Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Rule 6.2, Interpretation and Policy .01 Concerning Strategy Orders, 46230-46237 [2018-19773]
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Federal Register / Vol. 83, No. 177 / Wednesday, September 12, 2018 / Notices
Rule 5.2–E(j)(3).16 The Commission
notes that the Exchange proposes no
other changes to the Funds.
Accordingly, the Commission believes
that the proposed continued listing
requirements are adequately designed to
help deter manipulation of the Shares.
For the foregoing reasons, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 1, is consistent with Sections 6(b)(5)
and 11A of the Act and the rules and
regulations thereunder applicable to a
national securities exchange.
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–NYSEArca–2018–38 and
should be submitted on or before
October 3, 2018.
SECURITIES AND EXCHANGE
COMMISSION
V. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 1
September 6, 2018.
IV. Solicitation of Comments on
Amendment No. 1
Interested persons are invited to
submit written data, views, and
arguments concerning Amendment No.
1. Comments may be submitted by any
of the following methods:
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 1, prior to
the 30th day after the date of
publication of notice of Amendment No.
1 in the Federal Register. Amendment
No. 1 supplements the proposal by,
among other things, eliminating an
issuer concentration requirement from
the proposed continued listing criteria
applicable to the Shares and deleting
the condition that would require a
change to the index methodology before
the proposed continued listing criteria
would apply. The changes and
additional information in Amendment
No. 1 raise no novel issues and assist
the Commission in finding that the
proposal is consistent with the Act.
Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2)
of the Exchange Act,17 to approve the
proposed rule change, as modified by
Amendment No. 1, on an accelerated
basis.
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Electronic Comments
• 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–
NYSEArca–2018–38 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–NYSEArca–2018–38. 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 this
filing will also be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
VI. Conclusion
supra note 12 and accompanying text.
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Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change To Amend Rule
6.2, Interpretation and Policy .01
Concerning Strategy Orders
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 August
24, 2018, Cboe Exchange, Inc.
(‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III 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
Cboe Options proposes a rule change
to amend and clarify the definition of a
strategy order, clarify other definitions
related to the modified HOSS
procedure, and permit the entry of
orders that offset imbalances after the
strategy order cut-off time.
(additions are italicized; deletions are
[bracketed])
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Rules of Cboe Exchange, Inc.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,18 that the
proposed rule change (SR–NYSEArca–
2018–38), as modified by Amendment
No. 1 thereto, be, and hereby is,
approved on an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–19772 Filed 9–11–18; 8:45 am]
BILLING CODE 8011–01–P
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Rule 6.2. Hybrid Opening (and
Sometimes Closing) System (‘‘HOSS’’)
(a)–(h) No change.
. . . Interpretations and Policies:
.01 Modified Opening Procedure
for Series Used to Calculate the
Exercise[/] or Final Settlement Value[s]
of Expiring Volatility Index[es]
Derivatives.
(a) Definitions. For purposes of this
Interpretation and Policy .01, the
following terms have the meanings
below:
Volatility Index Derivatives
The term ‘‘volatility index
derivatives’’ means volatility index
options listed for trading on the
Exchange (as determined under Rule
24.9(a)(5) and (6)), (security) futures
17 15
U.S.C. 78s(b)(2).
U.S.C. 78f(b)(2).
19 17 CFR 200.30–3(a)(12).
18 15
16 See
[Release No. 34–84045; File No. SR–CBOE–
2018–062]
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2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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listed for trading on an affiliated
designated contract market, or over-thecounter derivatives overlying a volatility
index whose exercise or final settlement
values, as applicable, are calculated
pursuant to, or by reference to, as
applicable, the modified opening
procedure described in this
Interpretation and Policy .01.
Exercise Settlement Value
Determination Day
The term ‘‘exercise settlement value
determination day’’ means a day on
which the Exchange determines the
exercise or final settlement value, as
applicable, of expiring volatility index
derivatives.
Constituent Option Series
The term ‘‘constituent option series’’
means all option series listed on the
Exchange that are used to calculate the
exercise or final settlement value, as
applicable, of expiring volatility index
derivatives.
Strategy Order
The Exchange deems individual
orders (considered collectively) a market
participant submits for participation in
the modified opening procedure to be a
‘‘strategy order,’’ based on related facts
and circumstances considered by the
Exchange, only if the orders:
(1) Relate to the market participant’s
positions in expiring volatility index
derivatives;
(2) are for option series with the
expiration that the Exchange will use to
calculate the exercise or final settlement
value, as applicable, of the applicable
volatility index derivative;
(3) are for option series with strike
prices approximating the range of series
that are later determined to constitute
the constituent option series for the
applicable expiration;
(4) are for put (call) options with
strike prices equal to or less (greater)
than the ‘‘at-the-money’’ strike price;
and
(5) have quantities approximating the
weighting formula used to determine the
exercise or final settlement value, as
applicable, in accordance with the
applicable volatility index methodology.
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Non-Strategy Order
The term ‘‘non-strategy order’’ means
any order (including an order in a
constituent option series) a market
participant submits for participation in
the modified opening procedure that is
not a strategy order (or a change to or
cancellation of a strategy order).
Examples of non-strategy orders
include, but are not limited to:
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(1) A buy (sell) order in a constituent
options series if an EOI disseminated no
more than two minutes prior to the time
a market participant submitted the
order included a sell (buy) imbalance
and the size of the order is no larger
than the size of the imbalance in the
EOI, regardless of whether the market
participant previously submitted a
strategy order or has positions in
expiring volatility index derivatives; or
(2) a Market-Maker bid or offer in a
constituent option series, as set forth in
paragraph (e) below.
(b) Use of Modified Opening
Procedure. [All provisions set forth in
Rule 6.2 remain in effect unless
superseded or modified by this
Interpretation and Policy .01.] On [the
dates on which the] exercise [and final]
settlement value determination days
[are calculated for options (as
determined under Rule 24.9(a)(5) or (6))
or (security) futures contracts on a
volatility index (i.e., expiration and
final settlement dates)], the Exchange
[utilizes]uses the [modified] opening
procedure described in Rule 6.2, as
modified by this Interpretation and
Policy .01, for constituent option
series[below for all series used to
calculate the exercise/final settlement
value of the volatility index for expiring
options and (security) futures contracts
(these option series referred to as
‘‘constituent options’’)].
([a]c) Strategy Order[s] Cut-Off Time.
[All orders for participation in the
modified opening procedure that are
related to positions in, or a trading
strategy involving, expiring volatility
index options or (security) futures
(‘‘strategy orders’’)]Market participants
must submit strategy orders (which
orders must be entered into the
Exchange by a Trading Permit Holder),
and [any] changes to or cancellations of
[any such]strategy orders, prior to the
strategy order cut-off time. Market
participants[:]
[(i) must be received prior to the
applicable strategy order cut-off time for
the constituent option series (as
determined by the Exchange on a classby-class basis), which may be no earlier
than 8:00 a.m. and no later than the
opening of trading in the series. The
Exchange will announce all
determinations regarding changes to the
applicable strategy order cut-off time at
least one day prior to implementation.
(ii)] may not [be cancelled or
changed]change or cancel strategy
orders after the strategy order cut-off
time, unless the market participant
submits the change or cancellation:
(1) [after the applicable strategy order
cut-off time, unless the strategy order is
not executed in the modified opening
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procedure and the cancellation or
change is submitted] after the [modified
opening procedure is concluded]series
is open for trading; or
(2) [(provided that any such strategy
order may be changed or cancelled after
the applicable strategy order cut-off time
and] prior to the [applicable] nonstrategy order cut-off time in order to
correct a legitimate error, in which case
the [Trading Permit Holder]market
participant submitting the change or
cancellation [will]must prepare and
maintain a memorandum setting forth
the circumstances that resulted in the
change or cancellation and [will
file]submit a copy of the memorandum
[with]to the Exchange no later than the
next business day in a form and manner
prescribed by the Exchange[)].
The Exchange determines the strategy
order cut-off time on a class-by-class
basis, which may be no earlier than 8:00
a.m. Chicago time and no later than the
opening of trading in a series. The
Exchange will announce any changes to
the strategy order cut-off time at least
one day prior to implementation.
[In general, the Exchange will
consider orders to be strategy orders for
purposes of this Rule 6.2.01 if the orders
possess the following three
characteristics:
(A) The orders are for option series
with the expiration that will be used to
calculate the exercise or final settlement
value of the applicable volatility index
option or futures contract.
(B) The orders are for option series
spanning the full range of strike prices
for the appropriate expiration for option
series that will be used to calculate the
exercise or final settlement value of the
applicable volatility index option or
futures contract, but not necessarily
every available strike price.
(C) The orders are for put options
with strike prices less than the ‘‘at-themoney’’ strike price and for call options
with strike prices greater than the ‘‘atthe-money’’ strike price. The orders may
also be for put and call options with ‘‘atthe-money’’ strike prices.
Whether orders are strategy orders for
purposes of this Rule 6.2.01 depends
upon specific facts and circumstances.
The Exchange may also deem order
types other than those provided above
as strategy orders if the Exchange
determines that to be the case based
upon the applicable facts and
circumstances.]
([b]d) Non-Strategy Order[s] Cut-Off
Time. [All other orders for participation
in the modified opening procedure
(‘‘non-strategy orders’’), and any change
to or cancellation of any such order,
must be received]Market participants
must submit non-strategy orders (which
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orders must be entered into the
Exchange by a Trading Permit Holder)
prior to the [applicable]non-strategy
order cut-off time. [(as determined by
t]The Exchange determines the nonstrategy order cut-off time on a class-byclass basis[) in order to participate at the
opening price for the applicable series],
which may be no earlier than 8:25 a.m.
and no later than the opening of trading
in [the option]a series. The Exchange
will announce [all determinations
regarding]any changes to the
[applicable] non-strategy order cut-off
time at least one day prior to
implementation.
([c]e) Market-Makers. A Market-Maker
with an appointment in a class with
constituent option series may submit
bids and offers in those series for bona
fide market-making purposes in
accordance with Rule 8.7 and the
Exchange Act for its market-maker
account prior to the open of trading for
participation in the modified opening
procedure. The Exchange will deem
these bids and offers to be non-strategy
orders, and will not deem them to be
changes to or cancellations of
previously submitted strategy orders, if:
(i) the Trading Permit Holder with
which the Market-Maker is affiliated has
established, maintains, and enforces
reasonably designed written policies
and procedures (including information
barriers, as applicable), taking into
consideration the nature of the Trading
Permit Holder’s business and other facts
and circumstances, to prevent the
misuse of material nonpublic
information (including the submission
of strategy orders); and
(ii) when submitting these bids and
offers, the Market-Maker has no actual
knowledge of any previously submitted
strategy orders.
