Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change to Make Permanent the Operation of Its Program That Allows the Exchange To List P.M.-Settled Third Friday-of-the-Month S&P 500 Stock Index (“S&P 500”) Options (“SPX”) Series, 4265-4271 [2023-01260]
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Federal Register / Vol. 88, No. 15 / Tuesday, January 24, 2023 / Notices
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange.
All comments received will be posted
without change. Persons submitting
comments are cautioned that we do not
redact or edit personal identifying
information from comment submissions.
You should submit only information
that you wish to make available
publicly.
All submissions should refer to File
Number SR–NYSEAMER–2023–03 and
should be submitted on or before
February 14, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.17
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–01259 Filed 1–23–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96703; File No. SR–CBOE–
2023–005]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change to Make
Permanent the Operation of Its
Program That Allows the Exchange To
List P.M.-Settled Third Friday-of-theMonth S&P 500 Stock Index (‘‘S&P
500’’) Options (‘‘SPX’’) Series
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January 18, 2023.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on January 6,
2023, Cboe Exchange, Inc. (‘‘Exchange’’
or ‘‘Cboe Options’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
17 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to make
permanent the operation of its program
that allows the Exchange to list P.M.settled third Friday-of-the-month S&P
500 Stock Index (‘‘S&P 500’’) options
(‘‘SPX’’) series. The text of the proposed
rule change is provided below.
(additions are italicized; deletions are
[bracketed])
*
*
*
*
*
Rules of Cboe Exchange, Inc.
*
*
*
*
*
Rule 4.13. Series of Index Options
*
*
*
*
*
Interpretations and Policies
.01–.12 No change.
.13 In addition to A.M.-settled S&P 500
Stock Index (‘‘SPX’’) options approved for
trading on the Exchange pursuant to Rule
4.13, the Exchange may also list options on
SPX whose exercise settlement value is
derived from closing prices on the last
trading day prior to expiration (P.M.-settled
third Friday-of-the-month SPX options
series).
.14 The Exchange may [also] list options on
the Mini-SPX Index (‘‘XSP’’) and Mini-RUT
Index (‘‘MRUT’’) whose exercise settlement
value is derived from closing prices on the
last trading day prior to expiration (‘‘P.M.settled’’). [P.M.-settled third Friday-of-themonth SPX options series and] P.M.-settled
XSP and MRUT options will be listed for
trading for a pilot period ending May 8, 2023.
*
*
*
*
*
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
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4265
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to make
permanent its Pilot Program that
permits the Exchange to list SPX
options whose exercise settlement value
is derived from closing prices on the last
trading day prior to expiration
(‘‘SPXPM’’). The Securities and
Exchange Commission (the
‘‘Commission’’) approved a rule change
that established the SPXPM Pilot
Program on February 8, 2013.3 The
Exchange has since continuously
extended the pilot period, which,
pursuant to current Rule 4.13.13,4 is
currently set to expire on the earlier of
May 8, 2023 or the date on which the
SPXPM Pilot Program is approved on a
permanent basis.5 The Exchange hereby
requests that the Commission approve
the SPXPM Pilot Program on a
permanent basis.6
3 See Securities Exchange Act Release No. 68888
(February 8, 2013), 78 FR 10668 (February 14, 2013)
(SR–CBOE–2012–120) (the ‘‘SPXPM Approval
Order’’). Pursuant to Securities Exchange Act
Release No. 80060 (February 17, 2017), 82 FR 11673
(February 24, 2017) (SR–CBOE–2016–091), the
Exchange moved third-Friday P.M.-settled options
into the S&P 500 Index options class, and as a
result, the trading symbol for P.M.-settled S&P 500
Index options that have standard third Friday-ofthe-month expirations changed from ‘‘SPXPM’’ to
‘‘SPXW.’’ This change went into effect on May 1,
2017, pursuant to Cboe Options Regulatory Circular
RG17–054.
4 In 2019, the Exchange relocated prior Rule 24.9,
containing the provision which governs the Pilot
Program, to current Rule 4.13. See SR–CBOE–2019–
092 (October 4, 2019), which did not make any
substantive changes to prior Rule 24.9 and merely
relocated it to Rule 4.13.
5 See Securities Exchange Act Release Nos. 71424
(January 28, 2014), 79 FR 6249 (February 3, 2014)
(SR–CBOE–2014–004); 73338 (October 10, 2014), 79
FR 62502 (October 17, 2014) (SR–CBOE–2014–076);
77573 (April 8, 2016), 81 FR 22148 (April 14, 2016)
(SR–CBOE–2016–036); 80386 (April 6, 2017), 82 FR
17704 (April 12, 2017) (SR–CBOE–2017–025);
83166 (May 3, 2018), 83 FR 21324 (May 9, 2018)
(SR–CBOE–2018–036); 84535 (November 5, 2018),
83 FR 56129 (November 9, 2018) (SR–CBOE–2018–
069); 85688 (April 18, 2019), 84 FR 17214 (April 24,
2019) (SR–CBOE–2019–023); 87464 (November 5,
2019), 84 FR 61099 (November 12, 2019) (SR–
CBOE–2019–107); 88674 (April 16, 2020), 85 FR
22479 (April 22, 2020) (SR–CBOE–2020–036);
90263 (October 23, 2020), 85 FR 68611 (October 29,
2020) (SR–CBOE–2020–100); 91698 (April 28, 2021)
86 FR 23761 (May 4, 2021) (SR–CBOE–2021–027);
93455 (October 28, 2021), 86 FR 60660 (November
3, 2021) (SR–CBOE–2021–062); 94799 (April 27,
2022), 87 FR 26244 (May 3, 2022) (SR–CBOE–2022–
019); and 96222 (November 3, 2022), 87 FR 67736
(November 9, 2022) (SR–CBOE–2022–054).
6 The Exchange notes that it also proposes to
adopt Rule 4.13.14 to continue to govern the Pilot
Programs also currently in place in Rule 4.13.13
which permit the Exchange to list P.M.-settled
options on the Mini-SPX Index (‘‘XSP’’) and MiniRUT Index (‘‘MRUT’’). The Exchange plans to
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By way of background, when cashsettled 7 index options were first
introduced in the 1980s, settlement was
based on the closing value of the
underlying index on the option’s
expiration date. The Commission later
became concerned about the impact of
P.M.-settled, cash-settled index options
on the markets for the underlying stocks
at the close on expiration Fridays.
Specifically, certain episodes of price
reversals around the close on quarterly
expiration dates attracted the attention
of regulators to the possibility that the
simultaneous expiration of index
futures, futures options, and options
might be inducing abnormal volatility in
the index value around the close.8
Academic research at the time provided
at least some evidence suggesting that
futures and options expirations
contributed to excess volatility and
reversals around the close on those
days.9 In light of the concerns with P.M.
settlement and to help ameliorate the
price effects associated with expirations
of P.M.-settled, cash-settled index
products, in 1987, the Commodity
Futures Trading Commission (‘‘CFTC’’)
approved a rule change by the Chicago
Mercantile Exchange (‘‘CME’’) to
provide for A.M. settlement 10 for index
futures, including futures on the S&P
500.11 The Commission subsequently
approved a rule change by Cboe Options
to list and trade A.M.-settled SPX
options.12 In 1992, the Commission
approved Cboe Options’ proposal to
submit a separate proposal to make the operation
of these P.M. Pilot Programs permanent following
Commission approval of this proposal.
7 The seller of a ‘‘cash-settled’’ index option pays
out the cash value of the applicable index on
expiration or exercise. A ‘‘physically settled’’
option, like equity and ETF options, involves the
transfer of the underlying asset rather than cash.
See Characteristics and Risks of Standardized
Options, available at: https://www.theocc.com/
Company-Information/Documents-and-Archives/
Options-Disclosure-Document.
8 The close of trading on the quarterly expiration
Friday (i.e., the third Friday of March, June,
September and December), when options, index
futures, and options on index futures all expire
simultaneously, became known as the ‘‘triple
witching hour.’’
9 See Securities and Exchange Commission,
Division of Economic Risk and Analysis,
Memorandum, Cornerstone Analysis of PM CashSettled Index Option Pilots (February 2, 2021)
(‘‘DERA Staff PM Pilot Memo’’) at 5, available at:
https://www.sec.gov/files/Analysis_of_PM_Cash_
Settled_Index_Option_Pilots.pdf.
10 The exercise settlement value for an A.M.settled index option is determined by reference to
the reported level of the index as derived from the
opening prices of the component securities on the
business day before expiration.
11 See Securities Exchange Act Release No. 24367
(April 17, 1987), 52 FR 13890 (April 27, 1987) (SR–
CBOE–87–11) (noting that CME moved S&P 500
futures contract’s settlement value to opening prices
on the delivery date).
12 See id.
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transition all of its European-style cashsettled options on the S&P 500 Index to
A.M. settlement; 13 however, in 1993,
the Commission approved a rule
allowing Cboe Options to list P.M.settled options on certain broad-based
indices, including the S&P 500, expiring
at the end of each calendar quarter
(‘‘Quarterly Index Expirations’’) (since
adopted as permanent).14 Starting in
2006, the Commission approved
numerous rule changes, on a pilot basis,
permitting the Cboe Options to
introduce other index options,
including SPX options, with P.M.settlement. These include P.M.-settled
index options expiring weekly (other
than the third Friday) and at the end of
each month (‘‘EOM’’),15 SPXPM, as well
as P.M.-settled Mini-SPX Index (‘‘XSP’’)
options and Mini-Russell 2000 Index
(‘‘MRUT’’) options expiring on the third
Friday.16
As stated above, since its inception in
2013, the Exchange has continuously
extended the SPXPM Pilot Program
period and, during the course of the
SPXPM Pilot Program and in support of
the extensions of the SPXPM Pilot
Program, the Exchange has submitted
reports to the Commission regarding the
Pilot Program that detail the Exchange’s
experience with the Pilot Program,
pursuant to the SPXPM Approval
Order.17 Specifically, the Exchange has
submitted annual Pilot Program reports
to the Commission that contain an
analysis of volume, open interest, and
trading patterns. The analysis examines
trading in SPX options, as well as
trading in the securities that comprise
the S&P 500 Index. Additionally, for
series that exceed certain minimum
open interest parameters, the annual
reports provide analysis of index price
volatility and share trading activity. The
13 See Securities Exchange Act Release No. 30944
(July 21, 1992), 57 FR 33376 (July 28, 1992) (SR–
CBOE–92–09). Thereafter, the Commission
approved proposals by the options markets to
transfer most of their cash-settled index products to
A.M. settlement.
