Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Allow Certain Flexible Exchange Equity Options To Be Cash Settled, 53548-53555 [2023-16885]
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53548
Federal Register / Vol. 88, No. 151 / Tuesday, August 8, 2023 / Notices
RAILROAD RETIREMENT BOARD
Sunshine Act Meetings
10 a.m., August 16, 2023.
PLACE: Members of the public wishing
to attend the meeting must submit a
written request at least 24 hours prior to
the meeting to receive dial-in
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STATUS: This meeting will be open to the
public.
MATTERS TO BE CONSIDERED:
• Office of Legislative Affairs—Recent
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CONTACT PERSON FOR MORE INFORMATION:
Stephanie Hillyard, Secretary to the
Board, (312) 751–4920.
TIME AND DATE:
(Authority 5 U.S.C. 552b)
Dated: August 4, 2023.
Stephanie Hillyard,
Secretary to the Board.
BILLING CODE 7905–01–P
[Release No. 34–98044; File No. SR–CBOE–
2023–036]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Allow Certain Flexible
Exchange Equity Options To Be Cash
Settled
August 2, 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 August 1,
2023, Cboe Exchange, Inc. (the
‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
ddrumheller on DSK120RN23PROD with NOTICES1
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rules 4.21 and 8.35 related to Flexible
Exchange (‘‘FLEX’’) Options. The text of
the proposed rule change is available on
the Exchange’s website (https://
www.cboe.com/AboutCBOE/
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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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.
1. Purpose
SECURITIES AND EXCHANGE
COMMISSION
2 17
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[FR Doc. 2023–17049 Filed 8–4–23; 11:15 am]
1 15
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
Jkt 259001
The Exchange proposes to amend
Rules 4.21 and 8.35 related to FLEX
Options. FLEX Options are customized
equity or index contracts that allow
investors to tailor contract terms for
exchange-listed equity and index
options. The Exchange proposes to
amend Rule 4.21 to allow for cash
settlement of certain FLEX Equity
Options.3 Generally, FLEX Equity
Options are settled by physical delivery
of the underlying security,4 while all
FLEX Index Options are currently
settled by delivery in cash.5 As
proposed, FLEX Equity Options where
the underlying security is an ExchangeTraded Fund (‘‘ETF’’) would be
permitted to be settled by delivery in
cash if the underlying security meets
prescribed criteria. The Exchange notes
that cash-settled FLEX ETF Options will
be subject to the same trading rules and
procedures that currently govern the
trading of other FLEX Options on the
Exchange, with the exception of the
rules to accommodate the cashsettlement feature proposed in this rule
filing.
To permit cash settlement of certain
FLEX ETF Options, the Exchange
proposes new subparagraph (ii) to Rule
4.21(b)(5)(A). Proposed Rule
4.21(b)(5)(A)(ii) would provide that the
exercise settlement for a FLEX ETF
3 A ‘‘FLEX Equity Option’’ is an option on a
specified underlying equity security. See Cboe
Options Rule 1.1.
4 See Rule 4.21(b)(5)(A)(i).
5 See Rule 4.21(b)(5)(B). As discussed below, cash
settlement is also permitted in the over-the-counter
(‘‘OTC’’) market.
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Option may be by physical delivery of
the underlying ETF or by delivery in
cash if the underlying security,
measured over the prior six-month
period, has an average daily notional
value of $500 million or more and a
national average daily volume (‘‘ADV’’)
of at least 4,680,000 shares.6
The Exchange also proposes in the
introductory paragraph of Rule 4.21(b)
that a FLEX Equity Option overlying an
ETF (cash- or physically settled) may
not be the same type (put or call) and
may not have the same exercise style,
expiration date, and exercise price as a
non-FLEX Equity Option overlying the
same ETF.7 In other words, regardless of
whether a FLEX Equity Option
overlying an ETF is cash- or physically
settled, at least one of the exercise style
(i.e., American-style or European-style),
expiration date, and exercise price of
that FLEX Option must differ from those
terms of a non-FLEX Option overlying
the same ETF in order to list such a
FLEX Equity Option. For example,
suppose a non-FLEX SPY option (which
is physically settled, p.m.-settled and
American-style) with a September
expiration and exercise price of 475 is
listed for trading. A FLEX Trader could
not submit an order to trade a FLEX SPY
option (which is p.m.-settled) that is
cash-settled (or physically settled) and
American-style with a September
expiration and exercise price of 475.
In addition, the Exchange proposes
new subparagraph (a) to Rule
4.21(b)(5)(A)(ii), which would provide
that the Exchange will determine biannually the underlying ETFs that
satisfy the notional value and trading
volume requirements in proposed Rule
4.21(b)(5)(A)(ii) by using trading
statistics for the previous six-months.8
The proposed rule would further
provide that the Exchange will permit
cash settlement as a contract term on no
6 See proposed Rule 4.21(b)(5)(A)(ii). The
Exchange also proposes a corresponding
nonsubstantive amendment to Rule 4.21(b)(5)(A)(i)
and a nonsubstantive amendment to Rule 4.21 to
renumber current Rule 4.21(b)(5)(A)(ii) as new Rule
4.21(b)(5)(A)(iii).
7 All non-FLEX Equity Options (including on
ETFs) are physically settled. Note all FLEX and
non-FLEX Equity Options (including ETFs) are
p.m.-settled.
8 See proposed Rule 4.21(b)(5)(A)(ii)(a). The
Exchange will announce the implementation date of
the proposed rule change via Exchange Notice. The
Exchange plans to conduct the bi-annual review on
January 1 and July 1 of each year. The results of
the bi-annual review will be announced via
Exchange Notice and any new securities that
qualify would be permitted to have cash settlement
as a contract term beginning on February 1 and
August 1 of each year. If the Exchange initially
begins listing cash-settled FLEX Options on a
different date (e.g., September 1), it would initially
list securities that qualified as of the last bi-annual
review (e.g., the one conducted on July 1).
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Federal Register / Vol. 88, No. 151 / Tuesday, August 8, 2023 / Notices
more than 50 underlying ETFs that meet
the criteria in Rule 4.21(b)(5)(A)(ii), and
that if more than 50 underlying ETFs
satisfy the notional value and trading
volume requirements, then the
Exchange would select the top 50 ETFs
that have the highest average daily
volume.9
Proposed new subparagraph (b) to
Rule 4.21(b)(5)(A)(ii) would further
provide that if the Exchange determines
pursuant to the bi-annual review that an
underlying ETF ceases to satisfy the
requirements under Rule
4.21(b)(5)(A)(ii), any new position
overlying such ETF entered into will be
required to have exercise settlement by
physical delivery, and any open cashsettled FLEX ETF Option positions may
be traded only to close the position.10
The Exchange believes it is
appropriate to introduce cash settlement
as an alternative contract term to the
select group of ETFs because they are
among the most highly liquid and
actively traded securities. As described
more fully below, the Exchange believes
that the deep liquidity and robust
trading activity in the ETFs identified
by the Exchange as meeting the criteria
mitigate against historic concerns
regarding susceptibility to
manipulation.
ddrumheller on DSK120RN23PROD with NOTICES1
Characteristics of ETFs
ETFs are funds that have their value
derived from assets owned. The net
asset value (‘‘NAV’’) of an ETF is a daily
calculation that is based off the most
recent closing prices of the assets in the
fund and an actual accounting of the
total cash in the fund at the time of
calculation. The NAV of an ETF is
calculated by taking the sum of the
assets in the fund, including any
securities and cash, subtracting out any
liabilities, and dividing that by the
number of shares outstanding.
Additionally, each ETF is subject to a
creation and redemption mechanism to
ensure the price of the ETF does not
fluctuate too far away from its NAV,
which mechanisms reduce the potential
for manipulative activity. Each business
day, ETFs are required to make publicly
available a portfolio composition file
that describes the makeup of their
creation and redemption ‘‘baskets’’ (i.e.,
a specific list of names and quantities of
securities or other assets designed to
9 See
proposed Rule 4.21(b)(5)(A)(ii)(a).
proposed Rule 4.21(b)(5)(A)(ii)(b). A TPH
that is acting as a Market Maker may enter into an
opening transaction in order to accommodate
closing transactions of other market participants in
option series that are restricted to closing-only
transactions. See Cboe Options Rule 4.4; see also
Cboe Options Rule 8.46 (which authorizes the
10 See
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53549
Trading Data for the ETFs Proposed for
Cash Settlement
The Exchange believes that average
daily notional value is an appropriate
proxy for selecting underlying securities
that are not readily susceptible to
manipulation for purposes of
establishing a settlement price. Average
daily notional value considers both the
trading activity and the price of an
underlying security. As a general matter,
the more expensive an underlying
security’s price, the less cost-effective
manipulation could become. Further,
manipulation of the price of a security
encounters greater difficulty the more
volume that is traded. To calculate
average daily notional value (provided
in the table below), the Exchange
summed the notional value of each
trade for each symbol (i.e., the number
of shares times the price for each
execution in the security) and divided
that total by the number of trading days
in the six-month period (from January 1,
2023 through June 30, 2023) reviewed
by the Exchange.
