Self-Regulatory Organizations; Cboe Exchange, Inc.; Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 2, To Amend Certain Rules To Accommodate the Listing and Trading of Micro FLEX Index Options and To Make Other Clarifying and Non-Substantive Changes, 54269-54275 [2021-21211]
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Federal Register / Vol. 86, No. 187 / Thursday, September 30, 2021 / Notices
LOTTER on DSK11XQN23PROD with NOTICES1
transactions from any provisions of the
Act, or any rule thereunder, if such
exemption is necessary or appropriate
in the public interest and consistent
with the protection of investors and the
purposes fairly intended by the policy
and provisions of the Act. Applicants
state that the requested relief meets this
standard for the reasons discussed
below.
IV. Arguments in Support of the
Requested Relief
8. Applicants assert that boards of
registered investment companies,
including the Board, typically hold inperson meetings on a quarterly basis.
Applicants state that during the three to
four month period between board
meeting dates, market conditions may
change or investment opportunities may
arise such that the Adviser may wish to
make a Sub-Adviser Change. Applicants
also state that at these moments it may
be impractical, and/or costly to hold an
additional in-person Board meeting,
especially given the geographic
diversity of Board members and the
additional cost of holding in-person
meetings.
9. As a result, Applicants believe that
the requested relief would allow the
Subadvised Series to operate more
efficiently. In particular, Applicants
assert that without the delay inherent in
holding in-person Board meetings (and
the attendant difficulty of obtaining the
necessary quorum for, and the
additional costs of, an unscheduled inperson Board meeting), the Subadvised
Series would be able to act quicker and
with less expense to add or replace subadvisers when the Board and the
Adviser believe that a Sub-Adviser
Change would benefit the Subadvised
Series.
10. Applicants also note that the inperson meeting requirement in Section
15(c) of the Act was designed to prohibit
absentee approval of advisory
agreements. Applicants state that
condition 1 to the requested relief is
designed to avoid such absentee
approval by requiring that the Board
approve a Sub-Adviser Change at a
meeting where all participating Board
members can hear each other and be
heard by each other during the
meeting.9
11. Applicants, moreover, represent
that the Board would conduct any such
non-in-person consideration of a Sub9 Applicants state that technology that includes
visual capabilities will be used unless
unanticipated circumstances arise. Applicants also
state that the Board could not rely upon the relief
to approve a Sub-Advisory Agreement by written
consent or another form of absentee approval by the
Board.
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18:15 Sep 29, 2021
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Advisory Agreement in accordance with
its typical process for approving SubAdvisory Agreements. Consistent with
Section 15(c) of the Act, the Board
would request and evaluate such
information as may reasonably be
necessary to evaluate the terms of any
Sub-Advisory Agreement, and the
Adviser and sub-adviser would provide
such information.
12. Finally, Applicants note that if
one or more Board members request that
a Sub-Adviser Change be considered inperson, then the Board would not be
able to rely on the relief and would have
to consider the Sub-Adviser Change at
an in-person meeting.
V. Applicants’ Conditions
Applicants agree that any order
granting the requested relief will be
subject to the following conditions:
1. The Independent Board Members
will approve the Sub-Adviser Change at
a non-in-person meeting in which Board
members may participate by any means
of communication that allows those
Board members participating to hear
each other simultaneously during the
meeting.
2. Management will represent that the
materials provided to the Board for the
non-in-person meeting include the same
information the Board would have
received if a Sub-Adviser Change were
sought at an in-person Board meeting.
3. The notice of the non-in-person
meeting will explain the need for
considering the Sub-Adviser Change at
a non-in-person meeting. Once notice of
the non-in-person meeting to consider a
Sub-Adviser Change is sent, Board
members will be given the opportunity
to object to considering the Sub-Adviser
Change at a non-in-person Board
meeting. If a Board member requests
that the Sub-Adviser Change be
considered in-person, the Board will
consider the Sub-Adviser Change at an
in-person meeting, unless such request
is rescinded.
4. A Subadvised Series’ ability to rely
on the requested relief will be disclosed
in the Subadvised Series’ registration
statement.
5. In the event that the Commission
adopts a rule under the Act providing
substantially similar relief to that in the
order requested in the application, the
requested order will expire on the
effective date of that rule.
For the Commission, by the Division
of Investment Management, under
delegated authority.
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54269
Dated: September 27, 2021.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–21321 Filed 9–29–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93122; File No. SR–CBOE–
2021–041]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Order Granting
Approval of a Proposed Rule Change,
as Modified by Amendment No. 2, To
Amend Certain Rules To
Accommodate the Listing and Trading
of Micro FLEX Index Options and To
Make Other Clarifying and NonSubstantive Changes
September 24, 2021.
On July 23, 2021, Cboe Exchange, Inc.
(‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (the ‘‘Act’’),1 and Rule 19b–4
thereunder,2 a proposed rule change to
accommodate the listing and trading of
flexible exchange (‘‘FLEX’’) index
options with an index multiplier of one
(‘‘Micro FLEX Index Options’’) and to
make other clarifying and nonsubstantive changes.3 The proposed rule
change was published in the Federal
Register on August 12, 2021.4 On
September 22, 2021, the Exchange
submitted partial Amendment No. 2 to
the proposed rule change.5 The
Commission received no comments on
the proposed rule change. The
Commission is approving the proposed
rule change, as modified by Amendment
No. 2.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 On August 4, 2021, the Exchange filed partial
Amendment No. 1 to the proposed rule change. The
Exchange withdrew partial Amendment No. 1 on
August 6, 2021.
4 Securities Exchange Release No. 92599 (August
6, 2021), 86 FR 44411 (August 12, 2021) (‘‘Notice’’).
5 In Amendment No. 2, the Exchange stated that,
currently, the Exchange lists non-FLEX options on
12 (not 13, as stated in the Exchange’s original
filing) broad-based indexes with a value of at least
100, and the proposed rule change would authorize
the Exchange to list Micro FLEX Options on the
same 12 indexes, which are all broad-based and all
have a value of at least 100. The Exchange stated
that it delisted options on FTSE 100 Mini-Index
(UKXM). The Exchange also made a conforming
change to its representation under the heading
‘‘Capacity.’’ Because Amendment No. 2 does not
materially alter the substance of the proposed rule
change, Amendment No. 2 is not subject to notice
and comment. Amendment No. 2 is available on the
Commission’s website at: https://www.sec.gov/
comments/sr-cboe-2021-041/srcboe2021041.htm.
2 17
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I. Description of the Proposed Rule
Change, as Modified by Amendment
No. 2
The Exchange proposes to amend its
rules to permit the trading of FLEX
index options with an index multiplier
of one on broad-based indexes for which
the value of the underlying is at least
100. The Commission recently approved
a rule change that provided the
Exchange with the authority to list
options with an index multiplier of one
on broad-based indexes for which the
value of the underlying is at least 100
on the Exchange’s standardized, nonFLEX market.6
Currently, CBOE Rule 4.21(b)(1) states
the index multiplier for FLEX index
options is 100. The Exchange proposes
to add to the rule that the index
multiplier for FLEX index options on
broad-based indexes for which the value
of the underlying is at least 100 7 may
also be one in addition to the current
index multiplier of 100. The proposed
rule change amends CBOE Rule
4.21(b)(1) to state that if a FLEX Trader 8
specifies an index on a FLEX Order,9 the
6 See CBOE Rule 4.11 (providing for the listing of
non-FLEX options with a multiplier of one (‘‘microoptions’’). See Securities Exchange Release No.
91528 (April 9, 2021), 86 FR 19933 (April 15, 2021).
According to the Exchange, currently, the Exchange
lists non-FLEX options on 12 broad-based indexes
with a value of at least 100: S&P 500 Index, MiniS&P 500 Index (XSP), Russell 2000 Index (RUT),
Mini-Russell 2000 Index (MRUT), Dow Jones
Industrial Average (DJX), S&P 100 Index (OEX and
XEO), S&P 500 ESG Index (SPESG), MSCI EAFE
Index (MXEA), MSCI Emerging Markets Index
(MXEF), Russell 1000 Growth Index (RLG), Russell
1000 Value Index (RLV), and Russell 1000 Index
(RUI). The Exchange states that the proposed rule
change will authorize the Exchange to list Micro
FLEX Index Options on the same 12 indexes, which
are all broad-based and all have a value of at least
100. In Amendment No. 2, the Exchange stated that
it may authorize for trading a FLEX option class on
any index if it may authorize for trading a nonFLEX option class on that index, even if the
Exchange does not list that non-FLEX option class
for trading. Currently, the Exchange is authorized
to (but does not) list for trading options on six
additional broad-based indexes with values of at
least 100. The Exchange stated that the Exchange’s
system currently prevents FLEX trading on these
indexes (and other underlying securities and
indexes on which the Exchange does not list nonFLEX options even though authorized to under its
rules). If the Exchange updates its system in the
future to permit FLEX trading on underlying
securities or indexes on which the Exchange does
not list non-FLEX options, Micro FLEX Index
Options on these six indexes (assuming they still
satisfied the Exchange’s maintenance listing criteria
in Rule 4.10 and had values of at least 100) would
be permitted to be listed and traded. See infra note
27.
7 These are the same indexes on which the
Exchange may list micro-options.
8 A ‘‘FLEX Trader’’ is a Trading Permit Holder the
Exchange has approved to trade FLEX options on
the Exchange.
9 A ‘‘FLEX Order’’ is an order submitted in FLEX
options. The submission of a FLEX Order makes the
FLEX option series in that order eligible for trading.
See CBOE Rule 5.72(b).
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FLEX Trader must also include whether
the index option has an index multiplier
of 100 or 1 when identifying the class
of FLEX Order.10 The Exchange states
that, to the extent the Exchange lists a
Micro FLEX Index Option on an index
on which it also lists a standard FLEX
index option, it will be listed with a
different trading symbol than the
standard index option with the same
underlying index to reduce any
potential confusion.11
In its proposal, the Exchange stated
that its rules permit trading in a put or
call FLEX option series only if it does
not have the same exercise style, same
expiration date, and same exercise price
as a non-FLEX option series on the same
underlying security or index that is
already available for trading.12 The
Exchange proposes to add to the
introductory paragraph of CBOE Rule
4.21(b) that a FLEX index option with
an index multiplier of one may not be
the same type (put or call) and may not
have the same exercise style, expiration
date, settlement type, and exercise price
as a non-FLEX index option overlying
the same index listed for trading
(regardless of the whether the index
multiplier of the non-FLEX index option
is one or 100). As a result, a Micro FLEX
Index Option may not have the same
terms as a non-FLEX index option or
non-FLEX micro-option. The Exchange
states that this will prevent a Micro
FLEX Index Option from being listed
with terms identical to those of a nonFLEX index option with a multiplier of
100 or a non-FLEX micro-option with a
multiplier of one on the same index.
The Exchange states that a Micro
FLEX Index Option would become
fungible 13 with a non-FLEX micro10 When submitting a FLEX Order, the submitting
FLEX Trader must include all required terms of a
FLEX option series. These terms include, in
addition to the underlying equity security or index,
the type of options (put or call), exercise style,
expiration date, settlement type, and exercise price.
See CBOE Rule 4.21(b). Pursuant to CBOE Rule
4.21(b)(1), the submitting FLEX Trader must
include the underlying equity security or index on
the FLEX Order. The Exchange states that,
therefore, each FLEX index option series in a Micro
FLEX Index Option class will include the same
flexible terms as any other FLEX option series,
including strike price, settlement, expiration date,
and exercise style as required by CBOE Rule
4.21(b).
