Self-Regulatory Organizations; Cboe Exchange, Inc.; Order Approving a Proposed Rule Change Relating to Flexibly Structured Options, 22550-22552 [2018-10272]

Download as PDF 22550 Federal Register / Vol. 83, No. 94 / Tuesday, May 15, 2018 / Notices standing in the financial markets. The Exchange believes that fees for connectivity are constrained by the robust competition for order flow among exchanges and non-exchange markets. Further, excessive fees for connectivity, would serve to impair an exchange’s ability to compete for order flow rather than burdening competition. The Exchange also does not believe the proposed rule change would impact intramarket competition as it would apply to all TPHs and non-TPHs equally. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange neither solicited nor received comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 19 and paragraph (f) of Rule 19b–4 20 thereunder. 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 will institute proceedings to determine whether the proposed rule change 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 daltland on DSKBBV9HB2PROD with NOTICES • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– C2–2018–006 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. 19 15 20 17 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f). VerDate Sep<11>2014 20:27 May 14, 2018 All submissions should refer to File Number SR–C2–2018–006. 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 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–C2–2018–006 and should be submitted on or before June 5, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.21 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–10261 Filed 5–14–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–83205; File No. SR–CBOE– 2018–008] Self-Regulatory Organizations; Cboe Exchange, Inc.; Order Approving a Proposed Rule Change Relating to Flexibly Structured Options May 9, 2018. I. Introduction On January 18, 2018, Cboe Exchange, Inc. (‘‘Exchange’’ or ‘‘Cboe Options’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities 21 17 Jkt 244001 PO 00000 CFR 200.30–3(a)(12). Frm 00110 Fmt 4703 Sfmt 4703 Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change amending Cboe Options’s rules relating to the fungibility of Flexible Exchange Options (‘‘FLEX Options’’). The proposed rule change was published for comment in the Federal Register on February 8, 2018.3 On March 23, 2018, 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 the proposed rule change should be disapproved.4 The Commission received no comment letters on the proposed rule change. This order approves the proposed rule change. II. Description of the Proposed Rule Change In its filing, the Exchange proposed to amend Interpretation and Policy .02 to Rule 24A.4, which sets forth requirements relating to a FLEX Option that has the same terms as a Non-FLEX Option.5 First, Cboe Options has proposed to amend the rule to make all FLEX Options fungible with Non-FLEX Options that have identical terms.6 Currently, FLEX Options that have quarterly expirations,7 short term expirations,8 weekly expirations,9 and End of Month (‘‘EOM’’) expirations 10 are not fungible with Non-FLEX Options with identical terms.11 The OCC 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 82622 (Feb. 2, 2018), 83 FR 5668 (Feb. 8, 2018) (‘‘Notice’’). 4 See Securities Exchange Act Release No. 82936 (Mar. 23, 2018), 83 FR 13552 (Mar. 29, 2018). 5 See Cboe Options Rule 24A.1(q). 6 See proposed Cboe Options Rule 24A.4.02(a) (‘[t]his Interpretation and Policy shall apply to all FLEX Options’’). 7 See Cboe Options Rules 5.5(e), 24.9(a)(2)(B), and 24.9(c). 8 See Cboe Options Rules 5.5(d) and 24.9(a)(2)(A). 9 See Cboe Options Rule 24.9(e). These are currently traded pursuant to the Nonstandard Expirations Pilot Program. 10 Id. These are also traded pursuant to the Nonstandard Expiration Pilot Program. 11 Cboe Options states in its proposal that FLEX Options with these expirations were not originally intended to be fungible. See Securities Exchange Release Act Nos. 62658 (August 5, 2010), 75 FR 49010, 49011 n.8 (August 12, 2010) (SR–CBOE– 2009–075) (notice). The notice states that FLEX Options do not become fungible with subsequently introduced Non-FLEX structured quarterly and short term options, and that they will not be with End of Week (‘‘EOW’’) and EOM expirations because of their similarities to the quarterly and short term options. EOW expirations are now called weekly expirations as Cboe Options Rule 24.9(e) was amended to include Monday and Wednesday expirations. See also Securities Exchange Release Act No. 62911 (September 14, 2010), 75 FR 57539 (September 21, 2010) (SR–CBOE–2009–075) (approval order). 2 17 E:\FR\FM\15MYN1.SGM 15MYN1 Federal Register / Vol. 83, No. 94 / Tuesday, May 15, 2018 / Notices currently prohibits fungibility in quarterly and short-term options,12 so, as described in more detail below, Cboe Options proposes to delay the effectiveness of this proposed rule change to allow time for OCC to amend its bylaws. Second, the Exchange has proposed to clarify that if the expiration date is an Exchange holiday, Cboe Options Rule 24A.4.02 shall designate the previous business day as the expiration date.13 However, for weekly expirations that expire on a Monday that is an Exchange holiday,14 Cboe Options Rule 24A.4.02 shall designate the business day that immediately follows the Exchange holiday as the expiration date.15 According to the Exchange, the proposed rule is designed to clarify that when the expiration of a Non-FLEX Option is moved to the business day immediately before (or after) the Exchange holiday, the FLEX Option that also expires on the day before (or after) will be fungible with the Non-FLEX Option.16 Third, Cboe Options has proposed to clarify that in