Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Permit the Listing and Trading of P.M.-Settled Series on Certain Broad-Based Index Options on a Pilot Basis, 54635-54641 [2018-23624]
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Federal Register / Vol. 83, No. 210 / Tuesday, October 30, 2018 / Notices
with those of the Affiliated Exchanges
and to make the Exchange’s Rulebook
easier to read and more accessible to its
Members. The Exchange believes that
the adoption and harmonization of the
arbitration rules and cross-reference
updates are of a non-substantive nature.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed changes do not impose a
burden on competition because, as
previously stated, they are (i) of a nonsubstantive nature, (ii) intended to
harmonize the structure of the
Exchange’s rules with those of its
Affiliated Exchanges, and (iii) intended
to organize the Rulebook in a way that
it will ease the Members’ navigation and
reading of the rules across the Affiliated
Exchanges.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
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Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 10 and
subparagraph (f)(6) of Rule 19b–4
thereunder.11
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
10 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
11 17
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to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
54635
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–23623 Filed 10–29–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
[Release No. 34–84480; File No. SR–
CboeBZX–2018–066]
• 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–
MRX–2018–32 on the subject line.
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing of
a Proposed Rule Change To Permit the
Listing and Trading of P.M.-Settled
Series on Certain Broad-Based Index
Options on a Pilot Basis
Paper Comments
October 24, 2018.
• 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–MRX–2018–32. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml).
Copies of the submission, all
subsequent amendments, all written
statements with respect to the proposed
rule change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. 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–MRX–
2018–32 and should be submitted on or
before November 20, 2018.
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Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on October
11, 2018, Cboe BZX Exchange, Inc. filed
with the Securities and Exchange
Commission (the ‘‘Commission’’ or
‘‘SEC’’) 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 BZX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BZX Options’’)
proposes to permit the listing and
trading of P.M.-settled series on certain
broad-based index options on a pilot
basis.
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/CBOELegal
RegulatoryHome.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
12 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 83, No. 210 / Tuesday, October 30, 2018 / Notices
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The proposed rule change permits the
listing and trading of P.M.-settled series
on certain broad-based index options on
a pilot basis.3 First, the proposed rule
change would permit the listing and
trading of XSP options with thirdFriday-of-the-month expiration dates,
whose exercise settlement value will be
based on the closing index value on the
expiration day (‘‘P.M.-settled’’) for an
initial period of twelve months (the
‘‘XSPPM Pilot Program’’) from the date
of approval of this proposed rule
change. Second, the proposed rule
change would permit the listing and
trading of P.M.-settled options on broadbased indexes with weekly expirations
(‘‘Weeklys’’) and end-of-month
expirations (‘‘EOMs’’) for an initial
period of 12 months (the ‘‘Nonstandard
Expirations Pilot Program’’) from the
date of approval of this proposed rule
change.
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XSPPM Pilot Program
Proposed Rule 29.11(a)(6) permits the
listing and trading, in addition to A.M.settled XSP options, of P.M.-settled XSP
options with third-Friday-of-the-month
expiration dates on a pilot basis for an
initial period of 12 months from the
date of approval of this proposed rule
change. XSP options are A.M.-settled
pursuant to the generic listing criteria in
Rule 29.11(a)(5). The Exchange believes
permitting the trading of XSP options on
a P.M.-settled basis will encourage
greater trading in XSP options.
Other than settlement and closing
time on the last trading day (as
discussed below), contract terms for
P.M.-settled XSP options will be the
same as the A.M.-settled XSP options.
The proposed contract would use a $100
multiplier. The minimum trading
increments, strike price intervals, and
expirations would be the same as the
A.M.-settled XSP option series. P.M.settled XSP options would have
European-style exercise. The Exchange
will also have flexibility to open for
3 The Exchange is authorized to list for trading
options that overlie the Mini-SPX Index (‘‘XSP’’)
and the Russell 2000 Index (‘‘RUT’’). See Rule
29.11(a).
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trading additional series in response to
customer demand.
The proposed rule change amends
Rule 29.10(a) to state that, on their last
trading day, transactions in P.M.-settled
XSP options may be effected on the
Exchange between the hours of 9:30
a.m. and 4:00 p.m. Eastern time (as
opposed to the normal trading hours for
non-expiring P.M.-settled XSP options,
which are from 9:30 a.m. to 4:15 p.m.
Eastern time). XSP options are typically
priced in the market based on
corresponding futures values. The
primary listing markets for the
component securities that comprise the
S&P 500 Index close trading in those
securities at 4:00 p.m. The primary
listing exchanges for the component
securities disseminate closing prices of
the component securities, which are
used to calculate the exercise settlement
value of the S&P 500 Index. The
Exchange believes that, under normal
trading circumstances, the primary
listing markets have sufficient
bandwidth to prevent any data queuing
that would cause any trades that are
executed prior to the closing time from
being reported after 4:00 p.m. Despite
the fact that the exercise settlement
value will be fixed at or soon after 4:00
p.m., if the Exchange did not close
trading in expiring P.M.-settled XSP
options at 4:00 p.m. on their last trading
day, trading in expiring P.M.-settled
XSP options would continue for an
additional fifteen minutes until 4:15
p.m. and would not be able to be priced
on corresponding futures values, but
rather the known cash value. At the
same time, the prices of non-expiring
P.M.-settled XSP option series would
continue to move and be priced in
response to changes in corresponding
futures prices.
A potential pricing divergence could
occur between 4:00 p.m. and 4:15 p.m.
on the final trading day in expiring
P.M.-settled XSP options (e.g. switch
from pricing off of futures to cash).
Further, the switch from pricing off of
futures to cash can be a difficult and
risky switchover for liquidity providers.
As a result, without closing expiring
contracts at 4:00 p.m., it is foreseeable
that Market-Makers could react by
widening spreads in order to
compensate for the additional risk.
Therefore, the Exchange believes that, in
order to mitigate potential investor
confusion and the potential for
increased costs to investors, it is
appropriate to cease trading in the
expiring P.M.-settled XSP contracts at
4:00 p.m. The Exchange does not
believe the proposed change will impact
volatility on the underlying cash market
at the close on third Fridays. Further,
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other options exchanges close trading in
certain options on the last trading day
for certain classes.4
If the Exchange were to propose an
extension of the XSPPM Pilot Program
or should the Exchange propose to make
the XSPPM Pilot Program permanent,
the Exchange would submit a filing
proposing such amendments to the
XSPPM Pilot Program. Further, any
positions established under the XSPPM
Pilot Program would not be impacted by
the expiration of the XSPPM Pilot
Program. For example, if the Exchange
lists a P.M.-settled XSP option that
expires after the XSPPM Pilot Program
expires (and is not extended), then those
positions would continue to exist. If the
pilot were not extended, then the
positions could continue to exist.
However, any further trading in those
series would be restricted to
transactions where at least one side of
the trade is a closing transaction.
As part of the XSPPM Pilot Program,
the Exchange will submit a pilot report
to the Commission at least two months
prior to the expiration date of the pilot.
This annual report will contain an
analysis of volume, open interest, and
trading patterns. The analysis would
examine trading in the proposed option
product as well as trading in the
securities that comprise the S&P 500
Index. In addition, for series that exceed
certain minimum open interest
parameters, the annual report will
provide analysis of index price volatility
and, if needed, share trading activity.
The annual report will contain the
following volume and open interest
data:
(1) Monthly volume aggregated for all
trades;
(2) monthly volume aggregated by
expiration date;
(3) monthly volume for each
individual series;
(4) month-end open interest
aggregated for all series;
(5) month-end open interest
aggregated by expiration date; and
(6) month-end open interest for each
individual series.
The annual report will also contain
the information noted above for
expiration Friday A.M.-settled XSP
option series, if applicable, for the
period covered in the annual report. In
addition to the annual report, the
Exchange will provide the Commission
with interim reports of the information
listed in (1) through (6) above.
4 See Cboe Options Rule 24.6, Interpretations and
Policies .01 (options with Quarterly Index
Expirations), .03 (Cboe S&P 500 A.M./P.M. Basis
options), .04 (P.M.-settled SPX options with third
Friday-of-the-month expiration and P.M.-settled
XSP options), and .05 (MSCI EAFE Index options).
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In the annual report, the annual report
would contain the following analysis of
trading patterns in expiration Friday,
P.M.-settled XSP option series in the
XSPPM Pilot Program:
(1) A time series analysis of open
interest; and
(2) an analysis of the distribution of
trade sizes.
