contracts are issued and guaranteed by OCC. Finally, the
price discovery and dissemination provided by BOX and its Participants
would lead to more transparent markets. The Exchange believes that its
ability to offer cash-settled FLEX ETF Options would aid it in
competing with the OTC market and at the same time expand the universe
of products available to interested market participants. The Exchange
believes that an exchange-traded alternative may provide a useful risk
management and trading vehicle for market participants and their
customers. Further, the Exchange believes listing cash-settled FLEX ETF
Options would provide investors with competition on an exchange
platform, as another exchange recently listed the same options.\17\
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\17\ Id.
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The Exchange notes that OCC has received approval from the
Commission for rule changes that will accommodate the clearance and
settlement of cash-settled ETF Options.\18\ BOX has also analyzed its
capacity and represents that it and The Options Price Reporting
Authority (OPRA) have the necessary systems capacity to handle the
additional traffic associated with the listing of cash-settled FLEX ETF
Options. BOX believes any additional traffic that would be generated
from the introduction of cash-settled FLEX ETF Options would be
manageable. BOX expects that Participants will not have a capacity
issue as a result of this proposed rule change. The Exchange also does
not believe this proposed rule change will cause fragmentation of
liquidity. The Exchange will monitor the trading volume associated with
the additional options series listed as a result of this proposed rule
change and the effect (if any) of these additional series on market
fragmentation and on the capacity of the Exchange's automated systems.
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\18\ See Securities Exchange Act Release No. 94910 (May 13,
2022), 87 FR 30531 (May 19, 2022) (SR-OCC-2022-003).
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The Exchange does not believe that allowing cash settlement as a
contract term would render the marketplace for equity options more
susceptible to manipulative practices. The Exchange believes that
manipulating the settlement price of cash-settled FLEX ETF Options
would be difficult based on the size of the market for the underlying
ETFs that are the subject of this proposed rule change. The Exchange
notes that each underlying ETF in the table above is sufficiently
active to alleviate concerns about potential manipulative activity.
Further, in the Exchange's view, the vast liquidity in the underlying
ETFs that would currently be eligible to be traded as cash-settled FLEX
options under the proposal ensures a multitude of market participants
at any given time. Moreover, given the high level of participation
among market participants that enter quotes and/or orders in physically
settled options on these ETFs, the Exchange believes it would be very
difficult for a single participant to alter the price of the underlying
ETF or options overlying such ETF in any significant way without
exposing the would-be manipulator to regulatory scrutiny. The Exchange
further believes any attempt to manipulate the price of the underlying
ETF or options overlying such ETF would also be cost prohibitive. As a
result, the Exchange believes there is significant participation among
market participants to prevent manipulation of cash-settled FLEX ETF
Options.
Still, the Exchange believes it has an adequate surveillance
program in place and intends to apply the same program procedures to
cash-settled FLEX ETF Options that it applies to options currently
trading BOX.\19\ FLEX Equity Options, including FLEX ETF Options, and
their respective symbols are integrated into the Exchange's existing
surveillance system architecture and are thus subject to the relevant
surveillance processes. The Exchange believes that the existing
surveillance procedures at the Exchange are capable of properly
identifying unusual and/or illegal trading activity, which procedures
the Exchange would utilize to surveil for aberrant trading in cash-
settled FLEX ETF Options.
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\19\ For example, the regulatory program for the Exchange
includes surveillance designed to identify manipulative and other
improper options trading, including, spoofing, marking the close,
front running, wash sales, etc.
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With respect to regulatory scrutiny, the Exchange believes its
existing surveillance technologies and procedures adequately address
potential concerns regarding possible
[[Page 16415]]
manipulation of the settlement value at or near the close of the
market. The Exchange notes that the regulatory program operated by and
overseen by the Exchange \20\ includes cross-market surveillance
designed to identify manipulative and other improper trading, including
spoofing, algorithm gaming, marking the close and open, as well as more
general, abusive behavior related to front running, wash sales,
quoting/routing, and Reg SHO violations, that may occur on the Exchange
or other markets. These cross-market patterns incorporate relevant data
from various markets beyond the Exchange. The Exchange represents that
its existing trading surveillances are adequate to monitor trading in
the underlying ETFs and subsequent trading of options on those
securities on BOX, including cash-settled FLEX ETF Options.\21\
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\20\ The Exchange maintains regulatory services agreements with
Financial Industry Regulatory Authority, Inc. (``FINRA'') whereby
FINRA provides certain regulatory services to the exchanges,
including cross-market surveillance, investigation, and enforcement
services.