Further, the Exchange proposes that
qualifying ETFs also meet an ADV
standard. The purpose for this second
criteria is to prevent unusually
expensive underlying securities from
qualifying under the average daily
notional value standard while not being
one of the most actively traded
securities. The Exchange believes an
ADV requirement of 4,680,000 shares a
day is appropriate because it represents
average trading in the underlying ETF of
200 shares per second. While no
security is immune from all
manipulation, the Exchange believes
that the combination of average daily
notional value and ADV as prerequisite
requirements would limit cash
settlement of FLEX ETF Options to
those underlying ETFs that would be
less susceptible to manipulation in
order to establish a settlement price.
The Exchange believes that the
proposed objective criteria would
ensure that only the most robustly
traded and deeply liquid ETFs would
qualify to have cash settlement as a
contract term. As provided in the table
below, as of June 30, 2023, the Exchange
would be able to provide cash
settlement as a contract term for FLEX
ETF Options on 39 underlying ETFs, as
only this group of securities would
currently meet the requirement of 500
Million or more average daily notional
value and a minimum ADV of 4,680,000
shares. The table below provides the list
of the 39 ETFs that, as of June 30, 2023,
would be eligible to have cash
settlement as a contract term.
Exchange to impose, from time to time in its
discretion, such restrictions on Exchange option
transactions or the exercise of option contracts in
one or more series of options of any class dealt on
the Exchange as it deems advisable in the interests
of maintaining a fair and orderly market).
Consistent with a Market Maker’s duty to maintain
fair and orderly markets under Rule 5.51, the
Exchange will provide guidance to reflect that a
TPH acting as a Market Maker in cash-settled FLEX
ETF Options can enter into an opening transaction
to facilitate closing only transactions of another
market participant in cash-settled FLEX ETF Option
series that are restricted to closing-only
transactions.
track the performance of the portfolio as
a whole). ETF shares are created when
an Authorized Participant, typically a
market maker or other large institutional
investor, deposits the daily creation
basket or cash with the ETF issuer. In
return for the creation basket or cash (or
both), the ETF issues to the Authorized
Participant a ‘‘creation unit’’ that
consists of a specified number of ETF
shares. For instance, IWM is designed to
track the performance of the Russell
2000 Index. An Authorized Participant
will purchase all the Russell 2000
constituent securities in the exact same
weight as the index prescribes, then
deliver those shares to the ETF issuer.
In exchange, the ETF issuer gives the
Authorized Participant a block of
equally valued ETF shares, on a one-forone fair value basis. This process can
also work in reverse. A redemption is
achieved when the Authorized
Participant accumulates a sufficient
number of shares of the ETF to
constitute a creation unit and then
exchanges these ETF shares with the
ETF issuer, thereby decreasing the
supply of ETF shares in the market.
The principal, and perhaps most
important, feature of ETFs is their
reliance on an ‘‘arbitrage function’’
performed by market participants that
influences the supply and demand of
ETF shares and, thus, trading prices
relative to NAV. As noted above, new
ETF shares can be created and existing
shares redeemed based on investor
demand; thus, ETF supply is openended. This arbitrage function helps to
keep an ETF’s price in line with the
value of its underlying portfolio, i.e., it
minimizes deviation from NAV.
Generally, in the Exchange’s view, the
higher the liquidity and trading volume
of an ETF, the more likely the price of
the ETF will not deviate from the value
of its underlying portfolio, making such
ETFs less susceptible to price
manipulation.
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Federal Register / Vol. 88, No. 151 / Tuesday, August 8, 2023 / Notices
Average daily
notional value
(in dollars)
(1/1/23–6/30/23)
Symbol
Security name
AGG ........................
ARKK ......................
BIL ..........................
EEM ........................
EFA .........................
EMB ........................
EWZ ........................
FXI ..........................
GDX ........................
GLD ........................
HYG ........................
IEF ..........................
IEFA ........................
IEMG ......................
IWM ........................
IYR ..........................
JNK .........................
KRE ........................
KWEB .....................
LQD ........................
QQQ .......................
SMH ........................
SOXL ......................
SOXS ......................
SPXL ......................
SPY ........................
SQQQ .....................
TLT .........................
TQQQ .....................
XBI ..........................
XLE .........................
XLF .........................
XLI ..........................
XLK .........................
XLP .........................
XLU .........................
XLV .........................
XLY .........................
XOP ........................
ISHARES TR CORE US AGGBD ET ....................................................................
ARK ETF TR INNOVATION ETF ...........................................................................
SPDR SER TR BLOOMBERG 1–3 MO .................................................................
ISHARES TR MSCI EMG MKT ETF ......................................................................
ISHARES TR MSCI EAFE ETF .............................................................................
ISHARES TR JPMORGAN USD EMG ..................................................................
ISHARES INC MSCI BRAZIL ETF .........................................................................
ISHARES TR CHINA LG–CAP ETF ......................................................................
VANECK ETF TRUST GOLD MINERS ETF .........................................................
SPDR GOLD TR GOLD SHS .................................................................................
ISHARES TR IBOXX HI YD ETF ...........................................................................
ISHARES TR 7–10 YR TRSY BD ..........................................................................
ISHARES CORE MSCI EAFE ETF ........................................................................
ISHARES INC CORE MSCI EMKT ........................................................................
ISHARES TR RUSSELL 2000 ETF .......................................................................
ISHARES TR U.S. REAL ES ETF .........................................................................
SPDR SER TR BLOOMBERG HIGH Y .................................................................
SPDR S&P REGIONAL BANKING ETF ................................................................
KRANESHARES TR CSI CHI INTERNET .............................................................
ISHARES TR IBOXX INV CP ETF .........................................................................
INVESCO QQQ TR UNIT SER 1 ...........................................................................
VANECK SEMICONDUCTOR ETF ........................................................................
DIREXION SHS ETF TR DLY SCOND 3XBU .......................................................
DIREXION SHS ETF TR DLY SEMICNDTR BR ...................................................
DIREXION SHS ETF TR DRX S&P500BULL ........................................................
SPDR S&P 500 ETF TR TR UNIT .........................................................................
PROSHARES TR ULTRAPRO SHT QQQ .............................................................
ISHARES TR 20 YR TR BD ETF ...........................................................................
PROSHARES TR ULTRAPRO QQQ .....................................................................
SPDR SER TR S&P BIOTECH ..............................................................................
SELECT SECTOR SPDR TR ENERGY ................................................................
SELECT SECTOR SPDR TR FINANCIAL .............................................................
SELECT SECTOR SPDR TR SBI INT–INDS ........................................................
SELECT SECTOR SPDR TR TECHNOLOGY ......................................................
SELECT SECTOR SPDR TR SBI CONS STPLS .................................................
SELECT SECTOR SPDR TR SBI INT–UTILS ......................................................
SELECT SECTOR SPDR TR SBI HEALTHCARE ................................................
SELECT SECTOR SPDR TR SBI CONS DISCR ..................................................
SPDR SER TR S&P OILGAS EXP ........................................................................
The Exchange believes that permitting
cash settlement as a contract term for
FLEX ETF Options for the ETFs in the
above table would broaden the base of
investors that use FLEX Options to
manage their trading and investment
risk, including investors that currently
trade in the over-the-counter (‘‘OTC’’)
market for customized options, where
settlement restrictions do not apply.
Today, equity options are settled
physically at The Options Clearing
Corporation (‘‘OCC’’), i.e., upon
exercise, shares of the underlying
security must be assumed or delivered.
Physical settlement may possess certain
risks with respect to volatility and
movement of the underlying security at
expiration against which market
participants may need to hedge. The
Exchange believes cash settlement may
be preferable to physical delivery in
some circumstances as it does not
present the same risk. If an issue with
the delivery of the underlying security
arises, it may become more expensive
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(and time consuming) to reverse the
delivery because the price of the
underlying security would almost
certainly have changed. Reversing a
cash payment, on the other hand, would
not involve any such issue because
reversing a cash delivery would simply
involve the exchange of cash.
Additionally, with physical settlement,
market participants that have a need to
generate cash would have to sell the
underlying security while incurring the
costs associated with liquidating their
position as well as the risk of an adverse
movement in the price of the underlying
security.