Also, for series that exceed certain
minimum parameters, the annual report
will also contain the following analysis
related to index price changes and, if
needed, underlying share trading
volume at the close on expiration
Fridays:
(1) A comparison of index price
changes at the close of trading on a
given expiration Friday with
comparable price changes from a control
sample. The data will include a
calculation of percentage price changes
for various time intervals and compare
that information to the respective
control sample. Raw percentage price
change data as well as percentage price
change data normalized for prevailing
market volatility, as measured by an
appropriate index as agreed by the
Commission and the Exchange, would
be provided; and
(2) a calculation of share volume for
a sample set of the component securities
representing an upper limit on share
trading that could be attributable to
expiring in-the-money series. The data,
if needed, will include a comparison of
the calculated share volume for
securities in the sample set to the
average daily trading volumes of those
securities over a sample period.
The minimum open interest
parameters, control sample, time
intervals, method for randomly selecting
the component securities, and sample
periods would be determined by the
Exchange and the Commission.
Additionally, the Exchange will
provide the Commission with any
additional data or analyses the
Commission requests because it deems
such data or analyses necessary to
determine whether the XSPPM Pilot
Program is consistent with the Exchange
Act. The Exchange will make public all
data and analyses it submits to the
Commission under the XSPPM Pilot
Program.
Other exchanges currently have pilots
that permit P.M.-settled index options.5
Nonstandard Expirations Pilot Program
The proposed rule change permits the
listing and trading, on a pilot basis, of
P.M.-settled options on broad-based
indexes with nonstandard expiration
5 See
Cboe Options Rule 24.9, Interpretation and
Policy .14 and Phlx Rule 1101A, Commentary .05.
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dates for an initial period of 12 months
from the date of approval of this
proposed rule change. The Nonstandard
Expirations Pilot Program will permit
both Weeklys and EOMs as discussed
below. Contract terms for the Weekly
and EOM expirations will be similar to
those of the A.M.-settled broad-based
index options, except that the Weekly
and EOM expirations will be P.M.settled.
Proposed Rule 29.11(j)(1) permits the
Exchange to open for trading Weeklys
on any broad-based index eligible for
standard options trading to expire on
any Monday, Wednesday, or Friday
(other than the third Friday-of-themonth or days that coincide with an
EOM). Weeklys will be subject to all
provisions of Rule 29.11 and will be
treated the same as options on the same
underlying index that expire on the
third Friday of the expiration month.
However, Weeklys will be P.M.-settled,
and new Weekly series may be added
up to and including on the expiration
date for an expiring Weekly.
The maximum number of expirations
that may be listed for each Weekly (i.e.,
a Monday expiration, a Wednesday
expiration, or Friday expiration, as
applicable) in a given class will be the
same as the maximum number of
expirations permitted in Rule
29.11(a)(3) for standard options on the
same broad-based index.6 Weeklys
would not need to be for consecutive
Monday, Wednesday, or Friday
expirations, as applicable. However, the
expiration date of a non-consecutive
expiration would not be permitted
beyond what would be considered the
last expiration date if the maximum
number of expirations were listed
consecutively. Weeklys that are first
listed in a given class could expire up
to four weeks from the actual listing
date. If the last trading day of a month
is a Monday, Wednesday, or Friday and
the Exchange lists EOMs and Weeklys,
as applicable, in a given class, the
Exchange will list an EOM instead of a
Weekly in the given class. Other
expirations in the same class are not
counted as part of the maximum
number of Weeklys for a broad-based
index class. If the Exchange is not open
for business on a respective Monday,
the normally Monday expiring Weeklys
would expire on the following business
day. If the Exchange is not open for
business on a respective Wednesday or
Friday, the normally Wednesday or
6 Pursuant to Rule 29.11(a)(3), the Exchange may
list up to six expiration months at any one time.
Therefore, pursuant to the proposed rule change,
the Exchange may list a maximum of six Weekly
expirations under the Nonstandard Expirations
Pilot Program.
PO 00000
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54637
Friday expiring Weekly will expire on
the previous business day.
Proposed Rule 29.11(a)(2) [sic]
permits the Exchange to open for
trading EOMs on any broad-based index
eligible for standard options trading to
expire on the last trading day of the
month. EOMs will be subject to all
provisions of Rule 29.11 and treated the
same as options on the same underlying
index that expire on the third Friday of
the expiration month. However, EOMs
will be P.M.-settled, and new series of
EOMs may be added up to and
including on the expiration date for an
expiring EOM.
The maximum number of expirations
that may be listed for EOMs in a given
class is the same as the maximum
number of expirations permitted in Rule
29.11(a)(3) for standard options on the
same broad-based index.7 EOMs need
not be for consecutive end-of-month
expirations. However, the expiration
date of a non-consecutive expiration
may not be beyond what would be
considered the last expiration date if the
maximum number of expirations were
listed consecutively. EOMs that are first
listed in a given class may expire up to
four weeks from the actual listing date.
Other expirations in the same class are
not counted as part of the maximum
number of EOMs for a broad-based
index class.
The proposed rule change amends
Rule 29.11(c)(5)(C) to provide that the
lowest strike interval for series of XSP
options listed under the Nonstandard
Expirations Pilot Program will be $0.50.
With respect to XSP, this is consistent
with the minimum strike interval for
XSP options listed under the Short
Term Series Program.8 Additionally,
this is consistent with the minimum
strike interval for options on the
Standard & Poor’s Depository Receipts
Trust (SPY), which is an ETF that like
XSP tracks the performance of 1/10th
the value of the S&P 500 Index, with
weekly expirations.9
Weeklys and EOMs will be subject to
the same rules that currently govern the
trading of standard monthly broadbased index options, including sales
practice rules, margin requirements, and
floor trading procedures. Contract terms
for Weeklys and EOMs will be the same
as those for standard monthly broadbased index options. Since Weeklys and
EOMs will be new types of series, and
not a new class, the Exchange proposes
that Weeklys and EOMs will be
aggregated for any applicable reporting
7 Id.
8 See
9 See
E:\FR\FM\30OCN1.SGM
Rule 29.11(c)(5)(C).
Rule 19.6, Interpretation and Policy .05(f).
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and other requirements.10 Pursuant to
new proposed Rule 29.11(j)(4),
transactions in expiring Weeklys and
EOMs may be effected on the Exchange
between the hours of 9:30 a.m. and 4:00
p.m. (Eastern time).
As stated above, this proposed rule
change establishes a Nonstandard
Expirations Pilot Program for broadbased index options on a pilot basis, for
an initial period of 12 months from the
date of approval of this proposed rule
change. If the Exchange were to propose
an extension of the Nonstandard
Expirations Pilot Program or should the
Exchange propose to make it permanent,
the Exchange would submit a filing
proposing such amendments. Further,
any positions established under the
Nonstandard Expirations Pilot Program
would not be impacted by the
expiration of the pilot. For example, if
the Exchange lists a Weekly or EOM that
expires after the Nonstandard
Expirations Pilot Program expires (and
is not extended), then those positions
would continue to exist. However, any
further trading in those series would be
restricted to transactions where at least
one side of the trade is a closing
transaction.
As part of the Nonstandard
Expirations Pilot Program, the Exchange
will submit a pilot report to the
Commission at least two months prior to
the expiration date of the pilot (the
‘‘annual report’’). The annual report will
contain an analysis of volume, open
interest, and trading patterns. In
addition, for series that exceed certain
minimum open interest parameters, the
annual report will provide analysis of
the index price volatility, and, if
needed, share trading activity.
For all Weekly and EOM series, the
annual report will contain the following
volume and open interest data for each
broad-based index overlying Weekly
and EOM options:
(1) Monthly volume aggregated for all
Weekly and EOM series;
10 Rule 29.5(a) requires Options Members to
comply with the applicable rules of Cboe Options
with respect to position limits for broad-based
index options for options traded on Cboe Options.
Cboe Options Rule 24.4, Interpretation and Policy
.03 sets forth the reporting requirements for certain
market indexes that do not have position limits,
including XSP and RUT, and would apply to XSP
and RUT options traded on the Exchange pursuant
to Rule 29.5(a); see also Cboe Options Rule 24.4(b),
which provides that Weeklys and EOMs will be
aggregated with option contracts on the same broadbased index and will be subject to the overall
position limit, and would apply to Weeklys/EOMs
traded on the Exchange pursuant to Rule 29.5(a).
The Exchange notes that the proposed aggregation
is consistent with the aggregation requirements or
other types of option series (e.g., quarterly expiring
options) that may be listed on the Exchange and
that do not expire on the customary ‘‘third Friday’’
(see Cboe Options Rule 24.4(e)).
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(2) Volume in Weekly and EOM series
aggregated by expiration date;
(3) Month-end open interest
aggregated for all Weekly and EOM
series;
(4) Month-end open interest for EOM
series aggregated by expiration date and
open interest for Weekly series
aggregated by expiration date;
(5) Ratio of monthly aggregate volume
in Weekly and EOM series to total
monthly class volume; and
(6) Ratio of month-end open interest
in EOM series to total month-end class
open interest and ratio of open interest
in each Weekly series to total class open
interest.