14 See Securities Exchange Act Release No. 31800
(February 1, 1993), 58 FR 7274 (February 5, 1993)
(SR–CBOE–92–13); and see Rule 4.13(a)(2)(B); see
also Securities Exchange Act Release Nos. 54123
(July 11, 2006), 71 FR 40558 (July 17, 2006) (SR–
CBOE–2006–65); and 60164 (June 23, 2009), 74 FR
31333 (June 30, 2009) (SR–CBOE–2009–029).
15 See Securities Exchange Act Release Nos.
62911 (September 14, 2010), 75 FR 57539
(September 21, 2010) (SR–CBOE–2009–075); 76529
(November 30, 2015), 80 FR 75695 (December 3,
2015) (SR–CBOE–2015–106); 78132 (June 22, 2016),
81 FR 42018 (June 28, 2016) (SR–CBOE–2016–046);
and 78531 (August 10, 2016), 81 FR 54643 (August
16, 2016) (SR–CBOE–2016–046).
16 See Securities Exchange Act Release Nos.
70087 (July 31, 2013), 78 FR 47809 (August 6, 2013)
(SR–CBOE–2013–055); and 91067 (February 5,
2021) 86 FR 9108 (February 11, 2021) (SR–CBOE–
2020–116).
17 See supra note 3.
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Exchange has also submitted periodic
interim reports that contain some, but
not all, of the information contained in
the annual reports (together with the
periodic interim reports, the ‘‘pilot
reports’’).18
The pilot reports contained the
following volume and open interest
data:
(1) monthly volume aggregated for all
trades;
(2) monthly volume aggregated by
expiration date;
(3) monthly volume for each
individual series;
(4) month-end open interest
aggregated for all series;
(5) month-end open interest for all
series aggregated by expiration date; and
(6) month-end open interest for each
individual series.
The annual reports also contained the
information noted in Items (1) through
(6) above for Expiration Friday, A.M.settled SPX options traded on Cboe
Options, as well as the following
analysis of trading patterns in SPX
options series in the Pilot Program:
(1) a time series analysis of open
interest; and
(2) an analysis of the distribution of
trade sizes.
Finally, for series that exceed certain
minimum parameters,19 the annual
reports contained the following analysis
related to index price changes and
underlying share trading volume at the
close on Expiration Fridays:
(1) a comparison of index price
changes at the close of trading on a
given Expiration Friday with
comparable price changes from a control
sample. The data includes a calculation
of percentage price changes for various
time intervals and compare that
information to the respective control
sample. Raw percentage price change
data as well as percentage price change
data normalized for prevailing market
volatility, as measured by the Cboe
Volatility Index (VIX), is provided; and
(2) a calculation of share volume for
a sample set of the component securities
representing an upper limit on share
trading that could be attributable to
expiring in-the-money series. The data
includes a comparison of the calculated
share volume for securities in the
sample set to the average daily trading
18 In providing the pilot reports to the
Commission, the Exchange previously requested
confidential treatment of the pilot reports under the
Freedom of Information Act (‘‘FOIA’’). See 5 U.S.C.
552.
19 The Exchange and the Commission determined
the minimum open interest parameters, control
sample, time intervals, method for randomly
selecting the component securities, and sample
periods.
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volumes of those securities over a
sample period.
Also, during the course of the SPXPM
Pilot Program, the Exchange provided
the Commission with any additional
data or analyses the Commission
requested if it deemed such data or
analyses necessary to determine
whether the Pilot Program was
consistent with the Exchange Act. The
Exchange has made public on its
website all data and analyses previously
submitted to the Commission under the
Pilot Program,20 and will continue to
make public any data and analyses it
submits to the Commission while the
SPXPM Pilot Program is still in effect.
The Exchange has concluded that the
SPXPM Pilot Program does not
negatively impact market quality or
raise any unique or prohibitive
regulatory concerns. The Exchange has
not identified any evidence from the
pilot data indicating that the trading of
P.M.-settled SPX options has any
adverse impact on fair and orderly
markets on Expiration Fridays for the
S&P 500 Index or the underlying
securities comprising the S&P 500, nor
have there been any observations of
abnormal market movements
attributable to P.M.-settled SPX options
from any market participants that have
come to the attention of the Exchange.
Based on a study conducted by the
Commission’s Division of Economic and
Risk Analysis (‘‘DERA’’) staff on the
pilot data from 2006 through 2018,21
and the Exchange’s review of the pilot
data from 2019 through 2021, the size of
the market for P.M.-settled SPX options
(including quarterly, weekly, EOM and
third Friday expirations) since 2007 has
grown from a trivial portion of the
overall market to a substantial share
(from around 0.1% of open interest in
2007 to 30% in 2021).22 Notional value
of open interest in P.M.-settled SPX
options increased from approximately a
20 Available at https://www.cboe.com/aboutcboe/
legal-regulatory/national-market-system-plans/pmsettlement-spxpm-data.
21 See DERA Staff PM Pilot Memo, at 13 (‘‘Option
settlement quantity data for A.M.- and P.M.-settled
options were obtained from the Cboe, including the
number of contracts that settled in-the-money for
each exchange-traded option series on the S&P 500
index . . . on expiration days from January 20,
2006 through December 31, 2018. Daily open
interest and volume data for [SPX] option series
were also obtained from Cboe, including open
interest data from January 3, 2006 through
December 31, 2018 and trading volume data from
January 3, 2006 through December 31, 2018.’’)
22 The DERA staff study reviewed and provided
statistics for market share, median notional value of
open interest and median volume in 2007 and in
2018. The Exchange provides updated statistics for
market share, median notional value of open
interest and median volume in 2021, replacing the
2018 statistics provided in the Commission staff
study.
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median of $1.5 billion in 2007 to $1.9
trillion in 2021, approximately 1260
times its value in 2007. Notional open
interest in A.M.-settled SPX options was
already hovering around a median of
$1.4 trillion in 2007, and it has since
increased to approximately $4.4 trillion
in 2021. It is also important to note that
open interest on expiring P.M.-settled
SPX options, as compared to A.M.settled options, is spread out across a
greater number of expiration dates,
which results in a smaller percentage of
open interest expiring on any one date,
thus mitigating concerns that SPXPM
option expiration may have a disruptive
effect on the market.23 Daily trading
volume in P.M.-settled SPX options has
increased from a median of about 700
contracts in 2007 to nearly 1.9 million
contracts in 2021,24 and now exceeds
trading volume in A.M.-settled SPX
options.
Moreover, the DERA staff study of the
P.M.-settled SPX options pilot data
(2006 through 2018) did not identify
any significant economic impact on S&P
500 futures,25 the S&P 500, or the
underlying component securities of the
S&P 500 surrounding the close. For
purposes of the study, volatility was by
and large measured by using the
standard deviation 26 of one-minute
returns of S&P 500 futures values and
the index value during regular hours on
each day reviewed (excluding the first
and last 15 minutes of trading) and then
compared with the standard deviation
of one-minute returns (for S&P 500
futures, the S&P 500, and the underlying
component securities of the S&P 500)
over the last 15 minutes of a trading
23 See
DERA Staff PM Pilot Memo, at 2.
Exchange notes that the DERA staff study
used two-sided volume data for the median volume
in 2007 and in 2018; therefore, the Exchange
provides two-sided volume data for the median
volume in 2021.
25 Futures on the S&P 500 experience high
volume and liquidity both before and after the close
of the underlying market. Therefore, futures are a
useful measure of abnormal volatility surrounding
the close and the open. See DERA Staff PM Pilot
Memo, at 14. The Exchange agrees with this
approach.
26 Standard deviation applied to a rate of return
(in this case, one-minute) of an instrument can
indicate that instrument’s historical volatility. The
greater the standard deviation, the greater the
variance between price and the mean, which
indicates a larger price range, i.e., higher volatility.
24 The
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4267
day.27 Using this as a general measure,28
the DERA staff study then reviewed
whether, and to what extent, the
settlement quantity of SPXPM options
and the levels of open interest in
SPXPM options on expiration days (as
compared to non-expiration days) may
be associated with general price
volatility and price reversals for S&P
500 futures, the S&P 500, and the
underlying component securities of the
S&P 500 near the close. From its review
of the study, the Exchange agrees that,
although volatility before the market
close is generally higher than during the
rest of the trading day, there is no
evidence of any significant adverse
economic impact to the futures, index,
or underlying index component
securities markets as a result of the
quantity of P.M.-settled SPX options
that settle at the close or the amount of
expiring open interest in P.M.-settled
SPX options. For example, the largest
settlement event that occurred during
the time period of the study (a
settlement of $100.4 billion of notional
on December 29, 2017) had an estimated
impact on the futures price of only
approximately 0.02% (a predicted
impact of $0.54 relative to a closing
futures price of $2,677).
In particular, the DERA staff study
found that an additional P.M.-settled
SPX options settlement quantity equal
to $10 billion in notional value is
associated with a marginal impact on
futures prices during the last 15 minutes
of the trading day of only about $0.06
(where the hypothetical index level is
2,500), additional expiring open interest
in P.M.-settled SPX options equal to $10
billion in notional value is associated
with a marginal impact on futures prices
during the last 15 minutes of the trading
day of only about $0.05 (assumed index
level is 2,500). Also, an additional
increase in settlement quantity or in
expiring open interest, each equal to $20
million in notional value, did not result
in any meaningful futures price
reversals near the close (neither was
27 For example, if on a particular day the standard
deviation of one-minute returns between 3:45 p.m.
ET and 4:00 p.m. ET is 0.004 and the standard
deviation of returns from 9:45 a.m. ET to 3:45 p.m.
ET is 0.002, this metric would take on a value of
2 for that day, indicating that volatility during the
last 15 minutes of the trading day was twice as high
as it was during the rest of the trading day. See
DERA Staff PM Pilot Memo, at 15; see also DERA
Staff PM Pilot Memo, at Section V, which discusses
in detail the metrics used to measure, for the
purposes of the study, the extent to which the
market may experience abnormal volatility
surrounding SPXPM option settlement.
28 See DERA Staff PM Pilot Memo, at Section V,
which discusses in detail the metrics used to
measure, for the purposes of the study, the extent
to which the market may experience abnormal
volatility surrounding SPXPM option settlement.