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(b) Not applicable.
(c) Not applicable.
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The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
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
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
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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
Statutory Basis for, the Proposed Rule
Change
(a) Purpose
Cboe Options and Cboe Futures
Exchange, LLC (‘‘CFE’’) list options and
futures, respectively, on different
volatility indexes that are calculated
using prices of options traded on Cboe
Options.3 The exercise settlement value
for these volatility index derivatives is
determined on the morning of their
expiration date through a special
opening quotation (‘‘SOQ’’) of the
volatility index using the opening prices
of a portfolio of options (for example,
the exercise settlement value of VIX
options and futures uses the opening
prices of a portfolio of S&P 500 Index
options (‘‘SPX options’’) that expire
approximately 30 days later). On the
days when the exercise settlement
values for these volatility index
derivatives are determined, Cboe
Options opens the constituent options 4
for these volatility indexes using the
modified Hybrid Opening System
(‘‘HOSS’’) procedure.5 The main feature
of the modified HOSS procedure used to
calculate the exercise settlement value
for expiring volatility index options and
(security) futures that distinguishes it
from the normal opening procedure
used on all other days is a cutoff time
for the entry of strategy orders.6 By
3 These volatility indexes include the Cboe
Volatility Index (‘‘VIX’’) and the Russell 2000
Volatility Index (‘‘RVX’’). Options expire on an
expiration date and settle to an exercise settlement
value, and futures settle on a final settlement date
to a final settlement value. For ease of reference, the
Exchange will use the options terminology
throughout this filing when referring to the
‘‘expiration/final settlement date’’ and ‘‘expiration/
final settlement value’’ for volatility index
derivatives.
4 ‘‘Constituent options’’ are the series used to
calculate the exercise/final settlement value of the
volatility index for expiring options and (security)
futures contracts.
5 See Rule 6.2, Interpretation and Policy .01.
6 Currently, strategy orders are defined as all
orders (defined in Rule 1.1(ooo) as a firm
commitment to buy or sell option contracts) for
participation in the modified opening procedure
that are related to positions in, or a trading strategy
involving, volatility index options or (security)
futures (as discussed below, the proposed rule
change is adding ‘‘expiring’’ to this definition). In
general, the Exchange currently considers orders to
be strategy orders if they are for (a) option series
with the expiration that will be used to calculate
the exercise or final settlement value of the
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providing market participants with a
mechanism to buy and sell constituent
options at prices used to calculate the
exercise settlement value of the
volatility index derivatives, the
volatility index settlement process is
‘‘tradable.’’
The volatility index settlement
process is patterned after the process
used to calculate the exercise settlement
value of SPX options. On the days SPX
options expire, S&P calculates an SOQ
of the S&P 500 Index using the opening
prices of the component stocks in their
primary markets. Market participants
can replicate the exposure of their
expiring SPX options by entering orders
to buy and sell the component stocks of
the S&P 500 Index at their opening
prices. If they are successful, market
participants can effectively construct a
portfolio that matches the value of the
SOQ. At this point, the derivatives and
cash markets converge.
In a very similar way, the exercise
settlement value for volatility index
derivatives is an SOQ of the volatility
index using opening prices of the
constituent options used to determine
the value of the index. With respect to
VIX, the VIX exercise settlement value
is calculated using the opening prices of
SPX options that expire approximately
30 days later. Analogous to the
settlement process for SPX options,
market participants can replicate the
exposure of their expiring VIX
derivatives by entering buy and sell
orders in constituent SPX options. If
they are successful, market participants
can effectively construct a portfolio of
SPX options whose value matches the
value of the VIX SOQ. By doing so,
market participants may make or take
delivery of the SPX options that will be
used to calculate the exercise settlement
value of their VIX derivatives.
A tradable settlement creates the
opportunity to convert the exposure of
an expiring VIX derivative into the
portfolio of SPX options that will be
used to calculate the exercise settlement
applicable volatility index option or futures
contract; (b) option series spanning the full range
of strike prices for the appropriate expiration for
option series that will be used to calculate the
exercise or final settlement value of the applicable
volatility index option or futures contract (not
necessarily every available strike price); and (c) put
options with strike prices at or less than the ‘‘atthe-money’’ strike price and for call options with
strike prices greater than or at the ‘‘at-the-money’’
strike price. Whether orders are strategy orders
depends upon specific facts and circumstances. The
Exchange may also deem order types other than
those provided above as strategy orders if the
Exchange determines that to be the case based upon
the applicable facts and circumstances. The strategy
order cut-off time may be no earlier than 8:00 a.m.
and no later than the opening of trading in the
series, and is currently 8:20 a.m. Chicago time. See
Rule 6.2, Interpretation and Policy .01.
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value of the expiring contract.
Specifically, some market participants
may desire to maintain the vega, or
volatility, risk exposure of expiring VIX
derivatives. Since VIX derivatives
expire 30 days prior to the SPX options
used to calculate their settlement value,
a market participant may have a vega
risk from its portfolio of index positions
that the participant wants to continue to
hedge after the participant’s VIX
derivatives expire. To continue that
vega coverage following expiration of a
VIX derivative, a market participant
may determine to trade the portfolio of
SPX options used to calculate the
exercise settlement value of an expiring
VIX derivative, since those SPX options
still have 30 more days to expiration.
This trade essentially replaces the
uncovered vega exposure ‘‘hole’’ created
by an expiring VIX derivative.
Since the VIX settlement value
converges with the value of the portfolio
of SPX options used to calculate that
VIX settlement value, trading this SPX
option portfolio mitigates settlement
risk.7 This is because, if done properly,
the vega exposure obtained in the SPX
option portfolio will replicate the vega
exposure of the expiring VIX derivative.
Because a market participant is
converting vega exposure from one
instrument (expiring VIX derivative) to
another (portfolio of SPX options
expiring in 30 days), the market
participant is likely to be indifferent to
the settlement price received for the
expiring VIX derivative. Importantly,
trading the next VIX derivative
expiration (i.e., rolling) will not
accomplish the conversion of vega
exposure since that VIX derivative
contract would necessarily cover a
different period of expected volatility
and would be based on an entirely
different portfolio of SPX options.
To replicate expiring volatility index
derivatives on their expiration dates
with portfolios of constituent options,
market participants generally submit
strategy orders to participate in the
7 In the absence of a tradeable settlement,
settlement risk refers to the difference between the
exercise settlement value of the expiring volatility
index derivatives and the value of the portfolio of
the option series used to calculate the exercise
settlement value. The potential disparity between
the exercise settlement value for expiring volatility
index derivatives and the value of the replicating
portfolio of constituent options series is referred to
as ‘‘slippage.’’ A tradeable settlement provides
convergence between the value of the exercise
settlement value and the value of the portfolio of
option series used to calculate the exercise
settlement value (i.e., eliminates slippage). With
respect to expiring VIX derivatives, for example,
while it is possible to construct a replicating
portfolio of SPX options, it is highly unlikely that
traders would be able to trade constituent SPX
options at prices that would match the final
settlement price.
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modified HOSS procedure on exercise
settlement value determination dates.
The Exchange understands that the
entry of strategy orders may lead to
order imbalances in the option series
being used to determine the exercise
settlement value. To the extent (1)
market participants seeking to replicate
an expiring VIX derivative position are
on one side of the market (e.g., strategy
order to buy SPX options) and (2) those
market participants’ orders predominate
over other orders during the modified
HOSS procedure, those trades may
contribute to an order imbalance prior
to the open.
To provide market participants with
time to enter additional orders and
quotes to offset any such imbalances
prior to the opening of these series, the
Exchange established a strategy order
cut-off time.8 The time period after this
cut-off time also permits market
participants to, among other things,
update prices of orders and quotes
(except, as discussed below, changes to
or cancellations of non-strategy orders
may not be submitted after this cut-off
time) in response to changing market
conditions until the open of trading.9
Generally, if a series (1) has a market
order imbalance, or (2) is at a price that
is outside the Exchange prescribed
opening width (as described in Rule
6.2(d)), the series will not open for
trading. Prior to the open, the Exchange
disseminates messages to market
participants indicating the expected
opening price for a series or imbalance
information for that series (as
applicable) to further encourage market
participants to enter orders and quotes
to offset any imbalances and to promote
a fair and orderly opening.
The proposed rule change first moves
all defined terms in Interpretation and
Policy .01 to proposed paragraph (a),
adds certain defined terms, and revises
and clarifies existing defined terms as
each is used in Interpretation and Policy
.01. Cboe Options proposes to add and
modify the following defined terms in
Interpretation and Policy .01 with
respect to the modified HOSS
procedure:
8 See Securities Exchange Act Release Nos. 52367
(August 31, 2005), 70 FR 53401 (September 8, 2005)
(SR–CBOE–2004–86) (established initially for rapid
opening system procedure, which is no longer
used). The Commission stated it believed that the
proposed rule change may serve the intended
benefits of the strategy order cut-off time without
imposing an undue burden on market participants.
Id. at 53402.
9 Pursuant to Rule 6.2, Interpretation and Policy
.01(b), the Exchange may determine a non-strategy
order cut-off time, which may be no earlier than
8:25 a.m. and no later than the opening of trading.
The current non-strategy order cut-off time is the
opening of trading.
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• Volatility Index Derivatives: The
proposed term ‘‘volatility index
derivatives’’ means volatility index
options listed for trading on the
Exchange (as determined under Rule
24.9(a)(5) and (6)), (security) futures
listed for trading on an affiliated
designated contract market, or over-thecounter (‘‘OTC’’) derivatives overlying a
volatility index whose exercise or final
settlement values, as applicable, are
calculated pursuant to, or by reference
to, as applicable, the modified opening
procedure described in Interpretation
and Policy .01. The current introductory
paragraph to Interpretation and Policy
.01 states the modified opening
procedure is used on the dates on which
the exercise and final settlement values
are calculated for options (as
determined under Rule 24.9(a)(5) or (6))
or (security) futures contracts on a
volatility index (i.e., expiration and
final settlement dates), which is
consistent with the proposed definition.