\21\ Such surveillance procedures generally focus on detecting
securities trading subject to opening price manipulation, closing
price manipulation, layering, spoofing or other unlawful activity
impacting an underlying security, the option, or both. The Exchange
has price movement alerts, unusual market activity and order book
alerts active for all trading symbols.
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Additionally, for options, the Exchange utilizes an array of
patterns that monitor manipulation of options, or manipulation of
equity securities (regardless of venue) for the purpose of impacting
options prices on the Exchange (i.e., mini-manipulation strategies).
That surveillance coverage is initiated once options begin trading on
BOX. Accordingly, the Exchange believes that the cross-market
surveillance performed by the Exchange or FINRA, on behalf of the
Exchange, coupled with the Exchange's own monitoring for violative
activity on BOX comprise a comprehensive surveillance program that is
adequate to monitor for manipulation of the underlying ETF and
overlying option. Furthermore, the Exchange believes that the existing
surveillance procedures at the Exchange are capable of properly
identifying unusual and/or illegal trading activity, which the Exchange
would utilize to surveil for aberrant trading in cash-settled FLEX ETF
Options.
In addition to the surveillance procedures and processes described
above, improvements in audit trails (i.e., the Consolidated Audit
Trail), recordkeeping practices, and inter-exchange cooperation over
the last two decades have greatly increased the Exchange's ability to
detect and punish attempted manipulative activities. In addition, the
Exchange is a member of the Intermarket Surveillance Group
(``ISG'').\22\ The ISG members work together to coordinate surveillance
and investigative information sharing in the stock and options markets.
For surveillance purposes, the Exchange would therefore have access to
information regarding trading activity in the pertinent underlying
securities. The Exchange will monitor and adjust its surveillance
procedures as needed for the cash settlement of FLEX ETF Options.
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\22\ ISG is an industry organization formed in 1983 to
coordinate intermarket surveillance among the SROs by cooperatively
sharing regulatory information pursuant to a written agreement
between the parties. The goal of the ISG's information sharing is to
coordinate regulatory efforts to address potential intermarket
trading abuses and manipulations.
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The proposed rule change is designed to allow investors seeking to
effect cash-settled FLEX ETF Options with the opportunity for a
different method of settling option contracts at expiration if they
choose to do so. As noted above, market participants may choose cash
settlement because physical settlement possesses certain risks with
respect to volatility and movement of the underlying security at
expiration that market participants may need to hedge against. The
Exchange believes that offering innovative products flows to the
benefit of the investing public. A robust and competitive market
requires that exchanges respond to Participants' evolving needs by
constantly improving their offerings. Such efforts would be stymied if
exchanges were prohibited from offering innovative products for reasons
that are generally debated in academic literature. The Exchange
believes that introducing cash-settled FLEX ETF Options would further
broaden the base of investors that use FLEX Equity Options to manage
their trading and investment risk, including investors that currently
trade in the OTC market for customized options, where settlement
restrictions do not apply. The proposed rule change is also designed to
encourage market makers to shift liquidity from the OTC market onto
BOX, which, it believes, would enhance the process of price discovery
conducted on BOX through increased order flow. The Exchange also
believes that this may open up cash-settled FLEX ETF Options to more
retail investors. The Exchange does not believe that this proposed rule
change raises any unique regulatory concerns because existing
safeguards--such as position limits (and the aggregation of cash-
settled positions with physically-settled positions), exercise limits
(and the aggregation of cash-settled positions with physically-settled
positions), and reporting requirements--would continue to apply. The
Exchange believes the proposed position and exercise limits may further
help mitigate the concerns that the limits are designed to address
about the potential for manipulation and market disruption in the
options and the underlying securities.\23\
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\23\ See supra note 13.