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found to cause a price reversal of over
one standard deviation 29).
Likewise, the study identified that an
additional total P.M.-settled SPX
options settlement quantity equal to $10
billion in notional value corresponds to
price movement in the S&P 500 of only
about $0.08 (assuming an index level of
2,500) during the last 15 minutes of the
trading day, and that additional expiring
open interest equal to $10 billion in
notional value corresponds to a price
movement in the S&P 500 of only about
$0.06 (assuming an index level of 2,500)
during the last 15 minutes of the trading
day. The study also identified that it
would take an increase of $34 billion in
notional value of total settlement
quantity and of expiring open interest
for one additional S&P 500 price
reversal of greater than two standard
deviations to occur in the last 15
minutes before the market close. Also,
regarding potential impact to S&P 500
component securities, it would take an
increase in total P.M.-settled SPX
options settlement quantity equal to $20
billion to effect a price movement of
only approximately $0.03 for a $200
stock, an increase in expiring open
interest in P.M.-settled SPX options
equal to $10 billion to effect a price
movement less than half a standard
deviation, and an increase in total P.M.settled SPX settlement quantity equal to
$7 billion to achieve a price reversal
greater two standard deviations.
The study employed the same metrics
to determine whether there is greater
price volatility for S&P 500 futures, the
S&P 500, and the component securities
of the S&P 500 related to SPXPM option
settlements during an environment of
high market volatility (i.e., on days in
which the VIX Index was in the top
10% of closing index values) and did
not identify indicators of any significant
economic impact on these markets near
the close as a result of the P.M.-settled
SPX options settlement.30 In addition to
this, the DERA staff study, applying the
same metrics and analysis as for P.M.settled SPX options to A.M.-settled SPX
options, did not identify any evidence
of a statistically significant relationship
between settlement quantity or expiring
open interest of A.M.-settled options
and volatility near the open.
Upon review of the results of the
DERA staff study, the Exchange agrees
that each of the above-described
marginal price movements in S&P 500
futures, the S&P 500, and the S&P 500
29 See
supra note 26.
30 The Exchange also notes that the study did not
identify any evidence that less liquid S&P 500
constituent securities experienced any greater
impact from the settlement of P.M.-settled SPX
options.
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component securities affected by
increases in P.M.-settled SPX options
settlement quantity and expiring open
interest appear to be de minimis pricing
changes from those that occur over
regular trading hours (outside of the last
15 minutes of the trading day). Further,
the Exchange has not observed any
significant economic impact or other
adverse effects on the market from
similar reviews of its pilot reports and
data submitted after 2018.31 In its
review of a sample of the pilot data from
2019 through 2021, the Exchange
similarly measured volatility over the
final fifteen minutes of each trading day
by taking the standard deviation of
rolling one-minute returns of the S&P
500 level (excluding the first and last
fifteen minutes of trading) and
comparing such with the standard
deviation of one-minute returns 32 of the
S&P 500 level, over the last 15 minutes
of a trading day. The Exchange
identified an average standard deviation
ratio of 1.42 for the S&P 500 on nonexpiration days and an average standard
deviation ratio of 1.54 for the S&P 500
on expiration days (a ratio between
expiration days and non-expiration days
of 1.09). The Exchange also notes that,
using the same methodology, it
observed that, from 2015 through
2019,33 the average standard deviation
ratio for the S&P 500 on non-expiration
days was 1.11 and the average standard
deviation ratio for the S&P 500 on
expiration days was 1.22 (a ratio
between expiration days and nonexpiration days of 1.10). While the
average standard deviation ratio on both
expiration and non-expiration days was
higher in 2019 through 2021 due to
overall market volatility, the ratios
between the standard deviation ratios
on expiration days and non-expirations
days remained nearly identical between
the 2015 through 2019 timeframe and
the 2019 through 2021. This shows that,
in cases where overall market volatility
may increase, the normalized impact on
expiration days to non-expiration days
generally remains consistent.
In addition to this, the Exchange notes
that the S&P 500 is rebalanced quarterly.
The changes resulting from each
rebalancing coincide with the thirdFriday of the quarterly rebalancing
month (i.e., March, June, September,
October and December) 34 and generally
31 Total SPX open interest volumes were
examined for expiration dates over a roughly twoyear period between October 2019 and November
2021.
32 Calculated at every tick for the prior minute.
33 November 2015 through November 2021.
34 See S&P Dow Jones Indices, Equity Indices
Policies & Practices, Methodology (August 2021), at
15, available at https://www.spglobal.com/spdji/en/
PO 00000
Frm 00118
Fmt 4703
Sfmt 4703
drive an increase in trading activity
from investors that seek to track the S&P
500. As such, The Exchange measured
volatility on quarterly rebalancing dates
and found that the average standard
deviation ratio was 1.62, which suggests
more closing volatility on quarterly
rebalance dates compared to nonquarterly expiration dates (for which the
average standard deviation ratio was
1.22), thus indicating that the impact
rebalancing may have on the S&P 500 is
greater than any impact that P.M.-settled
SPX options may have on the S&P 500.
The Exchange additionally focused its
study of the post-2018 sample pilot data
on reviewing for potential correlation
between excess market volatility and
price reversals and the hedging activity
of liquidity providers. As explained in
the DERA staff study, potential impact
of P.M.-settled SPX options on the
correlated equity markets is thought to
stem from the hedging activity of
liquidity providers in such options.35 To
determine any such potential
correlation, the Exchange studied the
expected action of liquidity providers
that are the primary source of the
hedging on settlement days. These
liquidity providers generally deltahedge their S&P 500 index exposure via
S&P 500 futures and on settlement day
unwind their futures positions that
correspond with the delta of their inthe-money (ITM) expiring P.M.-settled
SPX options. Assuming such behavior,
the Exchange estimated the Market-OnClose (‘‘MOC’’) 36 volume for the shares
of the S&P 500 component securities
(i.e., ‘‘MOC share volume’’) that could
ultimately result from the unwinding of
the liquidity providers’ futures positions
by equating the notional value of the
futures positions that correspond to
expiring ITM open interest to the
number S&P 500 component security
contracts (based on the weight of each
S&P 500 component security). That is,
the Exchange calculated (an estimate) of
the amount of MOC volume in the S&P
500 component markets attributable
hedging activity as a result of expiring
ITM P.M.-settled SPX options (i.e.,
‘‘hedging MOC’’). The Exchange then:
(1) compared the hedging MOC share
volume to all MOC share volume on
expiration days and non-expiration
trading days; and (2) compared the
notional value of the hedging futures
positions (i.e., that correspond to
expiring ITM P.M.-settled SPX options
documents/methodologies/methodology-sp-equityindices-policies-practices.pdf.
35 See DERA Staff PM Pilot Memo, at 10–12.
36 MOC orders allow a market participant to trade
at the closing price. Market participants generally
utilize MOC orders to ensure they exit positions at
the end of the trading day.
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Federal Register / Vol. 88, No. 15 / Tuesday, January 24, 2023 / Notices
open interest) to the notional value of
expiring ITM P.M.-settled SPX options
open interest, the notional value of all
expiring P.M.-settled SPX options open
interest and the notional value of all
P.M.-settled SPX options open interest.
The Exchange observed that, on
average, there were approximately 25%
more MOC shares executed on
expiration days (332 expiration days)
than non-expiration days (209 nonexpiration days). While, at first glance,
the volume of MOC shares executed on
expiration days seems much greater
than the volume executed on nonexpiration days, the Exchange notes that
much of this difference is attributable to
just eight expiration days—the quarterly
index rebalancing dates captured within
the scope of the post-2018 sample pilot
data. The average MOC share volume on
the eight quarterly rebalancing dates
was approximately 4.8 times the average
MOC share volume on the non-quarterly
rebalancing expiration dates; again,
indicating that the impact rebalancing
may have on the S&P 500 Index is
greater than any impact that P.M.-settled
SPX options may have on the S&P 500
Index. That is, the Exchange observed
that the majority of closing volume on
quarterly rebalance dates is driven by
rebalancing of shares in in the S&P 500,
and not by P.M.-settled SPX options
expiration-related hedging activity.
Notwithstanding the MOC share volume
on quarterly rebalancing dates, the
volume of MOC shares executed on
expiration days (324 expiration days)
was only approximately 13% more than
that on non-expiration days,
substantially less than the increase in
volume over non-expiration days
wherein the eight index rebalancing
dates are included in expiration day
volume. In addition to this, the
Exchange observed that the hedging
MOC share volume (i.e., the expected
MOC share volume resulting from
hedging activity in connection with
expiring ITM P.M.-settled SPX options)
was, on average, less than the MOC
share volume on non-expiration days,
and was only approximately 20% of the
total MOC share volume on expiration
days, indicating that other sources of
MOC share volume generally exceed the
volume resulting from hedging activity
of expiring ITM P.M.-settled SPX
options and would more likely be a
source of any potential market volatility.
The Exchange also observed that,
across all third-Friday expirations, the
notional value of the hedging futures
positions was approximately 25% of the
notional value of expiring ITM P.M.settled SPX options, approximately
3.8% of the notional value of all
expiring P.M.-settled SPX options, and
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19:17 Jan 23, 2023
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approximately only 0.5% of the notional
value of all P.M.-settled SPX options. As
such, the estimated hedging activity
from liquidity providers on expiration
days is a fraction of the expiring open
interest in P.M.-settled SPX options,
which, the Exchange notes, is only 14%
of the total open interest in P.M.-settled
SPX options; thus, indicating negligible
capacity for hedging activity to increase
volatility in the underlying markets.
While unrelated to the initial
concerns of P.M.-settlement as
described above, at the request of the
Commission, the Exchange recently
completed an analysis intended to
evaluate whether the SPXPM Program
impacted the quality of the SPX option
market. Specifically, the Exchange
compared values of key market quality
indicators (specifically, the bid-ask
spread 37 and effective spread 38) in
SPXW options both before and after the
introduction of Tuesday expirations and
Thursday expirations for SPXW options
on April 18 and May 11, 2022,
respectively.39 Options on the Standard
& Poor’s Depositary Receipts S&P 500
ETF (‘‘SPY’’) were used as a control
group to account for any market factors
that might influence key market quality
indicators. The Exchange used data
from January 3, 2022 through March 4,
2022 (the two-month period prior to the
introduction of SPXW options with
Tuesday expirations) and data from May
11, 2022 to July 10, 2022 (the twomonth period following the
introduction of SPXW options with
Thursday expirations).40 Given the time
that as passed since the introduction of
P.M.-settled SPX options, the Exchange
is unable to analyze whether the
introduction of PM-settled options SPX
options significantly impacted the
market quality of A.M.-settled SPX
options. The Exchange believes
37 The Exchange calculated for each of SPXW
options (with Monday, Wednesday, and Friday
expirations) and SPY Weekly options (with
Monday, Wednesday, and Friday expirations) the
daily time-weighted bid-ask spread on the Exchange
during its regular trading hours session, adjusted for
the difference in size between SPXW options and
SPY options (SPXW options are approximately ten
times the value of SPY options).