Additionally, the proposed definition
includes OTC derivatives overlying a
volatility index, as these derivatives
often reference the exercise settlement
value the Exchange determines using
the modified HOSS procedure.
• Exercise Settlement Value
Determination Day: The proposed term
‘‘exercise settlement value
determination day’’ means a day on
which the Exchange determines the
exercise or final settlement value, as
applicable, of expiring volatility index
derivatives. This proposed definition is
consistent with the current introductory
paragraph in Interpretation and Policy
.01, which refers to the date on which
the exercise and final settlement values
are calculated for options (as
determined under Rule 24.9(a)(5) or (6))
or (security) futures contracts on a
volatility index (i.e., expiration and
final settlement dates) as the dates on
which the Exchange uses the modified
HOSS procedure set forth in
Interpretation and Policy .01.
• Constituent Option Series: The
proposed term ‘‘constituent option
series’’ means all option series listed on
the Exchange that are used to calculate
the exercise or final settlement value, as
applicable, of expiring volatility index
derivatives. The current definition of
‘‘constituent options’’ in the current
introductory paragraph to Interpretation
and Policy .01 is all series used to
calculate the exercise/final settlement
value of the volatility index for expiring
options and (security) futures contracts,
which is consistent with the proposed
definition. The proposed definition
makes nonsubstantive changes to the
definition and incorporates new defined
terms.
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• Strategy Orders: Pursuant to the
proposed rule change, the Exchange will
deem individual orders (considered
collectively) a market participant
submits for participation in the
modified opening procedure to be a
‘‘strategy order,’’ based on related facts
and circumstances 10 considered by the
Exchange, only if the orders:
Æ Relate to the market participant’s
positions in expiring volatility index
derivatives;
Æ are for option series with the
expiration that the Exchange will use to
calculate the exercise or final settlement
value, as applicable, of the applicable
volatility index derivative;
Æ are for option series with strike
prices approximating the range of series
that are later determined to constitute
the constituent option series for the
applicable expiration;
Æ are for put (call) options with strike
prices equal to or less (greater) than the
‘‘at-the-money’’ strike price; and
Æ have quantities approximating the
weighting formula used to determine
the exercise or final settlement value, as
applicable, in accordance with the
applicable volatility index methodology.
Current paragraph (a) defines strategy
orders as all orders for participation in
the modified opening procedure that are
related to positions in, or a trading
strategy involving, expiring volatility
index options or (security) futures. The
current rule also says, in general, the
Exchange will consider orders to be
strategy orders for purposes of Rule 6.2,
Interpretation and Policy .01 if the
orders possess three characteristics:
• The orders are for option series
with the expiration that will be used to
calculate the exercise or final settlement
value of the applicable volatility index
option or futures contract;
• the orders are for option series
spanning the full range of strike prices
for the appropriate expiration for option
series that will be used to calculate the
exercise or final settlement value of the
applicable volatility index option or
futures contract, but not necessarily
every available strike; and
• the orders are for put options with
strike prices less than the ‘‘at-themoney’’ strike price and for call options
with strike prices greater than the ‘‘atthe-money’’ strike price. The orders may
10 The Exchange will evaluate facts and
circumstances to determine whether the five criteria
are satisfied. For example, the Exchange will
consider whether orders are for option series with
strike prices approximating the range of series that
are later determined to constitute the constituent
option series for the applicable expiration based on
facts and circumstances. Approximate range
includes not only the beginning and end points of
the range, but also the population of strikes within
the range.
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also be for put and call options with ‘‘atthe-money’’ strike prices. The current
rule also states whether orders are
strategy orders for purposes of Rule 6.2,
Interpretation and Policy .01 depends
upon specific facts and circumstances.
Currently, the Exchange may also deem
order types other than those provided
above as strategy orders if the Exchange
determines that to be the case based
upon the applicable facts and
circumstances.
When the definition of strategy order
was adopted, volatility index
derivatives had only just begun trading.
The Exchange believed some flexibility
within the rules regarding what
constituted a strategy order was
appropriate to permit market
participants to submit strategy orders in
a manner consistent with their
businesses. Additionally, flexibility
within the rule provided the Exchange
with the ability to gain experience in
monitoring trading in these products
and evaluating the use of strategy
orders.11 However, the Exchange
understands this flexibility has created
some confusion among market
participants regarding what orders
constitute a strategy order. As a result of
this confusion, the Exchange
understands certain market participants
may hesitate to submit orders in the
modified opening procedure out of
concern that such orders could be
deemed either a new strategy order or a
modification to or cancellation of an
existing strategy order. This perceived
risk may lead to reduced liquidity and
may increase the time it takes to open
a series at a competitive price.12
The proposed definition of strategy
order limits strategy orders to strips of
orders in constituent options series
submitted by a market participant that
contain the characteristics of orders that
would replicate the exposure of the
market participant’s expiring volatility
index derivatives. This is consistent
with how market participants use
strategy orders, as discussed above, and
is also consistent with the initial
purpose of the strategy order cut-off
time.13 The rule specifies that a group
of orders must contain the five specific
characteristics to be deemed a strategy
order. The first characteristic in the
proposed strategy order definition,
which requires orders to be related to
the market participant’s positions in
expiring volatility index derivatives, is
a factor under the current rule for orders
11 See
note 6.
Rule 6.2(d).
13 See Securities Exchange act Release No. 52367
(August 31, 2005), 70 FR 53401 (September 8, 2005)
(SR–CBOE–2004–86) (order approving modified
ROS opening procedure).
12 See
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to be deemed a strategy order.14
Similarly, under the current rule, if
orders possess the second through
fourth characteristics in the proposed
definition of strategy order, the
Exchange will generally consider those
orders to be strategy orders for purposes
of Rule 6.2, Interpretation and Policy
.01.15 The fifth characteristic in the
proposed definition of strategy orders is
not listed in the current rule as a
requirement for orders to be deemed
strategy orders. However, currently, the
Exchange generally looks for orders to
be in quantities that approximate the
weighting formula used in the volatility
index methodology when determining
whether orders are strategy orders. In
order for groups of orders in constituent
options series to replicate the vega
exposure of related expiring volatility
index derivatives, the orders in
constituent options series would need to
possess these quantities.
The proposed rule change deletes the
provision stating that the Exchange may
also deem order types other than those
provided in the rule as strategy orders
if the Exchange determines it to be the
cased based upon the applicable facts
and circumstances. Ultimately, based on
the Exchange’s experience of monitoring
trading in volatility index derivatives
and the modified opening procedure
used on exercise settlement value
determination days, orders intending to
replicate the vega of expiring volatility
index derivatives (or to liquidate a
hedge) possess the five specified
14 See current Rule 6.2, Interpretation and Policy
.01(a). The proposed rule change deletes the
concept of being related to a trading strategy, as that
is a broad term, and ultimately, as described in this
rule filing, strategy orders relate specifically to
positions in expiring volatility index derivatives,
thus making the term ‘‘trading strategy’’
unnecessary.
15 See current Rule 6.2, Interpretation and Policy
.01(A)–(C). The Exchange notes the proposed rule
change modifies the characteristic in current .01(B)
to provide that the orders must approximate the
range of series that later are determined to
constitute the constituent option series rather than
be for the full range. The purpose of this change is
to account for the fact that, while many market
participants can determine what the full range and
population of strike prices will be, they may not be
exact. Bids and offers of series may change in
response to market conditions between the strategy
order cut-off time and the opening of trading, which
may impact which series ultimately constitute the
constituent option series. For example, with respect
to VIX, participants may not have certainty prior to
the strategy order cut-off time regarding which
series will have zero-bid prices and thus be
excluded from the settlement calculation. See VIX
methodology at https://www.cboe.com/micro/vix/
vix-index-rules-and-methodology.pdf. Additionally,
this will ensure that market participants cannot
purposefully not enter an order for one strike
within the range to avoid their orders being subject
to the strategy order cut-off time. As the current rule
provides the Exchange with significant flexibility to
determine what constitutes a strategy order, this
flexibility is consistent with the current rules.
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characteristics,16 and thus orders
intended to be strategy orders would
possess the proposed characteristics.17
The Exchange believes the proposed
definition provides market participants
with more clarity with respect to what
constitutes strategy orders. The
Exchange believes this added clarity
may increase liquidity on volatility
settlement dates, as it provides more
certainty with respect to which orders
they need to submit prior to the strategy
order cut-off time and which orders they
may submit after that time.
• Non-Strategy Orders: The proposed
term ‘‘non-strategy order’’ means any
order (including an order in a
constituent option series) a market
participant submits for participation in
the modified opening procedure that is
not a strategy order (or a change to or
cancellation of a strategy order).
Examples of non-strategy orders
include, but are not limited to:
Æ A buy (sell) order in a constituent
options series if an expected opening
information message (‘‘EOI’’) 18 is
disseminated no more than two minutes
prior to the time a market participant
submitted the order included a sell
(buy) imbalance and the size of the
order is no larger than the size of the
imbalance in the EOI, regardless of
whether the market participant
previously submitted a strategy order or
has positions in expiring volatility
index derivatives; or
Æ a Market-Maker bid or offer in a
constituent option series, as set forth in
proposed paragraph (e) (current
paragraph (c)).
As discussed above, the Exchange
understands the entry of strategy orders
may create imbalances in the
constituent option series. To provide
market participants with time to enter
additional orders and quotes to offset
any such imbalances prior to the
opening of these series, the Exchange
established a strategy order cut-off
time.19 Imbalances may prevent a series
from opening, such as if it is a market
order imbalance (as described in Rule
16 For example, the VIX methodology describes
how a portfolio of options may provide a constant
exposure to the variance of an asset, which is what
strategy orders attempt to do. See https://
www.cboe.com/micro/vix/vix-index-rules-andmethodology.pdf.
17 As discussed above, the proposed rule retains
some flexibility pursuant to which the Exchange
may consider facts and circumstances to determine
whether orders possess the five proposed criteria
for what constitutes a strategy order, and a
modification of a strategy order.
18 See Rule 6.2(a)(ii).
19 See Securities Exchange Act Release Nos.
52367 (August 31, 2005), 70 FR 53401 (September
8, 2005) (SR–CBOE–2004–86) (established initially
for rapid opening system procedure, which his no
longer used).