the event a Non-FLEX American-style series is added intraday, a FLEX position is permitted to be closed using FLEX trading procedures for the balance of the trading day on which the Non-FLEX series is added against another closing only FLEX position.17 The Exchange notes that when it was adopted, the Exchange intended to limit this provision to American-style exercises. According to the Exchange, American-style options face assignment risk because when a Non-FLEX Option is listed, the OCC cannot net the positions of the NonFLEX Option and the FLEX Option with identical terms until the next business day.18 Fourth, the Exchange has proposed several non-substantive changes that are designed to make the text easier to read. The Exchange believes that such changes will clarify that the fungibility provisions apply to FLEX Options series with terms identical to the terms of a Non-FLEX Options series.19 12 See Article I of OCC By-Laws. Proposed Cboe Options Rule 24A.4.02(a). 14 See Cboe Options Rule 24.9(e)(1). 15 See Proposed Cboe Options Rule 24A.4.02(a). 16 See Notice, supra note 3, at 5669. 17 See proposed Cboe Options Rule 24A.4.02(b). 18 See Notice, supra note 3, at 5669 n.7. See also Securities Exchange Act Release No. 62870 (September 8, 2010), 75 FR 56147 (September 15, 2010) (SR–CBOE–2010–078) (stating that there is assignment risk for American-style options only). The Commission notes that an American-style option may be exercised at any time during its life, whereas, a European-style option may only be exercised at the end of its life. 19 See Notice, supra note 3, at 5669. daltland on DSKBBV9HB2PROD with NOTICES 13 See VerDate Sep<11>2014 20:27 May 14, 2018 Jkt 244001 Finally, the proposed rule text provides that the Exchange’s current rule will remain in effect until the effective date specified by the Exchange in a Regulatory Circular.20 The Regulatory Circular announcing the effective date shall be issued at least 30 days prior to the effective date 21 and such effective date shall be no later than July 31, 2018.22 As noted in Cboe Options’s proposal,23 the delayed effectiveness is intended to allow OCC time to amend its bylaws to eliminate its current restriction on fungibility of certain options. III. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act 24 and the rules and regulations thereunder applicable to a national securities exchange.25 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,26 which requires that the rules of an exchange be 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 regulating, clearing, settling, processing information with respect to, and 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. The Commission notes that the rules concerning the fungibility of certain FLEX Options and Non-FLEX Options were previously approved by the Commission.27 The proposed rule change extends fungibility to quarterly expirations, short term expirations, and, to the nonstandard expiration pilot program weekly and EOM expirations. The Commission believes that amending Rule 24A.4.02 to allow these additional FLEX Options to become fungible with standardized options with identical terms could result in some benefits to FLEX Options participants in that it may potentially increase the liquidity available to traders of FLEX Options. As 20 Id. at 5670. 21 Id. 22 Id. 23 Id. 24 15 U.S.C. 78f. 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). 26 15 U.S.C. 78f(b)(5). 27 See Securities Exchange Act Release No. 59417 (Feb. 18, 2009), 74 FR 8591 (Feb. 25, 2009) (SR– CBOE–2009–115). 25 In PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 22551 the Exchange noted in its rule proposal, this is because there are more market participants in the Non-FLEX Options and thus there is potentially more liquidity available to market participants with FLEX Options that will be able to exit their FLEX Options positions in the standardized Non-FLEX Option market.28 Because FLEX Options in quarterly, short term, weekly, and EOM expirations are not fungible with their Non-FLEX counterparts, parallel markets in these expirations exist—one FLEX and one Non-FLEX. The Commission previously stated that it is concerned that FLEX Options could act as a surrogate for trading in standardized options.29 The Commission recognizes that the FLEX Options market is designed to combine the benefits of an auction market with the features of negotiated transactions, and therefore continuous quotes may not always be available. Permitting more expirations in FLEX Options to be fungible with their Non-FLEX counterparts could help to ensure that market participants cannot avoid the protections provided to investors in the standardized market for these expirations by trading FLEX Options. Specifically, once a Non-FLEX series is open for trading, new FLEX Options are not permitted in that series. In addition, once a Non-FLEX Options series is open, all outstanding FLEX Options in the same series become fungible with Non-FLEX Options in the standardized market, are traded pursuant to standardized market trading rules, and are aggregated for position and exercise limit purposes. Allowing these FLEX Options to be fungible with their NonFLEX counterparts could potentially address some of these surrogacy concerns. Nevertheless, the FLEX market was originally intended to allow customization of option terms that were not available in the standardized options. While this has evolved over time with the current fungibility provisions, as the additional classes of options noted above are allowed to become fungible with identical term standardized options, some of which have much shorter terms to expiration, we expect the Exchange to carefully monitor the fungible FLEX Options (and standardized options counterparts) to ensure that they are not being used in a way to trade ahead and/or gain an advantage over other market participants prior to the standardized 28 See 29 See E:\FR\FM\15MYN1.SGM Notice, supra note 3, at 5670. 