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Given the novel characteristics of cash-settled FLEX ETF Options,
the Exchange will conduct a review of the trading in cash-settled FLEX
ETF Options over an initial five-year period. The Exchange will furnish
five reports to the Commission based on this review, the first of which
would be provided within 60 days after the first anniversary of the
initial listing date of the first cash-settled FLEX ETF Option under
the proposed rule and each subsequent annual report to be provided
within 60 days after the second, third, fourth and fifth anniversary of
such initial listing. At a minimum, each report will provide a
comparison between the trading volume of all cash-settled FLEX ETF
Options listed under the proposed rule and physically settled options
on the same underlying security, the liquidity of the market for such
options products and the underlying ETF, and any manipulation concerns
arising in connection with the trading of cash-settled FLEX ETF Options
under the proposed rule. The Exchange will also provide additional data
as requested by the Commission during this five-year period. The
reports will also discuss any recommendations the Exchange may have for
enhancements to the listing standards based on its review. The Exchange
believes these reports will allow the Commission and the Exchange to
evaluate, among other things, the impact such options have, and any
potential adverse effects, on price volatility and the market for the
underlying ETFs, the component securities underlying the ETFs, and the
options on the same underlying ETFs and make appropriate
recommendations, if any, in response to the reports.
The Exchange notes that it will issue a notice to Participants via
Notice announcing the implementation date of the proposal.
2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Securities Exchange Act of 1934
(the
[[Page 16416]]
``Act''),\24\ in general, and Section 6(b)(5) of the Act,\25\ in
particular, in that it is 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 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. In particular, the Exchange believes that introducing
cash-settled FLEX ETF Options will increase order flow to BOX, increase
the variety of options products available for trading, and provide a
valuable tool for investors to manage risk.
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\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposal to permit cash settlement
as a contract term for options on the specified group of equity
securities would remove impediments to and perfect the mechanism of a
free and open market as cash-settled FLEX ETF Options would enable
market participants to receive cash in lieu of shares of the underlying
security, which would, in turn, provide greater opportunities for
market participants to manage risk through the use of a cash-settled
product to the benefit of investors and the public interest. The
Exchange does not believe that allowing cash settlement as a contract
term for options on the specified group of equity securities would
render the marketplace for equity options more susceptible to
manipulative practices. As illustrated in the table above, each of the
qualifying underlying securities is actively traded and highly liquid
and thus would not be susceptible to manipulation because, over a six-
month period, each security had an average daily notional value of at
least $500 million and an ADV of at least 4,680,000 shares, which
indicates that there is substantial liquidity present in the trading of
these securities, and that there is significant depth and breadth of
market participants providing liquidity and of investor interest. The
Exchange believes the proposed bi-annual review to determine
eligibility for an underlying ETF to have cash settlement as a contract
term would remove impediments to and perfect the mechanism of a free
and open market as it would permit the Exchange to select only those
underlying ETFs that are actively traded and have robust liquidity as
each qualifying ETF would be required to meet the average daily
notional value and average daily volume requirements, as well as to
select the same underlying ETFs on which other exchanges may list cash-
settled FLEX ETF Options.\26\
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\26\ See supra note 12.
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The Exchange believes that the data provided by the Exchange
supports the supposition that permitting cash settlement as a FLEX term
for the 43 underlying ETFs that would currently qualify to have cash
settlement as a contract term would broaden the base of investors that
use FLEX Equity Options to manage their trading and investment risk,
including investors that currently trade in the OTC market for
customized options, where settlement restrictions do not apply.
The Exchange believes that the proposal to permit cash settlement
for certain FLEX ETF options would remove impediments to and perfect
the mechanism of a free and open market because the proposed rule
change would provide Participants with enhanced methods to manage risk
by receiving cash if they choose to do so instead of the underlying
security. In addition, this proposal would promote just and equitable
principles of trade and protect investors and the general public
because cash settlement would provide investors with an additional tool
to manage their risk. Further, the Exchange notes that other exchanges
have previously received approval that allow for the trading of cash-
settled options \27\ and, specifically, cash-settled FLEX ETF Options
in an identical manner as the Exchange proposes to list them pursuant
to this rule filing.\28\ The proposed rule change therefore should not
raise issues for the Commission that it has not previously addressed.
---------------------------------------------------------------------------
\27\ See supra note 11.
\28\ See supra note 3.