In addition, the annual report will
contain the information noted above for
standard expiration Friday, A.M.-settled
series, if applicable, for the period
covered in the annual report as well as
for the six-month period prior to the
initiation of the pilot.
Upon request by the SEC, the
Exchange will provide a data file
containing:
(1) Weekly and EOM option volume
data aggregated by series, and
(2) Weekly open interest for each
expiring series and EOM month-end
open interest for expiring series.
In the annual report, the Exchange
also proposes to identify Weekly and
EOM trading patterns by undertaking a
time series analysis of open interest in
Weekly and EOM series aggregated by
expiration date compared to open
interest in near-term standard expiration
Friday A.M.-settled series in order to
determine whether users are shifting
positions from standard series to
Weekly and EOM series. In addition, to
the extent that data on other weekly or
monthly P.M.-settled products from
other exchanges is publicly available,
the report will also compare open
interest with these options in order to
determine whether users are shifting
positions from other weekly or monthly
P.M.-settled products to the Weekly and
EOM series. Declining open interest in
standard series or the weekly or
monthly P.M.-settled products of other
exchanges accompanied by rising open
interest in Weekly and EOM series
would suggest that users are shifting
positions.
For each Weekly and EOM expiration
that has open interest that exceeds
certain minimum thresholds, the annual
report will contain the following
analysis related to index price changes
and, if needed, underlying share trading
volume at the close on expiration dates:
(1) A comparison of index price
changes at the close of trading on a
given expiration date with comparable
price changes from a control sample.
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Sfmt 4703
The data will include a calculation of
percentage price changes for various
time intervals and compare that
information to the respective control
sample. Raw percentage price change
data as well as percentage price change
data normalized for prevailing market
volatility, as measured by an
appropriate index agreed to by the
Commission and the Exchange, will be
provided; and
(2) If needed, a calculation of share
volume for a sample set of the
component securities representing an
upper limit on share trading that could
be attributable to expiring in-the-money
Weekly and EOM series. The data, if
needed, will include a comparison of
the calculated share volume for
securities in the sample set to the
average daily trading volumes of those
securities over a sample period.
The minimum open interest
parameters, control sample, time
intervals, method for selecting the
component securities, and sample
periods will be determined by the
Exchange and the Commission.
Additionally, the Exchange will
provide the Commission with any
additional data or analyses the
Commission requests because it deems
such data or analyses necessary to
determine whether the Nonstandard
Expirations Pilot Program is consistent
with the Exchange Act. The Exchange
will make public all data and analyses
it submits to the Commission under the
Nonstandard Expirations Pilot Program.
Other exchanges currently have pilots
that have weekly and end-of-month
expirations.11
Additional Information
Precedent exists for P.M.-settled
broad-based index options, as other
options exchanges list P.M.-settled
broad-based index options.12 The
Exchange does not believe that any
market disruptions will be encountered
with the introduction of listing P.M.settled options on the Exchange. The
Exchange will monitor for any such
disruptions or the development of any
factors that would cause such
disruptions.
The Exchange notes that P.M.-settled
options predominate in the over-thecounter (‘‘OTC’’) market, and the
Exchange is not aware of any adverse
effects in the stock market attributable
to the P.M.-settlement feature. The
11 See Cboe Options Rule 24.9(e); and Phlx Rule
1101A(b)(vii).
12 See, e.g., Cboe Options Rule 24.9(a)(4) (OEX not
listed as A.M.-settled) and Interpretation and Policy
.14 (permits listing of P.M.-settled SPX and XSP
options); and PHLX Rule 1101A, Commentary .05
(permits listing of P.M.-settled NDX options).
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Exchange is merely proposing to offer a
P.M.-settled product in an exchange
environment that offers the benefit of
added transparency, price discovery,
and stability. In response to any
potential concerns that disruptive
trading conduct could occur as a result
of the concurrent listing and trading of
two index option products based on the
same index but for which different
settlement methodologies exist (i.e., one
is A.M.-settled and one is P.M.-settled),
the Exchange notes that Cboe Options
lists and trades both A.M.-settled and
P.M.-settled SPX options, and Phlx lists
and trades both A.M.-settled and P.M.settled NDX options. The Exchange is
not aware of any market disruptions
occurring as a result of these exchanges
offering both products.
The adoption of P.M.-settled options
on an exchange that lists A.M.-settled
options in the same class would provide
greater spread opportunities. This
manner of trading in different products
allows a market participant to take
advantage of the different expiration
times, providing expanded trading
opportunities. In the options market
currently, market participants regularly
trade similar or related products in
conjunction with each other, which
contributes to overall market liquidity.
The Exchange represents it has an
adequate surveillance program in place
for index options. The Exchange is a
member of the Intermarket Surveillance
Group (‘‘ISG’’), which is comprised of
an international group of exchanges,
market centers, and market regulators.
The purpose of ISG is to provide a
framework for the sharing of
information and the coordination of
regulatory efforts among exchanges
trading securities and related products
to address potential intermarket
manipulations and trading abuses. ISG
plays a crucial role in information
sharing among markets that trade
securities, options on securities,
security futures products, and futures
and options on broad-based security
indexes. A list of identifying current ISG
members is available at https://
www.isgportal.org/isgPortal/public/
members.htm.
The Exchange has analyzed its
capacity and represents that it believes
the Exchange and OPRA have the
necessary systems capacity to handle
the additional traffic associated with the
listing of P.M.-settled XSP and Weekly/
EOM option series up to the proposed
number of possible expirations and
strike prices. The Exchange believes any
additional traffic that would be
generated from the introduction of P.M.settled XSP and Weekly/EOM options
series will be manageable. The
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17:34 Oct 29, 2018
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Exchange believes its Members will not
have a capacity issue as a result of this
proposed rule change. The Exchange
also represents that it does not believe
this expansion will cause fragmentation
of liquidity. The Exchange will monitor
the trading volume associated with the
additional options series listed as a
result of this proposed rule change and
the effect (if any) of these additional
series on market fragmentation and on
the capacity of the Exchange’s
automated systems.
P.M.-settled options would be subject
to all provisions of Rule 29.11. P.M.settled options would be subject to the
same rules that govern the trading of
A.M.-settled options overlying the same
indexes, including sales practice rules,
margin requirements, and floor trading
procedures. P.M.-settled options will be
subject to the margin requirements set
forth in Chapter 28 and the position
limits set forth in Rule 29.5. Chapter 28
imposes the margin requirements of
either Cboe Options or the New York
Stock Exchange on Exchange Options
Members. Similarly, Rule 29.5 imposes
position (and exercise) limits for broadbased index options of Cboe Options on
Exchange Options Members. Since P.M.settled options will be a new type of
series, and not a new class, the
Exchange proposes that the P.M.-settled
options will be aggregated for any
applicable reporting and other
requirements.13 Currently, there are no
position limits on RUT and XSP
options.14 Therefore, there will be no
position limits on P.M.-settled RUT and
XSP options. P.M.-settled XSP options
and Weekly/EOM broad-based index
options are currently authorized for
listing on Cboe Options,15 and thus the
same margin requirements and position
and exercise limits that apply to these
13 See Rule 29.5(a), which requires Options
Members to comply with the applicable rules of
Cboe Options with respect to position limits for
broad-based index options for options traded on
Cboe Options. Cboe Options Rule 24.4(b), which
applies to index options traded on the Exchange
pursuant to Rule 29.5(a), provides that Nonstandard
Expirations will be aggregated with option contracts
on the same broad-based index and subject to the
overall position limit. Additionally, Cboe Options
Rule 24.4(d), which applies to index options traded
on the Exchange pursuant to Rule 29.5(a), positions
in reduced-value index options will be aggregated
with positions in full-value indices. The Exchange
notes that the proposed aggregation is consistent
with the aggregation requirements for other types of
option series (e.g. quarterly expiring options) that
are listed on the Exchange and that do not expire
on the customary ‘‘third Friday.’’ See Cboe Options
Rule 24.4 (which applies to the Exchange pursuant
to Rule 29.5(a)).
14 See Cboe Options Rule 24.4(a) (which applies
to the Exchange pursuant to Rule 29.5(a)).
15 Similarly, pursuant to Cboe Options Chapter
12, Cboe Options Trading Permit Holders may
request to have New York Stock Exchange margin
requirements apply to their trading.
PO 00000
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54639
products as listed and traded on Cboe
Options will apply to these products
when listed and traded on the
Exchange. The proposed rule change
will also result in similar regulatory
treatment for similar option products.
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.16 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 17 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.