11 The Exchange states that, for example, a
standard FLEX index option for index ABC with an
index multiplier of 100 may have symbol 4ABC,
while a Micro FLEX Index Option for index ABC
with a multiplier of one may have symbol 4ABC9
and a non-FLEX option on index ABC with an
index multiplier of 100 may have symbol ABC,
while a non-FLEX micro-option would have a
different symbol (such as ABC9).
12 See CBOE Rule 4.21(a)(1).
13 Under CBOE Rule 4.22(a), if the Exchange lists
for trading a non-FLEX option series with identical
terms as a FLEX option series, all existing open
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option with the same terms pursuant to
CBOE Rule 4.22(a), but would not be
fungible with a non-FLEX option
overlying the same index with a
multiplier of 100 with the same
expiration date, settlement, and exercise
price. The Exchange states that because
the proposed rule change would not
permit a Micro FLEX Index Option to be
listed with the same terms as a nonFLEX index option regardless of the
index multiplier, proposed CBOE Rule
4.22(b)(2) will provide that if a nonFLEX index option series with an index
multiplier of 100 and the same terms as
a Micro FLEX Index Option overlying
the same index is listed for trading, a
position established under the FLEX
trading procedures may be closed using
the FLEX trading procedures in Chapter
5, Section F against another closing only
FLEX position during the time period
that non-FLEX index option series is
listed for trading. During the time that
non-FLEX index option series is listed
for trading, pursuant to CBOE Rule 5.72,
no FLEX Orders may be submitted into
an electronic auction or represented for
open outcry trading for a FLEX index
option series with a multiplier of one
with the same terms as the non-FLEX
index option series overlying the same
index with an index multiplier of 100,
unless the FLEX Order is a closing
order.14 This proposed ‘‘closing only’’
process is similar to the current ‘‘closing
only’’ process for non-FLEX option
American-style series added intraday, as
set forth in current CBOE Rule 4.22(b).15
The Exchange states that this proposed
change would prevent new Micro FLEX
Index Option positions from being
opened when a non-FLEX Index Option
with a multiplier of 100 with the same
terms is listed for trading.16 In addition,
as proposed, CBOE Rule 4.22(b) would
require that the Exchange notifies FLEX
positions established under the FLEX trading
procedures are fully fungible with the non-FLEX
option series, and any further trading in the series
would be as non-FLEX options subject to non-FLEX
trading procedures and rules.
14 The Exchange states that, to the extent the nonFLEX index option is later delisted, then opening
trades of the Micro FLEX Index Option may resume
after that occurs.
15 The Exchange plans to renumber current CBOE
Rule 4.22(b) as CBOE Rule 4.22(b)(1), accompanied
by non-substantive punctuation mark changes to
reflect proposed CBOE Rule 4.22(b)(2).
16 As proposed, if the Exchange lists a non-FLEX
index option with a multiplier of one with identical
terms as a Micro FLEX Index Option, then current
CBOE Rule 4.22(a) applies to the fungibility of those
options (or proposed CBOE Rule 4.22(b)(1) if it is
an American-style series added intraday) and the
FLEX Micro Index Option would no longer be a
FLEX option, but instead be traded as a standard
micro-option.
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Traders when a FLEX option series is
restricted to closing only transactions.17
Trading Hours
Pursuant to CBOE Rule 5.1(b)(3)(A)
and (c)(1), Micro FLEX Index Options
will be available for trading during the
same hours as non-FLEX Index Options
pursuant to CBOE Rule 5.1(b)(2).
Accordingly, Regular Trading Hours for
Micro FLEX Index Options will
generally be 9:30 a.m. to 4:15 p.m.
Eastern time.18 To the extent an index
option is authorized for trading during
Global Trading Hours, the Exchange
states it may also list Micro FLEX Index
Options during that trading session as
well, the hours for which trading
session are 3:00 a.m. to 9:15 a.m.
Eastern time.
Expiration, Settlement, and Exercise
Style
In accordance with CBOE Rule
4.21(b), FLEX Traders may designate the
type (put or call), exercise style,
expiration date, and settlement type of
Micro FLEX Index Options.
LOTTER on DSK11XQN23PROD with NOTICES1
Exercise Prices
The Exchange proposes to amend
CBOE Rule 4.21(b)(6) to state that the
exercise price for a FLEX index option
series in a class with a multiplier of one
is set at the same level as the exercise
price for a FLEX index option series in
a class with a multiplier of 100. To
illustrate the deliverable exercise price
for index options with different
multipliers as well as physically settled
equity options, the proposed rule
change adds the following examples to
CBOE Rule 4.21(b)(6) regarding how the
deliverable for a Micro FLEX Index
Option will be calculated (as well as for
a FLEX index option with a multiplier
of 100 and a FLEX equity option, for
additional clarity and transparency): If
the exercise price of a FLEX option
17 The Exchange proposes to move this provision
to make it clear it will apply to the entire paragraph
(b) as proposed to be amended, and to make
changes that it states would modernize this
provision. Currently, CBOE Rule 4.22(b) states that
a FLEX Official announces to FLEX Traders when
such a FLEX option series is restricted to closing
only transactions. The Exchange states that this was
true when FLEX options were traded only in open
outcry and a verbal announcement was made to the
trading floor. The Exchange states that currently,
because FLEX options are available for electronic
and open outcry trading, the Exchange notifies
FLEX Traders when a FLEX option series is
restricted to closing only transactions. Accordingly,
the Exchange proposes to revise Rule 4.22(b) to
state that the Exchange notifies FLEX Traders when
a FLEX Option series is restricted to closing only
transactions. The Exchange also states that, in
accordance with CBOE Rule 1.5, the Exchange
currently notifies FLEX Traders of restricted FLEX
option series by electronic message.
18 Certain indexes close trading at 4:00 p.m.
Eastern time. See CBOE Rule 5.1.
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series is a fixed price of $50, it will
deliver: (A) 100 shares of the underlying
security at $50 (with a total deliverable
of $5,000) if a FLEX equity option; (B)
cash equal to 100 (i.e., the index
multiplier) times 50 (with a total
deliverable value of $5,000) if a FLEX
index option with a multiplier of 100;
and (C) cash equal to 1 (i.e., the index
multiplier) times 50 (with a total
deliverable value of $50) if a Micro
FLEX Index Option. If the exercise price
of a FLEX option series is 50% of the
closing value of the underlying security
or index, as applicable, on the trade
date, it will deliver: (A) 100 shares of
the underlying security at a price equal
to 50% of the closing value of the
underlying security on the trade date
(with a total deliverable of 100 times
that percentage amount) if a FLEX
Equity Option; (B) cash equal to 100
(i.e., the index multiplier) times a value
equal to 50% of the closing value of the
underlying index on the trade date (with
a total deliverable of 100 times that
percentage amount) if a FLEX index
option with a multiplier of 100; and (C)
cash equal to 1 (i.e., the index
multiplier) times a value equal to 50%
of the closing value of the underlying
index on the trade date (with a total
deliverable of one times that percentage
amount) if a Micro FLEX Index Option.
The Exchange states that the
descriptions of exercise prices for FLEX
equity options and FLEX index options
with a multiplier of 100 are true today,
and that the examples merely add
clarity to the rules.
Bids and Offers
Pursuant to CBOE Rule 5.4(c), the
Exchange states that it will determine
the minimum increment for bids and
offers on Micro FLEX Index Options (as
it does for all other FLEX options) on a
class-by-class basis, which may not be
smaller than (1) $0.01, if the exercise
price for the FLEX option series is a
fixed price, or (2) 0.01%, if the exercise
price for the FLEX option series is a
percentage of the closing value of the
underlying equity security or index on
the trade date.19 The proposed rule
change amends CBOE Rule 5.3(e)(3) to
describe the difference between the
expression of bids and offers for FLEX
equity options, FLEX index options
with a multiplier of 100, and Micro
FLEX Index Options. Currently, that
rule states that bids and offers for FLEX
options must be expressed in (a) U.S.
dollars and decimals if the exercise
price for the FLEX option series is a
19 The System (as defined in CBOE Rule 1.5(aa))
rounds bids and offers to the nearest minimum
increment.
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54271
fixed price, or (b) a percentage, if the
exercise price for the FLEX option series
is a percentage of the closing value of
the underlying equity security or index
on the trade date, per unit.20 As noted
above, a FLEX option contract unit
consists of 100 shares of the underlying
security or 100 times the value of the
underlying index, as they currently have
a 100 contract multiplier.21
The proposed rule change states that
bids and offers for Micro FLEX Index
Options must be expressed in (a) U.S.
dollars and decimals if the exercise
price for the FLEX option series is a
fixed price, or (b) a percentage per unit
(if a FLEX equity option or a FLEX
index option with a multiplier of 100)
or per 1/100th unit (if a FLEX index
option with a multiplier of one) of the
underlying security or index, as
applicable, if the exercise price for the
FLEX option series is a percentage of the
closing value of the underlying equity
security or index on the trade date.
Additionally, the proposed rule change
adds examples describing how FLEX
options bids and offers must be
expressed. The proposed rule will state
that, if the exercise price of a FLEX
option series is a fixed price, a bid of
‘‘0.50’’ represents a bid of (A) $50 (0.50
times 100 shares) for a FLEX equity
option; (B) $50 (0.50 times an index
multiplier of 100) for a FLEX index
option with a multiplier of 100; and (C)
$0.50 (0.50 times an index multiplier of
one) for a Micro FLEX Index Option. If
the exercise price of a FLEX option
series is a percentage of the closing
value of the underlying equity security,
a bid of ‘‘0.50’’ represents a bid of (A)
50% (0.50 times 100 shares) of the
closing value of the underlying equity
security on the trade date if a FLEX
equity option; (B) 50% (0.50 times an
index multiplier of 100) of the closing
value of the underlying index on the
trade date if a FLEX index option with
a multiplier of 100; and (C) 0.50% (0.50
times an index multiplier of one) of the
closing value of the underlying index on
the trade date if a Micro FLEX Index
Option. The Exchange states that it
believes the proposed rule language
identifies a clear, transparent
20 The Exchange states that the proposed rule
change reorganizes the language in this provision to
make clear that the phrase ‘‘if the exercise price for
the FLEX option series is a percentage of the closing
value of the underlying equity security or index on
the trade date’’ applies to the entire clause (B) of
5.3(e)(3). The proposed rule change also adds a
cross-reference to CBOE Rule 5.4 to provide that
bids and offers in U.S. dollars and decimals and
percentages of the closing values of the underlying
equity security or index on the trade date must be
in the applicable minimum increment as set forth
in CBOE Rule 5.4.
21 See current CBOE Rule 4.21(b)(1).
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Federal Register / Vol. 86, No. 187 / Thursday, September 30, 2021 / Notices
description of the differences between
FLEX index options with a multiplier of
100 and Micro FLEX Index Options and
provides clarity regarding how bids and
offers of FLEX equity options and FLEX
index options with a multiplier of 100
will be required to be expressed.
LOTTER on DSK11XQN23PROD with NOTICES1
Contract Size Limits
The Exchange states that the proposed
rule change updates various other
provisions in the following rules to
reflect that 100 Micro FLEX Index
Options overlying an index will be
economically equivalent to one contract
for a standard index option overlying
the same index:
• Rule 5.74: CBOE Rule 5.74
describes the Exchange’s FLEX
Solicitation Auction Mechanism (‘‘FLEX
SAM’’). An order, or the smallest leg of
a complex order, must be for at least the
minimum size designated by the
Exchange (which may not be less than
500 standard option contracts or 5,000
mini-option contracts). The proposed
rule change adds that 50,000 Micro
FLEX Index Options is the
corresponding minimum size for orders
submitted into FLEX SAM Auctions.