74 FR at 8593. 15MYN1 daltland on DSKBBV9HB2PROD with NOTICES 22552 Federal Register / Vol. 83, No. 94 / Tuesday, May 15, 2018 / Notices options becoming available to all market participants. Furthermore, the Commission expects the Cboe Options to report any undue effects that may occur as a result of these fungibility rule changes, including taking prompt action should any unanticipated consequences occur. The Commission also expects, prior to the effective date of the new rule, the Exchange to address whether additional position limit aggregation rules should be adopted prior to the rule’s delayed implementation date. We note that currently the FLEX rules require that certain FLEX Options positions be aggregated with the position limits in the standardized market.30 The Commission believes that the remaining proposed changes will help protect investors and the public interest by providing clarity and transparency to the rules. The proposed rule text regarding Exchange holidays will clarify the fungibility of FLEX Options with expiration dates on Exchange holidays and are consistent with the expiration of the same standardized options on Exchange holidays. Amending the intraday add provision to state that it applies solely to American-style expirations will codify in the rule text the Exchange’s original intent with respect to this provision. Further, the other nonsubstantive, clarifying changes will make the rule easier to read and understand. Finally, as noted above the Exchange cannot actually implement this rule change immediately because OCC bylaws currently restrict fungibility of quarterly and short term options. The Commission believes that the delayed implementation date of July 31, 2018 should provide OCC with time to consider fungibility in quarterly and short-term options and determine whether to amend the OCC By-laws to accommodate the changes being adopted by the Exchange. The Exchange has also committed to announce the implementation of the change at least 30 days prior to the effective date pursuant to a Regulatory Circular, which should provide adequate advance notice to market participants. To the extent OCC is not able to implement a bylaw change at or prior to the July 31, 2018, we would expect the Exchange to amend its rules or extend the implementation date. For the reasons above, the Commission finds that the proposed rule change is consistent with the Act. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,31 that the proposed rule change (SR–CBOE–2018– 008) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.32 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–10272 Filed 5–14–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–83199; File No. SR–BX– 2018–016] Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Memorialize Its Order and Execution Information Into Chapter VI, Section 19, Entitled Data Feeds May 9, 2018. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on April 27, 2018, Nasdaq BX, Inc. (‘‘BX’’ or ‘‘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. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to a proposal to memorialize its order and execution information into Chapter VI, Section 19, entitled ‘‘Data Feeds.’’ The text of the proposed rule change is available on the Exchange’s website at https://nasdaqbx.cchwallstreet.com/, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for 31 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 32 17 30 See Cboe Options Rule 24A.7, concerning FLEX position limits and reporting requirements. VerDate Sep<11>2014 20:27 May 14, 2018 Jkt 244001 PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 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 Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to memorialize its order and execution information into Chapter VI, Section 19, entitled ‘‘Data Feeds.’’ The Exchange proposes to rename this rule ‘‘Data Feeds and Trade Information.’’ The Exchange proposes other grammatical corrections in Section 19(a) as well. Section 19(b) First, the Exchange proposes to adopt a new Section 19(b) and memorialize the following order and execution information which were previously filed by the Exchange: (1) CTI; 3 (2) TradeInfo 4; and (3) FIX DROP.5 The Exchange originally noted in the CTI and FIX DROP Filing that CTI offers real-time clearing trade updates.6 The message containing the trade details is also simultaneously sent to The Options Clearing Corporation. The trade messages are routed to a member’s connection containing certain information. The administrative and market event messages include, but are not limited to: System event messages to communicate operational-related events; options directory messages to relay basic option symbol and contract information for options traded on the Exchange; complex strategy messages to relay information for those strategies traded on the Exchange; trading action messages to inform market participants when a specific option or strategy is halted or released for trading on the Exchange; and an indicator which distinguishes electronic and nonelectronically delivered orders. 3 See Securities Exchange Act Release No. 73894 (December 19, 2014), 79 FR 78119 (December 29, 1014) (SR–BX–2014–060) (‘‘CTI and FIX DROP Filing’’). 4 See Securities Exchange Act Release No. 60826 (October 14, 2009), 74 FR 54605 (October 22, 2009) (SR–BX–2009–062) (‘‘TradeInfo Filing’’). 5 See note 3 above. 6 A real-time clearing trade update is a message that is sent to a member after an execution has occurred and contains trade details. See Securities Exchange Act Release No. 73894 (December 19, 2014), 79 FR 78119 (December 29, 1014) (SR–BX– 2014–060). E:\FR\FM\15MYN1.SGM 15MYN1