The Exchange believes the proposed
rule change will attract order flow to the
Exchange, increase the variety of listed
options to investors, and provide a
valuable hedge tool to investors. The
Exchange believes the proposed rule
change will also remove impediments to
and perfect the mechanism of a free and
open market, and in general protect
investors by expanding the ability of
investors to hedge risks against market
movements stemming from economic
releases or market events that occur
during the month and at the end of the
month. Accordingly, the Exchange
believes that P.M.-settled options will
create greater trading and hedging
opportunities and flexibility, and
provide customers with the ability to
more closely tailor their investment
objectives.
The Commission has previously
stated that when cash-settled index
options were first introduced in the
1980s, they generally utilized closingprice settlement procedures (i.e., P.M.
settlement). The Commission stated it
became concerned about the impact of
P.M. settlement on cash-settled index
options on the markets for the
underlying stocks at the close on
expiration Fridays, especially during the
quarterly expirations of the third Friday
of March, June, September, and
December when options, index futures,
16 15
17 15
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U.S.C. 78f(b)(5).
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and options on index futures all expire
simultaneously. The Commission
expressed concerns that P.M. settlement
was believed to have contributed to
above-average volume and added
market volatility on those days, which
sometimes led to sharp price
movements during the last hour of
trading, as a consequence of which the
close of trading on the quarterly
expiration Friday became known as the
‘‘triple witching hour.’’ The
Commission observed that besides
contributing to investor anxiety,
heightened volatility during the
expiration periods created the
opportunity for manipulation and other
abusive trading practices in anticipation
of the liquidity constraints.18
However, the Exchange believes that
the above concerns that have led to the
transition to A.M. settlement for index
derivatives have been largely mitigated.
It believes that expiration pressure in
the underlying cash markets at the close
has been greatly reduced with the
advent of multiple primary listing and
unlisted trading privilege markets, and
that trading is now widely dispersed
among many market centers.
Additionally, the Exchange notes that
opening procedures in the 1990s were
deemed acceptable to mitigate one-sided
order flow driven by index option
expiration and that the New York Stock
Exchange and Nasdaq Stock Market,
LLC each use an automated closing
cross procedures and has a closing order
type that facilitates orderly closings.
These closing procedures on the
exchanges on which the components of
the S&P 500 Index trade are wellequipped to mitigate imbalance pressure
at the close. In addition, after-hours
trading now provides market
participants with an alternative to help
offset market-on-close imbalances.19
Other exchanges currently have pilots
that permit P.M.-settled index options 20
and Weekly/EOM options.21
The proposed rule change to permit
transactions on the Exchange in P.M.settled XSP and Weekly/EOM options
on their last trading day between the
hours of 9:30 a.m. and 4:00 p.m. Eastern
time (as opposed to the normal trading
hours for non-expiring P.M.-settled XSP
and Weekly/EOM options, which are
18 See Securities Exchange Act Release No. 65256
(September 2, 2011), 76 FR 55569 (September 9,
2011) (SR–C2–2011–008) (order approving listing of
SPXPM options on C2); see also Securities
Exchange Act Release No. 81293 (August 2, 2017),
82 FR 151 (August 8, 2017) (SR–Phlx–2017–04) (or
approving listing of NDXPM options on Phlx).
19 See id.
20 See Cboe Options Rule 24.9, Interpretation and
Policy .14; and Phlx Rule 1101A, Commentary .05.
21 See Cboe Options Rule 24.9(e); and Phlx Rule
1101A(b)(vii).
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Jkt 247001
from 9:30 a.m. to 4:15 p.m. Eastern time)
will prevent potential pricing
divergence that could occur between
4:00 p.m. and 4:15 p.m. on the final
trading day in expiring P.M.-settled XSP
options. Without closing expiring
contracts at 4:00 p.m., it is foreseeable
that Market-Makers would react by
widening spreads in order to
compensate for the additional risk.
Therefore, the Exchange believes that, in
order to mitigate potential investor
confusion and the potential for
increased costs to investors, it is
appropriate to cease trading in the
expiring P.M.-settled XSP and Weekly/
EOM contracts at 4:00 p.m. The
Exchange does not believe the proposed
change will impact volatility on the
underlying cash market at the close on
third Fridays. Further, the other options
exchanges close trading in certain
options on the last trading day for
certain classes.22
The Exchange has analyzed its
capacity and represents that it believes
the Exchange and OPRA have the
necessary systems capacity to handle
the additional traffic associated with the
listing of P.M.-settled options. The
Exchange believes any additional traffic
that may be generated from the
introduction of P.M.-settled options will
be manageable. The Exchange
represents that it has in place adequate
surveillance procedures to monitor
trading in these options thereby helping
to ensure the maintenance of a fair and
orderly market.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. P.M.-settled
options would be available for trading
on the Exchange to all market
participants. The Exchange believes the
proposed rule change will increase the
variety of listed options to investors,
and provide valuable hedge tools to
investors. The listing of P.M.-settled
options will enhance competition by
providing investors with an additional
investment vehicle, through which
investors can gain and hedge exposure
to the stocks that compose the
applicable broad-based indexes.
Additionally, markets participants are
welcome to become Members and trade
at the Exchange if they determine this
22 See Cboe Options Rule 24.6, Interpretations
and Policies .01 (options with Quarterly Index
Expirations), .03 (Cboe S&P 500 AM/PM Basis
options), .04 (P.M.-settled SPX options with third
Friday-of-the-month expiration and P.M.-settled
XSP options), and .05 (MSCI EAFE Index options).
PO 00000
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Fmt 4703
Sfmt 4703
proposed rule change has made the
Exchange more attractive or favorable.
Further, this product could offer a
competitive alternative to other existing
investment products that seek to allow
Members to gain broad market exposure.
Finally, all options exchanges are free to
compete by listing and trading index
options that are P.M.-settled. Other
exchanges currently have pilots that
permit P.M.-settled index options 23 or
Weeklys/EOMs.24
The proposed rule change to permit
transactions on the Exchange in P.M.settled XSP and Weekly/EOM options
on their last trading day between the
hours of 9:30 a.m. and 4:00 p.m. Eastern
time (as opposed to the normal trading
hours for non-expiring P.M.-settled XSP
and Weekly/EOM options, which are
from 9:30 a.m. to 4:15 p.m. Eastern time)
will prevent potential pricing
divergence that could occur between
4:00 p.m. and 4:15 p.m. on the final
trading day in expiring P.M.-settled XSP
and Weekly/EOM options. Without
closing expiring contracts at 4:00 p.m.,
it is foreseeable that Market-Makers
would react by widening spreads in
order to compensate for the additional
risk. Therefore, the Exchange believes
that, in order to mitigate potential
investor confusion and the potential for
increased costs to investors, it is
appropriate to cease trading in the
expiring P.M.-settled XSP and Weekly/
EOM contracts at 4:00 p.m. The
Exchange does not believe the proposed
change will impact volatility on the
underlying cash market at the close on
third Fridays. Further, the other options
exchanges close trading in certain
options on the last trading day for
certain classes.25
The Exchange believes that the
proposed rule change will relieve any
burden on, or otherwise promote,
competition, as the rules are
substantially the same as those of other
options exchanges, as noted above.
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.
23 See Cboe Options Rule 24.9, Interpretation and
Policy .14 and Phlx Rule 1101A, Interpretation and
Policy .05.
24 See Cboe Options Rule 24.9(e); and Phlx Rule
1101A(b)(vii).
25 See Cboe Options Rule 24.6, Interpretations
and Policies .01 (options with Quarterly Index
Expirations), .03 (Cboe S&P 500 AM/PM Basis
options), .04 (P.M.-settled SPX options with third
Friday-of-the-month expiration and P.M.-settled
XSP options), and .05 (MSCI EAFE Index options).
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Federal Register / Vol. 83, No. 210 / Tuesday, October 30, 2018 / Notices
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:
khammond on DSK30JT082PROD with NOTICES
Electronic Comments
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–CboeBZX–2018–066, and
should be submitted on or before
November 20, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–23624 Filed 10–29–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84477; File No. SR–Phlx–
2018–62]
• 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–
CboeBZX–2018–066 on the subject line.
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Delete Current Rules
on Arbitration
Paper Comments
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 October
9, 2018, Nasdaq PHLX LLC (‘‘Phlx’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘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.