38 The Exchange calculated the volume-weighted
average daily effective spread for simple trades for
each of SPXW options (with Monday, Wednesday,
and Friday expirations) and SPY Weekly options
(with Monday, Wednesday, and Friday expirations)
as twice the amount of the absolute value of the
difference between an order execution price and the
midpoint of the national best bid and offer at the
time of execution, adjusted for the difference in size
between SPXW options and SPY options.
39 For purposes of comparison, the Exchange
paired SPXW options and SPY options with the
same moneyness and same days to expiration.
40 The Exchange observed comparable market
volatility levels during the pre-intervention and
post-intervention time ranges.
PO 00000
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4269
analyzing whether the introduction of
new SPXW P.M.-settled expirations (i.e.,
SPXW options with Tuesday and
Thursday expirations) impacted the
market quality of then-existing SPXW
P.M.-settled expirations (i.e., SPXW
options with Monday, Wednesday, and
Friday expirations) provides a
reasonable substitute to evaluate
whether the introduction of P.M.-settled
index options impacted the market
quality of the SPX market when the
pilot began.
As a result of this analysis, the
Exchange believes the introduction of
SPX options with Tuesday and
Thursday options had no significant
impact on the market quality of SPXW
options with Monday, Wednesday, and
Friday expirations. With respect to the
majority of series analyzed, the
Exchange observed no statistically
significant difference in the bid-ask
spread or the effective spread of the
series in the period prior to introduction
of the Tuesday and Thursday
expirations and the period following the
introduction of the Tuesday and
Thursday expirations. While
statistically insignificant, the Exchange
notes that in many series, particularly as
they were closer to expiration, the
Exchange observed that the values of
these spreads decreased during the
period following the introduction of the
Tuesday and Thursday expirations.41
To further note, given the significant
changes in the closing procedures of the
primary markets in recent decades,
including considerable advances in
trading systems and technology, the
Exchange believes that the risks of any
potential impact of P.M.-, cash-settled
SPX options on the underlying cash
markets are also de minimis.
The Exchange proposes to make the
SPXPM Program permanent as P.M.settled index products, particularly SPX
options, have become an integral part of
the Exchange’s product offerings,
providing investors with greater trading
opportunities and flexibility. As
indicated by the significant growth in
the size of the market for P.M.-settled
SPX options, such options have been,
and continue to be, well-received and
widely used by market participants.
Therefore, the Exchange wishes to be
able to continue to provide investors
with the ability to trade SPXPM options
on a permanent basis. The Exchange
believes that the permanent
continuation of the SPXPM Program
will serve to maintain the status quo by
41 In any series in which the Exchange observed
an increase in the market quality indicators, the
Exchange notes any such increase was also
statistically insignificant.
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Federal Register / Vol. 88, No. 15 / Tuesday, January 24, 2023 / Notices
continuing to offer a product to which
investors have become accustomed and
have incorporated into their business
models and day-to-day trading
methodologies for nearly ten years. As
such, the Exchange also believes that
ceasing to offer SPXPM options may
result in significant market disruption
and investor confusion. The Exchange
has not identified any significant impact
on market quality nor any unique or
prohibitive regulatory concerns as a
result of the SPXPM Pilot Program, and,
as such, the Exchange believes that the
continuation of the SPXPM Program as
a pilot, including the use of time and
resources to compile and analyze
quarterly and annual pilot reports and
pilot data, is no longer necessary and
that making the SPXPM Program
permanent will allow the Exchange to
otherwise allocate time and resources to
other industry initiatives.
tkelley on DSK125TN23PROD with NOTICES
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.42 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 43 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
In particular, the Exchange believes
that the making the SPXPM Program
permanent will allow the Exchange to
be able to continue to offer SPXPM
options—a product of which has
become an integral part of the
Exchange’s offerings—on a continuous
and permanent basis. Since their
reintroduction beginning in 2006,44
P.M.-settled SPX options have been, and
continue to be, well-received and
widely used by market participants,
providing investors with greater trading
opportunities and flexibility. The
Exchange believes that the permanent
42 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
44 See supra notes 21–24. As described above, the
Exchange’s conclusion is consistent with the
analysis in the DERA Staff PM Pilot Memo.
43 15
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continuation of the SPXPM Program
will remove impediments to and perfect
the mechanism of a free and open
market and a national market system,
and, in general, protect investors and
the public interest by continuing to offer
a product to which investors have
become accustomed and have
incorporated into their business models
and day-to-day trading strategies for
nearly nine years. As indicated by the
significant growth in the size of the
market for P.M.-settled SPX options,
such options have been, and continue to
be, well-received and widely used by
market participants. Conversely, the
Exchange believes ceasing to offer the
SPXPM Program may result in
significant market disruption and
investor confusion, as P.M.-settled
index products, particularly SPX
options, have become an integral part of
the Exchange’s product offerings,
providing investors with greater trading
opportunities and flexibility.
The Exchange further believes that
making the SPXPM Program permanent
will remove impediments to and perfect
the mechanism of a free and open
market and a national market system
and protect investors, while maintaining
a fair and orderly market, as the
Exchange believes that previous
concerns (arising in the 1980s) regarding
options expirations potentially
contributing to excess volatility and
reversals around the close have been
adequately diminished. As described in
detail above, the Exchange has observed
no significant adverse market impact or
identified any meaningful regulatory
concerns during the nearly nine-year
operation of the SPXPM Program as a
pilot nor during the 15 years since P.M.settled SPX options were reintroduced
to the marketplace.45 Notably, the
Exchange did not identify any
significant economic impact (including
on pricing or volatility or in connection
with reversals) on S&P 500 futures, the
S&P 500, or the underlying component
securities of the S&P 500 surrounding
the close as a result of the quantity of
P.M.-settled SPX options that settle at
the close or the amount of expiring open
interest in P.M.-settled SPX options, nor
any demonstrated capacity for options
hedging activity to impact volatility in
the underlying markets. The Exchange
also believes the introduction of P.M.settled SPX options had no significant
impact on the market quality of A.M.settled SPX options or other options.
The Exchange believes this as a result of
its analysis conducted after the
introduction of SPXW options with
Tuesday and Thursday expirations,
45 See
PO 00000
supra notes 21–24.
Frm 00120
Fmt 4703
Sfmt 4703
which demonstrated no statistically
significant impact on the bid-ask or
effective spreads of SPXW options with
Monday, Wednesday, and Friday
expirations after trading in the SPXW
options with Tuesday and Thursday
expirations began. While SPXW options
are P.M.-settled and SPX options are
A.M.-settled, they are otherwise nearly
identical products. Therefore, the
Exchange believes analyzing the impact
of new SPXW options on then-existing
SPXW options permit the Exchange to
extrapolate from this data that it is
unlikely the introduction of P.M.-settled
SPXW options significantly impacted
the market quality of A.M.-settled SPX
options when the pilot began.
Additionally, the significant changes in
the closing procedures of the primary
markets in recent decades, including
considerable advances in trading
systems and technology, has
significantly minimized risks of any
potential impact of P.M.-, cash-settled
SPX options on the underlying cash
markets. As such, the Exchange believes
that a permanent SPXPM Program does
not raise any unique or prohibitive
regulatory concerns and that such
trading has not, and will not, adversely
impact fair and orderly markets on
Expiration Fridays for the S&P 500 and
its component securities. Further, as the
Exchange has not identified any
significant impact on market quality or
any unique or prohibitive regulatory
concerns as a result of offering SPXPM
options, the Exchange believes that the
continuation of the SPXPM Program as
a pilot, including the gathering,
submission and review of the pilot
reports and data, is no longer necessary
and that making the SPXPM Program
permanent will allow the Exchange to
otherwise allocate time and resources to
other industry initiatives.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
Cboe Options does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange does not believe that making
the SPXPM Program permanent will
impose any unnecessary or
inappropriate burden on intramarket
competition because SPXPM options
will continue to be available to all
market participants who wish to
participate in the SPXPM options
market. The Exchange believes that the
significant and sustained growth the
P.M.-settled SPX options market has
experienced since their reintroduction
through pilot programs indicates strong,
continued investor interest and demand,
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Federal Register / Vol. 88, No. 15 / Tuesday, January 24, 2023 / Notices
warranting a permanent SPXPM
Program. The Exchange believes that,
for the period that P.M.-settled SPX
options have been in operation as pilot
programs, they have provided investors
with a desirable product with which to
trade and wishes to permanently offer
this product to investors. Furthermore,
during the pilot period, the Exchange
has not observed any significant adverse
market effects nor identified any
regulatory concerns as a result of the
SPXPM Program, and, as such, the
continuation of the SPXPM Program as
a pilot, including the gathering,
submission and review of the pilot
reports and data, is no longer
necessary—a permanent SPXPM
Program will allow the Exchange to
otherwise allocate time and resources to
other industry initiatives.
The Exchange further does not believe
that making the SPXPM Program
permanent will impose any burden on
intermarket competition that is not
necessary or appropriate in furtherance
of the purposes of the Act because it
applies to a class of options listed only
for trading on Cboe Options. The
Exchange notes that other exchanges are
free to and do offer competing products.