Agencies

[Federal Register Volume 83, Number 94 (Tuesday, May 15, 2018)]
[Notices]
[Pages 22550-22552]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-10272]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83205; File No. SR-CBOE-2018-008]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Approving a Proposed Rule Change Relating to Flexibly Structured 
Options

May 9, 2018.

I. Introduction

    On January 18, 2018, Cboe Exchange, Inc. (``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change amending Cboe Options's rules relating to the 
fungibility of Flexible Exchange Options (``FLEX Options''). The 
proposed rule change was published for comment in the Federal Register 
on February 8, 2018.\3\ On March 23, 2018, 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 the proposed rule change should be disapproved.\4\ 
The Commission received no comment letters on the proposed rule change. 
This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 82622 (Feb. 2, 
2018), 83 FR 5668 (Feb. 8, 2018) (``Notice'').
    \4\ See Securities Exchange Act Release No. 82936 (Mar. 23, 
2018), 83 FR 13552 (Mar. 29, 2018).
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II. Description of the Proposed Rule Change

    In its filing, the Exchange proposed to amend Interpretation and 
Policy .02 to Rule 24A.4, which sets forth requirements relating to a 
FLEX Option that has the same terms as a Non-FLEX Option.\5\
---------------------------------------------------------------------------

    \5\ See Cboe Options Rule 24A.1(q).
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    First, Cboe Options has proposed to amend the rule to make all FLEX 
Options fungible with Non-FLEX Options that have identical terms.\6\ 
Currently, FLEX Options that have quarterly expirations,\7\ short term 
expirations,\8\ weekly expirations,\9\ and End of Month (``EOM'') 
expirations \10\ are not fungible with Non-FLEX Options with identical 
terms.\11\ The OCC

[[Page 22551]]

currently prohibits fungibility in quarterly and short-term 
options,\12\ so, as described in more detail below, Cboe Options 
proposes to delay the effectiveness of this proposed rule change to 
allow time for OCC to amend its bylaws.
---------------------------------------------------------------------------