• 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-CboeBZX–2018–066. 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
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17:34 Oct 29, 2018
Jkt 247001
October 24, 2018.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to delete the
current rules on arbitration (‘‘Current
Arbitration Rules’’), under Rule 950,
and incorporate by reference The
Nasdaq Stock Market LLC’s (‘‘Nasdaq’’)
rules on arbitration at General 6
(‘‘Proposed Arbitration Rules’’), into
General 6 of the Exchange’s rulebook’s
(‘‘Rulebook’’) shell structure.3
26 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Recently, the Exchange added a shell structure
to its Rulebook with the purpose of improving
efficiency and readability and to align its rules
closer to those of its five sister exchanges, The
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54641
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaqphlx.cchwallstreet.com/,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
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
1. Purpose
The Exchange proposes to delete the
rules on arbitration, currently under
Rule 950, and incorporate by reference
the Nasdaq rules on arbitration at
General 6 of Nasdaq’s rulebook into
General 6 of the Exchange’s Rulebook.
The Exchange adopted the Current
Arbitration Rules to ensure a fair and
efficient manner in which to handle any
dispute, claim or controversy arising out
of, or in connection with, the business
of any Member of the Exchange. To help
administer the process of dispute
resolution, the Exchange and FINRA are
parties to a Regulatory Contract,
pursuant to which FINRA has agreed to
perform certain functions and provide
access to certain services, including:
Member regulation and registration;
non-real time market surveillance;
examinations and investigations; and
dispute resolution. FINRA currently
operates the largest securities dispute
resolution forum in the United States,4
and has given the Exchange access to
these services. Under the Current
Arbitration Rules, Members and
associated persons of a Member are
subject to the FINRA Code of
Arbitration Procedure.
Nasdaq Stock Market LLC; Nasdaq BX, Inc.; Nasdaq
ISE, LLC; Nasdaq GEMX, LLC; and Nasdaq MRX,
LLC (‘‘Affiliated Exchanges’’). The shell structure
currently contains eight (8) Chapters which, once
complete, will apply a common set of rules to the
Affiliated Exchanges. See Securities Exchange Act
Release No. 82169 (November 29, 2017), 82 FR
57508 (December 5, 2017) (SR–PHLX–2017–97).
4 https://www.finra.org/arbitration-and-mediation.
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]]>Agencies
[Federal Register Volume 83, Number 210 (Tuesday, October 30, 2018)]
[Notices]
[Pages 54635-54641]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-23624]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84480; File No. SR-CboeBZX-2018-066]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Permit the Listing and Trading of
P.M.-Settled Series on Certain Broad-Based Index Options on a Pilot
Basis
October 24, 2018.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on October 11, 2018, Cboe BZX Exchange, Inc. filed with the
Securities and Exchange Commission (the ``Commission'' or ``SEC'') 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 BZX Exchange, Inc. (the ``Exchange'' or ``BZX Options'')
proposes to permit the listing and trading of P.M.-settled series on
certain broad-based index options on a pilot basis.
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
[[Page 54636]]
statements may be examined at the places specified in Item IV below.
The Exchange has prepared summaries, set forth in sections A, B, and C
below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The proposed rule change permits the listing and trading of P.M.-
settled series on certain broad-based index options on a pilot
basis.\3\ First, the proposed rule change would permit the listing and
trading of XSP options with third-Friday-of-the-month expiration dates,
whose exercise settlement value will be based on the closing index
value on the expiration day (``P.M.-settled'') for an initial period of
twelve months (the ``XSPPM Pilot Program'') from the date of approval
of this proposed rule change. Second, the proposed rule change would
permit the listing and trading of P.M.-settled options on broad-based
indexes with weekly expirations (``Weeklys'') and end-of-month
expirations (``EOMs'') for an initial period of 12 months (the
``Nonstandard Expirations Pilot Program'') from the date of approval of
this proposed rule change.
---------------------------------------------------------------------------
\3\ The Exchange is authorized to list for trading options that
overlie the Mini-SPX Index (``XSP'') and the Russell 2000 Index
(``RUT''). See Rule 29.11(a).
---------------------------------------------------------------------------
XSPPM Pilot Program
Proposed Rule 29.11(a)(6) permits the listing and trading, in
addition to A.M.-settled XSP options, of P.M.-settled XSP options with
third-Friday-of-the-month expiration dates on a pilot basis for an
initial period of 12 months from the date of approval of this proposed
rule change. XSP options are A.M.-settled pursuant to the generic
listing criteria in Rule 29.11(a)(5). The Exchange believes permitting
the trading of XSP options on a P.M.-settled basis will encourage
greater trading in XSP options.
Other than settlement and closing time on the last trading day (as
discussed below), contract terms for P.M.-settled XSP options will be
the same as the A.M.-settled XSP options. The proposed contract would
use a $100 multiplier. The minimum trading increments, strike price
intervals, and expirations would be the same as the A.M.-settled XSP
option series. P.M.-settled XSP options would have European-style
exercise. The Exchange will also have flexibility to open for trading
additional series in response to customer demand.
The proposed rule change amends Rule 29.10(a) to state that, on
their last trading day, transactions in P.M.-settled XSP options may be
effected on the Exchange between the hours of 9:30 a.m. and 4:00 p.m.
Eastern time (as opposed to the normal trading hours for non-expiring
P.M.-settled XSP options, which are from 9:30 a.m. to 4:15 p.m. Eastern
time). XSP options are typically priced in the market based on
corresponding futures values. The primary listing markets for the
component securities that comprise the S&P 500 Index close trading in
those securities at 4:00 p.m. The primary listing exchanges for the
component securities disseminate closing prices of the component
securities, which are used to calculate the exercise settlement value
of the S&P 500 Index. The Exchange believes that, under normal trading
circumstances, the primary listing markets have sufficient bandwidth to
prevent any data queuing that would cause any trades that are executed
prior to the closing time from being reported after 4:00 p.m. Despite
the fact that the exercise settlement value will be fixed at or soon
after 4:00 p.m., if the Exchange did not close trading in expiring
P.M.-settled XSP options at 4:00 p.m. on their last trading day,
trading in expiring P.M.-settled XSP options would continue for an
additional fifteen minutes until 4:15 p.m. and would not be able to be
priced on corresponding futures values, but rather the known cash
value. At the same time, the prices of non-expiring P.M.-settled XSP
option series would continue to move and be priced in response to
changes in corresponding futures prices.
A potential pricing divergence could occur between 4:00 p.m. and
4:15 p.m. on the final trading day in expiring P.M.-settled XSP options
(e.g. switch from pricing off of futures to cash). Further, the switch
from pricing off of futures to cash can be a difficult and risky
switchover for liquidity providers. As a result, without closing
expiring contracts at 4:00 p.m., it is foreseeable that Market-Makers
could react by widening spreads in order to compensate for the
additional risk. Therefore, the Exchange believes that, in order to
mitigate potential investor confusion and the potential for increased
costs to investors, it is appropriate to cease trading in the expiring
P.M.-settled XSP contracts at 4:00 p.m. The Exchange does not believe
the proposed change will impact volatility on the underlying cash
market at the close on third Fridays. Further, other options exchanges
close trading in certain options on the last trading day for certain
classes.\4\
---------------------------------------------------------------------------
\4\ See Cboe Options Rule 24.6, Interpretations and Policies .01
(options with Quarterly Index Expirations), .03 (Cboe S&P 500 A.M./
P.M. Basis options), .04 (P.M.-settled SPX options with third
Friday-of-the-month expiration and P.M.-settled XSP options), and
.05 (MSCI EAFE Index options).
---------------------------------------------------------------------------
If the Exchange were to propose an extension of the XSPPM Pilot
Program or should the Exchange propose to make the XSPPM Pilot Program
permanent, the Exchange would submit a filing proposing such amendments
to the XSPPM Pilot Program. Further, any positions established under
the XSPPM Pilot Program would not be impacted by the expiration of the
XSPPM Pilot Program. For example, if the Exchange lists a P.M.-settled
XSP option that expires after the XSPPM Pilot Program expires (and is
not extended), then those positions would continue to exist. If the
pilot were not extended, then the positions could continue to exist.
However, any further trading in those series would be restricted to
transactions where at least one side of the trade is a closing
transaction.
As part of the XSPPM Pilot Program, the Exchange will submit a
pilot report to the Commission at least two months prior to the
expiration date of the pilot. This annual report will contain an
analysis of volume, open interest, and trading patterns. The analysis
would examine trading in the proposed option product as well as trading
in the securities that comprise the S&P 500 Index. In addition, for
series that exceed certain minimum open interest parameters, the annual
report will provide analysis of index price volatility and, if needed,
share trading activity.
The annual report will contain the following volume and open
interest data:
(1) Monthly volume aggregated for all trades;
(2) monthly volume aggregated by expiration date;
(3) monthly volume for each individual series;
(4) month-end open interest aggregated for all series;
(5) month-end open interest aggregated by expiration date; and
(6) month-end open interest for each individual series.