The Exchange notes that the
Securities and Exchange Commission
(the ‘‘Commission’’) has previously
approved a rule filing of another
exchange that allowed for the trading of
cash-settled options 11 and, specifically,
11 See, e.g., PHLX FX Options traded on Nasdaq
PHLX and S&P 500® Index Options traded on Cboe
Options Exchange. The Commission approved, on
a pilot basis, the listing and trading of RealDayTM
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$703,126,857
858,537,852
691,090,219
1,284,326,169
1,308,724,046
559,160,916
756,467,915
953,344,257
717,525,246
1,373,373,829
3,038,710,673
833,776,310
640,740,104
610,571,206
5,402,906,722
575,694,782
809,645,750
1,020,754,439
556,570,098
2,209,277,519
17,517,678,522
954,728,520
1,240,910,219
832,524,309
946,357,247
34,975,824,706
4,273,866,273
2,246,375,199
3,902,736,049
709,508,423
1,648,556,002
1,699,571,786
1,190,848,482
1,006,555,659
855,296,387
879,471,277
1,187,391,938
742,561,935
619,413,460
Average daily
volume
(in shares)
(1/1/23–6/30/23)
7,116,525
22,026,750
7,543,846
32,458,368
18,457,234
6,510,071
26,179,000
32,659,170
22,888,829
7,600,698
40,690,044
8,506,605
9,645,504
12,458,329
29,985,329
6,749,049
8,834,914
22,996,273
18,594,683
20,444,446
55,508,283
4,827,785
76,587,443
45,142,015
13,134,890
85,701,074
130,095,374
21,559,136
149,675,087
8,539,337
19,872,930
51,002,077
11,870,935
6,839,312
11,569,373
13,077,264
9,085,631
5,018,636
4,826,441
cash-settled FLEX ETF Options (which
the Exchange proposes to list in the
same manner as that exchange).12
Options on the SPDR S&P 500 Trust on the BOX
Options Exchange LLC (‘‘BOX’’). See Securities
Exchange Act Release No. 79936 (February 2, 2017),
82 FR 9886 (February 8, 2017) (‘‘RealDay Pilot
Program’’). The RealDay Pilot Program was
extended until February 2, 2019. See Securities
Exchange Act Release No. 82414 (December 28,
2017), 83 FR 577 (January 4, 2018) (SR–BOX–2017–
38). The RealDay Pilot Program was never
implemented by BOX. See also Securities Exchange
Act Release Nos. 56251 (August 14, 2007), 72 FR
46523 (August 20, 2007) (SR–Amex–2004–27)
(Order approving listing of cash-settled Fixed
Return Options (‘‘FROs’’)); and 71957 (April 16,
2014), 79 FR 22563 (April 22, 2014) (SR–
NYSEMKT–2014–06) (Order approving name
change from FROs to ByRDs and re-launch of these
products, with certain modifications).
12 See Securities Exchange Act Release Nos.
88131 (February 5, 2020), 85 FR 7806 (February 11,
2020) (SR–NYSEAMER–2019–38) (Order Approving
a Proposed Rule Change, as Modified by
Amendment No. 1, to Allow Certain Flexible Equity
Options To Be Cash Settled); and 97231 (March 31,
2023), 88 FR 20587 (April 6, 2023) (SR–
NYSEAMER–2023–22) (Notice of Filing and
Immediate Effectiveness of Proposed Change to
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ddrumheller on DSK120RN23PROD with NOTICES1
With respect to position and exercise
limits, cash-settled FLEX ETF Options
would be subject to the position limits
set forth in Rule 8.35. Accordingly, the
Exchange proposes new Rule
8.35(c)(1)(B), which would provide that
a position in FLEX Equity Options
where the underlying security is an ETF
and that is settled in cash pursuant to
Rule 4.21(b)(5)(A)(ii) would be subject
to the position limits set forth in Rule
8.30, and subject to the exercise limits
set forth in Rule 8.42.13 The proposed
rule further states that positions in such
cash-settled FLEX Equity Options shall
be aggregated with positions in
physically settled options on the same
underlying ETF for the purpose of
calculating the position limits set forth
in Rule 8.30, and the exercise limits set
forth in Rule 8.42.14 Given that each of
the underlying ETFs that would
currently be eligible to have cashsettlement as a contract term have
established position and exercise limits
applicable to physically settled options,
the Exchange believes it is appropriate
for the same position and exercise limits
to also apply to cash-settled options.
Accordingly, of the 39 underlying
securities that would currently be
eligible to have cash settlement as a
FLEX contract term, 25 would have a
position limit of 250,000 contracts
pursuant to Rule 8.30, Interpretation
and Policy .02.15 Further, pursuant to
Rule 8.30, Interpretation and Policy .07,
Make a Clarifying Change to the Term Settlement
Style Applicable to Flexible Exchange Options).
13 The Exchange proposes to add to proposed
Rule 8.35(c)(1)(A) a cross-reference to paragraph (d)
of Rule 8.35, as Rule 8.35(d) also contains
provisions about position limits for FLEX Equity
Options that would be exceptions to the statement
in Rule 8.35(c) that FLEX Equity Options have no
position limits (in addition to the language in
proposed Rule 8.35(c)(1)(B)). The Exchange also
proposes to add to Rule 8.35(d) a cross-reference to
proposed Rule 8.35(c)(1)(B), as the proposed rule
adds language regarding aggregation of positions for
purposes of position limits, which is currently
covered in paragraph (d). Further, the Exchange
proposes other nonsubstantive changes to Rule
8.35(c) to add a corresponding change to proposed
Rule 8.35(c)(1)(A) and to add paragraph numbering
and lettering, add subheadings, and delete certain
introductory words that are, as a result of the
paragraph reorganization, no longer necessary.
14 See proposed Rule 8.35(c)(1)(B). The
aggregation of position and exercise limits would
include all positions on physically settled FLEX
and non-FLEX options on the same underlying
ETFs.
15 Rule 8.30, Interpretation and Policy .02(e)
provides that the position limit shall be 250,000
contracts for options: (i) on an underlying security
that had trading volume of at least 100,000,000
shares during the most recent six-month trading
period; or (ii) on an underlying security that had
trading volume of at least 75,000,000 shares during
the most recent six-month trading period and has
at least 300,000,000 shares currently outstanding.
Twenty-five of the thirty-nine underlying ETFs
currently meet the requirements under
Interpretation and Policy .02(e).
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eight would have a position limit of
500,000 contracts; four (EEM, FXI, IWM,
and EFA) would have a position limit of
1,000,000 contracts; one (QQQ) would
have a position limit of 1,800,000
contracts; and one (SPY) would have a
position limit of 3,600,000.16
The Exchange understands that cashsettled ETF options are currently traded
in the OTC market by a variety of
market participants, e.g., hedge funds,
proprietary trading firms, and pension
funds.17 These options are not fungible
with the exchange listed options. The
Exchange believes some of these market
participants would prefer to trade
comparable instruments on an
exchange, where they would be cleared
and settled through a regulated clearing
agency. The Exchange expects that users
of these OTC products would be among
the primary users of exchange-traded
cash-settled FLEX ETF Options. The
Exchange also believes that the trading
of cash-settled FLEX ETF Options
would allow these same market
participants to better manage the risk
associated with the volatility of
underlying equity positions given the
enhanced liquidity that an exchangetraded product would bring.
In the Exchange’s view, cash-settled
FLEX ETF Options traded on the
Exchange would have three important
advantages over the contracts that are
traded in the OTC market. First, as a
result of greater standardization of
contract terms, exchange-traded
contracts should develop more
liquidity. Second, counter-party credit
risk would be mitigated by the fact that
the contracts are issued and guaranteed
by OCC. Finally, the price discovery and
dissemination provided by the
Exchange and its members would lead
to more transparent markets. The
Exchange believes that its ability to offer
cash-settled FLEX ETF Options would
aid it in competing with the OTC market
and at the same time expand the
universe of products available to
interested market participants. The
Exchange believes that an exchangetraded alternative may provide a useful
risk management and trading vehicle for
market participants and their customers.
Further, the Exchange believes listing
cash-settled FLEX ETF Options would
provide investors with competition on
an exchange platform, as another
16 These were based on position limits as of July
28, 2023. Position limits are available on at OCC—
Position Limits (theocc.com). Position limits for
ETFs are always determined in accordance with the
Exchange’s Rules regarding position limits.
17 As noted above, another option exchange
received approval to list certain cash-settled FLEX
ETF Options. See supra note 12.
PO 00000
Frm 00101
Fmt 4703
Sfmt 4703
53551
exchange as received Commission
approval to list the same options.18
The Exchange notes that OCC has
received approval from the Commission
for rule changes that will accommodate
the clearance and settlement of cashsettled ETF Options.19 The Exchange
has also analyzed its capacity and
represents that it and The Options Price
Reporting Authority (OPRA) have the
necessary systems capacity to handle
the additional traffic associated with the
listing of cash-settled FLEX ETF
Options. The Exchange believes any
additional traffic that would be
generated from the introduction of cashsettled FLEX ETF Options would be
manageable. The Exchange expects that
Trading Permit Holders (‘‘TPHs’’) will
not have a capacity issue as a result of
this proposed rule change. The
Exchange also does not believe this
proposed rule change will cause
fragmentation of liquidity. The
Exchange will monitor the trading
volume associated with the additional
options series listed as a result of this
proposed rule change and the effect (if
any) of these additional series on market
fragmentation and on the capacity of the
Exchange’s automated systems.