To the extent that the permanent
offering and continued trading of
SPXPM options may make Cboe Options
a more attractive marketplace to market
participants at other exchanges, such
market participants may elect to become
Cboe Options market participants.
tkelley on DSK125TN23PROD with NOTICES
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. by order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
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19:17 Jan 23, 2023
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including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2023–005 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CBOE–2023–005. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CBOE–2023–005, and
should be submitted on or before
February 14, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.46
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–01260 Filed 1–23–23; 8:45 am]
BILLING CODE 8011–01–P
46
PO 00000
17 CFR 200.30–3(a)(12).
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4271
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96700; File No. SR–LCH
SA–2023–002]
Self-Regulatory Organizations; LCH
SA; Notice of Filing and Immediate
Effectiveness of Proposed Rule
Change, as Modified by Amendment
No. 1, Relating to the CDSClear Fee
Grid for 2023
January 18, 2023.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder 2
notice is hereby given that on January 5,
2023, Banque Centrale de
Compensation, which conducts
business under the name LCH SA (‘‘LCH
SA’’), filed with the Securities and
Exchange Commission (‘‘Commission’’
or ‘‘SEC’’) the proposed rule change
described in Items I, II and III below,
which Items have been prepared
primarily by LCH SA. LCH SA filed the
proposed rule change pursuant to
Section 19(b)(3)(A) of the Act,3 and Rule
19b–4(f)(2) 4 thereunder, so that the
proposal was effective upon filing with
the Commission. On January 13, 2023,
LCH SA filed Amendment No. 1 to the
proposed rule change, which replaced
and superseded in its entirety the
original filing.5 The Commission is
publishing this notice to solicit
comments on the proposed rule change,
as modified by Amendment No. 1
(hereafter, the ‘‘proposed rule change’’),
from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
(a) On January 5, 2023, Banque
Centrale de Compensation, which
conducts business under the name LCH
SA (‘‘LCH SA’’), filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change SR–LCH SA–2023–002
(‘‘Proposed Rule Change’’) pursuant to
Section 19(b) of the Securities Exchange
Act of 1934 (‘‘Act’’) and Rule 19b–
4 thereunder in order to modify and
update the current CDSClear fee grid to
be effective early January 2023. This
Amendment No. 1 to the Proposed Rule
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(2).
5 Amendment No. 1 amends Exhibit 1A to correct
a non-substantive formatting error and adds further
explanation and justification to Part II(b), statutory
basis. Amendment No. 1 also submits an exhibit to
the proposed rule change as an Exhibit 3. In a
separate correspondence that accompanies
Amendment No. 1, LCH SA requests confidential
treatment for this Exhibit 3.
2 17
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24JAN1
]]>Agencies
[Federal Register Volume 88, Number 15 (Tuesday, January 24, 2023)]
[Notices]
[Pages 4265-4271]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-01260]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96703; File No. SR-CBOE-2023-005]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change to Make Permanent the Operation of Its
Program That Allows the Exchange To List P.M.-Settled Third Friday-of-
the-Month S&P 500 Stock Index (``S&P 500'') Options (``SPX'') Series
January 18, 2023.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on January 6, 2023, Cboe Exchange, Inc. (``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to make permanent the operation of its program that allows the Exchange
to list P.M.-settled third Friday-of-the-month S&P 500 Stock Index
(``S&P 500'') options (``SPX'') series. The text of the proposed rule
change is provided below.
(additions are italicized; deletions are [bracketed])
* * * * *
Rules of Cboe Exchange, Inc.
* * * * *
Rule 4.13. Series of Index Options
* * * * *
Interpretations and Policies
.01-.12 No change.
.13 In addition to A.M.-settled S&P 500 Stock Index (``SPX'')
options approved for trading on the Exchange pursuant to Rule 4.13,
the Exchange may also list options on SPX whose exercise settlement
value is derived from closing prices on the last trading day prior
to expiration (P.M.-settled third Friday-of-the-month SPX options
series).
.14 The Exchange may [also] list options on the Mini-SPX Index
(``XSP'') and Mini-RUT Index (``MRUT'') whose exercise settlement
value is derived from closing prices on the last trading day prior
to expiration (``P.M.-settled''). [P.M.-settled third Friday-of-the-
month SPX options series and] P.M.-settled XSP and MRUT options will
be listed for trading for a pilot period ending May 8, 2023.
* * * * *
The text of the proposed rule change is also available on the
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to make permanent its Pilot Program that
permits the Exchange to list SPX options whose exercise settlement
value is derived from closing prices on the last trading day prior to
expiration (``SPXPM''). The Securities and Exchange Commission (the
``Commission'') approved a rule change that established the SPXPM Pilot
Program on February 8, 2013.\3\ The Exchange has since continuously
extended the pilot period, which, pursuant to current Rule 4.13.13,\4\
is currently set to expire on the earlier of May 8, 2023 or the date on
which the SPXPM Pilot Program is approved on a permanent basis.\5\ The
Exchange hereby requests that the Commission approve the SPXPM Pilot
Program on a permanent basis.\6\
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\3\ See Securities Exchange Act Release No. 68888 (February 8,
2013), 78 FR 10668 (February 14, 2013) (SR-CBOE-2012-120) (the
``SPXPM Approval Order''). Pursuant to Securities Exchange Act
Release No. 80060 (February 17, 2017), 82 FR 11673 (February 24,
2017) (SR-CBOE-2016-091), the Exchange moved third-Friday P.M.-
settled options into the S&P 500 Index options class, and as a
result, the trading symbol for P.M.-settled S&P 500 Index options
that have standard third Friday-of-the-month expirations changed
from ``SPXPM'' to ``SPXW.'' This change went into effect on May 1,
2017, pursuant to Cboe Options Regulatory Circular RG17-054.
\4\ In 2019, the Exchange relocated prior Rule 24.9, containing
the provision which governs the Pilot Program, to current Rule 4.13.
See SR-CBOE-2019-092 (October 4, 2019), which did not make any
substantive changes to prior Rule 24.9 and merely relocated it to
Rule 4.13.
\5\ See Securities Exchange Act Release Nos. 71424 (January 28,
2014), 79 FR 6249 (February 3, 2014) (SR-CBOE-2014-004); 73338
(October 10, 2014), 79 FR 62502 (October 17, 2014) (SR-CBOE-2014-
076); 77573 (April 8, 2016), 81 FR 22148 (April 14, 2016) (SR-CBOE-
2016-036); 80386 (April 6, 2017), 82 FR 17704 (April 12, 2017) (SR-
CBOE-2017-025); 83166 (May 3, 2018), 83 FR 21324 (May 9, 2018) (SR-
CBOE-2018-036); 84535 (November 5, 2018), 83 FR 56129 (November 9,
2018) (SR-CBOE-2018-069); 85688 (April 18, 2019), 84 FR 17214 (April
24, 2019) (SR-CBOE-2019-023); 87464 (November 5, 2019), 84 FR 61099
(November 12, 2019) (SR-CBOE-2019-107); 88674 (April 16, 2020), 85
FR 22479 (April 22, 2020) (SR-CBOE-2020-036); 90263 (October 23,
2020), 85 FR 68611 (October 29, 2020) (SR-CBOE-2020-100); 91698
(April 28, 2021) 86 FR 23761 (May 4, 2021) (SR-CBOE-2021-027); 93455
(October 28, 2021), 86 FR 60660 (November 3, 2021) (SR-CBOE-2021-
062); 94799 (April 27, 2022), 87 FR 26244 (May 3, 2022) (SR-CBOE-
2022-019); and 96222 (November 3, 2022), 87 FR 67736 (November 9,
2022) (SR-CBOE-2022-054).
\6\ The Exchange notes that it also proposes to adopt Rule
4.13.14 to continue to govern the Pilot Programs also currently in
place in Rule 4.13.13 which permit the Exchange to list P.M.-settled
options on the Mini-SPX Index (``XSP'') and Mini-RUT Index
(``MRUT''). The Exchange plans to submit a separate proposal to make
the operation of these P.M. Pilot Programs permanent following
Commission approval of this proposal.
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[[Page 4266]]
By way of background, when cash-settled \7\ index options were
first introduced in the 1980s, settlement was based on the closing
value of the underlying index on the option's expiration date. The
Commission later became concerned about the impact of P.M.-settled,
cash-settled index options on the markets for the underlying stocks at
the close on expiration Fridays. Specifically, certain episodes of
price reversals around the close on quarterly expiration dates
attracted the attention of regulators to the possibility that the
simultaneous expiration of index futures, futures options, and options
might be inducing abnormal volatility in the index value around the
close.\8\ Academic research at the time provided at least some evidence
suggesting that futures and options expirations contributed to excess
volatility and reversals around the close on those days.\9\ In light of
the concerns with P.M. settlement and to help ameliorate the price
effects associated with expirations of P.M.-settled, cash-settled index
products, in 1987, the Commodity Futures Trading Commission (``CFTC'')
approved a rule change by the Chicago Mercantile Exchange (``CME'') to
provide for A.M. settlement \10\ for index futures, including futures
on the S&P 500.\11\ The Commission subsequently approved a rule change
by Cboe Options to list and trade A.M.-settled SPX options.\12\ In
1992, the Commission approved Cboe Options' proposal to transition all
of its European-style cash-settled options on the S&P 500 Index to A.M.
settlement; \13\ however, in 1993, the Commission approved a rule
allowing Cboe Options to list P.M.-settled options on certain broad-
based indices, including the S&P 500, expiring at the end of each
calendar quarter (``Quarterly Index Expirations'') (since adopted as
permanent).\14\ Starting in 2006, the Commission approved numerous rule
changes, on a pilot basis, permitting the Cboe Options to introduce
other index options, including SPX options, with P.M.-settlement. These
include P.M.-settled index options expiring weekly (other than the
third Friday) and at the end of each month (``EOM''),\15\ SPXPM, as
well as P.M.-settled Mini-SPX Index (``XSP'') options and Mini-Russell
2000 Index (``MRUT'') options expiring on the third Friday.\16\
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\7\ The seller of a ``cash-settled'' index option pays out the
cash value of the applicable index on expiration or exercise. A
``physically settled'' option, like equity and ETF options, involves
the transfer of the underlying asset rather than cash. See
Characteristics and Risks of Standardized Options, available at:
https://www.theocc.com/Company-Information/Documents-and-Archives/Options-Disclosure-Document.
\8\ The close of trading on the quarterly expiration Friday
(i.e., the third Friday of March, June, September and December),
when options, index futures, and options on index futures all expire
simultaneously, became known as the ``triple witching hour.''
\9\ See Securities and Exchange Commission, Division of Economic
Risk and Analysis, Memorandum, Cornerstone Analysis of PM Cash-
Settled Index Option Pilots (February 2, 2021) (``DERA Staff PM
Pilot Memo'') at 5, available at: https://www.sec.gov/files/Analysis_of_PM_Cash_Settled_Index_Option_Pilots.pdf.