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6.2(d)). Prior to the open, the Exchange
disseminates EOIs to market
participants indicating, among other
things, imbalance information for series
to further encourage market participants
to enter orders to offset any imbalances
and promote a fair and orderly
opening.20 However, Rule 6.2 currently
does not permit market participants that
submitted strategy orders prior to the
cut-off time to submit orders that would
address order imbalances after the
strategy order cut-off time in series used
to calculate the exercise settlement
value.
However, if a market participant
enters a strategy order prior to the
strategy order cut-off time, the Exchange
understands such market participant
may refrain from entering orders to
offset imbalances because of the
perceived risk that such an order may be
deemed to be a new strategy order or a
change to the existing strategy order,
which is activity the current rule does
not permit. This perceived risk may
reduce liquidity at the opening on
exercise settlement value determination
days and may increase the risk that
some series do not open because of an
imbalance.21
In order to promote a fair and orderly
opening process, the Exchange seeks to
encourage all market participants to
enter orders following the strategy order
cut-off time for the purpose of offsetting
imbalances in constituent option series
until the opening of trading., [sic]
Accordingly, the Exchange proposes to
add to the definition of non-strategy
orders a buy (sell) order in a constituent
options series if an EOI disseminated no
more than two minutes prior to the time
a market participant submitted the order
included a sell (buy) imbalance and the
size of the order is no larger than the
size of the imbalance in the EOI,22
regardless of whether the market
participant previously submitted a
strategy order or has positions in
expiring volatility derivatives.
The purpose of permitting market
participants to enter orders to offset
order imbalances is not to permit them
to modify strategy orders, but rather to
encourage them to respond to EOIs that
indicate an imbalance in a series exists.
The Exchange believes explicitly
20 See
Rule 6.2(a)(ii).
Rule 6.2(d).
22 Currently, EOIs are disseminated every five
seconds. Therefore, for example, if an EOI
disseminated at 8:27:00 indicated a sell order
imbalance of 500 contracts, a market participant’s
submission of a buy order of 100 contracts at 8:28
would not be a strategy order or modification of a
previously submitted strategy order. The twominute time period is intended to provide market
participants with sufficient time to manually enter
an order in response to an EOI message.
21 See
PO 00000
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46235
permitting market participants to offset
order imbalances in response to EOIs, as
set forth in the proposed definition of
non-strategy orders, may increase
liquidity in series, including in
constituent option series, which would
contribute to a fair and orderly opening
in those series. The Exchange
disseminates these messages for the
purpose of encouraging submission of
orders to address order imbalances.
Therefore, the Exchange does not
believe such orders are ‘‘related to’’
expiring volatility index derivatives,
and thus would not constitute a strategy
order under the current or proposed
definition, as discussed above. The
Exchange believes the proposed rule
change is consistent with the definition
of strategy order because the proposed
rule explicitly excludes orders
submitted for this imbalance offsetting
purpose from falling within the strategy
order definition.
The remainder of the proposed
definition, including subparagraphs (1)
and (3), is consistent with the current
definition of non-strategy orders in
current paragraph (b), and just clarifies
examples of non-strategy orders that
exist in the current rule. The proposed
definition also makes nonsubstantive
changes and incorporates new defined
terms.
Proposed paragraph (b) provides that,
on exercise settlement value
determination days, the Exchange uses
the opening procedure described in
Rule 6.2, as modified by Interpretation
and Policy .01, for constituent option
series. This clarifies that the opening
procedure the Exchange uses for
constituent option series on exercise
settlement value determination days is
the same as the opening procedure used
for all option series on all other days,
except as set forth in Interpretation and
Policy .01. This proposed provision is
consistent with the current introductory
paragraph, and makes nonsubstantive
changes and incorporates new defined
terms.
Proposed paragraph (c) states market
participants must submit strategy
orders, and changes to or cancellations
of strategy orders, prior to the strategy
order cut-off time (which the Exchange
has currently set as 8:20 a.m. Chicago
time). Market participants may not
change or cancel strategy orders after
the strategy order cut-off time, unless
the market participant submits the
change or cancellation (1) after the
modified opening procedure is
concluded; or (2) to correct a legitimate
error, in which case the market
participant submitting the change or
cancellation must prepare and maintain
a memorandum setting forth the
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circumstances that resulted in the
change or cancellation and submit a
copy of the memorandum to the
Exchange no later than the next
business day in a form and manner
prescribed by the Exchange. The
Exchange determines the strategy order
cut-off time on a class-by-class basis,
which may be no earlier than 8:00 a.m.
Chicago time and no later than the
opening of trading in a series. The
Exchange has currently set the strategy
order cut-off time as 8:20 a.m. Chicago
time. The Exchange will announce any
changes to the strategy order cut-off
time at least one day prior to
implementation. Proposed paragraph (c)
is substantively the same as information
in current paragraph (a), and makes
nonsubstantive changes and
incorporates defined terms. Proposed
paragraph (c) also excludes the
description of what constitutes a
strategy order, which was included in
current paragraph (a) and has been
moved to proposed paragraph (a) as a
defined term, as discussed above.
Proposed paragraph (d) states market
participants must submit non-strategy
orders prior to the non-strategy order
cut-off time. The Exchange determines
the non-strategy order cut-off time on a
class-by-class basis, and it may be no
earlier than 8:25 a.m. Chicago time and
no later than the opening of trading in
a series. The Exchange has currently set
the non-strategy order cut-off time to be
the opening of trading. The Exchange
will announce any changes to the nonstrategy order cut-off time at least one
day prior to implementation. Proposed
paragraph (d) is substantively the same
as current paragraph (b), and makes
nonsubstantive changes and
incorporates defined terms. Proposed
paragraph (d) also excludes the
description of what constitutes a nonstrategy order, which is currently
included in current paragraph (a) and
has been moved to proposed paragraph
(a) as a defined term, as discussed
above.
The proposed rule change makes
additional nonsubstantive changes,
including revising the heading for
Interpretation and Policy .01 and
updating the paragraph lettering.
The Exchange notes the proposed rule
change would not impact a Trading
Permit Holder’s requirements to abide
by Exchange Rules 4.1 (Just and
Equitable Principles of Trade), 4.7
(Manipulation), and 4.18 (Prevention of
the Misuse of Material, Nonpublic
Information). The Exchange believes the
proposed rule change may contribute to
additional liquidity during the modified
HOSS procedure, and thus a fair and
orderly opening on exercise settlement
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value determination days. A fair and
orderly opening in these series benefits
all market participants who trade in the
volatility index derivatives and the
constituent series. The Exchange will
continue to conduct surveillance
procedures to monitor trading in the
constituent option series, including but
not limited to compliance with the
strategy order cut-off time (in
accordance with the proposed rule
change).
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.23 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 24 requirements 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.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 25 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the proposed definition
of a strategy order provides market
participants with additional clarity
regarding what orders constitute
strategy orders, and the Exchange
believes this added clarity benefits
investors and promotes just and
equitable principles of trades. The
proposed rule change with respect to
the definition of strategy orders is
consistent with the current definition of
strategy orders and the Exchange’s view
of what orders constitute a strategy
order, as well as the legitimate purposes
of strategy orders, because orders
submitted for the purposes of
constituting a strategy order generally
possess the five specified characteristics
(four of which are in current Rule 6.2,
Interpretation and Policy .01(a)).
Additionally, the proposed definition
of non-strategy order provides market
23 15
24 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
25 Id.
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participants with additional clarity
regarding orders that do not constitute
strategy orders (and thus that may be
submitted after the strategy-order cut-off
time and prior to the non-strategy order
cut-off time). The Exchange believes
explicitly permitting market
participants to enter orders to offset
order imbalances in response to EOIs
that indicate an imbalance in a series
exists will encourage entry of orders
when there is an imbalance in a series,
even if market participants previously
submitted strategy orders. This
proposed rule change allows the
maximum number of participants to
address order imbalances during the
opening process for the constituent
option series while executing their
investment and hedging strategies. The
Exchange believes these changes may
increase liquidity in series, including in
constituent option series, to offset
imbalances. This result would
contribute to a fair and orderly opening
process and would benefit all market
participants who trade in the volatility
index derivatives or the constituent
option series. The Exchange also
believes these changes are consistent
with the original purpose of the strategy
order cut-off time. The Exchange
believes this additional clarity with
respect to what is and is not a strategy
order will provide market participants
with more certainty with respect to
which orders constitute strategy orders,
and thus which orders need to be
submitted prior to the strategy order cutoff time. It also clarifies for market
participants the activity in which they
may engage after the strategy order cutoff time. The Exchange believes the
proposed reorganization of
Interpretation and Policy .01, including
defining all relevant terms at the
beginning of Interpretation and Policy
.01, also benefits market participants by
providing additional clarity with respect
to all defined terms for the modified
HOSS procedure.
The Exchange notes the proposed rule
change would not impact a Trading
Permit Holder’s requirements to abide
by Exchange Rules 4.1 (Just and
Equitable Principles of Trade), 4.7
(Manipulation), and 4.18 (Prevention of
the Misuse of Material, Nonpublic
Information). The Exchange believes the
proposed rule change may contribute to
additional liquidity during the modified
HOSS procedure, and thus to a fair and
orderly opening in constituent option
series on exercise settlement value
determination days. A fair and orderly
opening in these series benefits all
market participants who trade in the
volatility index derivatives and the
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constituent series. The Exchange will
continue to conduct surveillance
procedures to monitor trading in the
constituent option series, including but
not limited to compliance with the
strategy order cut-off time (in
accordance with the proposed rule
change).
daltland on DSKBBV9HB2PROD with NOTICES
B. Self-Regulatory Organization’s
Statement on Burden on Competition
Cboe Options does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed rule change applies in the
same manner to all market participants
who submit orders to the Exchange in
constituent option series on exercise
settlement value determination days.
The proposed rule change, and the
proposed definition of strategy order in
particular, provides market participants
with clarity for market participants with
respect to what constitutes a strategy
order and is generally consistent with
the current rules and the Exchange’s
view of what orders constitute a strategy
order. Additionally, the proposed
definition of non-strategy order,
particularly the explicit permission to
enter orders in response to EOIs that
indicate an imbalance in a series, is
consistent with the original intent of the
strategy order cut-off time.26 The
proposed rule change has no impact on
intermarket competition, as it applies to
orders submitted for participation in the
Exchange’s modified opening procedure
used to calculate settlement values for
expiring volatility index derivatives.