    \6\ See proposed Cboe Options Rule 24A.4.02(a) (`[t]his 
Interpretation and Policy shall apply to all FLEX Options'').
    \7\ See Cboe Options Rules 5.5(e), 24.9(a)(2)(B), and 24.9(c).
    \8\ See Cboe Options Rules 5.5(d) and 24.9(a)(2)(A).
    \9\ See Cboe Options Rule 24.9(e). These are currently traded 
pursuant to the Nonstandard Expirations Pilot Program.
    \10\ Id. These are also traded pursuant to the Nonstandard 
Expiration Pilot Program.
    \11\ Cboe Options states in its proposal that FLEX Options with 
these expirations were not originally intended to be fungible. See 
Securities Exchange Release Act Nos. 62658 (August 5, 2010), 75 FR 
49010, 49011 n.8 (August 12, 2010) (SR-CBOE-2009-075) (notice). The 
notice states that FLEX Options do not become fungible with 
subsequently introduced Non-FLEX structured quarterly and short term 
options, and that they will not be with End of Week (``EOW'') and 
EOM expirations because of their similarities to the quarterly and 
short term options. EOW expirations are now called weekly 
expirations as Cboe Options Rule 24.9(e) was amended to include 
Monday and Wednesday expirations. See also Securities Exchange 
Release Act No. 62911 (September 14, 2010), 75 FR 57539 (September 
21, 2010) (SR-CBOE-2009-075) (approval order).
    \12\ See Article I of OCC By-Laws.
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    Second, the Exchange has proposed to clarify that if the expiration 
date is an Exchange holiday, Cboe Options Rule 24A.4.02 shall designate 
the previous business day as the expiration date.\13\ However, for 
weekly expirations that expire on a Monday that is an Exchange 
holiday,\14\ Cboe Options Rule 24A.4.02 shall designate the business 
day that immediately follows the Exchange holiday as the expiration 
date.\15\ According to the Exchange, the proposed rule is designed to 
clarify that when the expiration of a Non-FLEX Option is moved to the 
business day immediately before (or after) the Exchange holiday, the 
FLEX Option that also expires on the day before (or after) will be 
fungible with the Non-FLEX Option.\16\
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    \13\ See Proposed Cboe Options Rule 24A.4.02(a).
    \14\ See Cboe Options Rule 24.9(e)(1).
    \15\ See Proposed Cboe Options Rule 24A.4.02(a).
    \16\ See Notice, supra note 3, at 5669.
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    Third, Cboe Options has proposed to clarify that in the event a 
Non-FLEX American-style series is added intra-day, a FLEX position is 
permitted to be closed using FLEX trading procedures for the balance of 
the trading day on which the Non-FLEX series is added against another 
closing only FLEX position.\17\ The Exchange notes that when it was 
adopted, the Exchange intended to limit this provision to American-
style exercises. According to the Exchange, American-style options face 
assignment risk because when a Non-FLEX Option is listed, the OCC 
cannot net the positions of the Non-FLEX Option and the FLEX Option 
with identical terms until the next business day.\18\
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    \17\ See proposed Cboe Options Rule 24A.4.02(b).
    \18\ See Notice, supra note 3, at 5669 n.7. See also Securities 
Exchange Act Release No. 62870 (September 8, 2010), 75 FR 56147 
(September 15, 2010) (SR-CBOE-2010-078) (stating that there is 
assignment risk for American-style options only). The Commission 
notes that an American-style option may be exercised at any time 
during its life, whereas, a European-style option may only be 
exercised at the end of its life.
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    Fourth, the Exchange has proposed several non-substantive changes 
that are designed to make the text easier to read. The Exchange 
believes that such changes will clarify that the fungibility provisions 
apply to FLEX Options series with terms identical to the terms of a 
Non-FLEX Options series.\19\
---------------------------------------------------------------------------

    \19\ See Notice, supra note 3, at 5669.
---------------------------------------------------------------------------

    Finally, the proposed rule text provides that the Exchange's 
current rule will remain in effect until the effective date specified 
by the Exchange in a Regulatory Circular.\20\ The Regulatory Circular 
announcing the effective date shall be issued at least 30 days prior to 
the effective date \21\ and such effective date shall be no later than 
July 31, 2018.\22\ As noted in Cboe Options's proposal,\23\ the delayed 
effectiveness is intended to allow OCC time to amend its bylaws to 
eliminate its current restriction on fungibility of certain options.
---------------------------------------------------------------------------