\10\ The exercise settlement value for an A.M.-settled index
option is determined by reference to the reported level of the index
as derived from the opening prices of the component securities on
the business day before expiration.
\11\ See Securities Exchange Act Release No. 24367 (April 17,
1987), 52 FR 13890 (April 27, 1987) (SR-CBOE-87-11) (noting that CME
moved S&P 500 futures contract's settlement value to opening prices
on the delivery date).
\12\ See id.
\13\ See Securities Exchange Act Release No. 30944 (July 21,
1992), 57 FR 33376 (July 28, 1992) (SR-CBOE-92-09). Thereafter, the
Commission approved proposals by the options markets to transfer
most of their cash-settled index products to A.M. settlement.
\14\ See Securities Exchange Act Release No. 31800 (February 1,
1993), 58 FR 7274 (February 5, 1993) (SR-CBOE-92-13); and see Rule
4.13(a)(2)(B); see also Securities Exchange Act Release Nos. 54123
(July 11, 2006), 71 FR 40558 (July 17, 2006) (SR-CBOE-2006-65); and
60164 (June 23, 2009), 74 FR 31333 (June 30, 2009) (SR-CBOE-2009-
029).
\15\ See Securities Exchange Act Release Nos. 62911 (September
14, 2010), 75 FR 57539 (September 21, 2010) (SR-CBOE-2009-075);
76529 (November 30, 2015), 80 FR 75695 (December 3, 2015) (SR-CBOE-
2015-106); 78132 (June 22, 2016), 81 FR 42018 (June 28, 2016) (SR-
CBOE-2016-046); and 78531 (August 10, 2016), 81 FR 54643 (August 16,
2016) (SR-CBOE-2016-046).
\16\ See Securities Exchange Act Release Nos. 70087 (July 31,
2013), 78 FR 47809 (August 6, 2013) (SR-CBOE-2013-055); and 91067
(February 5, 2021) 86 FR 9108 (February 11, 2021) (SR-CBOE-2020-
116).
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As stated above, since its inception in 2013, the Exchange has
continuously extended the SPXPM Pilot Program period and, during the
course of the SPXPM Pilot Program and in support of the extensions of
the SPXPM Pilot Program, the Exchange has submitted reports to the
Commission regarding the Pilot Program that detail the Exchange's
experience with the Pilot Program, pursuant to the SPXPM Approval
Order.\17\ Specifically, the Exchange has submitted annual Pilot
Program reports to the Commission that contain an analysis of volume,
open interest, and trading patterns. The analysis examines trading in
SPX options, as well as trading in the securities that comprise the S&P
500 Index. Additionally, for series that exceed certain minimum open
interest parameters, the annual reports provide analysis of index price
volatility and share trading activity. The Exchange has also submitted
periodic interim reports that contain some, but not all, of the
information contained in the annual reports (together with the periodic
interim reports, the ``pilot reports'').\18\
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\17\ See supra note 3.
\18\ In providing the pilot reports to the Commission, the
Exchange previously requested confidential treatment of the pilot
reports under the Freedom of Information Act (``FOIA''). See 5
U.S.C. 552.
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The pilot reports contained the following volume and open interest
data:
(1) monthly volume aggregated for all trades;
(2) monthly volume aggregated by expiration date;
(3) monthly volume for each individual series;
(4) month-end open interest aggregated for all series;
(5) month-end open interest for all series aggregated by expiration
date; and
(6) month-end open interest for each individual series.
The annual reports also contained the information noted in Items
(1) through (6) above for Expiration Friday, A.M.-settled SPX options
traded on Cboe Options, as well as the following analysis of trading
patterns in SPX options series in the Pilot Program:
(1) a time series analysis of open interest; and
(2) an analysis of the distribution of trade sizes.
Finally, for series that exceed certain minimum parameters,\19\ the
annual reports contained the following analysis related to index price
changes and underlying share trading volume at the close on Expiration
Fridays:
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\19\ The Exchange and the Commission determined the minimum open
interest parameters, control sample, time intervals, method for
randomly selecting the component securities, and sample periods.
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(1) a comparison of index price changes at the close of trading on
a given Expiration Friday with comparable price changes from a control
sample. The data includes a calculation of percentage price changes for
various time intervals and compare that information to the respective
control sample. Raw percentage price change data as well as percentage
price change data normalized for prevailing market volatility, as
measured by the Cboe Volatility Index (VIX), is provided; and
(2) a calculation of share volume for a sample set of the component
securities representing an upper limit on share trading that could be
attributable to expiring in-the-money series. The data includes a
comparison of the calculated share volume for securities in the sample
set to the average daily trading
[[Page 4267]]
volumes of those securities over a sample period.
Also, during the course of the SPXPM Pilot Program, the Exchange
provided the Commission with any additional data or analyses the
Commission requested if it deemed such data or analyses necessary to
determine whether the Pilot Program was consistent with the Exchange
Act. The Exchange has made public on its website all data and analyses
previously submitted to the Commission under the Pilot Program,\20\ and
will continue to make public any data and analyses it submits to the
Commission while the SPXPM Pilot Program is still in effect.
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\20\ Available at https://www.cboe.com/aboutcboe/legal-regulatory/national-market-system-plans/pm-settlement-spxpm-data.
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The Exchange has concluded that the SPXPM Pilot Program does not
negatively impact market quality or raise any unique or prohibitive
regulatory concerns. The Exchange has not identified any evidence from
the pilot data indicating that the trading of P.M.-settled SPX options
has any adverse impact on fair and orderly markets on Expiration
Fridays for the S&P 500 Index or the underlying securities comprising
the S&P 500, nor have there been any observations of abnormal market
movements attributable to P.M.-settled SPX options from any market
participants that have come to the attention of the Exchange. Based on
a study conducted by the Commission's Division of Economic and Risk
Analysis (``DERA'') staff on the pilot data from 2006 through 2018,\21\
and the Exchange's review of the pilot data from 2019 through 2021, the
size of the market for P.M.-settled SPX options (including quarterly,
weekly, EOM and third Friday expirations) since 2007 has grown from a
trivial portion of the overall market to a substantial share (from
around 0.1% of open interest in 2007 to 30% in 2021).\22\ Notional
value of open interest in P.M.-settled SPX options increased from
approximately a median of $1.5 billion in 2007 to $1.9 trillion in
2021, approximately 1260 times its value in 2007. Notional open
interest in A.M.-settled SPX options was already hovering around a
median of $1.4 trillion in 2007, and it has since increased to
approximately $4.4 trillion in 2021. It is also important to note that
open interest on expiring P.M.-settled SPX options, as compared to
A.M.-settled options, is spread out across a greater number of
expiration dates, which results in a smaller percentage of open
interest expiring on any one date, thus mitigating concerns that SPXPM
option expiration may have a disruptive effect on the market.\23\ Daily
trading volume in P.M.-settled SPX options has increased from a median
of about 700 contracts in 2007 to nearly 1.9 million contracts in
2021,\24\ and now exceeds trading volume in A.M.-settled SPX options.
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\21\ See DERA Staff PM Pilot Memo, at 13 (``Option settlement
quantity data for A.M.- and P.M.-settled options were obtained from
the Cboe, including the number of contracts that settled in-the-
money for each exchange-traded option series on the S&P 500 index .
. . on expiration days from January 20, 2006 through December 31,
2018. Daily open interest and volume data for [SPX] option series
were also obtained from Cboe, including open interest data from
January 3, 2006 through December 31, 2018 and trading volume data
from January 3, 2006 through December 31, 2018.'')
\22\ The DERA staff study reviewed and provided statistics for
market share, median notional value of open interest and median
volume in 2007 and in 2018. The Exchange provides updated statistics
for market share, median notional value of open interest and median
volume in 2021, replacing the 2018 statistics provided in the
Commission staff study.
\23\ See DERA Staff PM Pilot Memo, at 2.
\24\ The Exchange notes that the DERA staff study used two-sided
volume data for the median volume in 2007 and in 2018; therefore,
the Exchange provides two-sided volume data for the median volume in
2021.
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Moreover, the DERA staff study of the P.M.-settled SPX options
pilot data (2006 through 2018) did not identify any significant
economic impact on S&P 500 futures,\25\ the S&P 500, or the underlying
component securities of the S&P 500 surrounding the close. For purposes
of the study, volatility was by and large measured by using the
standard deviation \26\ of one-minute returns of S&P 500 futures values
and the index value during regular hours on each day reviewed
(excluding the first and last 15 minutes of trading) and then compared
with the standard deviation of one-minute returns (for S&P 500 futures,
the S&P 500, and the underlying component securities of the S&P 500)
over the last 15 minutes of a trading day.\27\ Using this as a general
measure,\28\ the DERA staff study then reviewed whether, and to what
extent, the settlement quantity of SPXPM options and the levels of open
interest in SPXPM options on expiration days (as compared to non-
expiration days) may be associated with general price volatility and
price reversals for S&P 500 futures, the S&P 500, and the underlying
component securities of the S&P 500 near the close. From its review of
the study, the Exchange agrees that, although volatility before the
market close is generally higher than during the rest of the trading
day, there is no evidence of any significant adverse economic impact to
the futures, index, or underlying index component securities markets as
a result of the quantity of P.M.-settled SPX options that settle at the
close or the amount of expiring open interest in P.M.-settled SPX
options. For example, the largest settlement event that occurred during
the time period of the study (a settlement of $100.4 billion of
notional on December 29, 2017) had an estimated impact on the futures
price of only approximately 0.02% (a predicted impact of $0.54 relative
to a closing futures price of $2,677).
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\25\ Futures on the S&P 500 experience high volume and liquidity
both before and after the close of the underlying market. Therefore,
futures are a useful measure of abnormal volatility surrounding the
close and the open. See DERA Staff PM Pilot Memo, at 14. The
Exchange agrees with this approach.
\26\ Standard deviation applied to a rate of return (in this
case, one-minute) of an instrument can indicate that instrument's
historical volatility. The greater the standard deviation, the
greater the variance between price and the mean, which indicates a
larger price range, i.e., higher volatility.
\27\ For example, if on a particular day the standard deviation
of one-minute returns between 3:45 p.m. ET and 4:00 p.m. ET is 0.004
and the standard deviation of returns from 9:45 a.m. ET to 3:45 p.m.
ET is 0.002, this metric would take on a value of 2 for that day,
indicating that volatility during the last 15 minutes of the trading
day was twice as high as it was during the rest of the trading day.