The Exchange believes the proposed
rule change provides market
participants with more certainty with
respect to which orders they need to
submit prior to the strategy order cut-off
time and which orders they may be
submit after that time, which may
increase liquidity in constituent option
series on volatility settlement dates.
Cboe Options believes that the
proposed rule change will relieve any
burden on, or otherwise promote,
competition. The Exchange believes the
proposed rule change may contribute to
liquidity in constituent option series
during the modified HOSS procedure,
and thus a fair and orderly opening on
exercise settlement value determination
days. A fair and orderly opening in
these series benefits all market
participants who trade in the volatility
index derivatives and the constituent
option series.
26 See
supra note 8.
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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 neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. By order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be 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:
46237
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CBOE–2018–062 and
should be submitted on or before
October 3, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.27
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–19773 Filed 9–11–18; 8:45 am]
BILLING CODE 8011–01–P
SMALL BUSINESS ADMINISTRATION
[Docket No. SBA–2018–0008]
Electronic Comments
Community Advantage Pilot Program
• 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–
CBOE–2018–062 on the subject line.
AGENCY:
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CBOE–2018–062. 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
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U.S. Small Business
Administration.
ACTION: Notice of extension of and
changes to Community Advantage Pilot
Program; and request for comments.
The Community Advantage
(‘‘CA’’) Pilot Program is a pilot program
to increase SBA-guaranteed loans to
small businesses in underserved areas.
The Small Business Administration
(‘‘SBA’’) continues to refine and
improve the design of the Community
Advantage Pilot Program. To support
SBA’s commitment to expanding access
to capital for small businesses and
entrepreneurs in underserved markets,
SBA is issuing this Notice to extend the
term of the CA Pilot Program, to
mitigate risks of the program by placing
a moratorium on accepting new CA
Lender applications, to limit fees that
can be collected from an applicant for
a CA loan, and to revise other program
requirements.
DATES: The moratorium on accepting
applications from lenders for
participation in the CA Pilot Program
and all other changes identified in this
Notice will be effective on October 1,
SUMMARY:
27 17
E:\FR\FM\12SEN1.SGM
CFR 200.30–3(a)(12).
12SEN1
]]>Agencies
[Federal Register Volume 83, Number 177 (Wednesday, September 12, 2018)]
[Notices]
[Pages 46230-46237]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-19773]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84045; File No. SR-CBOE-2018-062]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend Rule 6.2, Interpretation and
Policy .01 Concerning Strategy Orders
September 6, 2018.
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 August 24, 2018, Cboe Exchange, Inc. (``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Options proposes a rule change to amend and clarify the
definition of a strategy order, clarify other definitions related to
the modified HOSS procedure, and permit the entry of orders that offset
imbalances after the strategy order cut-off time.
(additions are italicized; deletions are [bracketed])
* * * * *
Rules of Cboe Exchange, Inc.
* * * * *
Rule 6.2. Hybrid Opening (and Sometimes Closing) System (``HOSS'')
(a)-(h) No change.
. . . Interpretations and Policies:
.01 Modified Opening Procedure for Series Used to Calculate the
Exercise[/] or Final Settlement Value[s] of Expiring Volatility
Index[es] Derivatives.
(a) Definitions. For purposes of this Interpretation and Policy
.01, the following terms have the meanings below:
Volatility Index Derivatives
The term ``volatility index derivatives'' means volatility index
options listed for trading on the Exchange (as determined under Rule
24.9(a)(5) and (6)), (security) futures
[[Page 46231]]
listed for trading on an affiliated designated contract market, or
over-the-counter derivatives overlying a volatility index whose
exercise or final settlement values, as applicable, are calculated
pursuant to, or by reference to, as applicable, the modified opening
procedure described in this Interpretation and Policy .01.
Exercise Settlement Value Determination Day
The term ``exercise settlement value determination day'' means a
day on which the Exchange determines the exercise or final settlement
value, as applicable, of expiring volatility index derivatives.
Constituent Option Series
The term ``constituent option series'' means all option series
listed on the Exchange that are used to calculate the exercise or final
settlement value, as applicable, of expiring volatility index
derivatives.
Strategy Order
The Exchange deems individual orders (considered collectively) a
market participant submits for participation in the modified opening
procedure to be a ``strategy order,'' based on related facts and
circumstances considered by the Exchange, only if the orders:
(1) Relate to the market participant's positions in expiring
volatility index derivatives;
(2) are for option series with the expiration that the Exchange
will use to calculate the exercise or final settlement value, as
applicable, of the applicable volatility index derivative;
(3) are for option series with strike prices approximating the
range of series that are later determined to constitute the constituent
option series for the applicable expiration;
(4) are for put (call) options with strike prices equal to or less
(greater) than the ``at-the-money'' strike price; and
(5) have quantities approximating the weighting formula used to
determine the exercise or final settlement value, as applicable, in
accordance with the applicable volatility index methodology.
Non-Strategy Order
The term ``non-strategy order'' means any order (including an order
in a constituent option series) a market participant submits for
participation in the modified opening procedure that is not a strategy
order (or a change to or cancellation of a strategy order). Examples of
non-strategy orders include, but are not limited to:
(1) A buy (sell) order in a constituent options series if an EOI
disseminated no more than two minutes prior to the time a market
participant submitted the order included a sell (buy) imbalance and the
size of the order is no larger than the size of the imbalance in the
EOI, regardless of whether the market participant previously submitted
a strategy order or has positions in expiring volatility index
derivatives; or
(2) a Market-Maker bid or offer in a constituent option series, as
set forth in paragraph (e) below.
(b) Use of Modified Opening Procedure. [All provisions set forth in
Rule 6.2 remain in effect unless superseded or modified by this
Interpretation and Policy .01.] On [the dates on which the] exercise
[and final] settlement value determination days [are calculated for
options (as determined under Rule 24.9(a)(5) or (6)) or (security)
futures contracts on a volatility index (i.e., expiration and final
settlement dates)], the Exchange [utilizes]uses the [modified] opening
procedure described in Rule 6.2, as modified by this Interpretation and
Policy .01, for constituent option series[below for all series used to
calculate the exercise/final settlement value of the volatility index
for expiring options and (security) futures contracts (these option
series referred to as ``constituent options'')].
([a]c) Strategy Order[s] Cut-Off Time. [All orders for
participation in the modified opening procedure that are related to
positions in, or a trading strategy involving, expiring volatility
index options or (security) futures (``strategy orders'')]Market
participants must submit strategy orders (which orders must be entered
into the Exchange by a Trading Permit Holder), and [any] changes to or
cancellations of [any such]strategy orders, prior to the strategy order
cut-off time. Market participants[:]
[(i) must be received prior to the applicable strategy order cut-
off time for the constituent option series (as determined by the
Exchange on a class-by-class basis), which may be no earlier than 8:00
a.m. and no later than the opening of trading in the series. The
Exchange will announce all determinations regarding changes to the
applicable strategy order cut-off time at least one day prior to
implementation.
(ii)] may not [be cancelled or changed]change or cancel strategy
orders after the strategy order cut-off time, unless the market
participant submits the change or cancellation:
(1) [after the applicable strategy order cut-off time, unless the
strategy order is not executed in the modified opening procedure and
the cancellation or change is submitted] after the [modified opening
procedure is concluded]series is open for trading; or
(2) [(provided that any such strategy order may be changed or
cancelled after the applicable strategy order cut-off time and] prior
to the [applicable] non-strategy order cut-off time in order to correct
a legitimate error, in which case the [Trading Permit Holder]market
participant submitting the change or cancellation [will]must prepare
and maintain a memorandum setting forth the circumstances that resulted
in the change or cancellation and [will file]submit a copy of the
memorandum [with]to the Exchange no later than the next business day in
a form and manner prescribed by the Exchange[)].
The Exchange determines the strategy order cut-off time on a class-
by-class basis, which may be no earlier than 8:00 a.m. Chicago time and
no later than the opening of trading in a series. The Exchange will
announce any changes to the strategy order cut-off time at least one
day prior to implementation.
[In general, the Exchange will consider orders to be strategy
orders for purposes of this Rule 6.2.01 if the orders possess the
following three characteristics:
(A) The orders are for option series with the expiration that will
be used to calculate the exercise or final settlement value of the
applicable volatility index option or futures contract.
(B) The orders are for option series spanning the full range of
strike prices for the appropriate expiration for option series that
will be used to calculate the exercise or final settlement value of the
applicable volatility index option or futures contract, but not
necessarily every available strike price.
(C) The orders are for put options with strike prices less than the
``at-the-money'' strike price and for call options with strike prices
greater than the ``at-the-money'' strike price. The orders may also be
for put and call options with ``at-the-money'' strike prices.
Whether orders are strategy orders for purposes of this Rule 6.2.01
depends upon specific facts and circumstances. The Exchange may also
deem order types other than those provided above as strategy orders if
the Exchange determines that to be the case based upon the applicable
facts and circumstances.]
([b]d) Non-Strategy Order[s] Cut-Off Time. [All other orders for
participation in the modified opening procedure (``non-strategy
orders''), and any change to or cancellation of any such order, must be
received]Market participants must submit non-strategy orders (which
[[Page 46232]]
orders must be entered into the Exchange by a Trading Permit Holder)
prior to the [applicable]non-strategy order cut-off time. [(as
determined by t]The Exchange determines the non-strategy order cut-off
time on a class-by-class basis[) in order to participate at the opening
price for the applicable series], which may be no earlier than 8:25
a.m. and no later than the opening of trading in [the option]a series.
The Exchange will announce [all determinations regarding]any changes to
the [applicable] non-strategy order cut-off time at least one day prior
to implementation.
([c]e) Market-Makers. A Market-Maker with an appointment in a class
with constituent option series may submit bids and offers in those
series for bona fide market-making purposes in accordance with Rule 8.7
and the Exchange Act for its market-maker account prior to the open of
trading for participation in the modified opening procedure. The
Exchange will deem these bids and offers to be non-strategy orders, and
will not deem them to be changes to or cancellations of previously
submitted strategy orders, if:
(i) the Trading Permit Holder with which the Market-Maker is
affiliated has established, maintains, and enforces reasonably designed
written policies and procedures (including information barriers, as
applicable), taking into consideration the nature of the Trading Permit
Holder's business and other facts and circumstances, to prevent the
misuse of material nonpublic information (including the submission of
strategy orders); and
(ii) when submitting these bids and offers, the Market-Maker has no
actual knowledge of any previously submitted strategy orders.