The Exchange does not believe that
allowing cash settlement as a contract
term would render the marketplace for
equity options more susceptible to
manipulative practices. The Exchange
believes that manipulating the
settlement price of cash-settled FLEX
ETF Options would be difficult based
on the size of the market for the
underlying ETFs that are the subject of
this proposed rule change. The
Exchange notes that each underlying
ETF in the table above is sufficiently
active to alleviate concerns about
potential manipulative activity. Further,
in the Exchange’s view, the vast
liquidity in the 39 underlying ETFs that
would currently be eligible to be traded
as cash-settled FLEX options under the
proposal ensures a multitude of market
participants at any given time.
Moreover, given the high level of
participation among market participants
that enter quotes and/or orders in
physically settled options on these
ETFs, the Exchange believes it would be
very difficult for a single participant to
alter the price of the underlying ETF or
options overlying such ETF in any
significant way without exposing the
would-be manipulator to regulatory
scrutiny. The Exchange further believes
any attempt to manipulate the price of
18 See
supra note 12.
Securities Exchange Act Release No. 34–
94910 (May 13, 2022), 87 FR 30531 (May 19, 2022)
(SR–OCC–2022–003).
19 See
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the underlying ETF or options overlying
such ETF would also be cost
prohibitive. As a result, the Exchange
believes there is significant
participation among market participants
to prevent manipulation of cash-settled
FLEX ETF Options.
Still, the Exchange believes it has an
adequate surveillance program in place
and intends to apply the same program
procedures to cash-settled FLEX ETF
Options that it applies to the Exchange’s
other options products.20 FLEX options
products and their respective symbols
are integrated into the Exchange’s
existing surveillance system
architecture and are thus subject to the
relevant surveillance processes. The
Exchange believes that the existing
surveillance procedures at the Exchange
are capable of properly identifying
unusual and/or illegal trading activity,
which procedures the Exchange would
utilize to surveil for aberrant trading in
cash-settled FLEX ETF Options.
With respect to regulatory scrutiny,
the Exchange believes its existing
surveillance technologies and
procedures adequately address potential
concerns regarding possible
manipulation of the settlement value at
or near the close of the market. The
Exchange notes that the regulatory
program operated by and overseen by
the Cboe Global Markets, the Exchange’s
parent company (‘‘Cboe’’), Regulatory
Division (which regulates the Exchange
and its affiliated national securities
exchanges) 21 includes cross-market
surveillance designed to identify
manipulative and other improper
trading, including spoofing, algorithm
gaming, marking the close and open, as
well as more general, abusive behavior
related to front running, wash sales,
quoting/routing, and Reg SHO
violations, that may occur on the
Exchange or other markets. These crossmarket patterns incorporate relevant
data from various markets beyond the
Exchange and its affiliates and from
markets not affiliated with the
Exchange. The Exchange represents that
its existing trading surveillances and
those of its affiliated markets are
adequate to monitor trading in the
underlying ETFs and subsequent trading
of options on those securities on the
20 For example, the regulatory program for the
Exchange includes surveillance designed to identify
manipulative and other improper options trading,
including, spoofing, marking the close, front
running, wash sales, etc.
21 Cboe and its affiliated securities exchanges
maintain regulatory services agreements with
Financial Industry Regulatory Authority, Inc.
(‘‘FINRA’’) whereby FINRA provides certain
regulatory services to the exchanges, including
cross-market surveillance, investigation, and
enforcement services.
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Exchange, including cash-settled FLEX
ETF Options.22
Additionally, for options, the
Exchange utilizes an array of patterns
that monitor manipulation of options, or
manipulation of equity securities
(regardless of venue) for the purpose of
impacting options prices on the
Exchange (i.e., mini-manipulation
strategies). That surveillance coverage is
initiated once options begin trading on
the Exchange. Accordingly, the
Exchange believes that the cross-market
surveillance performed by the Exchange
or FINRA, on behalf of the Exchange,
coupled with the Cboe Regulatory
Division’s own monitoring for violative
activity on the Exchange comprise a
comprehensive surveillance program
that is adequate to monitor for
manipulation of the underlying ETF and
overlying option. Furthermore, the
Exchange believes that the existing
surveillance procedures at the Exchange
are capable of properly identifying
unusual and/or illegal trading activity,
which the Exchange would utilize to
surveil for aberrant trading in cashsettled FLEX ETF Options.
In addition to the surveillance
procedures and processes described
above, improvements in audit trails (i.e.,
the Consolidated Audit Trail),
recordkeeping practices, and interexchange cooperation over the last two
decades have greatly increased the
Exchange’s ability to detect and punish
attempted manipulative activities. In
addition, the Exchange is a member of
the Intermarket Surveillance Group
(‘‘ISG’’). The ISG members work
together to coordinate surveillance and
investigative information sharing in the
stock and options markets.23 For
surveillance purposes, the Exchange
would therefore have access to
information regarding trading activity in
the pertinent underlying securities.
The proposed rule change is designed
to allow investors seeking to effect cashsettled FLEX ETF Options with the
opportunity for a different method of
settling option contracts at expiration if
they choose to do so. As noted above,
market participants may choose cash
settlement because physical settlement
possesses certain risks with respect to
volatility and movement of the
underlying security at expiration that
22 Such surveillance procedures generally focus
on detecting securities trading subject to opening
price manipulation, closing price manipulation,
layering, spoofing or other unlawful activity
impacting an underlying security, the option, or
both. The Exchange has price movement alerts,
unusual market activity and order book alerts active
for all trading symbols.
23 See, e.g., Cboe Regulatory Circular 20–028,
Establishment of the CMRWG. (April 8, 2020)
PO 00000
Frm 00102
Fmt 4703
Sfmt 4703
market participants may need to hedge
against. The Exchange believes that
offering innovative products flows to
the benefit of the investing public. A
robust and competitive market requires
that exchanges respond to members’
evolving needs by constantly improving
their offerings. Such efforts would be
stymied if exchanges were prohibited
from offering innovative products for
reasons that are generally debated in
academic literature. The Exchange
believes that introducing cash-settled
FLEX ETF Options would further
broaden the base of investors that use
FLEX Options to manage their trading
and investment risk, including investors
that currently trade in the OTC market
for customized options, where
settlement restrictions do not apply. The
proposed rule change is also designed to
encourage market makers to shift
liquidity from the OTC market onto the
Exchange, which, it believes, would
enhance the process of price discovery
conducted on the Exchange through
increased order flow. The Exchange also
believes that this may open up cashsettled FLEX ETF Options to more retail
investors. The Exchange does not
believe that this proposed rule change
raises any unique regulatory concerns
because existing safeguards—such as
position limits (and the aggregation of
cash-settled positions with physicallysettled positions), exercise limits (and
the aggregation of cash-settled positions
with physically-settled positions), and
reporting requirements—would
continue to apply. The Exchange
believes the proposed position and
exercise limits may further help mitigate
the concerns that the limits are designed
to address about the potential for
manipulation and market disruption in
the options and the underlying
securities.24
Given the novel characteristics of
cash-settled FLEX ETF Options, the
Exchange will conduct a review of the
trading in cash-settled FLEX ETF
Options over an initial five-year period.
The Exchange will furnish five reports
to the Commission based on this review,
the first of which would be provided
within 60 days after the first anniversary
of the initial listing date of the first
cash-settled FLEX ETF Option under the
proposed rule and each subsequent
annual report to be provided within 60
days after the second, third, fourth and
fifth anniversary of such initial listing.
At a minimum, each report will provide
a comparison between the trading
volume of all cash-settled FLEX ETF
Options listed under the proposed rule
and physically settled options on the
24 See
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supra note 16.
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same underlying security, the liquidity
of the market for such options products
and the underlying ETF, and any
manipulation concerns arising in
connection with the trading of cashsettled FLEX ETF Options under the
proposed rule. The Exchange will also
provide additional data as requested by
the Commission during this five-year
period. The reports will also discuss any
recommendations the Exchange may
have for enhancements to the listing
standards based on its review. The
Exchange believes these reports will
allow the Commission and the Exchange
to evaluate, among other things, the
impact such options have, and any
potential adverse effects, on price
volatility and the market for the
underlying ETFs, the component
securities underlying the ETFs, and the
options on the same underlying ETFs
and make appropriate
recommendations, if any, in response to
the reports.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the Act
and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.25 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 26 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.
Specifically, the Exchange believes that
introducing cash-settled FLEX ETF
Options will increase order flow to the
Exchange, increase the variety of
options products available for trading,
and provide a valuable tool for investors
to manage risk.