• Rule 5.87: CBOE Rule 5.87(f)
describes when a Floor Broker is
entitled to cross a certain percentage of
an order, subject to the requirements in
that paragraph. Under that rule, the
Exchange may determine on a class-byclass basis the eligible size for an order
that may be transacted pursuant to that
paragraph; however, the eligible order
size may not be less than 50 standard
option contracts (or 500 mini-option
contracts or 5,000 for micro-options).
The proposed rule change adds that
5,000 FLEX index option contracts with
an index multiplier of one is the
corresponding minimum size for orders
that may be crossed in accordance with
this provision. Additionally, CBOE Rule
5.87, Interpretation and Policy .07(a)
provides that CBOE Rule 5.86(e) 22 does
22 The Exchange states that CBOE Rule 5.86(e)
provides that it will be considered conduct
inconsistent with just and equitable principles of
trade for any TPH or person associated with a TPH,
who has knowledge of all material terms and
conditions of an original order and a solicited order,
including a facilitation order, that matches the
original order’s limit, the execution of which are
imminent, to enter, based on such knowledge, an
order to buy or sell an option of the same class as
an option that is the subject of the original order,
or an order to buy or sell the security underlying
such class, or an order to buy or sell any related
instrument until either (1) all the terms and
conditions of the original order and any changes in
the terms and conditions of the original order of
which that TPH or associated person has knowledge
are disclosed to the trading crowd or (2) the
solicited trade can no longer reasonably be
considered imminent in view of the passage of time
since the solicitation. An order to buy or sell a
‘‘related instrument,’’ means, in reference to an
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18:15 Sep 29, 2021
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not prohibit a Trading Permit Holder
(‘‘TPH’’) from buying or selling a stock,
security futures or futures position
following receipt of an order, including
an option order, but prior to announcing
such order to the trading crowd,
provided that the option order is in a
class designated as eligible for ‘‘tied
hedge’’ transactions and within the
eligibility size parameters, which are
determined by the Exchange and may
not be smaller than 500 standard option
contracts (or 5,000 mini-option
contracts or 50,000 micro-options). The
proposed rule change adds that 50,000
FLEX index option contracts with a
multiplier of one is the corresponding
minimum size for orders that may
qualify as tied hedge transactions and
not be deemed a violation of CBOE Rule
5.86(e).
Position and Exercise Limits 23
The proposed rule change amends
CBOE Rule 8.35(a) regarding position
limits for FLEX options to describe how
Micro FLEX Index Options will be
counted for purposes of determining
compliance with position limits.24
Because 100 Micro FLEX Index Options
are equivalent to one FLEX index option
with a multiplier of 100 overlying the
same index due to the difference in
contract multipliers, proposed CBOE
Rule 8.35(a)(7) states that for purposes
of determining compliance with the
position limits under CBOE Rule 8.35,
100 Micro FLEX Index Option contracts
equal one FLEX index option contract
with a multiplier of 100 with the same
underlying index. The proposed rule
change makes a corresponding change
to CBOE Rule 8.35(b) to clarify that, like
reduced-value FLEX contracts, Micro
FLEX Index Option contracts will be
aggregated with full-value contracts and
counted by the amount by which they
equal a full-value contract for purposes
of the reporting obligation in that
provision (i.e., 100 Micro FLEX Index
Options will equal one FLEX index
option contract with a multiplier of 100
index option, an order to buy or sell securities
comprising ten percent or more of the component
securities in the index or an order to buy or sell a
futures contract on any economically equivalent
index.
23 The Exchange states that, to the extent the
Exchange lists Micro FLEX Index Options on other
indexes in the future, they would be subject to the
same position and exercise limits set forth in the
applicable rules, and similarly aggregated with
standard options on the same indexes, as proposed.
24 The proposed rule change also corrects an
administrative error in CBOE Rule 8.35(a).
Currently, there are two subparagraphs numbered
as (a)(5). The proposed rule change amends
paragraph (a) to renumber the second subparagraph
(a)(5) to be subparagraph (a)(6).
PO 00000
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overlying the same index).25 The
proposed rule change also adds that
Micro FLEX Index Options on certain
broad-based indexes for which FLEX
index options with a multiplier of 100
have no position limits will also have
no position limits. The proposed rule
change amends CBOE Rule 8.42(g) to
make corresponding changes regarding
the application of exercise limits to
Micro FLEX Index Options. This is
consistent with the current treatment of
other reduced-value FLEX index options
with respect to position and exercise
limits. The margin requirements set
forth in Chapter 10 of the Exchange’s
Rules will apply to Micro FLEX Index
Options (as they currently do to all
FLEX options).26
Capacity
The Exchange represents that it
believes the Exchange and Options Price
Reporting Authority (‘‘OPRA’’) have the
necessary systems capacity to handle
the additional traffic associated with the
listing of new series that may result
from the introduction of the Micro FLEX
Index Options. Because the proposed
rule change is limited to broad-based
index options, which currently
represent only 12 of the indexes on
which the Exchange listed on the
Exchange, the Exchange states that
believes any additional traffic that may
be generated from the introduction of
Micro FLEX Index Options will be
manageable.27 The Exchange states that
it also understands that the OCC will be
able to accommodate the listing and
trading of Micro FLEX Index Options.
Other Changes
The Exchange proposes to amend
CBOE Rule 4.21(b)(6) to state that the
exercise price may be in increments no
smaller than: 28 (1) For a FLEX equity
option or FLEX index option that is not
Cliquet-settled, (a) $0.01, if the exercise
price for the FLEX option series is
expressed as a fixed price in terms of
25 The Exchange states that, as it does today with
respect to reduced-value indexes, the Exchange will
count Micro FLEX Index Options as a percentage
of a FLEX index option with a multiplier of 100
when calculating positions to determine
compliance with position limits.
26 According to the Exchange, pursuant to CBOE
Rule 8.43(j), FLEX index options with a multiplier
of one will be aggregated with non-FLEX index
options on the same underlying index in the same
manner as all other FLEX index options.
27 The Exchange states that if it updates its system
to permit FLEX trading on underlying securities
and indexes on which it does not list non-FLEX
options, including Micro FLEX Index Options
trading on broad-based indexes with a value of at
least 100, the Exchange would do so only if it had
sufficient capacity to permit such additional
trading. See supra note 6.
28 The Exchange states that this language is taken
from CBOE Rule 5.4(c)(4).
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dollars and decimals or a specific index
value, as applicable, or (b) 0.01%, if the
exercise price for the FLEX option series
is expressed as a percentage of the
closing value of the underlying equity
security or index on the trade date, as
applicable. The proposed rule change
also adds to CBOE Rule 4.21(b)(6) after
subparagraph (B) that the Exchange may
determine the smallest increment for
exercise prices of FLEX options on a
class-by-class basis. The Exchange states
that these changes codify long-standing
interpretations of the current rule,
which references the minimum
increment for bids and offers as set forth
in CBOE Rule 5.4.29 The Exchange states
that it believes this will make the rule
regarding permissible exercise prices for
FLEX options more transparent and thus
may eliminate potential confusion
regarding permissible exercise prices.30
The proposed rule change moves the
parenthetical regarding the system
rounding the exercise price to the
nearest minimum increment for bids
and offers in the class (as set forth in
CBOE Rule 5.4) from the introductory
clause in CBOE Rule 4.21(b)(6) to the
end of subclause (A)(ii) so that it applies
only to that subclause, as rounding
would only apply to exercise prices
expressed as a percentage. The proposed
rule change also adds to the
parenthetical in CBOE Rule
4.21(b)(6)(A)(ii) that the system rounds
the ‘‘actual’’ exercise price to the nearest
fixed price minimum increment to
provide additional clarity to the
provision, as the dollar value of an
exercise price expressed as a percentage
determined after the closing value is
available would be rounded to the
nearest minimum dollar value
increment, which dollar value would
represent the ultimate, ‘‘actual’’ exercise
price.
In addition, the proposed rule change
clarifies in CBOE Rule 5.3(e)(3) and
5.4(c)(4) that, following application of
the designated percentage to the closing
value of the underlying security or
index, the system rounds the final
29 The Exchange states that the proposed rule
change makes non-substantive changes to the
structure of this sentence to accommodate the
addition of the specific minimum increments for
the exercise price.
30 The Exchange also states that it believes
flexibility for the Exchange to determine the
smallest increment for exercise prices of FLEX
options on a class-by-class basis is appropriate to
permit the Exchange to make determinations based
on the market characteristics of different classes.
The Exchange notes the rules of another options
exchange similarly permit that exchange to
determine on a class-by-class basis both minimum
increments for exercise prices and premiums (i.e.,
bids and offers) stated using a percentage-based
methodology. See, e.g., NYSE Arca, Inc. Rule 5.32–
O(e)(2)(C).
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transaction prices (rather than bids and
offers) of FLEX options to the nearest
fixed price minimum increment for the
class as set forth in CBOE Rule
5.4(c)(4)(A). The Exchange states that
this is consistent with current
functionality and is merely a
clarification in the CBOE Rules to more
accurately reflect how the System
currently works.
In addition, the Exchange proposes to
add a parenthetical in the first
paragraph of CBOE Rule 5.3(e)(3)(B) to
state that bids and offers would be in
the applicable minimum increment as
set forth in CBOE Rule 5.4. The
Exchange states that this is true today
and merely incorporates a crossreference to CBOE Rule 5.4, which
describes permissible minimum
increments for bids and offers. The
Exchange states that it believes the
addition of this cross-reference will
provide additional transparency and
clarity to this rule.
The proposed rule change also
codifies in CBOE Rules 5.72(c)(3)(A)
and (d)(2), 5.73(e), and 5.74(e) how
FLEX Auction response bids and offers
(as well as Initiating Orders 31 and
Solicited Orders 32 with respect to FLEX
AIM Auctions and FLEX SAM Auctions,
respectively) are ranked during the
allocation process following each type
of FLEX Auction (i.e., electronic FLEX
Auction, open outcry FLEX Auction,
FLEX AIM Auction, and FLEX SAM
Auction, respectively). The Exchange
states that FLEX Orders will always first
be allocated to responses at the best
price, as applicable.33 The proposed
rule change clarifies that the term
‘‘price’’ refers to (1) the dollar and
decimal amount of the order or response
bid or offer or (2) the percentage value
of the order or response bid or offer, as
applicable. The Exchange states that
these are non-substantive changes, as
they reflect how ranking following
FLEX Auctions occurs today, and the
Exchange believes these changes will
provide additional transparency in the
CBOE Rules.
Finally, in CBOE Rule 4.22(b), the
proposed rule change modernizes the
31 ‘‘Initiating Order’’ is defined in CBOE Rule
5.37.
32 ‘‘Solicited Order’’ is defined in CBOE Rule
5.39.
33 The proposed rule change also clarifies this in
CBOE Rule 5.72(d)(2) by adding a cross-reference to
CBOE Rule 5.85(a)(1), which states that, with
respect to open outcry trading on the Exchange’s
trading floor, bids and offers with the highest bid
and lowest offer have priority. This is a nonsubstantive change that is currently true for open
outcry FLEX Auctions, and the proposed rule
change merely makes this explicit in CBOE Rule
5.72(d)(2), which cross-reference was previously
inadvertently omitted from the CBOE Rules.
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54273
provision regarding how FLEX Traders
are notified when a FLEX option series
becomes restricted. The Exchange also
proposes to move this provision to make
it clear it will apply to the entire
paragraph (b) as proposed to be
amended. Currently, CBOE Rule 4.22(b)
states a FLEX Official 34 announces to
FLEX Traders when such a FLEX option
series is restricted to closing only
transactions. The Exchange states that
this was true when FLEX options were
traded only in open outcry and a verbal
announcement was made to the trading
floor. The Exchange states that
currently, because FLEX options are
available for electronic and open outcry
trading, the Exchange notifies FLEX
Traders when a FLEX option series is
restricted to closing only transactions.