    \20\ Id. at 5670.
    \21\ Id.
    \22\ Id.
    \23\ Id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act \24\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.\25\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\26\ which 
requires that the rules of an exchange be 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 regulating, clearing, settling, processing 
information with respect to, and 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.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78f.
    \25\ 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).
    \26\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the rules concerning the fungibility of 
certain FLEX Options and Non-FLEX Options were previously approved by 
the Commission.\27\ The proposed rule change extends fungibility to 
quarterly expirations, short term expirations, and, to the nonstandard 
expiration pilot program weekly and EOM expirations. The Commission 
believes that amending Rule 24A.4.02 to allow these additional FLEX 
Options to become fungible with standardized options with identical 
terms could result in some benefits to FLEX Options participants in 
that it may potentially increase the liquidity available to traders of 
FLEX Options. As the Exchange noted in its rule proposal, this is 
because there are more market participants in the Non-FLEX Options and 
thus there is potentially more liquidity available to market 
participants with FLEX Options that will be able to exit their FLEX 
Options positions in the standardized Non-FLEX Option market.\28\
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    \27\ See Securities Exchange Act Release No. 59417 (Feb. 18, 
2009), 74 FR 8591 (Feb. 25, 2009) (SR-CBOE-2009-115).
    \28\ See Notice, supra note 3, at 5670.
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    Because FLEX Options in quarterly, short term, weekly, and EOM 
expirations are not fungible with their Non-FLEX counterparts, parallel 
markets in these expirations exist--one FLEX and one Non-FLEX. The 
Commission previously stated that it is concerned that FLEX Options 
could act as a surrogate for trading in standardized options.\29\ The 
Commission recognizes that the FLEX Options market is designed to 
combine the benefits of an auction market with the features of 
negotiated transactions, and therefore continuous quotes may not always 
be available. Permitting more expirations in FLEX Options to be 
fungible with their Non-FLEX counterparts could help to ensure that 
market participants cannot avoid the protections provided to investors 
in the standardized market for these expirations by trading FLEX 
Options. Specifically, once a Non-FLEX series is open for trading, new 
FLEX Options are not permitted in that series. In addition, once a Non-
FLEX Options series is open, all outstanding FLEX Options in the same 
series become fungible with Non-FLEX Options in the standardized 
market, are traded pursuant to standardized market trading rules, and 
are aggregated for position and exercise limit purposes. Allowing these 
FLEX Options to be fungible with their Non-FLEX counterparts could 
potentially address some of these surrogacy concerns.
---------------------------------------------------------------------------

    \29\ See 74 FR at 8593.
---------------------------------------------------------------------------

    Nevertheless, the FLEX market was originally intended to allow 
customization of option terms that were not available in the 
standardized options. While this has evolved over time with the current 
fungibility provisions, as the additional classes of options noted 
above are allowed to become fungible with identical term standardized 
options, some of which have much shorter terms to expiration, we expect 
the Exchange to carefully monitor the fungible FLEX Options (and 
standardized options counterparts) to ensure that they are not being 
used in a way to trade ahead and/or gain an advantage over other market 
participants prior to the standardized

[[Page 22552]]

options becoming available to all market participants.
    Furthermore, the Commission expects the Cboe Options to report any 
undue effects that may occur as a result of these fungibility rule 
changes, including taking prompt action should any unanticipated 
consequences occur. The Commission also expects, prior to the effective 
date of the new rule, the Exchange to address whether additional 
position limit aggregation rules should be adopted prior to the rule's 
delayed implementation date. We note that currently the FLEX rules 
require that certain FLEX Options positions be aggregated with the 
position limits in the standardized market.\30\
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    \30\ See Cboe Options Rule 24A.7, concerning FLEX position 
limits and reporting requirements.
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    The Commission believes that the remaining proposed changes will 
help protect investors and the public interest by providing clarity and 
transparency to the rules. The proposed rule text regarding Exchange 
holidays will clarify the fungibility of FLEX Options with expiration 
dates on Exchange holidays and are consistent with the expiration of 
the same standardized options on Exchange holidays. Amending the intra-
day add provision to state that it applies solely to American-style 
expirations will codify in the rule text the Exchange's original intent 
with respect to this provision. Further, the other non-substantive, 
clarifying changes will make the rule easier to read and understand.
    Finally, as noted above the Exchange cannot actually implement this 
rule change immediately because OCC bylaws currently restrict 
fungibility of quarterly and short term options. The Commission 
believes that the delayed implementation date of July 31, 2018 should 
provide OCC with time to consider fungibility in quarterly and short-
term options and determine whether to amend the OCC By-laws to 
accommodate the changes being adopted by the Exchange. The Exchange has 
also committed to announce the implementation of the change at least 30 
days prior to the effective date pursuant to a Regulatory Circular, 
which should provide adequate advance notice to market participants. To 
the extent OCC is not able to implement a bylaw change at or prior to 
the July 31, 2018, we would expect the Exchange to amend its rules or 
extend the implementation date.
    For the reasons above, the Commission finds that the proposed rule 
change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\31\ that the proposed rule change (SR-CBOE-2018-008) be, and 
hereby is, approved.
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    \31\ 15 U.S.C. 78s(b)(2).
    \32\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-10272 Filed 5-14-18; 8:45 am]
 BILLING CODE 8011-01-P
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