The Exchange believes that the
proposal to permit cash settlement as a
contract term for options on the
specified group of equity securities
would remove impediments to and
perfect the mechanism of a free and
open market as cash-settled FLEX ETF
Options would enable market
participants to receive cash in lieu of
shares of the underlying security, which
25 15
26 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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20:00 Aug 07, 2023
would, in turn, provide greater
opportunities for market participants to
manage risk through the use of a cashsettled product to the benefit of
investors and the public interest. The
Exchange does not believe that allowing
cash settlement as a contract term for
options on the specified group of equity
securities would render the marketplace
for equity options more susceptible to
manipulative practices. As illustrated in
the table above, each of the qualifying
underlying securities is actively traded
and highly liquid and thus would not be
susceptible to manipulation because,
over a six-month period, each security
had an average daily notional value of
at least $500 million and an ADV of at
least 4,680,000 shares, which indicates
that there is substantial liquidity present
in the trading of these securities, and
that there is significant depth and
breadth of market participants providing
liquidity and of investor interest. The
Exchange believes the proposed biannual review to determine eligibility
for an underlying ETF to have cash
settlement as a contract term would
remove impediments to and perfect the
mechanism of a free and open market as
it would permit the Exchange to select
only those underlying ETFs that are
actively traded and have robust
liquidity as each qualifying ETF would
be required to meet the average daily
notional value and average daily volume
requirements, as well as to select the
same underlying ETFs on which another
exchange may list cash-settled FLEX
ETF Options.27
The Exchange believes the proposed
change that, for FLEX ETF Options, at
least one of exercise style, expiration
date, and exercise price must differ from
options in the non-FLEX market will
provide clarity and eliminate confusion
regarding permissible terms of FLEX
ETF Options, including the proposed
cash-settled FLEX ETF Options.
The Exchange believes that the data
provided by the Exchange supports the
supposition that permitting cash
settlement as a FLEX term for the 39
underlying ETFs that would currently
qualify to have cash settlement as a
contract term would broaden the base of
investors that use FLEX Options to
manage their trading and investment
risk, including investors that currently
trade in the OTC market for customized
options, where settlement restrictions
do not apply.
The Exchange believes that the
proposal to permit cash settlement for
certain FLEX ETF options would
remove impediments to and perfect the
mechanism of a free and open market
because the proposed rule change
would provide TPHs with enhanced
methods to manage risk by receiving
cash if they choose to do so instead of
the underlying security. In addition, this
proposal would promote just and
equitable principles of trade and protect
investors and the general public because
cash settlement would provide investors
with an additional tool to manage their
risk. Further, the Exchange notes that
other exchanges have previously
received approval that allow for the
trading of cash-settled options 28 and,
specifically, cash-settled FLEX ETF
Options in an identical manner as the
Exchange proposes to list them pursuant
to this rule filing.29 The proposed rule
change therefore should not raise issues
for the Commission that it has not
previously addressed.
The proposed rule change to permit
cash settlement as a contract term for
options on up to 50 ETFs is designed to
promote just and equitable principles of
trade in that the availability of cash
settlement as a contract term would give
market participants an alternative to
trading similar products in the OTC
market. By trading a product in an
exchange-traded environment (that is
currently traded in the OTC market), the
Exchange would be able to compete
more effectively with the OTC market.
The Exchange believes the proposed
rule change is designed to prevent
fraudulent and manipulative acts and
practices in that it would lead to the
migration of options currently trading in
the OTC market to trading on the
Exchange. Also, any migration to the
Exchange from the OTC market would
result in increased market transparency.
Additionally, the Exchange believes the
proposed rule change is designed to
remove impediments to and to perfect
the mechanism for a free and open
market and a national market system,
and, in general, to protect investors and
the public interest in that it should
create greater trading and hedging
opportunities and flexibility. The
proposed rule change should also result
in enhanced efficiency in initiating and
closing out positions and heightened
contra-party creditworthiness due to the
role of OCC as issuer and guarantor of
the proposed cash-settled options.
Further, the proposed rule change
would result in increased competition
by permitting the Exchange to offer
products that are currently available for
trading only in the OTC market and are
approved to trade on another options
exchange.
28 See
27 See
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PO 00000
supra note 12.
Frm 00103
Fmt 4703
29 See
Sfmt 4703
53553
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supra note 11.
supra note 12.
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The Exchange believes that
establishing position limits for cashsettled FLEX ETF Options to be the
same as physically settled options on
the same underlying security, and
aggregating positions in cash-settled
FLEX ETF Options with physically
settled options on the same underlying
security for purposes of calculating
position limits is reasonable and
consistent with the Act. By establishing
the same position limits for cash-settled
FLEX ETF Options as for physically
settled options on the same underlying
security and, importantly, aggregating
such positions, the Exchange believes
that the position limit requirements for
cash-settled FLEX ETF Options should
help to ensure that the trading of cashsettled FLEX ETF Options would not
increase the potential for manipulation
or market disruption and could help to
minimize such incentives. For the same
reasons, the Exchange believes the
proposed exercise limits are reasonable
and consistent with the Act.
Finally, the Exchange represents that
it has an adequate surveillance program
in place to detect manipulative trading
in cash-settled FLEX ETF Options and
the underlying ETFs. Regarding the
proposed cash settlement, the Exchange
would use the same surveillance
procedures currently utilized for the
Exchange’s other FLEX Options. For
surveillance purposes, the Exchange
would have access to information
regarding trading activity in the
pertinent underlying ETFs. The
Exchange believes that limiting cash
settlement to no more than 50
underlying ETFs (currently, 39 ETFs
would be eligible to have cashsettlement as a contract term) would
minimize the possibility of
manipulation due to the robust liquidity
in both the equities and options
markets.
As a self-regulatory organization, the
Exchange recognizes the importance of
surveillance, among other things, to
detect and deter fraudulent and
manipulative trading activity as well as
other violations of Exchange rules and
the federal securities laws. As discussed
above, the Cboe Regulatory Division has
adequate surveillance procedures in
place to monitor trading in cash-settled
FLEX ETF Options and the underlying
securities, including to detect
manipulative trading activity in both the
options and the underlying ETF.30 The
30 Among other things, the Cboe Regulatory
Division’s regulatory program include cross-market
surveillance designed to identify manipulative and
other improper trading, including spoofing,
algorithm gaming, marking the close and open, as
well as more general abusive behavior related to
front running, wash sales, quoting/routing, and Reg
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Exchange further notes the liquidity and
active markets in the underlying ETFs,
and the high number of market
participants in both the underlying
ETFs and existing options on the ETFs,
helps to minimize the possibility of
manipulation. The Exchange further
notes that under Section 19(g) of the
Act, the Exchange, as a self-regulatory
organization, is required to enforce
compliance by its members and persons
associated with its members with the
Act, the rules and regulations
thereunder, and the rules of the
Exchange.31 The Exchange believes its
surveillance, along with the liquidity
criteria and position and exercise limits
requirements, are reasonably designed
to mitigate manipulation and market
disruption concerns and will permit it
to enforce compliance with the
proposed rules and other Exchange
rules in accordance with Section 19(g)
of the Act. The Exchange performs
ongoing evaluations of its surveillance
program to ensure its continued
effectiveness and will continue to
review its surveillance procedures on an
ongoing basis and make any necessary
enhancements and/or modifications that
may be needed for the cash settlement
of FLEX ETF Options.
Additionally, the Exchange will
monitor any effect additional options
series listed under the proposed rule
change will have on market
fragmentation and the capacity of the
Exchange’s automated systems. The
Exchange will take prompt action,
including timely communication with
the Commission and with other selfregulatory organizations responsible for
oversight of trading in options, the
underlying ETFs, and the ETFs’
component securities, should any
unanticipated adverse market effects
develop.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange does not believe that the
proposed rule change will impose any
burden on intramarket competition that
is not necessary or appropriate in
furtherance of the purposes of the Act,
as all TPHs that are registered as FLEX
Traders in accordance with the
Exchange’s Rules will be able to trade
SHO violations, that may occur on the Exchange
and other markets. Furthermore, the Exchange
stated that it has access to information regarding
trading activity in the pertinent underlying
securities as a member of ISG.
31 15 U.S.C. 78s(g).
PO 00000
Frm 00104
Fmt 4703
Sfmt 4703
cash-settled FLEX ETF Options in the
same manner. This includes the
proposed change that, for FLEX ETF
Options, at least one of exercise style,
expiration date, and exercise price must
differ from options in the non-FLEX
market, which will provide clarity and
eliminate confusion regarding
permissible terms of FLEX ETF Options,
including the proposed cash-settled
FLEX ETF Options, with which all
FLEX Traders must comply.
Additionally, positions in cash-settled
FLEX ETF Options of all FLEX Traders
will be subject to the same position
limits, and such positions will be
aggregated with positions in physically
settled options on the same underlying
in the same manner.