In accordance with CBOE Rule 1.5, the
Exchange currently notifies FLEX
Traders of restricted FLEX option series
by electronic message.
II. Discussion and Commission
Findings
After careful review of the proposal
and the comments received, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 2, is consistent with the Act and the
rules and regulations thereunder
applicable to a national securities
exchange.35 In particular, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 2, is consistent with Section 6(b)(5)
of the Act,36 which requires, among
other things, that the rules of a national
securities exchange be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, 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 FLEX options market was
designed to accommodate flexibility in
setting the specific terms of an options
contract for the purpose of satisfying
particular investment objectives that
could not be met by the Exchange’s
standardized non-FLEX options
market.37 By permitting traders to adjust
34 ‘‘FLEX
Official’’ is defined in CBOE Rule 5.75.
approving this proposed rule change, as
modified by Amendment No. 2, the Commission
has considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
36 15 U.S.C. 78f(b)(5).
37 See Securities Exchange Act Release No. 31920
(February 24, 1993), 58 FR 12280 at 12281 (March
3, 1993) (original order approving a CBOE proposal
to list and trade FLEX options on the S&P 100 and
500 Index options).
35 In
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the flexible terms (e.g., strike price,
expiration date, and exercise style),
market participants can trade
customized options on the Exchange
that are not available in the non-FLEX
options market.38 As discussed above,
the Exchange may list options with an
index multiplier of one on broad-based
indexes for which the value of the
underlying index is at least 100.39 By
permitting Micro FLEX Index Options
on such indexes, the proposal will
permit FLEX Traders to customize the
flexible terms of such options that are
authorized for trading on the non-FLEX
market.
In support of its proposal, the
Exchange states that the proposed rule
change will expand investor choice and
flexibility.40 In particular, the Exchange
states that listing and trading of Micro
FLEX Index Options could benefit
investors by providing them additional
granularity with respect to the prices at
which they may execute and exercise
index options on the Exchange.41 The
Exchange states that, in particular, it
believes that Micro FLEX Index Options
would provide institutional investors
with an additional exchange-traded tool
to manage the positions and associated
risk in their portfolios more precisely
based on notional value, which
currently may equal a fraction of a
standard contract.42 The Exchange
states that, given the various trading and
hedging strategies employed by
investors, this additional granularity
may provide investors with more
control over the trading of their
investment strategies and management
of their positions and risk associated
with option positions in their
portfolios.43 The Exchange further states
that this flexibility is currently available
on the OTC market, and believes that
the proposed rule change may shift
liquidity from the OTC market onto the
Exchange, which the Exchange believes
would increase market transparency as
well as enhance price discovery through
increased order flow.44
38 The FLEX options market operates under a
separate structure than the standardized non-FLEX
options market (‘‘non-FLEX options market’’) and
does not offer the same level of transparency as the
non-FLEX options market. Among the differences
between the market structure for FLEX options and
non-FLEX options is that the FLEX options market
does not have a public customer order book and
there is no national best bid or offer (‘‘NBBO’’).
39 See supra note 6.
40 See Notice, supra note 4, 86 FR at 44416.
41 See id. In the Notice, the Exchange provided
examples of the trading of a Micro FLEX Index
Options as compared to a FLEX index option with
a multiplier of 100 and the potential benefits for
investors. See id. at 44418–19.
42 See id. at 44416–17.
43 See id. at 44417.
44 See id.
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The Commission believes this
proposal, which permits Micro FLEX
Index Options only on broad-based
indexes where the value of the
underlying is at least 100, strikes a
reasonable balance between the
Exchange’s desire to offer a wider array
of investment opportunities and the
need to avoid unnecessary proliferation
of FLEX options series. However, the
Commission expects the Exchange to
monitor the trading of Micro FLEX
Index Options to evaluate whether any
issues develop.
The Commission believes that the
proposed rule change is consistent with
the Act because it would provide
investors with additional investment
choices in FLEX options, while also
implementing certain protections
designed to avoid concerns related to
price protections on the non-FLEX
market and market fragmentation. In
particular, the proposed rule requiring
that terms of the Micro FLEX Index
Option differ from those of a non-FLEX
index option or non-FLEX micro-option
can help to address concerns that FLEX
options would act as a surrogate for the
trading of non-FLEX options.45 This is
important given certain investor
protections stated above that exist in the
non-FLEX options market that are not
present in the FLEX options market.46
The proposed rule change states that a
FLEX index option with an index
multiplier of one may not be the same
type (put or call) and may not have the
same exercise style, expiration date,
settlement type, and exercise price as a
non-FLEX index option overlying the
same index listed for trading (regardless
of the index multiplier of the non-FLEX
index option).47 A Micro FLEX Index
Option therefore may not have the same
terms as a non-FLEX index option or
non-FLEX micro-option. This will
prevent a Micro FLEX Index Option
from being listed with terms identical to
those of a non-FLEX index option (with
an index multiplier of 1 or 100) on the
same index, and is thus designed to
avoid price protection and market
fragmentation concerns that could arise
from trading options with identical
terms on the FLEX and non-FLEX
markets.
In addition, the Commission believes
that the fungibility provisions under
CBOE Rule 4.22 will facilitate this
change by preventing new Micro FLEX
Index Option positions from being
opened when a non-FLEX index option
with a multiplier of 100 with the same
terms is listed for trading and by only
45 See
supra note 13 and 16.
supra note 38.
47 See proposed CBOE Rule 4.21(b).
46 See
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permitting closing transactions in this
situation.48 Further, pursuant to CBOE
Rule 4.22(a), a Micro FLEX Index
Option with the same terms as a
subsequently added non-FLEX microoption would become fungible with the
non-FLEX micro-option. Accordingly,
once a non-FLEX micro-option is added
with the same terms as an outstanding
Micro FLEX Index Option, the Micro
FLEX Index Option would no longer
trade in the FLEX options market and
instead would become a standardized,
non-FLEX option and trade under the
same rules that apply to any other
standard non-FLEX micro-option.49
The Commission also believes that the
proposal is consistent with the Act, in
particular the protection of investors
and the public interest, as it includes
several aspects designed to reduce
potential investor confusion. In
particular, the Commission believes that
the proposed treatment of exercise
prices, bids and offers, size
requirements for FLEX SAM auctions
and for crossing orders, and position
and exercise limits for Micro FLEX
Index Options is consistent with the
Act, as these proposed changes should
make clear how Micro FLEX Index
Options would be quoted and traded 50
and are consistent with the treatment of
certain reduced-value index options and
micro-options.51 Additionally, the
Commission believes that the use of
different trading symbols for Micro
FLEX Index Options should help
48 See CBOE Rule 4.22. To facilitate this, the
Exchange is providing that if an identical non-FLEX
index option with an index multiplier of 100 is
added with the same terms as a Micro FLEX Index
Option overlying the same index with a multiplier
of one, a position established under the FLEX
trading procedures may be closed using the trading
procedures against another closing only FLEX
position during the time period that non-FLEX
index option series is listed for trading. See
proposed CBOE Rule 4.22(b)(2); see also supra
notes 14–16 and accompanying text. In addition, as
proposed, CBOE Rule 4.22 would state that the
Exchange notifies FLEX Traders when a FLEX
options series is restricted to closing only
transactions. See proposed CBOE Rule 4.22(b)(2).
The Commission believes that permitting such
closing only transactions will help investors close
out an outstanding Micro FLEX Index Option
should a non-FLEX index option with a multiplier
of 100 with the same terms subsequently be added.
49 See CBOE Rule 4.22(a).
50 The Commission also believes that the
examples that the Exchange proposes to add to the
rules provide clarity to the operation of the
proposed rules. See CBOE Rule 4.21(b)(6) (exercise
prices), CBOE Rule 5.3(e)(3) (bids and offers).
51 The Exchange has made changes to provisions
in its rules to reflect that 100 Micro FLEX Index
Options will be economically equivalent to one
contract for non-FLEX index option with a
multiplier of 100 overlying the same index. See
CBOE Rule 5.74 (order size for FLEX SAM), CBOE
Rule 5.87 (crossing orders), CBOE Rule 8.35(a)(7)
(position limits), CBOE Rule 8.42(g) (exercise
limits).
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investors and other market participants
to distinguish those options from the
related non-FLEX options with a
multiplier of 100 and micro-options as
well as FLEX index options with a
multiplier of 100, reducing potential
investor confusion.52
The Commission believes it is
appropriate for Micro FLEX Index
Options to trade pursuant to existing
FLEX rules governing the listing and
trading of FLEX index options. In
addition, the Exchange states that it and
OPRA have the necessary systems
capacity to handle the additional traffic
associated with the listing of new series
that may result from the introduction of
Micro FLEX Index Options.53 The
Exchange also states that the OCC will
be able to accommodate the listing and
trading of Micro FLEX Index Options.
As a national securities exchange, the
Exchange is required, under Section
6(b)(1) of the Act,54 to enforce
compliance by its members and persons
associated with its members with the
provisions of the Act, Commission rules
and regulations thereunder, and its own
rules. The Exchange states that its
existing surveillance and reporting
safeguards are designed to deter and
detect possible manipulative behavior
that might arise from listing and trading
Micro FLEX Options. In addition, Micro
FLEX Index Options will be traded
under the Exchange’s existing regulatory
regime for FLEX index options, which
includes, among other things, the
Exchange’s existing rules regarding
customer protection, safeguards related
to position and exercise limits, as
applicable,55 and reporting
requirements. In particular, Micro FLEX
Index Option orders entered by TPHs on
behalf of customers, including
institutional and retail customers, will
be subject to all Exchange rules
regarding doing business with the
public, including those within Chapter
9 of the Exchange’s Rules.56 The
supra note 11.
supra note 27.
54 15 U.S.C. 78f(b)(1).
55 There are, however, no position limits or
exercise limits for certain broad-based FLEX index
options. See CBOE Rule 8.35(b) and CBOE Rule
8.42(g).
56 The Commission notes that these rules require,
among other things, that: (i) A TPH may not accept
an option order, including a Micro FLEX Index
Option order, from a customer unless that
customer’s account has been approved for options
transactions in accordance with CBOE Rule 9.1; (ii)
TPHs that conduct customer business, including
institutional and retail customer business, must
ensure they provide for appropriate supervisory
control over that business and maintain customer
records in accordance with CBOE Rule 9.2; and (iii)
TPHs will also need to provide customers that trade
Micro FLEX Index Option (and any other option)
with a copy of the ODD and amendments to the
Commission believes that it is
consistent with the Act to apply
Exchange rules governing, among other
things, customer accounts, margin
requirements, and trading halt
procedures to the proposed Micro FLEX
Index Options that are otherwise
applicable to other FLEX index options.
Further, the Commission believes that
trading the Micro FLEX Index Options
pursuant to the Exchange’s current rules
governing the trading of FLEX index
options is consistent with the protection
of investors and should provide market
participants with the same flexibility to
customize certain terms of the options
while allowing investors to trade a
smaller sized options contract that may,
according to the Exchange, better meet
their hedging needs.
The Commission also believes the
proposed changes that the Exchange is
making regarding codifying how
percentage-based FLEX orders and
auction responses will be ranked are
consistent with the Act.57 The Exchange
states that such ranking provides FLEX
Traders willing to pay more (or receive
less) with priority.58 The Exchange
further states that providing priority to
FLEX Traders that submit more
aggressive responses will encourage
FLEX Traders to submit competitive
responses, which the Exchange believes
will benefit investors.59 In addition, the
Exchange states that such ranking is
consistent with the Exchange’s current
practice, as well as the way the
Exchange ranks dollar-priced
premiums.60 For the foregoing reasons,
the Commission believes that the
proposed rule change regarding the
ranking of percentage-based FLEX
orders and options responses is
consistent with the Act.