* * * * *
(b) Not applicable.
(c) Not applicable.
* * * * *
The text of the proposed rule change is also available on the
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
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 Exchange 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 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
Statutory Basis for, the Proposed Rule Change
(a) Purpose
Cboe Options and Cboe Futures Exchange, LLC (``CFE'') list options
and futures, respectively, on different volatility indexes that are
calculated using prices of options traded on Cboe Options.\3\ The
exercise settlement value for these volatility index derivatives is
determined on the morning of their expiration date through a special
opening quotation (``SOQ'') of the volatility index using the opening
prices of a portfolio of options (for example, the exercise settlement
value of VIX options and futures uses the opening prices of a portfolio
of S&P 500 Index options (``SPX options'') that expire approximately 30
days later). On the days when the exercise settlement values for these
volatility index derivatives are determined, Cboe Options opens the
constituent options \4\ for these volatility indexes using the modified
Hybrid Opening System (``HOSS'') procedure.\5\ The main feature of the
modified HOSS procedure used to calculate the exercise settlement value
for expiring volatility index options and (security) futures that
distinguishes it from the normal opening procedure used on all other
days is a cutoff time for the entry of strategy orders.\6\ By providing
market participants with a mechanism to buy and sell constituent
options at prices used to calculate the exercise settlement value of
the volatility index derivatives, the volatility index settlement
process is ``tradable.''
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\3\ These volatility indexes include the Cboe Volatility Index
(``VIX'') and the Russell 2000 Volatility Index (``RVX''). Options
expire on an expiration date and settle to an exercise settlement
value, and futures settle on a final settlement date to a final
settlement value. For ease of reference, the Exchange will use the
options terminology throughout this filing when referring to the
``expiration/final settlement date'' and ``expiration/final
settlement value'' for volatility index derivatives.
\4\ ``Constituent options'' are the series used to calculate the
exercise/final settlement value of the volatility index for expiring
options and (security) futures contracts.
\5\ See Rule 6.2, Interpretation and Policy .01.
\6\ Currently, strategy orders are defined as all orders
(defined in Rule 1.1(ooo) as a firm commitment to buy or sell option
contracts) for participation in the modified opening procedure that
are related to positions in, or a trading strategy involving,
volatility index options or (security) futures (as discussed below,
the proposed rule change is adding ``expiring'' to this definition).
In general, the Exchange currently considers orders to be strategy
orders if they are for (a) option series with the expiration that
will be used to calculate the exercise or final settlement value of
the applicable volatility index option or futures contract; (b)
option series spanning the full range of strike prices for the
appropriate expiration for option series that will be used to
calculate the exercise or final settlement value of the applicable
volatility index option or futures contract (not necessarily every
available strike price); and (c) put options with strike prices at
or less than the ``at-the-money'' strike price and for call options
with strike prices greater than or at the ``at-the-money'' strike
price. Whether orders are strategy orders depends upon specific
facts and circumstances. The Exchange may also deem order types
other than those provided above as strategy orders if the Exchange
determines that to be the case based upon the applicable facts and
circumstances. The strategy order cut-off time may be no earlier
than 8:00 a.m. and no later than the opening of trading in the
series, and is currently 8:20 a.m. Chicago time. See Rule 6.2,
Interpretation and Policy .01.
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The volatility index settlement process is patterned after the
process used to calculate the exercise settlement value of SPX options.
On the days SPX options expire, S&P calculates an SOQ of the S&P 500
Index using the opening prices of the component stocks in their primary
markets. Market participants can replicate the exposure of their
expiring SPX options by entering orders to buy and sell the component
stocks of the S&P 500 Index at their opening prices. If they are
successful, market participants can effectively construct a portfolio
that matches the value of the SOQ. At this point, the derivatives and
cash markets converge.
In a very similar way, the exercise settlement value for volatility
index derivatives is an SOQ of the volatility index using opening
prices of the constituent options used to determine the value of the
index. With respect to VIX, the VIX exercise settlement value is
calculated using the opening prices of SPX options that expire
approximately 30 days later. Analogous to the settlement process for
SPX options, market participants can replicate the exposure of their
expiring VIX derivatives by entering buy and sell orders in constituent
SPX options. If they are successful, market participants can
effectively construct a portfolio of SPX options whose value matches
the value of the VIX SOQ. By doing so, market participants may make or
take delivery of the SPX options that will be used to calculate the
exercise settlement value of their VIX derivatives.
A tradable settlement creates the opportunity to convert the
exposure of an expiring VIX derivative into the portfolio of SPX
options that will be used to calculate the exercise settlement
[[Page 46233]]
value of the expiring contract. Specifically, some market participants
may desire to maintain the vega, or volatility, risk exposure of
expiring VIX derivatives. Since VIX derivatives expire 30 days prior to
the SPX options used to calculate their settlement value, a market
participant may have a vega risk from its portfolio of index positions
that the participant wants to continue to hedge after the participant's
VIX derivatives expire. To continue that vega coverage following
expiration of a VIX derivative, a market participant may determine to
trade the portfolio of SPX options used to calculate the exercise
settlement value of an expiring VIX derivative, since those SPX options
still have 30 more days to expiration. This trade essentially replaces
the uncovered vega exposure ``hole'' created by an expiring VIX
derivative.
Since the VIX settlement value converges with the value of the
portfolio of SPX options used to calculate that VIX settlement value,
trading this SPX option portfolio mitigates settlement risk.\7\ This is
because, if done properly, the vega exposure obtained in the SPX option
portfolio will replicate the vega exposure of the expiring VIX
derivative. Because a market participant is converting vega exposure
from one instrument (expiring VIX derivative) to another (portfolio of
SPX options expiring in 30 days), the market participant is likely to
be indifferent to the settlement price received for the expiring VIX
derivative. Importantly, trading the next VIX derivative expiration
(i.e., rolling) will not accomplish the conversion of vega exposure
since that VIX derivative contract would necessarily cover a different
period of expected volatility and would be based on an entirely
different portfolio of SPX options.
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\7\ In the absence of a tradeable settlement, settlement risk
refers to the difference between the exercise settlement value of
the expiring volatility index derivatives and the value of the
portfolio of the option series used to calculate the exercise
settlement value. The potential disparity between the exercise
settlement value for expiring volatility index derivatives and the
value of the replicating portfolio of constituent options series is
referred to as ``slippage.'' A tradeable settlement provides
convergence between the value of the exercise settlement value and
the value of the portfolio of option series used to calculate the
exercise settlement value (i.e., eliminates slippage). With respect
to expiring VIX derivatives, for example, while it is possible to
construct a replicating portfolio of SPX options, it is highly
unlikely that traders would be able to trade constituent SPX options
at prices that would match the final settlement price.
---------------------------------------------------------------------------
To replicate expiring volatility index derivatives on their
expiration dates with portfolios of constituent options, market
participants generally submit strategy orders to participate in the
modified HOSS procedure on exercise settlement value determination
dates. The Exchange understands that the entry of strategy orders may
lead to order imbalances in the option series being used to determine
the exercise settlement value. To the extent (1) market participants
seeking to replicate an expiring VIX derivative position are on one
side of the market (e.g., strategy order to buy SPX options) and (2)
those market participants' orders predominate over other orders during
the modified HOSS procedure, those trades may contribute to an order
imbalance prior to the open.
To provide market participants with time to enter additional orders
and quotes to offset any such imbalances prior to the opening of these
series, the Exchange established a strategy order cut-off time.\8\ The
time period after this cut-off time also permits market participants
to, among other things, update prices of orders and quotes (except, as
discussed below, changes to or cancellations of non-strategy orders may
not be submitted after this cut-off time) in response to changing
market conditions until the open of trading.\9\ Generally, if a series
(1) has a market order imbalance, or (2) is at a price that is outside
the Exchange prescribed opening width (as described in Rule 6.2(d)),
the series will not open for trading. Prior to the open, the Exchange
disseminates messages to market participants indicating the expected
opening price for a series or imbalance information for that series (as
applicable) to further encourage market participants to enter orders
and quotes to offset any imbalances and to promote a fair and orderly
opening.
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release Nos. 52367 (August 31,
2005), 70 FR 53401 (September 8, 2005) (SR-CBOE-2004-86)
(established initially for rapid opening system procedure, which is
no longer used). The Commission stated it believed that the proposed
rule change may serve the intended benefits of the strategy order
cut-off time without imposing an undue burden on market
participants. Id. at 53402.
\9\ Pursuant to Rule 6.2, Interpretation and Policy .01(b), the
Exchange may determine a non-strategy order cut-off time, which may
be no earlier than 8:25 a.m. and no later than the opening of
trading. The current non-strategy order cut-off time is the opening
of trading.
---------------------------------------------------------------------------
The proposed rule change first moves all defined terms in
Interpretation and Policy .01 to proposed paragraph (a), adds certain
defined terms, and revises and clarifies existing defined terms as each
is used in Interpretation and Policy .01. Cboe Options proposes to add
and modify the following defined terms in Interpretation and Policy .01
with respect to the modified HOSS procedure:
Volatility Index Derivatives: The proposed term
``volatility index derivatives'' means volatility index options listed
for trading on the Exchange (as determined under Rule 24.9(a)(5) and
(6)), (security) futures listed for trading on an affiliated designated
contract market, or over-the-counter (``OTC'') derivatives overlying a
volatility index whose exercise or final settlement values, as
applicable, are calculated pursuant to, or by reference to, as
applicable, the modified opening procedure described in Interpretation
and Policy .01. The current introductory paragraph to Interpretation
and Policy .01 states the modified opening procedure is used on the
dates on which the exercise and final settlement values are calculated
for options (as determined under Rule 24.9(a)(5) or (6)) or (security)
futures contracts on a volatility index (i.e., expiration and final
settlement dates), which is consistent with the proposed definition.
Additionally, the proposed definition includes OTC derivatives
overlying a volatility index, as these derivatives often reference the
exercise settlement value the Exchange determines using the modified
HOSS procedure.
Exercise Settlement Value Determination Day: The proposed
term ``exercise settlement value determination day'' means a day on
which the Exchange determines the exercise or final settlement value,
as applicable, of expiring volatility index derivatives. This proposed
definition is consistent with the current introductory paragraph in
Interpretation and Policy .01, which refers to the date on which the
exercise and final settlement values are calculated for options (as
determined under Rule 24.9(a)(5) or (6)) or (security) futures
contracts on a volatility index (i.e., expiration and final settlement
dates) as the dates on which the Exchange uses the modified HOSS
procedure set forth in Interpretation and Policy .01.