The Exchange does not believe that
the proposed rule change will impose
any burden on intermarket competition
that is not necessary or appropriate in
furtherance of the purposes of the Act,
as the proposal is designed to increase
competition for order flow on the
Exchange in a manner that is beneficial
to investors because it is designed to
provide investors seeking to transact in
FLEX ETF Options with the opportunity
for an alternative method of settling
their option contracts at expiration. The
Exchange believes the proposed rule
change will encourage competition, as it
may broaden the base of investors that
use FLEX Options to manage their
trading and investment risk, including
investors that currently trade in the OTC
market for customized options, where
settlement restrictions do not apply. The
proposed rule change would give
market participants an alternative to
trading similar products in the OTC
market. By trading a product in an
exchange-traded environment (that is
currently traded in the OTC market), the
Exchange would be able to compete
more effectively with the OTC market.
The Exchange believes the proposed
rule change may increase competition as
it may lead to the migration of options
currently trading in the OTC market to
trading on the Exchange. Also, any
migration to the Exchange from the OTC
market would result in increased market
transparency and thus increased price
competition.
The Exchange further notes that it
operates in a highly competitive market
in which market participants can
readily direct order flow to competing
venues who offer similar functionality.
The Exchange believes the proposed
rule change encourages competition
amongst market participants to provide
tailored cash-settled FLEX ETF Option
contracts, as another exchange has
received approval to list these contracts
(subject to the same position and
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exercise limits as proposed).32
Therefore, the Exchange believes the
proposed rule change will enhance
intermarket competition by providing
investors with a choice of exchange
venues on which to trade cash-settled
FLEX ETF Options.
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
Because the foregoing proposed rule
change does not: (i) significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 33 and Rule 19b–
4(f)(6)(iii) thereunder.34
A proposed rule change filed under
Rule 19b–4(f)(6) 35 normally does not
become operative prior to 30 days after
the date of filing. However, pursuant to
Rule 19b–4(f)(6)(iii),36 the Commission
may designate a shorter time if such
action is consistent with the protection
of investors and the public interest. The
Exchange has asked the Commission to
waive the 30-day operative delay so that
the proposed rule change may become
operative upon filing. The Exchange
states, among other things, that waiver
of the 30-day operative delay will
protect investors by providing them
with an immediate choice and an
additional venue where they can trade
cash-settled FLEX ETF Options. The
Commission approved a substantially
similar proposal by another exchange
that was subject to notice and comment
and found consistent with the Act.37 For
these reasons, and because the proposed
rule change does not raise any novel
regulatory issues that have not been
addressed, the Commission believes
waiving the 30-day operative delay is
32 See
supra note 12.
U.S.C. 78s(b)(3)(A).
34 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
35 17 CFR 240.19b–4(f)(6).
36 17 CFR 240.19b–4(f)(6)(iii).
37 See supra note 12.
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consistent with the protection of
investors and the public interest.
Therefore, the Commission hereby
waives the operative delay and
designates the proposal operative upon
filing.38
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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–2023–036 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–2023–036. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–CBOE–2023–036 and should be
submitted on or before August 29, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.39
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–16885 Filed 8–7–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98045; File No. SR–MIAX–
2023–19]
Self-Regulatory Organizations; MIAX
International Securities Exchange LLC;
Order Instituting Proceedings To
Determine Whether To Approve or
Disapprove a Proposed Rule Change
To Amend MIAX Rule 307, Position
Limits
August 2, 2023.
I. Introduction
On April 21, 2023, Miami
International Securities Exchange LLC
(‘‘MIAX’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’), pursuant to
Section 19(b)(1) of the Securities
Exchange Act of 1934 (the ‘‘Act’’),1 and
Rule 19b–4 thereunder,2 a proposed rule
change to amend Exchange Rule 307,
Position Limits, to establish a process
for adjusting option position limits
following a stock split or reverse stock
split in the underlying security. The
proposed rule change was published for
comment in the Federal Register on
May 8, 2023.3 On June 14, 2023,
pursuant to Section 19(b)(2) of the Act,4
the Commission designated a longer
period within which to approve the
39 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 97421
(May 2, 2023), 88 FR 29725 (‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
1 15
38 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
PO 00000
Frm 00105
Fmt 4703
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08AUN1
]]>Agencies
[Federal Register Volume 88, Number 151 (Tuesday, August 8, 2023)]
[Notices]
[Pages 53548-53555]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-16885]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98044; File No. SR-CBOE-2023-036]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Allow
Certain Flexible Exchange Equity Options To Be Cash Settled
August 2, 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 August 1, 2023, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rules 4.21 and 8.35 related to
Flexible Exchange (``FLEX'') Options. The text of the proposed rule
change is 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 amend Rules 4.21 and 8.35 related to FLEX
Options. FLEX Options are customized equity or index contracts that
allow investors to tailor contract terms for exchange-listed equity and
index options. The Exchange proposes to amend Rule 4.21 to allow for
cash settlement of certain FLEX Equity Options.\3\ Generally, FLEX
Equity Options are settled by physical delivery of the underlying
security,\4\ while all FLEX Index Options are currently settled by
delivery in cash.\5\ As proposed, FLEX Equity Options where the
underlying security is an Exchange-Traded Fund (``ETF'') would be
permitted to be settled by delivery in cash if the underlying security
meets prescribed criteria. The Exchange notes that cash-settled FLEX
ETF Options will be subject to the same trading rules and procedures
that currently govern the trading of other FLEX Options on the
Exchange, with the exception of the rules to accommodate the cash-
settlement feature proposed in this rule filing.
---------------------------------------------------------------------------
\3\ A ``FLEX Equity Option'' is an option on a specified
underlying equity security. See Cboe Options Rule 1.1.
\4\ See Rule 4.21(b)(5)(A)(i).
\5\ See Rule 4.21(b)(5)(B). As discussed below, cash settlement
is also permitted in the over-the-counter (``OTC'') market.
---------------------------------------------------------------------------
To permit cash settlement of certain FLEX ETF Options, the Exchange
proposes new subparagraph (ii) to Rule 4.21(b)(5)(A). Proposed Rule
4.21(b)(5)(A)(ii) would provide that the exercise settlement for a FLEX
ETF Option may be by physical delivery of the underlying ETF or by
delivery in cash if the underlying security, measured over the prior
six-month period, has an average daily notional value of $500 million
or more and a national average daily volume (``ADV'') of at least
4,680,000 shares.\6\
---------------------------------------------------------------------------
\6\ See proposed Rule 4.21(b)(5)(A)(ii). The Exchange also
proposes a corresponding nonsubstantive amendment to Rule
4.21(b)(5)(A)(i) and a nonsubstantive amendment to Rule 4.21 to
renumber current Rule 4.21(b)(5)(A)(ii) as new Rule
4.21(b)(5)(A)(iii).
---------------------------------------------------------------------------
The Exchange also proposes in the introductory paragraph of Rule
4.21(b) that a FLEX Equity Option overlying an ETF (cash- or physically
settled) may not be the same type (put or call) and may not have the
same exercise style, expiration date, and exercise price as a non-FLEX
Equity Option overlying the same ETF.\7\ In other words, regardless of
whether a FLEX Equity Option overlying an ETF is cash- or physically
settled, at least one of the exercise style (i.e., American-style or
European-style), expiration date, and exercise price of that FLEX
Option must differ from those terms of a non-FLEX Option overlying the
same ETF in order to list such a FLEX Equity Option. For example,
suppose a non-FLEX SPY option (which is physically settled, p.m.-
settled and American-style) with a September expiration and exercise
price of 475 is listed for trading. A FLEX Trader could not submit an
order to trade a FLEX SPY option (which is p.m.-settled) that is cash-
settled (or physically settled) and American-style with a September
expiration and exercise price of 475.
---------------------------------------------------------------------------
\7\ All non-FLEX Equity Options (including on ETFs) are
physically settled. Note all FLEX and non-FLEX Equity Options
(including ETFs) are p.m.-settled.
---------------------------------------------------------------------------
In addition, the Exchange proposes new subparagraph (a) to Rule
4.21(b)(5)(A)(ii), which would provide that the Exchange will determine
bi-annually the underlying ETFs that satisfy the notional value and
trading volume requirements in proposed Rule 4.21(b)(5)(A)(ii) by using
trading statistics for the previous six-months.\8\ The proposed rule
would further provide that the Exchange will permit cash settlement as
a contract term on no
[[Page 53549]]
more than 50 underlying ETFs that meet the criteria in Rule
4.21(b)(5)(A)(ii), and that if more than 50 underlying ETFs satisfy the
notional value and trading volume requirements, then the Exchange would
select the top 50 ETFs that have the highest average daily volume.\9\
---------------------------------------------------------------------------
\8\ See proposed Rule 4.21(b)(5)(A)(ii)(a). The Exchange will
announce the implementation date of the proposed rule change via
Exchange Notice. The Exchange plans to conduct the bi-annual review
on January 1 and July 1 of each year. The results of the bi-annual
review will be announced via Exchange Notice and any new securities
that qualify would be permitted to have cash settlement as a
contract term beginning on February 1 and August 1 of each year. If
the Exchange initially begins listing cash-settled FLEX Options on a
different date (e.g., September 1), it would initially list
securities that qualified as of the last bi-annual review (e.g., the
one conducted on July 1).