Finally, the Commission believes that
the other non-substantive and clarifying
changes will help protect investors and
the public interest by providing clarity
and transparency to the rules by making
them easier to read and understand.61
52 See
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ODD in accordance with CBOE Rule 9.9 so that
customers are informed of any risks associated with
trading options, including Micro FLEX Index
Options.
57 See proposed amendments to CBOE Rule
4.21(b)(6), CBOE Rule 5.3(e)(3), and CBOE Rule
5.4(c)(4). As discussed above, following the
application of the designated percentage to the
closing value of the underlying security or index,
the system rounds the final transaction prices to the
nearest minimum fixed price increment for the
class as set forth in Rule 5.4. See CBOE Rule
5.3(e)(3) and CBOE Rule 5.4(c)(4).
58 See Notice, supra note 4 at 44420.
59 See id.
60 See id. at 44419.
61 See, e.g., proposed amendments to CBOE Rule
4.21(b)(6) (stating the minimum increments for
exercise prices); CBOE Rule 4.22(b) (changing the
terminology related to notification of when a FLEX
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54275
Accordingly, the Commission finds
that the proposed rule change, as
modified by Amendment No. 2, is
consistent with Section 6(b)(5) of the
Act 62 and the rules and regulations
thereunder applicable to a national
securities exchange.
III. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,63 that the
proposed rule change (SR–CBOE–2021–
041), as modified by Amendment No. 2,
be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.64
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–21211 Filed 9–29–21; 8:45 am]
BILLING CODE 8011–01–P
SMALL BUSINESS ADMINISTRATION
[License No. 02/02–0680]
GC SBIC VI, L.P.; Surrender of License
of Small Business Investment
Company
Pursuant to the authority granted to
the United States Small Business
Administration under the Small
Business Investment Act of 1958, as
amended, under Section 309 of the Act
and Section 107.1900 of the Small
Business Administration Rules and
Regulations (13 CFR 107.1900) to
function as a small business investment
company under the Small Business
Investment Company License No. 02/
02–0680 issued to GC SBIC VI, L.P., said
license is hereby declared null and void.
United States Small Business
Administration.
Bailey DeVries,
Associate Administrator, Office of Investment
and Innovation.
[FR Doc. 2021–21297 Filed 9–29–21; 8:45 am]
BILLING CODE P
option series is restricted to closing only
transactions). See also proposed amendments to
CBOE Rule 5.72(c)(3)(A); CBOE Rule 5.73(e); CBOE
Rule 5.74(e) (codifying that FLEX auction response
bids and offers as well as Initiating Orders and
Solicitation Orders with respect to FLEX AIM
Auctions and FLEX SAM Auctions, respectively,
are ranked during the allocation process based on
the dollar and decimal amount of the order or
response bid or offer, or the percentage value of the
order or response bid or offer, as applicable).
62 15 U.S.C. 78f(b)(5).
63 15 U.S.C. 78s(b)(2).
64 17 CFR 200.30–3(a)(12).
E:\FR\FM\30SEN1.SGM
30SEN1
]]>Agencies
[Federal Register Volume 86, Number 187 (Thursday, September 30, 2021)]
[Notices]
[Pages 54269-54275]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-21211]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93122; File No. SR-CBOE-2021-041]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Order
Granting Approval of a Proposed Rule Change, as Modified by Amendment
No. 2, To Amend Certain Rules To Accommodate the Listing and Trading of
Micro FLEX Index Options and To Make Other Clarifying and Non-
Substantive Changes
September 24, 2021.
On July 23, 2021, Cboe Exchange, Inc. (``Exchange'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (the
``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
accommodate the listing and trading of flexible exchange (``FLEX'')
index options with an index multiplier of one (``Micro FLEX Index
Options'') and to make other clarifying and non-substantive changes.\3\
The proposed rule change was published in the Federal Register on
August 12, 2021.\4\ On September 22, 2021, the Exchange submitted
partial Amendment No. 2 to the proposed rule change.\5\ The Commission
received no comments on the proposed rule change. The Commission is
approving the proposed rule change, as modified by Amendment No. 2.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On August 4, 2021, the Exchange filed partial Amendment No.
1 to the proposed rule change. The Exchange withdrew partial
Amendment No. 1 on August 6, 2021.
\4\ Securities Exchange Release No. 92599 (August 6, 2021), 86
FR 44411 (August 12, 2021) (``Notice'').
\5\ In Amendment No. 2, the Exchange stated that, currently, the
Exchange lists non-FLEX options on 12 (not 13, as stated in the
Exchange's original filing) broad-based indexes with a value of at
least 100, and the proposed rule change would authorize the Exchange
to list Micro FLEX Options on the same 12 indexes, which are all
broad-based and all have a value of at least 100. The Exchange
stated that it delisted options on FTSE 100 Mini-Index (UKXM). The
Exchange also made a conforming change to its representation under
the heading ``Capacity.'' Because Amendment No. 2 does not
materially alter the substance of the proposed rule change,
Amendment No. 2 is not subject to notice and comment. Amendment No.
2 is available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2021-041/srcboe2021041.htm.
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[[Page 54270]]
I. Description of the Proposed Rule Change, as Modified by Amendment
No. 2
The Exchange proposes to amend its rules to permit the trading of
FLEX index options with an index multiplier of one on broad-based
indexes for which the value of the underlying is at least 100. The
Commission recently approved a rule change that provided the Exchange
with the authority to list options with an index multiplier of one on
broad-based indexes for which the value of the underlying is at least
100 on the Exchange's standardized, non-FLEX market.\6\
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\6\ See CBOE Rule 4.11 (providing for the listing of non-FLEX
options with a multiplier of one (``micro-options''). See Securities
Exchange Release No. 91528 (April 9, 2021), 86 FR 19933 (April 15,
2021). According to the Exchange, currently, the Exchange lists non-
FLEX options on 12 broad-based indexes with a value of at least 100:
S&P 500 Index, Mini-S&P 500 Index (XSP), Russell 2000 Index (RUT),
Mini-Russell 2000 Index (MRUT), Dow Jones Industrial Average (DJX),
S&P 100 Index (OEX and XEO), S&P 500 ESG Index (SPESG), MSCI EAFE
Index (MXEA), MSCI Emerging Markets Index (MXEF), Russell 1000
Growth Index (RLG), Russell 1000 Value Index (RLV), and Russell 1000
Index (RUI). The Exchange states that the proposed rule change will
authorize the Exchange to list Micro FLEX Index Options on the same
12 indexes, which are all broad-based and all have a value of at
least 100. In Amendment No. 2, the Exchange stated that it may
authorize for trading a FLEX option class on any index if it may
authorize for trading a non-FLEX option class on that index, even if
the Exchange does not list that non-FLEX option class for trading.
Currently, the Exchange is authorized to (but does not) list for
trading options on six additional broad-based indexes with values of
at least 100. The Exchange stated that the Exchange's system
currently prevents FLEX trading on these indexes (and other
underlying securities and indexes on which the Exchange does not
list non-FLEX options even though authorized to under its rules). If
the Exchange updates its system in the future to permit FLEX trading
on underlying securities or indexes on which the Exchange does not
list non-FLEX options, Micro FLEX Index Options on these six indexes
(assuming they still satisfied the Exchange's maintenance listing
criteria in Rule 4.10 and had values of at least 100) would be
permitted to be listed and traded. See infra note 27.
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Currently, CBOE Rule 4.21(b)(1) states the index multiplier for
FLEX index options is 100. The Exchange proposes to add to the rule
that the index multiplier for FLEX index options on broad-based indexes
for which the value of the underlying is at least 100 \7\ may also be
one in addition to the current index multiplier of 100. The proposed
rule change amends CBOE Rule 4.21(b)(1) to state that if a FLEX Trader
\8\ specifies an index on a FLEX Order,\9\ the FLEX Trader must also
include whether the index option has an index multiplier of 100 or 1
when identifying the class of FLEX Order.\10\ The Exchange states that,
to the extent the Exchange lists a Micro FLEX Index Option on an index
on which it also lists a standard FLEX index option, it will be listed
with a different trading symbol than the standard index option with the
same underlying index to reduce any potential confusion.\11\
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\7\ These are the same indexes on which the Exchange may list
micro-options.
\8\ A ``FLEX Trader'' is a Trading Permit Holder the Exchange
has approved to trade FLEX options on the Exchange.
\9\ A ``FLEX Order'' is an order submitted in FLEX options. The
submission of a FLEX Order makes the FLEX option series in that
order eligible for trading. See CBOE Rule 5.72(b).
\10\ When submitting a FLEX Order, the submitting FLEX Trader
must include all required terms of a FLEX option series. These terms
include, in addition to the underlying equity security or index, the
type of options (put or call), exercise style, expiration date,
settlement type, and exercise price. See CBOE Rule 4.21(b). Pursuant
to CBOE Rule 4.21(b)(1), the submitting FLEX Trader must include the
underlying equity security or index on the FLEX Order. The Exchange
states that, therefore, each FLEX index option series in a Micro
FLEX Index Option class will include the same flexible terms as any
other FLEX option series, including strike price, settlement,
expiration date, and exercise style as required by CBOE Rule
4.21(b).
\11\ The Exchange states that, for example, a standard FLEX
index option for index ABC with an index multiplier of 100 may have
symbol 4ABC, while a Micro FLEX Index Option for index ABC with a
multiplier of one may have symbol 4ABC9 and a non-FLEX option on
index ABC with an index multiplier of 100 may have symbol ABC, while
a non-FLEX micro-option would have a different symbol (such as
ABC9).
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In its proposal, the Exchange stated that its rules permit trading
in a put or call FLEX option series only if it does not have the same
exercise style, same expiration date, and same exercise price as a non-
FLEX option series on the same underlying security or index that is
already available for trading.\12\ The Exchange proposes to add to the
introductory paragraph of CBOE Rule 4.21(b) that a FLEX index option
with an index multiplier of one may not be the same type (put or call)
and may not have the same exercise style, expiration date, settlement
type, and exercise price as a non-FLEX index option overlying the same
index listed for trading (regardless of the whether the index
multiplier of the non-FLEX index option is one or 100). As a result, a
Micro FLEX Index Option may not have the same terms as a non-FLEX index
option or non-FLEX micro-option. The Exchange states that this will
prevent a Micro FLEX Index Option from being listed with terms
identical to those of a non-FLEX index option with a multiplier of 100
or a non-FLEX micro-option with a multiplier of one on the same index.
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\12\ See CBOE Rule 4.21(a)(1).
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The Exchange states that a Micro FLEX Index Option would become
fungible \13\ with a non-FLEX micro-option with the same terms pursuant
to CBOE Rule 4.22(a), but would not be fungible with a non-FLEX option
overlying the same index with a multiplier of 100 with the same
expiration date, settlement, and exercise price. The Exchange states
that because the proposed rule change would not permit a Micro FLEX
Index Option to be listed with the same terms as a non-FLEX index
option regardless of the index multiplier, proposed CBOE Rule
4.22(b)(2) will provide that if a non-FLEX index option series with an
index multiplier of 100 and the same terms as a Micro FLEX Index Option
overlying the same index is listed for trading, a position established
under the FLEX trading procedures may be closed using the FLEX trading
procedures in Chapter 5, Section F against another closing only FLEX
position during the time period that non-FLEX index option series is
listed for trading. During the time that non-FLEX index option series
is listed for trading, pursuant to CBOE Rule 5.72, no FLEX Orders may
be submitted into an electronic auction or represented for open outcry
trading for a FLEX index option series with a multiplier of one with
the same terms as the non-FLEX index option series overlying the same
index with an index multiplier of 100, unless the FLEX Order is a
closing order.\14\ This proposed ``closing only'' process is similar to
the current ``closing only'' process for non-FLEX option American-style
series added intraday, as set forth in current CBOE Rule 4.22(b).\15\
The Exchange states that this proposed change would prevent new Micro
FLEX Index Option positions from being opened when a non-FLEX Index
Option with a multiplier of 100 with the same terms is listed for
trading.\16\ In addition, as proposed, CBOE Rule 4.22(b) would require
that the Exchange notifies FLEX
[[Page 54271]]
Traders when a FLEX option series is restricted to closing only
transactions.\17\
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\13\ Under CBOE Rule 4.22(a), if the Exchange lists for trading
a non-FLEX option series with identical terms as a FLEX option
series, all existing open positions established under the FLEX
trading procedures are fully fungible with the non-FLEX option
series, and any further trading in the series would be as non-FLEX
options subject to non-FLEX trading procedures and rules.