Constituent Option Series: The proposed term ``constituent
option series'' means all option series listed on the Exchange that are
used to calculate the exercise or final settlement value, as
applicable, of expiring volatility index derivatives. The current
definition of ``constituent options'' in the current introductory
paragraph to Interpretation and Policy .01 is all series used to
calculate the exercise/final settlement value of the volatility index
for expiring options and (security) futures contracts, which is
consistent with the proposed definition. The proposed definition makes
nonsubstantive changes to the definition and incorporates new defined
terms.
[[Page 46234]]
Strategy Orders: Pursuant to the proposed rule change, the
Exchange will deem individual orders (considered collectively) a market
participant submits for participation in the modified opening procedure
to be a ``strategy order,'' based on related facts and circumstances
\10\ considered by the Exchange, only if the orders:
---------------------------------------------------------------------------
\10\ The Exchange will evaluate facts and circumstances to
determine whether the five criteria are satisfied. For example, the
Exchange will consider whether orders are for option series with
strike prices approximating the range of series that are later
determined to constitute the constituent option series for the
applicable expiration based on facts and circumstances. Approximate
range includes not only the beginning and end points of the range,
but also the population of strikes within the range.
---------------------------------------------------------------------------
[cir] Relate to the market participant's positions in expiring
volatility index derivatives;
[cir] are for option series with the expiration that the Exchange
will use to calculate the exercise or final settlement value, as
applicable, of the applicable volatility index derivative;
[cir] are for option series with strike prices approximating the
range of series that are later determined to constitute the constituent
option series for the applicable expiration;
[cir] are for put (call) options with strike prices equal to or
less (greater) than the ``at-the-money'' strike price; and
[cir] have quantities approximating the weighting formula used to
determine the exercise or final settlement value, as applicable, in
accordance with the applicable volatility index methodology.
Current paragraph (a) defines strategy orders as all orders for
participation in the modified opening procedure that are related to
positions in, or a trading strategy involving, expiring volatility
index options or (security) futures. The current rule also says, in
general, the Exchange will consider orders to be strategy orders for
purposes of Rule 6.2, Interpretation and Policy .01 if the orders
possess three characteristics:
The orders are for option series with the expiration that
will be used to calculate the exercise or final settlement value of the
applicable volatility index option or futures contract;
the orders are for option series spanning the full range
of strike prices for the appropriate expiration for option series that
will be used to calculate the exercise or final settlement value of the
applicable volatility index option or futures contract, but not
necessarily every available strike; and
the orders are for put options with strike prices less
than the ``at-the-money'' strike price and for call options with strike
prices greater than the ``at-the-money'' strike price. The orders may
also be for put and call options with ``at-the-money'' strike prices.
The current rule also states whether orders are strategy orders for
purposes of Rule 6.2, Interpretation and Policy .01 depends upon
specific facts and circumstances. Currently, the Exchange may also deem
order types other than those provided above as strategy orders if the
Exchange determines that to be the case based upon the applicable facts
and circumstances.
When the definition of strategy order was adopted, volatility index
derivatives had only just begun trading. The Exchange believed some
flexibility within the rules regarding what constituted a strategy
order was appropriate to permit market participants to submit strategy
orders in a manner consistent with their businesses. Additionally,
flexibility within the rule provided the Exchange with the ability to
gain experience in monitoring trading in these products and evaluating
the use of strategy orders.\11\ However, the Exchange understands this
flexibility has created some confusion among market participants
regarding what orders constitute a strategy order. As a result of this
confusion, the Exchange understands certain market participants may
hesitate to submit orders in the modified opening procedure out of
concern that such orders could be deemed either a new strategy order or
a modification to or cancellation of an existing strategy order. This
perceived risk may lead to reduced liquidity and may increase the time
it takes to open a series at a competitive price.\12\
---------------------------------------------------------------------------
\11\ See note 6.
\12\ See Rule 6.2(d).
---------------------------------------------------------------------------
The proposed definition of strategy order limits strategy orders to
strips of orders in constituent options series submitted by a market
participant that contain the characteristics of orders that would
replicate the exposure of the market participant's expiring volatility
index derivatives. This is consistent with how market participants use
strategy orders, as discussed above, and is also consistent with the
initial purpose of the strategy order cut-off time.\13\ The rule
specifies that a group of orders must contain the five specific
characteristics to be deemed a strategy order. The first characteristic
in the proposed strategy order definition, which requires orders to be
related to the market participant's positions in expiring volatility
index derivatives, is a factor under the current rule for orders to be
deemed a strategy order.\14\ Similarly, under the current rule, if
orders possess the second through fourth characteristics in the
proposed definition of strategy order, the Exchange will generally
consider those orders to be strategy orders for purposes of Rule 6.2,
Interpretation and Policy .01.\15\ The fifth characteristic in the
proposed definition of strategy orders is not listed in the current
rule as a requirement for orders to be deemed strategy orders. However,
currently, the Exchange generally looks for orders to be in quantities
that approximate the weighting formula used in the volatility index
methodology when determining whether orders are strategy orders. In
order for groups of orders in constituent options series to replicate
the vega exposure of related expiring volatility index derivatives, the
orders in constituent options series would need to possess these
quantities.
---------------------------------------------------------------------------
\13\ See Securities Exchange act Release No. 52367 (August 31,
2005), 70 FR 53401 (September 8, 2005) (SR-CBOE-2004-86) (order
approving modified ROS opening procedure).
\14\ See current Rule 6.2, Interpretation and Policy .01(a). The
proposed rule change deletes the concept of being related to a
trading strategy, as that is a broad term, and ultimately, as
described in this rule filing, strategy orders relate specifically
to positions in expiring volatility index derivatives, thus making
the term ``trading strategy'' unnecessary.
\15\ See current Rule 6.2, Interpretation and Policy .01(A)-(C).
The Exchange notes the proposed rule change modifies the
characteristic in current .01(B) to provide that the orders must
approximate the range of series that later are determined to
constitute the constituent option series rather than be for the full
range. The purpose of this change is to account for the fact that,
while many market participants can determine what the full range and
population of strike prices will be, they may not be exact. Bids and
offers of series may change in response to market conditions between
the strategy order cut-off time and the opening of trading, which
may impact which series ultimately constitute the constituent option
series. For example, with respect to VIX, participants may not have
certainty prior to the strategy order cut-off time regarding which
series will have zero-bid prices and thus be excluded from the
settlement calculation. See VIX methodology at https://www.cboe.com/micro/vix/vix-index-rules-and-methodology.pdf. Additionally, this
will ensure that market participants cannot purposefully not enter
an order for one strike within the range to avoid their orders being
subject to the strategy order cut-off time. As the current rule
provides the Exchange with significant flexibility to determine what
constitutes a strategy order, this flexibility is consistent with
the current rules.
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The proposed rule change deletes the provision stating that the
Exchange may also deem order types other than those provided in the
rule as strategy orders if the Exchange determines it to be the cased
based upon the applicable facts and circumstances. Ultimately, based on
the Exchange's experience of monitoring trading in volatility index
derivatives and the modified opening procedure used on exercise
settlement value determination days, orders intending to replicate the
vega of expiring volatility index derivatives (or to liquidate a hedge)
possess the five specified
[[Page 46235]]
characteristics,\16\ and thus orders intended to be strategy orders
would possess the proposed characteristics.\17\ The Exchange believes
the proposed definition provides market participants with more clarity
with respect to what constitutes strategy orders. The Exchange believes
this added clarity may increase liquidity on volatility settlement
dates, as it provides more certainty with respect to which orders they
need to submit prior to the strategy order cut-off time and which
orders they may submit after that time.
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\16\ For example, the VIX methodology describes how a portfolio
of options may provide a constant exposure to the variance of an
asset, which is what strategy orders attempt to do. See https://www.cboe.com/micro/vix/vix-index-rules-and-methodology.pdf.
\17\ As discussed above, the proposed rule retains some
flexibility pursuant to which the Exchange may consider facts and
circumstances to determine whether orders possess the five proposed
criteria for what constitutes a strategy order, and a modification
of a strategy order.
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Non-Strategy Orders: The proposed term ``non-strategy
order'' means any order (including an order in a constituent option
series) a market participant submits for participation in the modified
opening procedure that is not a strategy order (or a change to or
cancellation of a strategy order). Examples of non-strategy orders
include, but are not limited to:
[cir] A buy (sell) order in a constituent options series if an
expected opening information message (``EOI'') \18\ is disseminated no
more than two minutes prior to the time a market participant submitted
the order included a sell (buy) imbalance and the size of the order is
no larger than the size of the imbalance in the EOI, regardless of
whether the market participant previously submitted a strategy order or
has positions in expiring volatility index derivatives; or
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\18\ See Rule 6.2(a)(ii).
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[cir] a Market-Maker bid or offer in a constituent option series,
as set forth in proposed paragraph (e) (current paragraph (c)).
As discussed above, the Exchange understands the entry of strategy
orders may create imbalances in the constituent option series. To
provide market participants with time to enter additional orders and
quotes to offset any such imbalances prior to the opening of these
series, the Exchange established a strategy order cut-off time.\19\
Imbalances may prevent a series from opening, such as if it is a market
order imbalance (as described in Rule 6.2(d)). Prior to the open, the
Exchange disseminates EOIs to market participants indicating, among
other things, imbalance information for series to further encourage
market participants to enter orders to offset any imbalances and
promote a fair and orderly opening.\20\ However, Rule 6.2 currently
does not permit market participants that submitted strategy orders
prior to the cut-off time to submit orders that would address order
imbalances after the strategy order cut-off time in series used to
calculate the exercise settlement value.
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\19\ See Securities Exchange Act Release Nos. 52367 (August 31,
2005), 70 FR 53401 (September 8, 2005) (SR-CBOE-2004-86)
(established initially for rapid opening system procedure, which his
no longer used).
\20\ See Rule 6.2(a)(ii).
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However, if a market participant enters a strategy order prior to
the strategy order cut-off time, the Exchange understands such market
participant may refrain from entering orders to offset imbalances
because of the perceived risk that such an order may be deemed to be a
new strategy order or a change to the existing strategy order, which is
activity the current rule does not permit. This perceived risk may
reduce liquidity at the opening on exercise settlement value
determination days and may increase the risk that some series do not
open because of an imbalance.\21\
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\21\ See Rule 6.2(d).