\9\ See proposed Rule 4.21(b)(5)(A)(ii)(a).
---------------------------------------------------------------------------
Proposed new subparagraph (b) to Rule 4.21(b)(5)(A)(ii) would
further provide that if the Exchange determines pursuant to the bi-
annual review that an underlying ETF ceases to satisfy the requirements
under Rule 4.21(b)(5)(A)(ii), any new position overlying such ETF
entered into will be required to have exercise settlement by physical
delivery, and any open cash-settled FLEX ETF Option positions may be
traded only to close the position.\10\
---------------------------------------------------------------------------
\10\ See proposed Rule 4.21(b)(5)(A)(ii)(b). A TPH that is
acting as a Market Maker may enter into an opening transaction in
order to accommodate closing transactions of other market
participants in option series that are restricted to closing-only
transactions. See Cboe Options Rule 4.4; see also Cboe Options Rule
8.46 (which authorizes the Exchange to impose, from time to time in
its discretion, such restrictions on Exchange option transactions or
the exercise of option contracts in one or more series of options of
any class dealt on the Exchange as it deems advisable in the
interests of maintaining a fair and orderly market). Consistent with
a Market Maker's duty to maintain fair and orderly markets under
Rule 5.51, the Exchange will provide guidance to reflect that a TPH
acting as a Market Maker in cash-settled FLEX ETF Options can enter
into an opening transaction to facilitate closing only transactions
of another market participant in cash-settled FLEX ETF Option series
that are restricted to closing-only transactions.
---------------------------------------------------------------------------
The Exchange believes it is appropriate to introduce cash
settlement as an alternative contract term to the select group of ETFs
because they are among the most highly liquid and actively traded
securities. As described more fully below, the Exchange believes that
the deep liquidity and robust trading activity in the ETFs identified
by the Exchange as meeting the criteria mitigate against historic
concerns regarding susceptibility to manipulation.
Characteristics of ETFs
ETFs are funds that have their value derived from assets owned. The
net asset value (``NAV'') of an ETF is a daily calculation that is
based off the most recent closing prices of the assets in the fund and
an actual accounting of the total cash in the fund at the time of
calculation. The NAV of an ETF is calculated by taking the sum of the
assets in the fund, including any securities and cash, subtracting out
any liabilities, and dividing that by the number of shares outstanding.
Additionally, each ETF is subject to a creation and redemption
mechanism to ensure the price of the ETF does not fluctuate too far
away from its NAV, which mechanisms reduce the potential for
manipulative activity. Each business day, ETFs are required to make
publicly available a portfolio composition file that describes the
makeup of their creation and redemption ``baskets'' (i.e., a specific
list of names and quantities of securities or other assets designed to
track the performance of the portfolio as a whole). ETF shares are
created when an Authorized Participant, typically a market maker or
other large institutional investor, deposits the daily creation basket
or cash with the ETF issuer. In return for the creation basket or cash
(or both), the ETF issues to the Authorized Participant a ``creation
unit'' that consists of a specified number of ETF shares. For instance,
IWM is designed to track the performance of the Russell 2000 Index. An
Authorized Participant will purchase all the Russell 2000 constituent
securities in the exact same weight as the index prescribes, then
deliver those shares to the ETF issuer. In exchange, the ETF issuer
gives the Authorized Participant a block of equally valued ETF shares,
on a one-for-one fair value basis. This process can also work in
reverse. A redemption is achieved when the Authorized Participant
accumulates a sufficient number of shares of the ETF to constitute a
creation unit and then exchanges these ETF shares with the ETF issuer,
thereby decreasing the supply of ETF shares in the market.
The principal, and perhaps most important, feature of ETFs is their
reliance on an ``arbitrage function'' performed by market participants
that influences the supply and demand of ETF shares and, thus, trading
prices relative to NAV. As noted above, new ETF shares can be created
and existing shares redeemed based on investor demand; thus, ETF supply
is open-ended. This arbitrage function helps to keep an ETF's price in
line with the value of its underlying portfolio, i.e., it minimizes
deviation from NAV. Generally, in the Exchange's view, the higher the
liquidity and trading volume of an ETF, the more likely the price of
the ETF will not deviate from the value of its underlying portfolio,
making such ETFs less susceptible to price manipulation.
Trading Data for the ETFs Proposed for Cash Settlement
The Exchange believes that average daily notional value is an
appropriate proxy for selecting underlying securities that are not
readily susceptible to manipulation for purposes of establishing a
settlement price. Average daily notional value considers both the
trading activity and the price of an underlying security. As a general
matter, the more expensive an underlying security's price, the less
cost-effective manipulation could become. Further, manipulation of the
price of a security encounters greater difficulty the more volume that
is traded. To calculate average daily notional value (provided in the
table below), the Exchange summed the notional value of each trade for
each symbol (i.e., the number of shares times the price for each
execution in the security) and divided that total by the number of
trading days in the six-month period (from January 1, 2023 through June
30, 2023) reviewed by the Exchange.
Further, the Exchange proposes that qualifying ETFs also meet an
ADV standard. The purpose for this second criteria is to prevent
unusually expensive underlying securities from qualifying under the
average daily notional value standard while not being one of the most
actively traded securities. The Exchange believes an ADV requirement of
4,680,000 shares a day is appropriate because it represents average
trading in the underlying ETF of 200 shares per second. While no
security is immune from all manipulation, the Exchange believes that
the combination of average daily notional value and ADV as prerequisite
requirements would limit cash settlement of FLEX ETF Options to those
underlying ETFs that would be less susceptible to manipulation in order
to establish a settlement price.
The Exchange believes that the proposed objective criteria would
ensure that only the most robustly traded and deeply liquid ETFs would
qualify to have cash settlement as a contract term. As provided in the
table below, as of June 30, 2023, the Exchange would be able to provide
cash settlement as a contract term for FLEX ETF Options on 39
underlying ETFs, as only this group of securities would currently meet
the requirement of 500 Million or more average daily notional value and
a minimum ADV of 4,680,000 shares. The table below provides the list of
the 39 ETFs that, as of June 30, 2023, would be eligible to have cash
settlement as a contract term.
[[Page 53550]]
----------------------------------------------------------------------------------------------------------------
Average daily Average daily
notional value volume (in
Symbol Security name (in dollars) (1/1/ shares) (1/1/23-6/
23-6/30/23) 30/23)
----------------------------------------------------------------------------------------------------------------
AGG..................................... ISHARES TR CORE US AGGBD ET..... $703,126,857 7,116,525
ARKK.................................... ARK ETF TR INNOVATION ETF....... 858,537,852 22,026,750
BIL..................................... SPDR SER TR BLOOMBERG 1-3 MO.... 691,090,219 7,543,846
EEM..................................... ISHARES TR MSCI EMG MKT ETF..... 1,284,326,169 32,458,368
EFA..................................... ISHARES TR MSCI EAFE ETF........ 1,308,724,046 18,457,234
EMB..................................... ISHARES TR JPMORGAN USD EMG..... 559,160,916 6,510,071
EWZ..................................... ISHARES INC MSCI BRAZIL ETF..... 756,467,915 26,179,000
FXI..................................... ISHARES TR CHINA LG-CAP ETF..... 953,344,257 32,659,170
GDX..................................... VANECK ETF TRUST GOLD MINERS ETF 717,525,246 22,888,829
GLD..................................... SPDR GOLD TR GOLD SHS........... 1,373,373,829 7,600,698
HYG..................................... ISHARES TR IBOXX HI YD ETF...... 3,038,710,673 40,690,044
IEF..................................... ISHARES TR 7-10 YR TRSY BD...... 833,776,310 8,506,605
IEFA.................................... ISHARES CORE MSCI EAFE ETF...... 640,740,104 9,645,504
IEMG.................................... ISHARES INC CORE MSCI EMKT...... 610,571,206 12,458,329
IWM..................................... ISHARES TR RUSSELL 2000 ETF..... 5,402,906,722 29,985,329
IYR..................................... ISHARES TR U.S. REAL ES ETF..... 575,694,782 6,749,049
JNK..................................... SPDR SER TR BLOOMBERG HIGH Y.... 809,645,750 8,834,914
KRE..................................... SPDR S&P REGIONAL BANKING ETF... 1,020,754,439 22,996,273
KWEB.................................... KRANESHARES TR CSI CHI INTERNET. 556,570,098 18,594,683
LQD..................................... ISHARES TR IBOXX INV CP ETF..... 2,209,277,519 20,444,446
QQQ..................................... INVESCO QQQ TR UNIT SER 1....... 17,517,678,522 55,508,283
SMH..................................... VANECK SEMICONDUCTOR ETF........ 954,728,520 4,827,785
SOXL.................................... DIREXION SHS ETF TR DLY SCOND 1,240,910,219 76,587,443
3XBU.