See DERA Staff PM Pilot Memo, at 15; see also DERA Staff PM Pilot
Memo, at Section V, which discusses in detail the metrics used to
measure, for the purposes of the study, the extent to which the
market may experience abnormal volatility surrounding SPXPM option
settlement.
\28\ See DERA Staff PM Pilot Memo, at Section V, which discusses
in detail the metrics used to measure, for the purposes of the
study, the extent to which the market may experience abnormal
volatility surrounding SPXPM option settlement.
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In particular, the DERA staff study found that an additional P.M.-
settled SPX options settlement quantity equal to $10 billion in
notional value is associated with a marginal impact on futures prices
during the last 15 minutes of the trading day of only about $0.06
(where the hypothetical index level is 2,500), additional expiring open
interest in P.M.-settled SPX options equal to $10 billion in notional
value is associated with a marginal impact on futures prices during the
last 15 minutes of the trading day of only about $0.05 (assumed index
level is 2,500). Also, an additional increase in settlement quantity or
in expiring open interest, each equal to $20 million in notional value,
did not result in any meaningful futures price reversals near the close
(neither was
[[Page 4268]]
found to cause a price reversal of over one standard deviation \29\).
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\29\ See supra note 26.
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Likewise, the study identified that an additional total P.M.-
settled SPX options settlement quantity equal to $10 billion in
notional value corresponds to price movement in the S&P 500 of only
about $0.08 (assuming an index level of 2,500) during the last 15
minutes of the trading day, and that additional expiring open interest
equal to $10 billion in notional value corresponds to a price movement
in the S&P 500 of only about $0.06 (assuming an index level of 2,500)
during the last 15 minutes of the trading day. The study also
identified that it would take an increase of $34 billion in notional
value of total settlement quantity and of expiring open interest for
one additional S&P 500 price reversal of greater than two standard
deviations to occur in the last 15 minutes before the market close.
Also, regarding potential impact to S&P 500 component securities, it
would take an increase in total P.M.-settled SPX options settlement
quantity equal to $20 billion to effect a price movement of only
approximately $0.03 for a $200 stock, an increase in expiring open
interest in P.M.-settled SPX options equal to $10 billion to effect a
price movement less than half a standard deviation, and an increase in
total P.M.-settled SPX settlement quantity equal to $7 billion to
achieve a price reversal greater two standard deviations.
The study employed the same metrics to determine whether there is
greater price volatility for S&P 500 futures, the S&P 500, and the
component securities of the S&P 500 related to SPXPM option settlements
during an environment of high market volatility (i.e., on days in which
the VIX Index was in the top 10% of closing index values) and did not
identify indicators of any significant economic impact on these markets
near the close as a result of the P.M.-settled SPX options
settlement.\30\ In addition to this, the DERA staff study, applying the
same metrics and analysis as for P.M.-settled SPX options to A.M.-
settled SPX options, did not identify any evidence of a statistically
significant relationship between settlement quantity or expiring open
interest of A.M.-settled options and volatility near the open.
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\30\ The Exchange also notes that the study did not identify any
evidence that less liquid S&P 500 constituent securities experienced
any greater impact from the settlement of P.M.-settled SPX options.
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Upon review of the results of the DERA staff study, the Exchange
agrees that each of the above-described marginal price movements in S&P
500 futures, the S&P 500, and the S&P 500 component securities affected
by increases in P.M.-settled SPX options settlement quantity and
expiring open interest appear to be de minimis pricing changes from
those that occur over regular trading hours (outside of the last 15
minutes of the trading day). Further, the Exchange has not observed any
significant economic impact or other adverse effects on the market from
similar reviews of its pilot reports and data submitted after 2018.\31\
In its review of a sample of the pilot data from 2019 through 2021, the
Exchange similarly measured volatility over the final fifteen minutes
of each trading day by taking the standard deviation of rolling one-
minute returns of the S&P 500 level (excluding the first and last
fifteen minutes of trading) and comparing such with the standard
deviation of one-minute returns \32\ of the S&P 500 level, over the
last 15 minutes of a trading day. The Exchange identified an average
standard deviation ratio of 1.42 for the S&P 500 on non-expiration days
and an average standard deviation ratio of 1.54 for the S&P 500 on
expiration days (a ratio between expiration days and non-expiration
days of 1.09). The Exchange also notes that, using the same
methodology, it observed that, from 2015 through 2019,\33\ the average
standard deviation ratio for the S&P 500 on non-expiration days was
1.11 and the average standard deviation ratio for the S&P 500 on
expiration days was 1.22 (a ratio between expiration days and non-
expiration days of 1.10). While the average standard deviation ratio on
both expiration and non-expiration days was higher in 2019 through 2021
due to overall market volatility, the ratios between the standard
deviation ratios on expiration days and non-expirations days remained
nearly identical between the 2015 through 2019 timeframe and the 2019
through 2021. This shows that, in cases where overall market volatility
may increase, the normalized impact on expiration days to non-
expiration days generally remains consistent.
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\31\ Total SPX open interest volumes were examined for
expiration dates over a roughly two-year period between October 2019
and November 2021.
\32\ Calculated at every tick for the prior minute.
\33\ November 2015 through November 2021.
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In addition to this, the Exchange notes that the S&P 500 is
rebalanced quarterly. The changes resulting from each rebalancing
coincide with the third-Friday of the quarterly rebalancing month
(i.e., March, June, September, October and December) \34\ and generally
drive an increase in trading activity from investors that seek to track
the S&P 500. As such, The Exchange measured volatility on quarterly
rebalancing dates and found that the average standard deviation ratio
was 1.62, which suggests more closing volatility on quarterly rebalance
dates compared to non-quarterly expiration dates (for which the average
standard deviation ratio was 1.22), thus indicating that the impact
rebalancing may have on the S&P 500 is greater than any impact that
P.M.-settled SPX options may have on the S&P 500.
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\34\ See S&P Dow Jones Indices, Equity Indices Policies &
Practices, Methodology (August 2021), at 15, available at https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-equity-indices-policies-practices.pdf.
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The Exchange additionally focused its study of the post-2018 sample
pilot data on reviewing for potential correlation between excess market
volatility and price reversals and the hedging activity of liquidity
providers. As explained in the DERA staff study, potential impact of
P.M.-settled SPX options on the correlated equity markets is thought to
stem from the hedging activity of liquidity providers in such
options.\35\ To determine any such potential correlation, the Exchange
studied the expected action of liquidity providers that are the primary
source of the hedging on settlement days. These liquidity providers
generally delta-hedge their S&P 500 index exposure via S&P 500 futures
and on settlement day unwind their futures positions that correspond
with the delta of their in-the-money (ITM) expiring P.M.-settled SPX
options. Assuming such behavior, the Exchange estimated the Market-On-
Close (``MOC'') \36\ volume for the shares of the S&P 500 component
securities (i.e., ``MOC share volume'') that could ultimately result
from the unwinding of the liquidity providers' futures positions by
equating the notional value of the futures positions that correspond to
expiring ITM open interest to the number S&P 500 component security
contracts (based on the weight of each S&P 500 component security).
That is, the Exchange calculated (an estimate) of the amount of MOC
volume in the S&P 500 component markets attributable hedging activity
as a result of expiring ITM P.M.-settled SPX options (i.e., ``hedging
MOC''). The Exchange then: (1) compared the hedging MOC share volume to
all MOC share volume on expiration days and non-expiration trading
days; and (2) compared the notional value of the hedging futures
positions (i.e., that correspond to expiring ITM P.M.-settled SPX
options
[[Page 4269]]
open interest) to the notional value of expiring ITM P.M.-settled SPX
options open interest, the notional value of all expiring P.M.-settled
SPX options open interest and the notional value of all P.M.-settled
SPX options open interest.
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\35\ See DERA Staff PM Pilot Memo, at 10-12.
\36\ MOC orders allow a market participant to trade at the
closing price. Market participants generally utilize MOC orders to
ensure they exit positions at the end of the trading day.
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The Exchange observed that, on average, there were approximately
25% more MOC shares executed on expiration days (332 expiration days)
than non-expiration days (209 non-expiration days). While, at first
glance, the volume of MOC shares executed on expiration days seems much
greater than the volume executed on non-expiration days, the Exchange
notes that much of this difference is attributable to just eight
expiration days--the quarterly index rebalancing dates captured within
the scope of the post-2018 sample pilot data. The average MOC share
volume on the eight quarterly rebalancing dates was approximately 4.8
times the average MOC share volume on the non-quarterly rebalancing
expiration dates; again, indicating that the impact rebalancing may
have on the S&P 500 Index is greater than any impact that P.M.-settled
SPX options may have on the S&P 500 Index. That is, the Exchange
observed that the majority of closing volume on quarterly rebalance
dates is driven by rebalancing of shares in in the S&P 500, and not by
P.M.-settled SPX options expiration-related hedging activity.
Notwithstanding the MOC share volume on quarterly rebalancing dates,
the volume of MOC shares executed on expiration days (324 expiration
days) was only approximately 13% more than that on non-expiration days,
substantially less than the increase in volume over non-expiration days
wherein the eight index rebalancing dates are included in expiration
day volume. In addition to this, the Exchange observed that the hedging
MOC share volume (i.e., the expected MOC share volume resulting from
hedging activity in connection with expiring ITM P.M.-settled SPX
options) was, on average, less than the MOC share volume on non-
expiration days, and was only approximately 20% of the total MOC share
volume on expiration days, indicating that other sources of MOC share
volume generally exceed the volume resulting from hedging activity of
expiring ITM P.M.-settled SPX options and would more likely be a source
of any potential market volatility.
The Exchange also observed that, across all third-Friday
expirations, the notional value of the hedging futures positions was
approximately 25% of the notional value of expiring ITM P.M.-settled
SPX options, approximately 3.8% of the notional value of all expiring
P.M.-settled SPX options, and approximately only 0.5% of the notional
value of all P.M.-settled SPX options. As such, the estimated hedging
activity from liquidity providers on expiration days is a fraction of
the expiring open interest in P.M.-settled SPX options, which, the
Exchange notes, is only 14% of the total open interest in P.M.-settled
SPX options; thus, indicating negligible capacity for hedging activity
to increase volatility in the underlying markets.