The annual report will also contain the information noted above for
expiration Friday A.M.-settled XSP option series, if applicable, for
the period covered in the annual report. In addition to the annual
report, the Exchange will provide the Commission with interim reports
of the information listed in (1) through (6) above.
[[Page 54637]]
In the annual report, the annual report would contain the following
analysis of trading patterns in expiration Friday, P.M.-settled XSP
option series in the XSPPM Pilot Program:
(1) A time series analysis of open interest; and
(2) an analysis of the distribution of trade sizes.
Also, for series that exceed certain minimum parameters, the annual
report will also contain the following analysis related to index price
changes and, if needed, underlying share trading volume at the close on
expiration Fridays:
(1) A comparison of index price changes at the close of trading on
a given expiration Friday with comparable price changes from a control
sample. The data will include a calculation of percentage price changes
for various time intervals and compare that information to the
respective control sample. Raw percentage price change data as well as
percentage price change data normalized for prevailing market
volatility, as measured by an appropriate index as agreed by the
Commission and the Exchange, would be provided; and
(2) a calculation of share volume for a sample set of the component
securities representing an upper limit on share trading that could be
attributable to expiring in-the-money series. The data, if needed, will
include a comparison of the calculated share volume for securities in
the sample set to the average daily trading volumes of those securities
over a sample period.
The minimum open interest parameters, control sample, time
intervals, method for randomly selecting the component securities, and
sample periods would be determined by the Exchange and the Commission.
Additionally, the Exchange will provide the Commission with any
additional data or analyses the Commission requests because it deems
such data or analyses necessary to determine whether the XSPPM Pilot
Program is consistent with the Exchange Act. The Exchange will make
public all data and analyses it submits to the Commission under the
XSPPM Pilot Program.
Other exchanges currently have pilots that permit P.M.-settled
index options.\5\
---------------------------------------------------------------------------
\5\ See Cboe Options Rule 24.9, Interpretation and Policy .14
and Phlx Rule 1101A, Commentary .05.
---------------------------------------------------------------------------
Nonstandard Expirations Pilot Program
The proposed rule change permits the listing and trading, on a
pilot basis, of P.M.-settled options on broad-based indexes with
nonstandard expiration dates for an initial period of 12 months from
the date of approval of this proposed rule change. The Nonstandard
Expirations Pilot Program will permit both Weeklys and EOMs as
discussed below. Contract terms for the Weekly and EOM expirations will
be similar to those of the A.M.-settled broad-based index options,
except that the Weekly and EOM expirations will be P.M.-settled.
Proposed Rule 29.11(j)(1) permits the Exchange to open for trading
Weeklys on any broad-based index eligible for standard options trading
to expire on any Monday, Wednesday, or Friday (other than the third
Friday-of-the-month or days that coincide with an EOM). Weeklys will be
subject to all provisions of Rule 29.11 and will be treated the same as
options on the same underlying index that expire on the third Friday of
the expiration month. However, Weeklys will be P.M.-settled, and new
Weekly series may be added up to and including on the expiration date
for an expiring Weekly.
The maximum number of expirations that may be listed for each
Weekly (i.e., a Monday expiration, a Wednesday expiration, or Friday
expiration, as applicable) in a given class will be the same as the
maximum number of expirations permitted in Rule 29.11(a)(3) for
standard options on the same broad-based index.\6\ Weeklys would not
need to be for consecutive Monday, Wednesday, or Friday expirations, as
applicable. However, the expiration date of a non-consecutive
expiration would not be permitted beyond what would be considered the
last expiration date if the maximum number of expirations were listed
consecutively. Weeklys that are first listed in a given class could
expire up to four weeks from the actual listing date. If the last
trading day of a month is a Monday, Wednesday, or Friday and the
Exchange lists EOMs and Weeklys, as applicable, in a given class, the
Exchange will list an EOM instead of a Weekly in the given class. Other
expirations in the same class are not counted as part of the maximum
number of Weeklys for a broad-based index class. If the Exchange is not
open for business on a respective Monday, the normally Monday expiring
Weeklys would expire on the following business day. If the Exchange is
not open for business on a respective Wednesday or Friday, the normally
Wednesday or Friday expiring Weekly will expire on the previous
business day.
---------------------------------------------------------------------------
\6\ Pursuant to Rule 29.11(a)(3), the Exchange may list up to
six expiration months at any one time. Therefore, pursuant to the
proposed rule change, the Exchange may list a maximum of six Weekly
expirations under the Nonstandard Expirations Pilot Program.
---------------------------------------------------------------------------
Proposed Rule 29.11(a)(2) [sic] permits the Exchange to open for
trading EOMs on any broad-based index eligible for standard options
trading to expire on the last trading day of the month. EOMs will be
subject to all provisions of Rule 29.11 and treated the same as options
on the same underlying index that expire on the third Friday of the
expiration month. However, EOMs will be P.M.-settled, and new series of
EOMs may be added up to and including on the expiration date for an
expiring EOM.
The maximum number of expirations that may be listed for EOMs in a
given class is the same as the maximum number of expirations permitted
in Rule 29.11(a)(3) for standard options on the same broad-based
index.\7\ EOMs need not be for consecutive end-of-month expirations.
However, the expiration date of a non-consecutive expiration may not be
beyond what would be considered the last expiration date if the maximum
number of expirations were listed consecutively. EOMs that are first
listed in a given class may expire up to four weeks from the actual
listing date. Other expirations in the same class are not counted as
part of the maximum number of EOMs for a broad-based index class.
---------------------------------------------------------------------------
\7\ Id.
---------------------------------------------------------------------------
The proposed rule change amends Rule 29.11(c)(5)(C) to provide that
the lowest strike interval for series of XSP options listed under the
Nonstandard Expirations Pilot Program will be $0.50. With respect to
XSP, this is consistent with the minimum strike interval for XSP
options listed under the Short Term Series Program.\8\ Additionally,
this is consistent with the minimum strike interval for options on the
Standard & Poor's Depository Receipts Trust (SPY), which is an ETF that
like XSP tracks the performance of 1/10th the value of the S&P 500
Index, with weekly expirations.\9\
---------------------------------------------------------------------------
\8\ See Rule 29.11(c)(5)(C).
\9\ See Rule 19.6, Interpretation and Policy .05(f).
---------------------------------------------------------------------------
Weeklys and EOMs will be subject to the same rules that currently
govern the trading of standard monthly broad-based index options,
including sales practice rules, margin requirements, and floor trading
procedures. Contract terms for Weeklys and EOMs will be the same as
those for standard monthly broad-based index options. Since Weeklys and
EOMs will be new types of series, and not a new class, the Exchange
proposes that Weeklys and EOMs will be aggregated for any applicable
reporting
[[Page 54638]]
and other requirements.\10\ Pursuant to new proposed Rule 29.11(j)(4),
transactions in expiring Weeklys and EOMs may be effected on the
Exchange between the hours of 9:30 a.m. and 4:00 p.m. (Eastern time).
---------------------------------------------------------------------------
\10\ Rule 29.5(a) requires Options Members to comply with the
applicable rules of Cboe Options with respect to position limits for
broad-based index options for options traded on Cboe Options. Cboe
Options Rule 24.4, Interpretation and Policy .03 sets forth the
reporting requirements for certain market indexes that do not have
position limits, including XSP and RUT, and would apply to XSP and
RUT options traded on the Exchange pursuant to Rule 29.5(a); see
also Cboe Options Rule 24.4(b), which provides that Weeklys and EOMs
will be aggregated with option contracts on the same broad-based
index and will be subject to the overall position limit, and would
apply to Weeklys/EOMs traded on the Exchange pursuant to Rule
29.5(a). The Exchange notes that the proposed aggregation is
consistent with the aggregation requirements or other types of
option series (e.g., quarterly expiring options) that may be listed
on the Exchange and that do not expire on the customary ``third
Friday'' (see Cboe Options Rule 24.4(e)).
---------------------------------------------------------------------------
As stated above, this proposed rule change establishes a
Nonstandard Expirations Pilot Program for broad-based index options on
a pilot basis, for an initial period of 12 months from the date of
approval of this proposed rule change. If the Exchange were to propose
an extension of the Nonstandard Expirations Pilot Program or should the
Exchange propose to make it permanent, the Exchange would submit a
filing proposing such amendments. Further, any positions established
under the Nonstandard Expirations Pilot Program would not be impacted
by the expiration of the pilot. For example, if the Exchange lists a
Weekly or EOM that expires after the Nonstandard Expirations Pilot
Program expires (and is not extended), then those positions would
continue to exist. However, any further trading in those series would
be restricted to transactions where at least one side of the trade is a
closing transaction.