\14\ The Exchange states that, to the extent the non-FLEX index
option is later delisted, then opening trades of the Micro FLEX
Index Option may resume after that occurs.
\15\ The Exchange plans to renumber current CBOE Rule 4.22(b) as
CBOE Rule 4.22(b)(1), accompanied by non-substantive punctuation
mark changes to reflect proposed CBOE Rule 4.22(b)(2).
\16\ As proposed, if the Exchange lists a non-FLEX index option
with a multiplier of one with identical terms as a Micro FLEX Index
Option, then current CBOE Rule 4.22(a) applies to the fungibility of
those options (or proposed CBOE Rule 4.22(b)(1) if it is an
American-style series added intraday) and the FLEX Micro Index
Option would no longer be a FLEX option, but instead be traded as a
standard micro-option.
\17\ The Exchange proposes to move this provision to make it
clear it will apply to the entire paragraph (b) as proposed to be
amended, and to make changes that it states would modernize this
provision. Currently, CBOE Rule 4.22(b) states that a FLEX Official
announces to FLEX Traders when such a FLEX option series is
restricted to closing only transactions. The Exchange states that
this was true when FLEX options were traded only in open outcry and
a verbal announcement was made to the trading floor. The Exchange
states that currently, because FLEX options are available for
electronic and open outcry trading, the Exchange notifies FLEX
Traders when a FLEX option series is restricted to closing only
transactions. Accordingly, the Exchange proposes to revise Rule
4.22(b) to state that the Exchange notifies FLEX Traders when a FLEX
Option series is restricted to closing only transactions. The
Exchange also states that, in accordance with CBOE Rule 1.5, the
Exchange currently notifies FLEX Traders of restricted FLEX option
series by electronic message.
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Trading Hours
Pursuant to CBOE Rule 5.1(b)(3)(A) and (c)(1), Micro FLEX Index
Options will be available for trading during the same hours as non-FLEX
Index Options pursuant to CBOE Rule 5.1(b)(2). Accordingly, Regular
Trading Hours for Micro FLEX Index Options will generally be 9:30 a.m.
to 4:15 p.m. Eastern time.\18\ To the extent an index option is
authorized for trading during Global Trading Hours, the Exchange states
it may also list Micro FLEX Index Options during that trading session
as well, the hours for which trading session are 3:00 a.m. to 9:15 a.m.
Eastern time.
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\18\ Certain indexes close trading at 4:00 p.m. Eastern time.
See CBOE Rule 5.1.
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Expiration, Settlement, and Exercise Style
In accordance with CBOE Rule 4.21(b), FLEX Traders may designate
the type (put or call), exercise style, expiration date, and settlement
type of Micro FLEX Index Options.
Exercise Prices
The Exchange proposes to amend CBOE Rule 4.21(b)(6) to state that
the exercise price for a FLEX index option series in a class with a
multiplier of one is set at the same level as the exercise price for a
FLEX index option series in a class with a multiplier of 100. To
illustrate the deliverable exercise price for index options with
different multipliers as well as physically settled equity options, the
proposed rule change adds the following examples to CBOE Rule
4.21(b)(6) regarding how the deliverable for a Micro FLEX Index Option
will be calculated (as well as for a FLEX index option with a
multiplier of 100 and a FLEX equity option, for additional clarity and
transparency): If the exercise price of a FLEX option series is a fixed
price of $50, it will deliver: (A) 100 shares of the underlying
security at $50 (with a total deliverable of $5,000) if a FLEX equity
option; (B) cash equal to 100 (i.e., the index multiplier) times 50
(with a total deliverable value of $5,000) if a FLEX index option with
a multiplier of 100; and (C) cash equal to 1 (i.e., the index
multiplier) times 50 (with a total deliverable value of $50) if a Micro
FLEX Index Option. If the exercise price of a FLEX option series is 50%
of the closing value of the underlying security or index, as
applicable, on the trade date, it will deliver: (A) 100 shares of the
underlying security at a price equal to 50% of the closing value of the
underlying security on the trade date (with a total deliverable of 100
times that percentage amount) if a FLEX Equity Option; (B) cash equal
to 100 (i.e., the index multiplier) times a value equal to 50% of the
closing value of the underlying index on the trade date (with a total
deliverable of 100 times that percentage amount) if a FLEX index option
with a multiplier of 100; and (C) cash equal to 1 (i.e., the index
multiplier) times a value equal to 50% of the closing value of the
underlying index on the trade date (with a total deliverable of one
times that percentage amount) if a Micro FLEX Index Option. The
Exchange states that the descriptions of exercise prices for FLEX
equity options and FLEX index options with a multiplier of 100 are true
today, and that the examples merely add clarity to the rules.
Bids and Offers
Pursuant to CBOE Rule 5.4(c), the Exchange states that it will
determine the minimum increment for bids and offers on Micro FLEX Index
Options (as it does for all other FLEX options) on a class-by-class
basis, which may not be smaller than (1) $0.01, if the exercise price
for the FLEX option series is a fixed price, or (2) 0.01%, if the
exercise price for the FLEX option series is a percentage of the
closing value of the underlying equity security or index on the trade
date.\19\ The proposed rule change amends CBOE Rule 5.3(e)(3) to
describe the difference between the expression of bids and offers for
FLEX equity options, FLEX index options with a multiplier of 100, and
Micro FLEX Index Options. Currently, that rule states that bids and
offers for FLEX options must be expressed in (a) U.S. dollars and
decimals if the exercise price for the FLEX option series is a fixed
price, or (b) a percentage, if the exercise price for the FLEX option
series is a percentage of the closing value of the underlying equity
security or index on the trade date, per unit.\20\ As noted above, a
FLEX option contract unit consists of 100 shares of the underlying
security or 100 times the value of the underlying index, as they
currently have a 100 contract multiplier.\21\
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\19\ The System (as defined in CBOE Rule 1.5(aa)) rounds bids
and offers to the nearest minimum increment.
\20\ The Exchange states that the proposed rule change
reorganizes the language in this provision to make clear that the
phrase ``if the exercise price for the FLEX option series is a
percentage of the closing value of the underlying equity security or
index on the trade date'' applies to the entire clause (B) of
5.3(e)(3). The proposed rule change also adds a cross-reference to
CBOE Rule 5.4 to provide that bids and offers in U.S. dollars and
decimals and percentages of the closing values of the underlying
equity security or index on the trade date must be in the applicable
minimum increment as set forth in CBOE Rule 5.4.
\21\ See current CBOE Rule 4.21(b)(1).
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The proposed rule change states that bids and offers for Micro FLEX
Index Options must be expressed in (a) U.S. dollars and decimals if the
exercise price for the FLEX option series is a fixed price, or (b) a
percentage per unit (if a FLEX equity option or a FLEX index option
with a multiplier of 100) or per 1/100th unit (if a FLEX index option
with a multiplier of one) of the underlying security or index, as
applicable, if the exercise price for the FLEX option series is a
percentage of the closing value of the underlying equity security or
index on the trade date. Additionally, the proposed rule change adds
examples describing how FLEX options bids and offers must be expressed.
The proposed rule will state that, if the exercise price of a FLEX
option series is a fixed price, a bid of ``0.50'' represents a bid of
(A) $50 (0.50 times 100 shares) for a FLEX equity option; (B) $50 (0.50
times an index multiplier of 100) for a FLEX index option with a
multiplier of 100; and (C) $0.50 (0.50 times an index multiplier of
one) for a Micro FLEX Index Option. If the exercise price of a FLEX
option series is a percentage of the closing value of the underlying
equity security, a bid of ``0.50'' represents a bid of (A) 50% (0.50
times 100 shares) of the closing value of the underlying equity
security on the trade date if a FLEX equity option; (B) 50% (0.50 times
an index multiplier of 100) of the closing value of the underlying
index on the trade date if a FLEX index option with a multiplier of
100; and (C) 0.50% (0.50 times an index multiplier of one) of the
closing value of the underlying index on the trade date if a Micro FLEX
Index Option. The Exchange states that it believes the proposed rule
language identifies a clear, transparent
[[Page 54272]]
description of the differences between FLEX index options with a
multiplier of 100 and Micro FLEX Index Options and provides clarity
regarding how bids and offers of FLEX equity options and FLEX index
options with a multiplier of 100 will be required to be expressed.
Contract Size Limits
The Exchange states that the proposed rule change updates various
other provisions in the following rules to reflect that 100 Micro FLEX
Index Options overlying an index will be economically equivalent to one
contract for a standard index option overlying the same index:
Rule 5.74: CBOE Rule 5.74 describes the Exchange's FLEX
Solicitation Auction Mechanism (``FLEX SAM''). An order, or the
smallest leg of a complex order, must be for at least the minimum size
designated by the Exchange (which may not be less than 500 standard
option contracts or 5,000 mini-option contracts). The proposed rule
change adds that 50,000 Micro FLEX Index Options is the corresponding
minimum size for orders submitted into FLEX SAM Auctions.
Rule 5.87: CBOE Rule 5.87(f) describes when a Floor Broker
is entitled to cross a certain percentage of an order, subject to the
requirements in that paragraph. Under that rule, the Exchange may
determine on a class-by-class basis the eligible size for an order that
may be transacted pursuant to that paragraph; however, the eligible
order size may not be less than 50 standard option contracts (or 500
mini-option contracts or 5,000 for micro-options). The proposed rule
change adds that 5,000 FLEX index option contracts with an index
multiplier of one is the corresponding minimum size for orders that may
be crossed in accordance with this provision. Additionally, CBOE Rule
5.87, Interpretation and Policy .07(a) provides that CBOE Rule 5.86(e)
\22\ does not prohibit a Trading Permit Holder (``TPH'') from buying or
selling a stock, security futures or futures position following receipt
of an order, including an option order, but prior to announcing such
order to the trading crowd, provided that the option order is in a
class designated as eligible for ``tied hedge'' transactions and within
the eligibility size parameters, which are determined by the Exchange
and may not be smaller than 500 standard option contracts (or 5,000
mini-option contracts or 50,000 micro-options). The proposed rule
change adds that 50,000 FLEX index option contracts with a multiplier
of one is the corresponding minimum size for orders that may qualify as
tied hedge transactions and not be deemed a violation of CBOE Rule
5.86(e).
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\22\ The Exchange states that CBOE Rule 5.86(e) provides that it
will be considered conduct inconsistent with just and equitable
principles of trade for any TPH or person associated with a TPH, who
has knowledge of all material terms and conditions of an original
order and a solicited order, including a facilitation order, that
matches the original order's limit, the execution of which are
imminent, to enter, based on such knowledge, an order to buy or sell
an option of the same class as an option that is the subject of the
original order, or an order to buy or sell the security underlying
such class, or an order to buy or sell any related instrument until
either (1) all the terms and conditions of the original order and
any changes in the terms and conditions of the original order of
which that TPH or associated person has knowledge are disclosed to
the trading crowd or (2) the solicited trade can no longer
reasonably be considered imminent in view of the passage of time
since the solicitation. An order to buy or sell a ``related
instrument,'' means, in reference to an index option, an order to
buy or sell securities comprising ten percent or more of the
component securities in the index or an order to buy or sell a
futures contract on any economically equivalent index.