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In order to promote a fair and orderly opening process, the
Exchange seeks to encourage all market participants to enter orders
following the strategy order cut-off time for the purpose of offsetting
imbalances in constituent option series until the opening of trading.,
[sic] Accordingly, the Exchange proposes to add to the definition of
non-strategy orders a buy (sell) order in a constituent options series
if an EOI disseminated no more than two minutes prior to the time a
market participant submitted the order included a sell (buy) imbalance
and the size of the order is no larger than the size of the imbalance
in the EOI,\22\ regardless of whether the market participant previously
submitted a strategy order or has positions in expiring volatility
derivatives.
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\22\ Currently, EOIs are disseminated every five seconds.
Therefore, for example, if an EOI disseminated at 8:27:00 indicated
a sell order imbalance of 500 contracts, a market participant's
submission of a buy order of 100 contracts at 8:28 would not be a
strategy order or modification of a previously submitted strategy
order. The two-minute time period is intended to provide market
participants with sufficient time to manually enter an order in
response to an EOI message.
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The purpose of permitting market participants to enter orders to
offset order imbalances is not to permit them to modify strategy
orders, but rather to encourage them to respond to EOIs that indicate
an imbalance in a series exists. The Exchange believes explicitly
permitting market participants to offset order imbalances in response
to EOIs, as set forth in the proposed definition of non-strategy
orders, may increase liquidity in series, including in constituent
option series, which would contribute to a fair and orderly opening in
those series. The Exchange disseminates these messages for the purpose
of encouraging submission of orders to address order imbalances.
Therefore, the Exchange does not believe such orders are ``related to''
expiring volatility index derivatives, and thus would not constitute a
strategy order under the current or proposed definition, as discussed
above. The Exchange believes the proposed rule change is consistent
with the definition of strategy order because the proposed rule
explicitly excludes orders submitted for this imbalance offsetting
purpose from falling within the strategy order definition.
The remainder of the proposed definition, including subparagraphs
(1) and (3), is consistent with the current definition of non-strategy
orders in current paragraph (b), and just clarifies examples of non-
strategy orders that exist in the current rule. The proposed definition
also makes nonsubstantive changes and incorporates new defined terms.
Proposed paragraph (b) provides that, on exercise settlement value
determination days, the Exchange uses the opening procedure described
in Rule 6.2, as modified by Interpretation and Policy .01, for
constituent option series. This clarifies that the opening procedure
the Exchange uses for constituent option series on exercise settlement
value determination days is the same as the opening procedure used for
all option series on all other days, except as set forth in
Interpretation and Policy .01. This proposed provision is consistent
with the current introductory paragraph, and makes nonsubstantive
changes and incorporates new defined terms.
Proposed paragraph (c) states market participants must submit
strategy orders, and changes to or cancellations of strategy orders,
prior to the strategy order cut-off time (which the Exchange has
currently set as 8:20 a.m. Chicago time). Market participants may not
change or cancel strategy orders after the strategy order cut-off time,
unless the market participant submits the change or cancellation (1)
after the modified opening procedure is concluded; or (2) to correct a
legitimate error, in which case the market participant submitting the
change or cancellation must prepare and maintain a memorandum setting
forth the
[[Page 46236]]
circumstances that resulted in the change or cancellation and submit a
copy of the memorandum to the Exchange no later than the next business
day in a form and manner prescribed by the Exchange. The Exchange
determines the strategy order cut-off time on a class-by-class basis,
which may be no earlier than 8:00 a.m. Chicago time and no later than
the opening of trading in a series. The Exchange has currently set the
strategy order cut-off time as 8:20 a.m. Chicago time. The Exchange
will announce any changes to the strategy order cut-off time at least
one day prior to implementation. Proposed paragraph (c) is
substantively the same as information in current paragraph (a), and
makes nonsubstantive changes and incorporates defined terms. Proposed
paragraph (c) also excludes the description of what constitutes a
strategy order, which was included in current paragraph (a) and has
been moved to proposed paragraph (a) as a defined term, as discussed
above.
Proposed paragraph (d) states market participants must submit non-
strategy orders prior to the non-strategy order cut-off time. The
Exchange determines the non-strategy order cut-off time on a class-by-
class basis, and it may be no earlier than 8:25 a.m. Chicago time and
no later than the opening of trading in a series. The Exchange has
currently set the non-strategy order cut-off time to be the opening of
trading. The Exchange will announce any changes to the non-strategy
order cut-off time at least one day prior to implementation. Proposed
paragraph (d) is substantively the same as current paragraph (b), and
makes nonsubstantive changes and incorporates defined terms. Proposed
paragraph (d) also excludes the description of what constitutes a non-
strategy order, which is currently included in current paragraph (a)
and has been moved to proposed paragraph (a) as a defined term, as
discussed above.
The proposed rule change makes additional nonsubstantive changes,
including revising the heading for Interpretation and Policy .01 and
updating the paragraph lettering.
The Exchange notes the proposed rule change would not impact a
Trading Permit Holder's requirements to abide by Exchange Rules 4.1
(Just and Equitable Principles of Trade), 4.7 (Manipulation), and 4.18
(Prevention of the Misuse of Material, Nonpublic Information). The
Exchange believes the proposed rule change may contribute to additional
liquidity during the modified HOSS procedure, and thus a fair and
orderly opening on exercise settlement value determination days. A fair
and orderly opening in these series benefits all market participants
who trade in the volatility index derivatives and the constituent
series. The Exchange will continue to conduct surveillance procedures
to monitor trading in the constituent option series, including but not
limited to compliance with the strategy order cut-off time (in
accordance with the proposed rule change).
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\23\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \24\ requirements 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. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \25\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\23\ 15 U.S.C. 78f(b).
\24\ 15 U.S.C. 78f(b)(5).
\25\ Id.
---------------------------------------------------------------------------
In particular, the proposed definition of a strategy order provides
market participants with additional clarity regarding what orders
constitute strategy orders, and the Exchange believes this added
clarity benefits investors and promotes just and equitable principles
of trades. The proposed rule change with respect to the definition of
strategy orders is consistent with the current definition of strategy
orders and the Exchange's view of what orders constitute a strategy
order, as well as the legitimate purposes of strategy orders, because
orders submitted for the purposes of constituting a strategy order
generally possess the five specified characteristics (four of which are
in current Rule 6.2, Interpretation and Policy .01(a)).
Additionally, the proposed definition of non-strategy order
provides market participants with additional clarity regarding orders
that do not constitute strategy orders (and thus that may be submitted
after the strategy-order cut-off time and prior to the non-strategy
order cut-off time). The Exchange believes explicitly permitting market
participants to enter orders to offset order imbalances in response to
EOIs that indicate an imbalance in a series exists will encourage entry
of orders when there is an imbalance in a series, even if market
participants previously submitted strategy orders. This proposed rule
change allows the maximum number of participants to address order
imbalances during the opening process for the constituent option series
while executing their investment and hedging strategies. The Exchange
believes these changes may increase liquidity in series, including in
constituent option series, to offset imbalances. This result would
contribute to a fair and orderly opening process and would benefit all
market participants who trade in the volatility index derivatives or
the constituent option series. The Exchange also believes these changes
are consistent with the original purpose of the strategy order cut-off
time. The Exchange believes this additional clarity with respect to
what is and is not a strategy order will provide market participants
with more certainty with respect to which orders constitute strategy
orders, and thus which orders need to be submitted prior to the
strategy order cut-off time. It also clarifies for market participants
the activity in which they may engage after the strategy order cut-off
time. The Exchange believes the proposed reorganization of
Interpretation and Policy .01, including defining all relevant terms at
the beginning of Interpretation and Policy .01, also benefits market
participants by providing additional clarity with respect to all
defined terms for the modified HOSS procedure.
The Exchange notes the proposed rule change would not impact a
Trading Permit Holder's requirements to abide by Exchange Rules 4.1
(Just and Equitable Principles of Trade), 4.7 (Manipulation), and 4.18
(Prevention of the Misuse of Material, Nonpublic Information). The
Exchange believes the proposed rule change may contribute to additional
liquidity during the modified HOSS procedure, and thus to a fair and
orderly opening in constituent option series on exercise settlement
value determination days. A fair and orderly opening in these series
benefits all market participants who trade in the volatility index
derivatives and the
[[Page 46237]]
constituent series. The Exchange will continue to conduct surveillance
procedures to monitor trading in the constituent option series,
including but not limited to compliance with the strategy order cut-off
time (in accordance with the proposed rule change).
B. Self-Regulatory Organization's Statement on Burden on Competition
Cboe Options does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed rule change
applies in the same manner to all market participants who submit orders
to the Exchange in constituent option series on exercise settlement
value determination days. The proposed rule change, and the proposed
definition of strategy order in particular, provides market
participants with clarity for market participants with respect to what
constitutes a strategy order and is generally consistent with the
current rules and the Exchange's view of what orders constitute a
strategy order. Additionally, the proposed definition of non-strategy
order, particularly the explicit permission to enter orders in response
to EOIs that indicate an imbalance in a series, is consistent with the
original intent of the strategy order cut-off time.\26\ The proposed
rule change has no impact on intermarket competition, as it applies to
orders submitted for participation in the Exchange's modified opening
procedure used to calculate settlement values for expiring volatility
index derivatives. The Exchange believes the proposed rule change
provides market participants with more certainty with respect to which
orders they need to submit prior to the strategy order cut-off time and
which orders they may be submit after that time, which may increase
liquidity in constituent option series on volatility settlement dates.
---------------------------------------------------------------------------
\26\ See supra note 8.
---------------------------------------------------------------------------
Cboe Options believes that the proposed rule change will relieve
any burden on, or otherwise promote, competition. The Exchange believes
the proposed rule change may contribute to liquidity in constituent
option series during the modified HOSS procedure, and thus a fair and
orderly opening on exercise settlement value determination days. A fair
and orderly opening in these series benefits all market participants
who trade in the volatility index derivatives and the constituent
option series.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be 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-CBOE-2018-062 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2018-062. 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-CBOE-2018-062 and should be submitted on
or before October 3, 2018.
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\27\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-19773 Filed 9-11-18; 8:45 am]
BILLING CODE 8011-01-P