As part of the Nonstandard Expirations Pilot Program, the Exchange
will submit a pilot report to the Commission at least two months prior
to the expiration date of the pilot (the ``annual report''). The annual
report will contain an analysis of volume, open interest, and trading
patterns. In addition, for series that exceed certain minimum open
interest parameters, the annual report will provide analysis of the
index price volatility, and, if needed, share trading activity.
For all Weekly and EOM series, the annual report will contain the
following volume and open interest data for each broad-based index
overlying Weekly and EOM options:
(1) Monthly volume aggregated for all Weekly and EOM series;
(2) Volume in Weekly and EOM series aggregated by expiration date;
(3) Month-end open interest aggregated for all Weekly and EOM
series;
(4) Month-end open interest for EOM series aggregated by expiration
date and open interest for Weekly series aggregated by expiration date;
(5) Ratio of monthly aggregate volume in Weekly and EOM series to
total monthly class volume; and
(6) Ratio of month-end open interest in EOM series to total month-
end class open interest and ratio of open interest in each Weekly
series to total class open interest.
In addition, the annual report will contain the information noted
above for standard expiration Friday, A.M.-settled series, if
applicable, for the period covered in the annual report as well as for
the six-month period prior to the initiation of the pilot.
Upon request by the SEC, the Exchange will provide a data file
containing:
(1) Weekly and EOM option volume data aggregated by series, and
(2) Weekly open interest for each expiring series and EOM month-end
open interest for expiring series.
In the annual report, the Exchange also proposes to identify Weekly
and EOM trading patterns by undertaking a time series analysis of open
interest in Weekly and EOM series aggregated by expiration date
compared to open interest in near-term standard expiration Friday A.M.-
settled series in order to determine whether users are shifting
positions from standard series to Weekly and EOM series. In addition,
to the extent that data on other weekly or monthly P.M.-settled
products from other exchanges is publicly available, the report will
also compare open interest with these options in order to determine
whether users are shifting positions from other weekly or monthly P.M.-
settled products to the Weekly and EOM series. Declining open interest
in standard series or the weekly or monthly P.M.-settled products of
other exchanges accompanied by rising open interest in Weekly and EOM
series would suggest that users are shifting positions.
For each Weekly and EOM expiration that has open interest that
exceeds certain minimum thresholds, the annual report will contain the
following analysis related to index price changes and, if needed,
underlying share trading volume at the close on expiration dates:
(1) A comparison of index price changes at the close of trading on
a given expiration date with comparable price changes from a control
sample. The data will include a calculation of percentage price changes
for various time intervals and compare that information to the
respective control sample. Raw percentage price change data as well as
percentage price change data normalized for prevailing market
volatility, as measured by an appropriate index agreed to by the
Commission and the Exchange, will be provided; and
(2) If needed, a calculation of share volume for a sample set of
the component securities representing an upper limit on share trading
that could be attributable to expiring in-the-money Weekly and EOM
series. The data, if needed, will include a comparison of the
calculated share volume for securities in the sample set to the average
daily trading volumes of those securities over a sample period.
The minimum open interest parameters, control sample, time
intervals, method for selecting the component securities, and sample
periods will be determined by the Exchange and the Commission.
Additionally, the Exchange will provide the Commission with any
additional data or analyses the Commission requests because it deems
such data or analyses necessary to determine whether the Nonstandard
Expirations Pilot Program is consistent with the Exchange Act. The
Exchange will make public all data and analyses it submits to the
Commission under the Nonstandard Expirations Pilot Program. Other
exchanges currently have pilots that have weekly and end-of-month
expirations.\11\
---------------------------------------------------------------------------
\11\ See Cboe Options Rule 24.9(e); and Phlx Rule 1101A(b)(vii).
---------------------------------------------------------------------------
Additional Information
Precedent exists for P.M.-settled broad-based index options, as
other options exchanges list P.M.-settled broad-based index
options.\12\ The Exchange does not believe that any market disruptions
will be encountered with the introduction of listing P.M.-settled
options on the Exchange. The Exchange will monitor for any such
disruptions or the development of any factors that would cause such
disruptions.
---------------------------------------------------------------------------
\12\ See, e.g., Cboe Options Rule 24.9(a)(4) (OEX not listed as
A.M.-settled) and Interpretation and Policy .14 (permits listing of
P.M.-settled SPX and XSP options); and PHLX Rule 1101A, Commentary
.05 (permits listing of P.M.-settled NDX options).
---------------------------------------------------------------------------
The Exchange notes that P.M.-settled options predominate in the
over-the-counter (``OTC'') market, and the Exchange is not aware of any
adverse effects in the stock market attributable to the P.M.-settlement
feature. The
[[Page 54639]]
Exchange is merely proposing to offer a P.M.-settled product in an
exchange environment that offers the benefit of added transparency,
price discovery, and stability. In response to any potential concerns
that disruptive trading conduct could occur as a result of the
concurrent listing and trading of two index option products based on
the same index but for which different settlement methodologies exist
(i.e., one is A.M.-settled and one is P.M.-settled), the Exchange notes
that Cboe Options lists and trades both A.M.-settled and P.M.-settled
SPX options, and Phlx lists and trades both A.M.-settled and P.M.-
settled NDX options. The Exchange is not aware of any market
disruptions occurring as a result of these exchanges offering both
products.
The adoption of P.M.-settled options on an exchange that lists
A.M.-settled options in the same class would provide greater spread
opportunities. This manner of trading in different products allows a
market participant to take advantage of the different expiration times,
providing expanded trading opportunities. In the options market
currently, market participants regularly trade similar or related
products in conjunction with each other, which contributes to overall
market liquidity.
The Exchange represents it has an adequate surveillance program in
place for index options. The Exchange is a member of the Intermarket
Surveillance Group (``ISG''), which is comprised of an international
group of exchanges, market centers, and market regulators. The purpose
of ISG is to provide a framework for the sharing of information and the
coordination of regulatory efforts among exchanges trading securities
and related products to address potential intermarket manipulations and
trading abuses. ISG plays a crucial role in information sharing among
markets that trade securities, options on securities, security futures
products, and futures and options on broad-based security indexes. A
list of identifying current ISG members is available at https://www.isgportal.org/isgPortal/public/members.htm.
The Exchange has analyzed its capacity and represents that it
believes the Exchange and OPRA have the necessary systems capacity to
handle the additional traffic associated with the listing of P.M.-
settled XSP and Weekly/EOM option series up to the proposed number of
possible expirations and strike prices. The Exchange believes any
additional traffic that would be generated from the introduction of
P.M.-settled XSP and Weekly/EOM options series will be manageable. The
Exchange believes its Members will not have a capacity issue as a
result of this proposed rule change. The Exchange also represents that
it does not believe this expansion will cause fragmentation of
liquidity. The Exchange will monitor the trading volume associated with
the additional options series listed as a result of this proposed rule
change and the effect (if any) of these additional series on market
fragmentation and on the capacity of the Exchange's automated systems.
P.M.-settled options would be subject to all provisions of Rule
29.11. P.M.-settled options would be subject to the same rules that
govern the trading of A.M.-settled options overlying the same indexes,
including sales practice rules, margin requirements, and floor trading
procedures. P.M.-settled options will be subject to the margin
requirements set forth in Chapter 28 and the position limits set forth
in Rule 29.5. Chapter 28 imposes the margin requirements of either Cboe
Options or the New York Stock Exchange on Exchange Options Members.
Similarly, Rule 29.5 imposes position (and exercise) limits for broad-
based index options of Cboe Options on Exchange Options Members. Since
P.M.-settled options will be a new type of series, and not a new class,
the Exchange proposes that the P.M.-settled options will be aggregated
for any applicable reporting and other requirements.\13\ Currently,
there are no position limits on RUT and XSP options.\14\ Therefore,
there will be no position limits on P.M.-settled RUT and XSP options.
P.M.-settled XSP options and Weekly/EOM broad-based index options are
currently authorized for listing on Cboe Options,\15\ and thus the same
margin requirements and position and exercise limits that apply to
these products as listed and traded on Cboe Options will apply to these
products when listed and traded on the Exchange. The proposed rule
change will also result in similar regulatory treatment for similar
option products.
---------------------------------------------------------------------------
\13\ See Rule 29.5(a), which requires Options Members to comply
with the applicable rules of Cboe Options with respect to position
limits for broad-based index options for options traded on Cboe
Options. Cboe Options Rule 24.4(b), which applies to index options
traded on the Exchange pursuant to Rule 29.5(a), provides that
Nonstandard Expirations will be aggregated with option contracts on
the same broad-based index and subject to the overall position
limit. Additionally, Cboe Options Rule 24.4(d), which applies to
index options traded on the Exchange pursuant to Rule 29.5(a),
positions in reduced-value index options will be aggregated with
positions in full-value indices. The Exchange notes that the
proposed aggregation is consistent with the aggregation requirements
for other types of option series (e.g. quarterly expiring options)
that are listed on the Exchange and that do not expire on the
customary ``third Friday.'' See Cboe Options Rule 24.4 (which
applies to the Exchange pursuant to Rule 29.5(a)).