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Position and Exercise Limits \23\
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\23\ The Exchange states that, to the extent the Exchange lists
Micro FLEX Index Options on other indexes in the future, they would
be subject to the same position and exercise limits set forth in the
applicable rules, and similarly aggregated with standard options on
the same indexes, as proposed.
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The proposed rule change amends CBOE Rule 8.35(a) regarding
position limits for FLEX options to describe how Micro FLEX Index
Options will be counted for purposes of determining compliance with
position limits.\24\ Because 100 Micro FLEX Index Options are
equivalent to one FLEX index option with a multiplier of 100 overlying
the same index due to the difference in contract multipliers, proposed
CBOE Rule 8.35(a)(7) states that for purposes of determining compliance
with the position limits under CBOE Rule 8.35, 100 Micro FLEX Index
Option contracts equal one FLEX index option contract with a multiplier
of 100 with the same underlying index. The proposed rule change makes a
corresponding change to CBOE Rule 8.35(b) to clarify that, like
reduced-value FLEX contracts, Micro FLEX Index Option contracts will be
aggregated with full-value contracts and counted by the amount by which
they equal a full-value contract for purposes of the reporting
obligation in that provision (i.e., 100 Micro FLEX Index Options will
equal one FLEX index option contract with a multiplier of 100 overlying
the same index).\25\ The proposed rule change also adds that Micro FLEX
Index Options on certain broad-based indexes for which FLEX index
options with a multiplier of 100 have no position limits will also have
no position limits. The proposed rule change amends CBOE Rule 8.42(g)
to make corresponding changes regarding the application of exercise
limits to Micro FLEX Index Options. This is consistent with the current
treatment of other reduced-value FLEX index options with respect to
position and exercise limits. The margin requirements set forth in
Chapter 10 of the Exchange's Rules will apply to Micro FLEX Index
Options (as they currently do to all FLEX options).\26\
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\24\ The proposed rule change also corrects an administrative
error in CBOE Rule 8.35(a). Currently, there are two subparagraphs
numbered as (a)(5). The proposed rule change amends paragraph (a) to
renumber the second subparagraph (a)(5) to be subparagraph (a)(6).
\25\ The Exchange states that, as it does today with respect to
reduced-value indexes, the Exchange will count Micro FLEX Index
Options as a percentage of a FLEX index option with a multiplier of
100 when calculating positions to determine compliance with position
limits.
\26\ According to the Exchange, pursuant to CBOE Rule 8.43(j),
FLEX index options with a multiplier of one will be aggregated with
non-FLEX index options on the same underlying index in the same
manner as all other FLEX index options.
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Capacity
The Exchange represents that it believes the Exchange and Options
Price Reporting Authority (``OPRA'') have the necessary systems
capacity to handle the additional traffic associated with the listing
of new series that may result from the introduction of the Micro FLEX
Index Options. Because the proposed rule change is limited to broad-
based index options, which currently represent only 12 of the indexes
on which the Exchange listed on the Exchange, the Exchange states that
believes any additional traffic that may be generated from the
introduction of Micro FLEX Index Options will be manageable.\27\ The
Exchange states that it also understands that the OCC will be able to
accommodate the listing and trading of Micro FLEX Index Options.
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\27\ The Exchange states that if it updates its system to permit
FLEX trading on underlying securities and indexes on which it does
not list non-FLEX options, including Micro FLEX Index Options
trading on broad-based indexes with a value of at least 100, the
Exchange would do so only if it had sufficient capacity to permit
such additional trading. See supra note 6.
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Other Changes
The Exchange proposes to amend CBOE Rule 4.21(b)(6) to state that
the exercise price may be in increments no smaller than: \28\ (1) For a
FLEX equity option or FLEX index option that is not Cliquet-settled,
(a) $0.01, if the exercise price for the FLEX option series is
expressed as a fixed price in terms of
[[Page 54273]]
dollars and decimals or a specific index value, as applicable, or (b)
0.01%, if the exercise price for the FLEX option series is expressed as
a percentage of the closing value of the underlying equity security or
index on the trade date, as applicable. The proposed rule change also
adds to CBOE Rule 4.21(b)(6) after subparagraph (B) that the Exchange
may determine the smallest increment for exercise prices of FLEX
options on a class-by-class basis. The Exchange states that these
changes codify long-standing interpretations of the current rule, which
references the minimum increment for bids and offers as set forth in
CBOE Rule 5.4.\29\ The Exchange states that it believes this will make
the rule regarding permissible exercise prices for FLEX options more
transparent and thus may eliminate potential confusion regarding
permissible exercise prices.\30\
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\28\ The Exchange states that this language is taken from CBOE
Rule 5.4(c)(4).
\29\ The Exchange states that the proposed rule change makes
non-substantive changes to the structure of this sentence to
accommodate the addition of the specific minimum increments for the
exercise price.
\30\ The Exchange also states that it believes flexibility for
the Exchange to determine the smallest increment for exercise prices
of FLEX options on a class-by-class basis is appropriate to permit
the Exchange to make determinations based on the market
characteristics of different classes. The Exchange notes the rules
of another options exchange similarly permit that exchange to
determine on a class-by-class basis both minimum increments for
exercise prices and premiums (i.e., bids and offers) stated using a
percentage-based methodology. See, e.g., NYSE Arca, Inc. Rule 5.32-
O(e)(2)(C).
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The proposed rule change moves the parenthetical regarding the
system rounding the exercise price to the nearest minimum increment for
bids and offers in the class (as set forth in CBOE Rule 5.4) from the
introductory clause in CBOE Rule 4.21(b)(6) to the end of subclause
(A)(ii) so that it applies only to that subclause, as rounding would
only apply to exercise prices expressed as a percentage. The proposed
rule change also adds to the parenthetical in CBOE Rule
4.21(b)(6)(A)(ii) that the system rounds the ``actual'' exercise price
to the nearest fixed price minimum increment to provide additional
clarity to the provision, as the dollar value of an exercise price
expressed as a percentage determined after the closing value is
available would be rounded to the nearest minimum dollar value
increment, which dollar value would represent the ultimate, ``actual''
exercise price.
In addition, the proposed rule change clarifies in CBOE Rule
5.3(e)(3) and 5.4(c)(4) that, following application of the designated
percentage to the closing value of the underlying security or index,
the system rounds the final transaction prices (rather than bids and
offers) of FLEX options to the nearest fixed price minimum increment
for the class as set forth in CBOE Rule 5.4(c)(4)(A). The Exchange
states that this is consistent with current functionality and is merely
a clarification in the CBOE Rules to more accurately reflect how the
System currently works.
In addition, the Exchange proposes to add a parenthetical in the
first paragraph of CBOE Rule 5.3(e)(3)(B) to state that bids and offers
would be in the applicable minimum increment as set forth in CBOE Rule
5.4. The Exchange states that this is true today and merely
incorporates a cross-reference to CBOE Rule 5.4, which describes
permissible minimum increments for bids and offers. The Exchange states
that it believes the addition of this cross-reference will provide
additional transparency and clarity to this rule.
The proposed rule change also codifies in CBOE Rules 5.72(c)(3)(A)
and (d)(2), 5.73(e), and 5.74(e) how FLEX Auction response bids and
offers (as well as Initiating Orders \31\ and Solicited Orders \32\
with respect to FLEX AIM Auctions and FLEX SAM Auctions, respectively)
are ranked during the allocation process following each type of FLEX
Auction (i.e., electronic FLEX Auction, open outcry FLEX Auction, FLEX
AIM Auction, and FLEX SAM Auction, respectively). The Exchange states
that FLEX Orders will always first be allocated to responses at the
best price, as applicable.\33\ The proposed rule change clarifies that
the term ``price'' refers to (1) the dollar and decimal amount of the
order or response bid or offer or (2) the percentage value of the order
or response bid or offer, as applicable. The Exchange states that these
are non-substantive changes, as they reflect how ranking following FLEX
Auctions occurs today, and the Exchange believes these changes will
provide additional transparency in the CBOE Rules.
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\31\ ``Initiating Order'' is defined in CBOE Rule 5.37.
\32\ ``Solicited Order'' is defined in CBOE Rule 5.39.
\33\ The proposed rule change also clarifies this in CBOE Rule
5.72(d)(2) by adding a cross-reference to CBOE Rule 5.85(a)(1),
which states that, with respect to open outcry trading on the
Exchange's trading floor, bids and offers with the highest bid and
lowest offer have priority. This is a non-substantive change that is
currently true for open outcry FLEX Auctions, and the proposed rule
change merely makes this explicit in CBOE Rule 5.72(d)(2), which
cross-reference was previously inadvertently omitted from the CBOE
Rules.
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Finally, in CBOE Rule 4.22(b), the proposed rule change modernizes
the provision regarding how FLEX Traders are notified when a FLEX
option series becomes restricted. The Exchange also proposes to move
this provision to make it clear it will apply to the entire paragraph
(b) as proposed to be amended. Currently, CBOE Rule 4.22(b) states a
FLEX Official \34\ announces to FLEX Traders when such a FLEX option
series is restricted to closing only transactions. The Exchange states
that this was true when FLEX options were traded only in open outcry
and a verbal announcement was made to the trading floor. The Exchange
states that currently, because FLEX options are available for
electronic and open outcry trading, the Exchange notifies FLEX Traders
when a FLEX option series is restricted to closing only transactions.
In accordance with CBOE Rule 1.5, the Exchange currently notifies FLEX
Traders of restricted FLEX option series by electronic message.
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\34\ ``FLEX Official'' is defined in CBOE Rule 5.75.
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II. Discussion and Commission Findings
After careful review of the proposal and the comments received, the
Commission finds that the proposed rule change, as modified by
Amendment No. 2, is consistent with the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\35\ In particular, the Commission finds that the proposed
rule change, as modified by Amendment No. 2, is consistent with Section
6(b)(5) of the Act,\36\ which requires, among other things, that the
rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, 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.
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\35\ In approving this proposed rule change, as modified by
Amendment No. 2, the Commission has considered the proposed rule's
impact on efficiency, competition, and capital formation. See 15
U.S.C. 78c(f).
\36\ 15 U.S.C. 78f(b)(5).
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The FLEX options market was designed to accommodate flexibility in
setting the specific terms of an options contract for the purpose of
satisfying particular investment objectives that could not be met by
the Exchange's standardized non-FLEX options market.\37\ By permitting
traders to adjust
[[Page 54274]]
the flexible terms (e.g., strike price, expiration date, and exercise
style), market participants can trade customized options on the
Exchange that are not available in the non-FLEX options market.\38\ As
discussed above, the Exchange may list options with an index multiplier
of one on broad-based indexes for which the value of the underlying
index is at least 100.\39\ By permitting Micro FLEX Index Options on
such indexes, the proposal will permit FLEX Traders to customize the
flexible terms of such options that are authorized for trading on the
non-FLEX market.
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\37\ See Securities Exchange Act Release No. 31920 (February 24,
1993), 58 FR 12280 at 12281 (March 3, 1993) (original order
approving a CBOE proposal to list and trade FLEX options on the S&P
100 and 500 Index options).
\38\ The FLEX options market operates under a separate structure
than the standardized non-FLEX options market (``non-FLEX options
market'') and does not offer the same level of transparency as the
non-FLEX options market. Among the differences between the market
structure for FLEX options and non-FLEX options is that the FLEX
options market does not have a public customer order book and there
is no national best bid or offer (``NBBO'').
\39\ See supra note 6.