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The proposed rule change to permit cash settlement as a contract
term for options on up to 50 ETFs is designed to promote just and
equitable principles of trade in that the availability of cash
settlement as a contract term would give market participants an
alternative to trading similar products in the OTC market. By trading a
product in an exchange-traded environment (that is currently traded in
the OTC market), BOX would be able to compete more effectively with the
OTC market. The Exchange believes the proposed rule change is designed
to prevent fraudulent and manipulative acts and practices in that it
would lead to the migration of options currently trading in the OTC
market to trading on the Exchange. Also, any migration to BOX from the
OTC market would result in increased market transparency. Additionally,
the Exchange believes the proposed rule change is designed to remove
impediments to and to perfect the mechanism for a free and open market
and a national market system, and, in general, to protect investors and
the public interest in that it should create greater trading and
hedging opportunities and flexibility. The proposed rule change should
also result in enhanced efficiency in initiating and closing out
positions and heightened contra-party creditworthiness due to the role
of OCC as issuer and guarantor of the proposed cash-settled options.
Further, the proposed rule change would result in increased competition
by permitting the Exchange to offer products that are currently
available for trading only in the OTC market and are approved to trade
on other options exchanges.
The Exchange believes that establishing position limits for cash-
settled FLEX ETF Options to be the same as physically settled options
on the same underlying security, and aggregating positions in cash-
settled FLEX ETF Options with physically settled options on the same
underlying security for purposes of calculating position limits is
reasonable and consistent with the Act. By establishing the same
position limits for cash-settled FLEX ETF Options as for physically
settled options on the same underlying security and, importantly,
aggregating such positions, the Exchange believes that the position
limit requirements for cash-settled FLEX ETF Options should help to
ensure that the trading of cash-settled FLEX ETF Options would not
increase the potential for manipulation or market disruption and could
help to minimize such incentives. For the same reasons, the Exchange
believes the proposed exercise limits are reasonable and consistent
with the Act.
Finally, the Exchange represents that it has an adequate
surveillance program in place to detect manipulative trading in cash-
settled FLEX ETF Options and the underlying ETFs. Regarding the
proposed cash settlement, the Exchange would use the same surveillance
procedures currently utilized for the Exchange's other FLEX Equity
Options. For surveillance purposes, the Exchange would have access to
information regarding trading activity in the pertinent underlying
ETFs. The Exchange believes that limiting cash settlement to no more
than 50 underlying ETFs (currently, 43 ETFs would be eligible to have
cash-settlement as a contract term) would minimize the possibility of
manipulation due to the robust liquidity in both the equities and
options markets.
[[Page 16417]]
As a self-regulatory organization, the Exchange recognizes the
importance of surveillance, among other things, to detect and deter
fraudulent and manipulative trading activity as well as other
violations of Exchange rules and the federal securities laws. As
discussed above, the Exchange has adequate surveillance procedures in
place to monitor trading in cash-settled FLEX ETF Options and the
underlying securities, including to detect manipulative trading
activity in both the options and the underlying ETF.\29\ The Exchange
further notes the liquidity and active markets in the underlying ETFs,
and the high number of market participants in both the underlying ETFs
and existing options on the ETFs, helps to minimize the possibility of
manipulation. The Exchange further notes that under Section 19(g) of
the Act, the Exchange, as a self-regulatory organization, is required
to enforce compliance by its members and persons associated with its
members with the Act, the rules and regulations thereunder, and the
rules of the Exchange.\30\ The Exchange believes its surveillance,
along with the liquidity criteria and position and exercise limits
requirements, are reasonably designed to mitigate manipulation and
market disruption concerns and will permit it to enforce compliance
with the proposed rules and other Exchange rules in accordance with
Section 19(g) of the Act. The Exchange performs ongoing evaluations of
its surveillance program to ensure its continued effectiveness and will
continue to review its surveillance procedures on an ongoing basis and
make any necessary enhancements and/or modifications that may be needed
for the cash settlement of FLEX ETF Options.
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\29\ Among other things, the Exchange's regulatory program
includes cross-market surveillance designed to identify manipulative
and other improper trading, including spoofing, algorithm gaming,
marking the close and open, as well as more general abusive behavior
related to front running, wash sales, quoting/routing, and Reg SHO
violations, that may occur on the Exchange and other markets.
Furthermore, the Exchange stated that it has access to information
regarding trading activity in the pertinent underlying securities as
a member of ISG.