\14\ See Cboe Options Rule 24.4(a) (which applies to the
Exchange pursuant to Rule 29.5(a)).
\15\ Similarly, pursuant to Cboe Options Chapter 12, Cboe
Options Trading Permit Holders may request to have New York Stock
Exchange margin requirements apply to their trading.
---------------------------------------------------------------------------
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.\16\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \17\ 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.
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes the proposed rule change will attract order
flow to the Exchange, increase the variety of listed options to
investors, and provide a valuable hedge tool to investors. The Exchange
believes the proposed rule change will also remove impediments to and
perfect the mechanism of a free and open market, and in general protect
investors by expanding the ability of investors to hedge risks against
market movements stemming from economic releases or market events that
occur during the month and at the end of the month. Accordingly, the
Exchange believes that P.M.-settled options will create greater trading
and hedging opportunities and flexibility, and provide customers with
the ability to more closely tailor their investment objectives.
The Commission has previously stated that when cash-settled index
options were first introduced in the 1980s, they generally utilized
closing-price settlement procedures (i.e., P.M. settlement). The
Commission stated it became concerned about the impact of P.M.
settlement on cash-settled index options on the markets for the
underlying stocks at the close on expiration Fridays, especially during
the quarterly expirations of the third Friday of March, June,
September, and December when options, index futures,
[[Page 54640]]
and options on index futures all expire simultaneously. The Commission
expressed concerns that P.M. settlement was believed to have
contributed to above-average volume and added market volatility on
those days, which sometimes led to sharp price movements during the
last hour of trading, as a consequence of which the close of trading on
the quarterly expiration Friday became known as the ``triple witching
hour.'' The Commission observed that besides contributing to investor
anxiety, heightened volatility during the expiration periods created
the opportunity for manipulation and other abusive trading practices in
anticipation of the liquidity constraints.\18\
---------------------------------------------------------------------------
\18\ See Securities Exchange Act Release No. 65256 (September 2,
2011), 76 FR 55569 (September 9, 2011) (SR-C2-2011-008) (order
approving listing of SPXPM options on C2); see also Securities
Exchange Act Release No. 81293 (August 2, 2017), 82 FR 151 (August
8, 2017) (SR-Phlx-2017-04) (or approving listing of NDXPM options on
Phlx).
---------------------------------------------------------------------------
However, the Exchange believes that the above concerns that have
led to the transition to A.M. settlement for index derivatives have
been largely mitigated. It believes that expiration pressure in the
underlying cash markets at the close has been greatly reduced with the
advent of multiple primary listing and unlisted trading privilege
markets, and that trading is now widely dispersed among many market
centers. Additionally, the Exchange notes that opening procedures in
the 1990s were deemed acceptable to mitigate one-sided order flow
driven by index option expiration and that the New York Stock Exchange
and Nasdaq Stock Market, LLC each use an automated closing cross
procedures and has a closing order type that facilitates orderly
closings. These closing procedures on the exchanges on which the
components of the S&P 500 Index trade are well-equipped to mitigate
imbalance pressure at the close. In addition, after-hours trading now
provides market participants with an alternative to help offset market-
on-close imbalances.\19\
---------------------------------------------------------------------------
\19\ See id.
---------------------------------------------------------------------------
Other exchanges currently have pilots that permit P.M.-settled
index options \20\ and Weekly/EOM options.\21\
---------------------------------------------------------------------------
\20\ See Cboe Options Rule 24.9, Interpretation and Policy .14;
and Phlx Rule 1101A, Commentary .05.
\21\ See Cboe Options Rule 24.9(e); and Phlx Rule 1101A(b)(vii).
---------------------------------------------------------------------------
The proposed rule change to permit transactions on the Exchange in
P.M.-settled XSP and Weekly/EOM options on their last trading day
between the hours of 9:30 a.m. and 4:00 p.m. Eastern time (as opposed
to the normal trading hours for non-expiring P.M.-settled XSP and
Weekly/EOM options, which are from 9:30 a.m. to 4:15 p.m. Eastern time)
will prevent potential pricing divergence that could occur between 4:00
p.m. and 4:15 p.m. on the final trading day in expiring P.M.-settled
XSP options. Without closing expiring contracts at 4:00 p.m., it is
foreseeable that Market-Makers would react by widening spreads in order
to compensate for the additional risk. Therefore, the Exchange believes
that, in order to mitigate potential investor confusion and the
potential for increased costs to investors, it is appropriate to cease
trading in the expiring P.M.-settled XSP and Weekly/EOM contracts at
4:00 p.m. The Exchange does not believe the proposed change will impact
volatility on the underlying cash market at the close on third Fridays.
Further, the other options exchanges close trading in certain options
on the last trading day for certain classes.\22\
---------------------------------------------------------------------------
\22\ See Cboe Options Rule 24.6, Interpretations and Policies
.01 (options with Quarterly Index Expirations), .03 (Cboe S&P 500
AM/PM Basis options), .04 (P.M.-settled SPX options with third
Friday-of-the-month expiration and P.M.-settled XSP options), and
.05 (MSCI EAFE Index options).
---------------------------------------------------------------------------
The Exchange has analyzed its capacity and represents that it
believes the Exchange and OPRA have the necessary systems capacity to
handle the additional traffic associated with the listing of P.M.-
settled options. The Exchange believes any additional traffic that may
be generated from the introduction of P.M.-settled options will be
manageable. The Exchange represents that it has in place adequate
surveillance procedures to monitor trading in these options thereby
helping to ensure the maintenance of a fair and orderly market.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. P.M.-settled options would
be available for trading on the Exchange to all market participants.
The Exchange believes the proposed rule change will increase the
variety of listed options to investors, and provide valuable hedge
tools to investors. The listing of P.M.-settled options will enhance
competition by providing investors with an additional investment
vehicle, through which investors can gain and hedge exposure to the
stocks that compose the applicable broad-based indexes. Additionally,
markets participants are welcome to become Members and trade at the
Exchange if they determine this proposed rule change has made the
Exchange more attractive or favorable. Further, this product could
offer a competitive alternative to other existing investment products
that seek to allow Members to gain broad market exposure. Finally, all
options exchanges are free to compete by listing and trading index
options that are P.M.-settled. Other exchanges currently have pilots
that permit P.M.-settled index options \23\ or Weeklys/EOMs.\24\
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\23\ See Cboe Options Rule 24.9, Interpretation and Policy .14
and Phlx Rule 1101A, Interpretation and Policy .05.
\24\ See Cboe Options Rule 24.9(e); and Phlx Rule 1101A(b)(vii).
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The proposed rule change to permit transactions on the Exchange in
P.M.-settled XSP and Weekly/EOM options on their last trading day
between the hours of 9:30 a.m. and 4:00 p.m. Eastern time (as opposed
to the normal trading hours for non-expiring P.M.-settled XSP and
Weekly/EOM options, which are from 9:30 a.m. to 4:15 p.m. Eastern time)
will prevent potential pricing divergence that could occur between 4:00
p.m. and 4:15 p.m. on the final trading day in expiring P.M.-settled
XSP and Weekly/EOM options. Without closing expiring contracts at 4:00
p.m., it is foreseeable that Market-Makers would react by widening
spreads in order to compensate for the additional risk. Therefore, the
Exchange believes that, in order to mitigate potential investor
confusion and the potential for increased costs to investors, it is
appropriate to cease trading in the expiring P.M.-settled XSP and
Weekly/EOM contracts at 4:00 p.m. The Exchange does not believe the
proposed change will impact volatility on the underlying cash market at
the close on third Fridays. Further, the other options exchanges close
trading in certain options on the last trading day for certain
classes.\25\
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\25\ See Cboe Options Rule 24.6, Interpretations and Policies
.01 (options with Quarterly Index Expirations), .03 (Cboe S&P 500
AM/PM Basis options), .04 (P.M.-settled SPX options with third
Friday-of-the-month expiration and P.M.-settled XSP options), and
.05 (MSCI EAFE Index options).
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The Exchange believes that the proposed rule change will relieve
any burden on, or otherwise promote, competition, as the rules are
substantially the same as those of other options exchanges, as noted
above.
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.
[[Page 54641]]
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-CboeBZX-2018-066 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-CboeBZX-2018-066. 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-CboeBZX-2018-066, and should be
submitted on or before November 20, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
Eduardo A. Aleman,
Assistant Secretary.
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\26\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2018-23624 Filed 10-29-18; 8:45 am]
BILLING CODE 8011-01-P