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In support of its proposal, the Exchange states that the proposed
rule change will expand investor choice and flexibility.\40\ In
particular, the Exchange states that listing and trading of Micro FLEX
Index Options could benefit investors by providing them additional
granularity with respect to the prices at which they may execute and
exercise index options on the Exchange.\41\ The Exchange states that,
in particular, it believes that Micro FLEX Index Options would provide
institutional investors with an additional exchange-traded tool to
manage the positions and associated risk in their portfolios more
precisely based on notional value, which currently may equal a fraction
of a standard contract.\42\ The Exchange states that, given the various
trading and hedging strategies employed by investors, this additional
granularity may provide investors with more control over the trading of
their investment strategies and management of their positions and risk
associated with option positions in their portfolios.\43\ The Exchange
further states that this flexibility is currently available on the OTC
market, and believes that the proposed rule change may shift liquidity
from the OTC market onto the Exchange, which the Exchange believes
would increase market transparency as well as enhance price discovery
through increased order flow.\44\
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\40\ See Notice, supra note 4, 86 FR at 44416.
\41\ See id. In the Notice, the Exchange provided examples of
the trading of a Micro FLEX Index Options as compared to a FLEX
index option with a multiplier of 100 and the potential benefits for
investors. See id. at 44418-19.
\42\ See id. at 44416-17.
\43\ See id. at 44417.
\44\ See id.
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The Commission believes this proposal, which permits Micro FLEX
Index Options only on broad-based indexes where the value of the
underlying is at least 100, strikes a reasonable balance between the
Exchange's desire to offer a wider array of investment opportunities
and the need to avoid unnecessary proliferation of FLEX options series.
However, the Commission expects the Exchange to monitor the trading of
Micro FLEX Index Options to evaluate whether any issues develop.
The Commission believes that the proposed rule change is consistent
with the Act because it would provide investors with additional
investment choices in FLEX options, while also implementing certain
protections designed to avoid concerns related to price protections on
the non-FLEX market and market fragmentation. In particular, the
proposed rule requiring that terms of the Micro FLEX Index Option
differ from those of a non-FLEX index option or non-FLEX micro-option
can help to address concerns that FLEX options would act as a surrogate
for the trading of non-FLEX options.\45\ This is important given
certain investor protections stated above that exist in the non-FLEX
options market that are not present in the FLEX options market.\46\ The
proposed rule change states that a FLEX index option with an index
multiplier of one may not be the same type (put or call) and may not
have the same exercise style, expiration date, settlement type, and
exercise price as a non-FLEX index option overlying the same index
listed for trading (regardless of the index multiplier of the non-FLEX
index option).\47\ A Micro FLEX Index Option therefore may not have the
same terms as a non-FLEX index option or non-FLEX micro-option. This
will prevent a Micro FLEX Index Option from being listed with terms
identical to those of a non-FLEX index option (with an index multiplier
of 1 or 100) on the same index, and is thus designed to avoid price
protection and market fragmentation concerns that could arise from
trading options with identical terms on the FLEX and non-FLEX markets.
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\45\ See supra note 13 and 16.
\46\ See supra note 38.
\47\ See proposed CBOE Rule 4.21(b).
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In addition, the Commission believes that the fungibility
provisions under CBOE Rule 4.22 will facilitate this change by
preventing new Micro FLEX Index Option positions from being opened when
a non-FLEX index option with a multiplier of 100 with the same terms is
listed for trading and by only permitting closing transactions in this
situation.\48\ Further, pursuant to CBOE Rule 4.22(a), a Micro FLEX
Index Option with the same terms as a subsequently added non-FLEX
micro-option would become fungible with the non-FLEX micro-option.
Accordingly, once a non-FLEX micro-option is added with the same terms
as an outstanding Micro FLEX Index Option, the Micro FLEX Index Option
would no longer trade in the FLEX options market and instead would
become a standardized, non-FLEX option and trade under the same rules
that apply to any other standard non-FLEX micro-option.\49\
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\48\ See CBOE Rule 4.22. To facilitate this, the Exchange is
providing that if an identical non-FLEX index option with an index
multiplier of 100 is added with the same terms as a Micro FLEX Index
Option overlying the same index with a multiplier of one, a position
established under the FLEX trading procedures may be closed using
the trading procedures against another closing only FLEX position
during the time period that non-FLEX index option series is listed
for trading. See proposed CBOE Rule 4.22(b)(2); see also supra notes
14-16 and accompanying text. In addition, as proposed, CBOE Rule
4.22 would state that the Exchange notifies FLEX Traders when a FLEX
options series is restricted to closing only transactions. See
proposed CBOE Rule 4.22(b)(2). The Commission believes that
permitting such closing only transactions will help investors close
out an outstanding Micro FLEX Index Option should a non-FLEX index
option with a multiplier of 100 with the same terms subsequently be
added.
\49\ See CBOE Rule 4.22(a).
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The Commission also believes that the proposal is consistent with
the Act, in particular the protection of investors and the public
interest, as it includes several aspects designed to reduce potential
investor confusion. In particular, the Commission believes that the
proposed treatment of exercise prices, bids and offers, size
requirements for FLEX SAM auctions and for crossing orders, and
position and exercise limits for Micro FLEX Index Options is consistent
with the Act, as these proposed changes should make clear how Micro
FLEX Index Options would be quoted and traded \50\ and are consistent
with the treatment of certain reduced-value index options and micro-
options.\51\ Additionally, the Commission believes that the use of
different trading symbols for Micro FLEX Index Options should help
[[Page 54275]]
investors and other market participants to distinguish those options
from the related non-FLEX options with a multiplier of 100 and micro-
options as well as FLEX index options with a multiplier of 100,
reducing potential investor confusion.\52\
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\50\ The Commission also believes that the examples that the
Exchange proposes to add to the rules provide clarity to the
operation of the proposed rules. See CBOE Rule 4.21(b)(6) (exercise
prices), CBOE Rule 5.3(e)(3) (bids and offers).
\51\ The Exchange has made changes to provisions in its rules to
reflect that 100 Micro FLEX Index Options will be economically
equivalent to one contract for non-FLEX index option with a
multiplier of 100 overlying the same index. See CBOE Rule 5.74
(order size for FLEX SAM), CBOE Rule 5.87 (crossing orders), CBOE
Rule 8.35(a)(7) (position limits), CBOE Rule 8.42(g) (exercise
limits).
\52\ See supra note 11.
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The Commission believes it is appropriate for Micro FLEX Index
Options to trade pursuant to existing FLEX rules governing the listing
and trading of FLEX index options. In addition, the Exchange states
that it and OPRA have the necessary systems capacity to handle the
additional traffic associated with the listing of new series that may
result from the introduction of Micro FLEX Index Options.\53\ The
Exchange also states that the OCC will be able to accommodate the
listing and trading of Micro FLEX Index Options.
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\53\ See supra note 27.
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As a national securities exchange, the Exchange is required, under
Section 6(b)(1) of the Act,\54\ to enforce compliance by its members
and persons associated with its members with the provisions of the Act,
Commission rules and regulations thereunder, and its own rules. The
Exchange states that its existing surveillance and reporting safeguards
are designed to deter and detect possible manipulative behavior that
might arise from listing and trading Micro FLEX Options. In addition,
Micro FLEX Index Options will be traded under the Exchange's existing
regulatory regime for FLEX index options, which includes, among other
things, the Exchange's existing rules regarding customer protection,
safeguards related to position and exercise limits, as applicable,\55\
and reporting requirements. In particular, Micro FLEX Index Option
orders entered by TPHs on behalf of customers, including institutional
and retail customers, will be subject to all Exchange rules regarding
doing business with the public, including those within Chapter 9 of the
Exchange's Rules.\56\ The Commission believes that it is consistent
with the Act to apply Exchange rules governing, among other things,
customer accounts, margin requirements, and trading halt procedures to
the proposed Micro FLEX Index Options that are otherwise applicable to
other FLEX index options. Further, the Commission believes that trading
the Micro FLEX Index Options pursuant to the Exchange's current rules
governing the trading of FLEX index options is consistent with the
protection of investors and should provide market participants with the
same flexibility to customize certain terms of the options while
allowing investors to trade a smaller sized options contract that may,
according to the Exchange, better meet their hedging needs.
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\54\ 15 U.S.C. 78f(b)(1).
\55\ There are, however, no position limits or exercise limits
for certain broad-based FLEX index options. See CBOE Rule 8.35(b)
and CBOE Rule 8.42(g).
\56\ The Commission notes that these rules require, among other
things, that: (i) A TPH may not accept an option order, including a
Micro FLEX Index Option order, from a customer unless that
customer's account has been approved for options transactions in
accordance with CBOE Rule 9.1; (ii) TPHs that conduct customer
business, including institutional and retail customer business, must
ensure they provide for appropriate supervisory control over that
business and maintain customer records in accordance with CBOE Rule
9.2; and (iii) TPHs will also need to provide customers that trade
Micro FLEX Index Option (and any other option) with a copy of the
ODD and amendments to the ODD in accordance with CBOE Rule 9.9 so
that customers are informed of any risks associated with trading
options, including Micro FLEX Index Options.
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The Commission also believes the proposed changes that the Exchange
is making regarding codifying how percentage-based FLEX orders and
auction responses will be ranked are consistent with the Act.\57\ The
Exchange states that such ranking provides FLEX Traders willing to pay
more (or receive less) with priority.\58\ The Exchange further states
that providing priority to FLEX Traders that submit more aggressive
responses will encourage FLEX Traders to submit competitive responses,
which the Exchange believes will benefit investors.\59\ In addition,
the Exchange states that such ranking is consistent with the Exchange's
current practice, as well as the way the Exchange ranks dollar-priced
premiums.\60\ For the foregoing reasons, the Commission believes that
the proposed rule change regarding the ranking of percentage-based FLEX
orders and options responses is consistent with the Act.
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\57\ See proposed amendments to CBOE Rule 4.21(b)(6), CBOE Rule
5.3(e)(3), and CBOE Rule 5.4(c)(4). As discussed above, following
the application of the designated percentage to the closing value of
the underlying security or index, the system rounds the final
transaction prices to the nearest minimum fixed price increment for
the class as set forth in Rule 5.4. See CBOE Rule 5.3(e)(3) and CBOE
Rule 5.4(c)(4).
\58\ See Notice, supra note 4 at 44420.
\59\ See id.
\60\ See id. at 44419.
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Finally, the Commission believes that the other non-substantive and
clarifying changes will help protect investors and the public interest
by providing clarity and transparency to the rules by making them
easier to read and understand.\61\
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\61\ See, e.g., proposed amendments to CBOE Rule 4.21(b)(6)
(stating the minimum increments for exercise prices); CBOE Rule
4.22(b) (changing the terminology related to notification of when a
FLEX option series is restricted to closing only transactions). See
also proposed amendments to CBOE Rule 5.72(c)(3)(A); CBOE Rule
5.73(e); CBOE Rule 5.74(e) (codifying that FLEX auction response
bids and offers as well as Initiating Orders and Solicitation Orders
with respect to FLEX AIM Auctions and FLEX SAM Auctions,
respectively, are ranked during the allocation process based on the
dollar and decimal amount of the order or response bid or offer, or
the percentage value of the order or response bid or offer, as
applicable).
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Accordingly, the Commission finds that the proposed rule change, as
modified by Amendment No. 2, is consistent with Section 6(b)(5) of the
Act \62\ and the rules and regulations thereunder applicable to a
national securities exchange.
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\62\ 15 U.S.C. 78f(b)(5).
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III. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\63\ that the proposed rule change (SR-CBOE-2021-041), as modified
by Amendment No. 2, be, and hereby is, approved.
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\63\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\64\
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\64\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-21211 Filed 9-29-21; 8:45 am]
BILLING CODE 8011-01-P