\30\ 15 U.S.C. 78s(g).
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Additionally, the Exchange will monitor any effect additional
options series listed under the proposed rule change will have on
market fragmentation and the capacity of BOX's automated systems. The
Exchange will take prompt action, including timely communication with
the Commission and with other self-regulatory organizations responsible
for oversight of trading in options, the underlying ETFs, and the ETFs'
component securities, should any unanticipated adverse market effects
develop.
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 not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange does not believe
that the proposed rule change will impose any burden on intramarket
competition that is not necessary or appropriate in furtherance of the
purposes of the Act, as all Floor Brokers and FLEX Market Makers that
are authorized to trade FLEX Equity Options in accordance with the
Exchange's Rules will be able to trade cash-settled FLEX ETF Options in
the same manner. This includes that, for all FLEX Equity Options,
including FLEX ETF Options, at least one of exercise style, expiration
date, and exercise price must differ from options in the non-FLEX
market. Additionally, positions in cash-settled FLEX ETF Options of all
Participants will be subject to the same position limits, and such
positions will be aggregated with positions in physically settled
options on the same underlying in the same manner.
The Exchange does not believe that the proposed rule change will
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as the proposal
is designed to increase competition for order flow on BOX in a manner
that is beneficial to investors because it is designed to provide
investors seeking to transact in FLEX ETF Options with the opportunity
for an alternative method of settling their option contracts at
expiration. The Exchange believes the proposed rule change will
encourage competition, as it may broaden the base of investors that use
FLEX Equity Options to manage their trading and investment risk,
including investors that currently trade in the OTC market for
customized options, where settlement restrictions do not apply. The
proposed rule change would give market participants an alternative to
trading similar products in the OTC market. By trading a product in an
exchange-traded environment (that is currently traded in the OTC
market), BOX would be able to compete more effectively with the OTC
market. The Exchange believes the proposed rule change may increase
competition as it may lead to the migration of options currently
trading in the OTC market to trading on BOX. Also, any migration to BOX
from the OTC market would result in increased market transparency and
thus increased price competition.
The Exchange further notes that it operates in a highly competitive
market in which market participants can readily direct order flow to
competing venues who offer similar functionality. The Exchange believes
the proposed rule change encourages competition amongst market
participants to provide tailored cash-settled FLEX ETF Option
contracts, as other exchanges have received approval to list these
contracts (subject to the same position and exercise limits as
proposed).\31\ Therefore, the Exchange believes the proposed rule
change will enhance intermarket competition by providing investors with
a choice of exchange venues on which to trade cash-settled FLEX ETF
Options.
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\31\ See supra note 3.
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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 has 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 from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \32\ and
Rule 19b-4(f)(6) \33\ thereunder.
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\32\ 15 U.S.C. 78s(b)(3)(A).
\33\ 17 CFR 240.19b-4(f)(6).
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A proposed rule change filed under Rule 19b-4(f)(6) \34\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\35\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has
requested that the Commission waive the 30-day operative delay so that
the proposal may become operative immediately upon
[[Page 16418]]
filing. The Commission believes that waiver of the 30-day operative
delay would allow the Exchange to offer the cash-settled FLEX ETF
Options that are the subject of this proposal following the issuance of
a notice to participants announcing the implementation date of the
proposal. The Commission further notes that other exchanges have
already received approval to offer cash-settled FLEX ETF Options
subject to the same parameters and limitations as set forth in this
proposal. The Commission therefore believes that the proposed rule
change presents no novel issues and waiver of the 30-day operative
delay is consistent with the protection of investors and the public
interest. Accordingly, the Commission hereby waives the 30-day
operative delay and designates the proposed rule change as operative
upon filing.\36\
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\34\ 17 CFR 240.19b-4(f)(6).
\35\ 17 CFR 240.19b-4(f)(6)(iii). 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.
\36\ For purposes only of waiving the 30-day operative delay,
the Commission also 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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-BOX-2025-07 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-BOX-2025-07. 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 SR-BOX-2025-07 and should be
submitted on or before May 8, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
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\37\ 17 CFR 200.30-3(a)(12), (59).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-06524 Filed 4-16-25; 8:45 am]
BILLING CODE 8011-01-P