While unrelated to the initial concerns of P.M.-settlement as
described above, at the request of the Commission, the Exchange
recently completed an analysis intended to evaluate whether the SPXPM
Program impacted the quality of the SPX option market. Specifically,
the Exchange compared values of key market quality indicators
(specifically, the bid-ask spread \37\ and effective spread \38\) in
SPXW options both before and after the introduction of Tuesday
expirations and Thursday expirations for SPXW options on April 18 and
May 11, 2022, respectively.\39\ Options on the Standard & Poor's
Depositary Receipts S&P 500 ETF (``SPY'') were used as a control group
to account for any market factors that might influence key market
quality indicators. The Exchange used data from January 3, 2022 through
March 4, 2022 (the two-month period prior to the introduction of SPXW
options with Tuesday expirations) and data from May 11, 2022 to July
10, 2022 (the two-month period following the introduction of SPXW
options with Thursday expirations).\40\ Given the time that as passed
since the introduction of P.M.-settled SPX options, the Exchange is
unable to analyze whether the introduction of PM-settled options SPX
options significantly impacted the market quality of A.M.-settled SPX
options. The Exchange believes analyzing whether the introduction of
new SPXW P.M.-settled expirations (i.e., SPXW options with Tuesday and
Thursday expirations) impacted the market quality of then-existing SPXW
P.M.-settled expirations (i.e., SPXW options with Monday, Wednesday,
and Friday expirations) provides a reasonable substitute to evaluate
whether the introduction of P.M.-settled index options impacted the
market quality of the SPX market when the pilot began.
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\37\ The Exchange calculated for each of SPXW options (with
Monday, Wednesday, and Friday expirations) and SPY Weekly options
(with Monday, Wednesday, and Friday expirations) the daily time-
weighted bid-ask spread on the Exchange during its regular trading
hours session, adjusted for the difference in size between SPXW
options and SPY options (SPXW options are approximately ten times
the value of SPY options).
\38\ The Exchange calculated the volume-weighted average daily
effective spread for simple trades for each of SPXW options (with
Monday, Wednesday, and Friday expirations) and SPY Weekly options
(with Monday, Wednesday, and Friday expirations) as twice the amount
of the absolute value of the difference between an order execution
price and the midpoint of the national best bid and offer at the
time of execution, adjusted for the difference in size between SPXW
options and SPY options.
\39\ For purposes of comparison, the Exchange paired SPXW
options and SPY options with the same moneyness and same days to
expiration.
\40\ The Exchange observed comparable market volatility levels
during the pre-intervention and post-intervention time ranges.
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As a result of this analysis, the Exchange believes the
introduction of SPX options with Tuesday and Thursday options had no
significant impact on the market quality of SPXW options with Monday,
Wednesday, and Friday expirations. With respect to the majority of
series analyzed, the Exchange observed no statistically significant
difference in the bid-ask spread or the effective spread of the series
in the period prior to introduction of the Tuesday and Thursday
expirations and the period following the introduction of the Tuesday
and Thursday expirations. While statistically insignificant, the
Exchange notes that in many series, particularly as they were closer to
expiration, the Exchange observed that the values of these spreads
decreased during the period following the introduction of the Tuesday
and Thursday expirations.\41\
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\41\ In any series in which the Exchange observed an increase in
the market quality indicators, the Exchange notes any such increase
was also statistically insignificant.
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To further note, given the significant changes in the closing
procedures of the primary markets in recent decades, including
considerable advances in trading systems and technology, the Exchange
believes that the risks of any potential impact of P.M.-, cash-settled
SPX options on the underlying cash markets are also de minimis.
The Exchange proposes to make the SPXPM Program permanent as P.M.-
settled index products, particularly SPX options, have become an
integral part of the Exchange's product offerings, providing investors
with greater trading opportunities and flexibility. As indicated by the
significant growth in the size of the market for P.M.-settled SPX
options, such options have been, and continue to be, well-received and
widely used by market participants. Therefore, the Exchange wishes to
be able to continue to provide investors with the ability to trade
SPXPM options on a permanent basis. The Exchange believes that the
permanent continuation of the SPXPM Program will serve to maintain the
status quo by
[[Page 4270]]
continuing to offer a product to which investors have become accustomed
and have incorporated into their business models and day-to-day trading
methodologies for nearly ten years. As such, the Exchange also believes
that ceasing to offer SPXPM options may result in significant market
disruption and investor confusion. The Exchange has not identified any
significant impact on market quality nor any unique or prohibitive
regulatory concerns as a result of the SPXPM Pilot Program, and, as
such, the Exchange believes that the continuation of the SPXPM Program
as a pilot, including the use of time and resources to compile and
analyze quarterly and annual pilot reports and pilot data, is no longer
necessary and that making the SPXPM Program permanent will allow the
Exchange to otherwise allocate time and resources to other industry
initiatives.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\42\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \43\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest.
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\42\ 15 U.S.C. 78f(b).
\43\ 15 U.S.C. 78f(b)(5).
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In particular, the Exchange believes that the making the SPXPM
Program permanent will allow the Exchange to be able to continue to
offer SPXPM options--a product of which has become an integral part of
the Exchange's offerings--on a continuous and permanent basis. Since
their reintroduction beginning in 2006,\44\ P.M.-settled SPX options
have been, and continue to be, well-received and widely used by market
participants, providing investors with greater trading opportunities
and flexibility. The Exchange believes that the permanent continuation
of the SPXPM Program will remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, protect investors and the public interest by continuing to
offer a product to which investors have become accustomed and have
incorporated into their business models and day-to-day trading
strategies for nearly nine years. As indicated by the significant
growth in the size of the market for P.M.-settled SPX options, such
options have been, and continue to be, well-received and widely used by
market participants. Conversely, the Exchange believes ceasing to offer
the SPXPM Program may result in significant market disruption and
investor confusion, as P.M.-settled index products, particularly SPX
options, have become an integral part of the Exchange's product
offerings, providing investors with greater trading opportunities and
flexibility.
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\44\ See supra notes 21-24. As described above, the Exchange's
conclusion is consistent with the analysis in the DERA Staff PM
Pilot Memo.
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The Exchange further believes that making the SPXPM Program
permanent will remove impediments to and perfect the mechanism of a
free and open market and a national market system and protect
investors, while maintaining a fair and orderly market, as the Exchange
believes that previous concerns (arising in the 1980s) regarding
options expirations potentially contributing to excess volatility and
reversals around the close have been adequately diminished. As
described in detail above, the Exchange has observed no significant
adverse market impact or identified any meaningful regulatory concerns
during the nearly nine-year operation of the SPXPM Program as a pilot
nor during the 15 years since P.M.-settled SPX options were
reintroduced to the marketplace.\45\ Notably, the Exchange did not
identify any significant economic impact (including on pricing or
volatility or in connection with reversals) on S&P 500 futures, the S&P
500, or the underlying component securities of the S&P 500 surrounding
the close as a result of the quantity of P.M.-settled SPX options that
settle at the close or the amount of expiring open interest in P.M.-
settled SPX options, nor any demonstrated capacity for options hedging
activity to impact volatility in the underlying markets. The Exchange
also believes the introduction of P.M.-settled SPX options had no
significant impact on the market quality of A.M.-settled SPX options or
other options. The Exchange believes this as a result of its analysis
conducted after the introduction of SPXW options with Tuesday and
Thursday expirations, which demonstrated no statistically significant
impact on the bid-ask or effective spreads of SPXW options with Monday,
Wednesday, and Friday expirations after trading in the SPXW options
with Tuesday and Thursday expirations began. While SPXW options are
P.M.-settled and SPX options are A.M.-settled, they are otherwise
nearly identical products. Therefore, the Exchange believes analyzing
the impact of new SPXW options on then-existing SPXW options permit the
Exchange to extrapolate from this data that it is unlikely the
introduction of P.M.-settled SPXW options significantly impacted the
market quality of A.M.-settled SPX options when the pilot began.
Additionally, the significant changes in the closing procedures of the
primary markets in recent decades, including considerable advances in
trading systems and technology, has significantly minimized risks of
any potential impact of P.M.-, cash-settled SPX options on the
underlying cash markets. As such, the Exchange believes that a
permanent SPXPM Program does not raise any unique or prohibitive
regulatory concerns and that such trading has not, and will not,
adversely impact fair and orderly markets on Expiration Fridays for the
S&P 500 and its component securities. Further, as the Exchange has not
identified any significant impact on market quality or any unique or
prohibitive regulatory concerns as a result of offering SPXPM options,
the Exchange believes that the continuation of the SPXPM Program as a
pilot, including the gathering, submission and review of the pilot
reports and data, is no longer necessary and that making the SPXPM
Program permanent will allow the Exchange to otherwise allocate time
and resources to other industry initiatives.
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\45\ See supra notes 21-24.
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B. Self-Regulatory Organization's Statement on Burden on Competition
Cboe Options does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe that making the SPXPM Program permanent will impose any
unnecessary or inappropriate burden on intramarket competition because
SPXPM options will continue to be available to all market participants
who wish to participate in the SPXPM options market. The Exchange
believes that the significant and sustained growth the P.M.-settled SPX
options market has experienced since their reintroduction through pilot
programs indicates strong, continued investor interest and demand,
[[Page 4271]]
warranting a permanent SPXPM Program. The Exchange believes that, for
the period that P.M.-settled SPX options have been in operation as
pilot programs, they have provided investors with a desirable product
with which to trade and wishes to permanently offer this product to
investors. Furthermore, during the pilot period, the Exchange has not
observed any significant adverse market effects nor identified any
regulatory concerns as a result of the SPXPM Program, and, as such, the
continuation of the SPXPM Program as a pilot, including the gathering,
submission and review of the pilot reports and data, is no longer
necessary--a permanent SPXPM Program will allow the Exchange to
otherwise allocate time and resources to other industry initiatives.
The Exchange further does not believe that making the SPXPM Program
permanent will impose any burden on intermarket competition that is not
necessary or appropriate in furtherance of the purposes of the Act
because it applies to a class of options listed only for trading on
Cboe Options. The Exchange notes that other exchanges are free to and
do offer competing products. To the extent that the permanent offering
and continued trading of SPXPM options may make Cboe Options a more
attractive marketplace to market participants at other exchanges, such
market participants may elect to become Cboe Options market
participants.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2023-005 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2023-005. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2023-005, and should be submitted
on or before February 14, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\46\
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\46\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-01260 Filed 1-23-23; 8:45 am]
BILLING CODE 8011-01-P