SOXS.................................... DIREXION SHS ETF TR DLY 832,524,309 45,142,015
SEMICNDTR BR.
SPXL.................................... DIREXION SHS ETF TR DRX 946,357,247 13,134,890
S&P500BULL.
SPY..................................... SPDR S&P 500 ETF TR TR UNIT..... 34,975,824,706 85,701,074
SQQQ.................................... PROSHARES TR ULTRAPRO SHT QQQ... 4,273,866,273 130,095,374
TLT..................................... ISHARES TR 20 YR TR BD ETF...... 2,246,375,199 21,559,136
TQQQ.................................... PROSHARES TR ULTRAPRO QQQ....... 3,902,736,049 149,675,087
XBI..................................... SPDR SER TR S&P BIOTECH......... 709,508,423 8,539,337
XLE..................................... SELECT SECTOR SPDR TR ENERGY.... 1,648,556,002 19,872,930
XLF..................................... SELECT SECTOR SPDR TR FINANCIAL. 1,699,571,786 51,002,077
XLI..................................... SELECT SECTOR SPDR TR SBI INT- 1,190,848,482 11,870,935
INDS.
XLK..................................... SELECT SECTOR SPDR TR TECHNOLOGY 1,006,555,659 6,839,312
XLP..................................... SELECT SECTOR SPDR TR SBI CONS 855,296,387 11,569,373
STPLS.
XLU..................................... SELECT SECTOR SPDR TR SBI INT- 879,471,277 13,077,264
UTILS.
XLV..................................... SELECT SECTOR SPDR TR SBI 1,187,391,938 9,085,631
HEALTHCARE.
XLY..................................... SELECT SECTOR SPDR TR SBI CONS 742,561,935 5,018,636
DISCR.
XOP..................................... SPDR SER TR S&P OILGAS EXP...... 619,413,460 4,826,441
----------------------------------------------------------------------------------------------------------------
The Exchange believes that permitting cash settlement as a contract
term for FLEX ETF Options for the ETFs in the above table would broaden
the base of investors that use FLEX Options to manage their trading and
investment risk, including investors that currently trade in the over-
the-counter (``OTC'') market for customized options, where settlement
restrictions do not apply.
Today, equity options are settled physically at The Options
Clearing Corporation (``OCC''), i.e., upon exercise, shares of the
underlying security must be assumed or delivered. Physical settlement
may possess certain risks with respect to volatility and movement of
the underlying security at expiration against which market participants
may need to hedge. The Exchange believes cash settlement may be
preferable to physical delivery in some circumstances as it does not
present the same risk. If an issue with the delivery of the underlying
security arises, it may become more expensive (and time consuming) to
reverse the delivery because the price of the underlying security would
almost certainly have changed. Reversing a cash payment, on the other
hand, would not involve any such issue because reversing a cash
delivery would simply involve the exchange of cash. Additionally, with
physical settlement, market participants that have a need to generate
cash would have to sell the underlying security while incurring the
costs associated with liquidating their position as well as the risk of
an adverse movement in the price of the underlying security.
The Exchange notes that the Securities and Exchange Commission (the
``Commission'') has previously approved a rule filing of another
exchange that allowed for the trading of cash-settled options \11\ and,
specifically, cash-settled FLEX ETF Options (which the Exchange
proposes to list in the same manner as that exchange).\12\
---------------------------------------------------------------------------
\11\ See, e.g., PHLX FX Options traded on Nasdaq PHLX and S&P
500[supreg] Index Options traded on Cboe Options Exchange. The
Commission approved, on a pilot basis, the listing and trading of
RealDayTM Options on the SPDR S&P 500 Trust on the BOX
Options Exchange LLC (``BOX''). See Securities Exchange Act Release
No. 79936 (February 2, 2017), 82 FR 9886 (February 8, 2017)
(``RealDay Pilot Program''). The RealDay Pilot Program was extended
until February 2, 2019. See Securities Exchange Act Release No.
82414 (December 28, 2017), 83 FR 577 (January 4, 2018) (SR-BOX-2017-
38). The RealDay Pilot Program was never implemented by BOX. See
also Securities Exchange Act Release Nos. 56251 (August 14, 2007),
72 FR 46523 (August 20, 2007) (SR-Amex-2004-27) (Order approving
listing of cash-settled Fixed Return Options (``FROs'')); and 71957
(April 16, 2014), 79 FR 22563 (April 22, 2014) (SR-NYSEMKT-2014-06)
(Order approving name change from FROs to ByRDs and re-launch of
these products, with certain modifications).
\12\ See Securities Exchange Act Release Nos. 88131 (February 5,
2020), 85 FR 7806 (February 11, 2020) (SR-NYSEAMER-2019-38) (Order
Approving a Proposed Rule Change, as Modified by Amendment No. 1, to
Allow Certain Flexible Equity Options To Be Cash Settled); and 97231
(March 31, 2023), 88 FR 20587 (April 6, 2023) (SR-NYSEAMER-2023-22)
(Notice of Filing and Immediate Effectiveness of Proposed Change to
Make a Clarifying Change to the Term Settlement Style Applicable to
Flexible Exchange Options).
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[[Page 53551]]
With respect to position and exercise limits, cash-settled FLEX ETF
Options would be subject to the position limits set forth in Rule 8.35.
Accordingly, the Exchange proposes new Rule 8.35(c)(1)(B), which would
provide that a position in FLEX Equity Options where the underlying
security is an ETF and that is settled in cash pursuant to Rule
4.21(b)(5)(A)(ii) would be subject to the position limits set forth in
Rule 8.30, and subject to the exercise limits set forth in Rule
8.42.\13\ The proposed rule further states that positions in such cash-
settled FLEX Equity Options shall be aggregated with positions in
physically settled options on the same underlying ETF for the purpose
of calculating the position limits set forth in Rule 8.30, and the
exercise limits set forth in Rule 8.42.\14\ Given that each of the
underlying ETFs that would currently be eligible to have cash-
settlement as a contract term have established position and exercise
limits applicable to physically settled options, the Exchange believes
it is appropriate for the same position and exercise limits to also
apply to cash-settled options. Accordingly, of the 39 underlying
securities that would currently be eligible to have cash settlement as
a FLEX contract term, 25 would have a position limit of 250,000
contracts pursuant to Rule 8.30, Interpretation and Policy .02.\15\
Further, pursuant to Rule 8.30, Interpretation and Policy .07, eight
would have a position limit of 500,000 contracts; four (EEM, FXI, IWM,
and EFA) would have a position limit of 1,000,000 contracts; one (QQQ)
would have a position limit of 1,800,000 contracts; and one (SPY) would
have a position limit of 3,600,000.\16\
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\13\ The Exchange proposes to add to proposed Rule 8.35(c)(1)(A)
a cross-reference to paragraph (d) of Rule 8.35, as Rule 8.35(d)
also contains provisions about position limits for FLEX Equity
Options that would be exceptions to the statement in Rule 8.35(c)
that FLEX Equity Options have no position limits (in addition to the
language in proposed Rule 8.35(c)(1)(B)). The Exchange also proposes
to add to Rule 8.35(d) a cross-reference to proposed Rule
8.35(c)(1)(B), as the proposed rule adds language regarding
aggregation of positions for purposes of position limits, which is
currently covered in paragraph (d). Further, the Exchange proposes
other nonsubstantive changes to Rule 8.35(c) to add a corresponding
change to proposed Rule 8.35(c)(1)(A) and to add paragraph numbering
and lettering, add subheadings, and delete certain introductory
words that are, as a result of the paragraph reorganization, no
longer necessary.
\14\ See proposed Rule 8.35(c)(1)(B). The aggregation of
position and exercise limits would include all positions on
physically settled FLEX and non-FLEX options on the same underlying
ETFs.
\15\ Rule 8.30, Interpretation and Policy .02(e) provides that
the position limit shall be 250,000 contracts for options: (i) on an
underlying security that had trading volume of at least 100,000,000
shares during the most recent six-month trading period; or (ii) on
an underlying security that had trading volume of at least
75,000,000 shares during the most recent six-month trading period
and has at least 300,000,000 shares currently outstanding. Twenty-
five of the thirty-nine underlying ETFs currently meet the
requirements under Interpretation and Policy .02(e).
\16\ These were based on position limits as of July 28, 2023.
Position limits are available on at OCC--Position Limits
(theocc.com). Position limits for ETFs are always determined in
accordance with the Exchange's Rules regarding position limits.
---------------------------------------------------------------------------
The Exchange understands that cash-settled ETF options are
currently traded in the OTC market by a variety of market participants,
e.g., hedge funds, proprietary trading firms, and pension funds.\17\
These options are not fungible with the exchange listed options. The
Exchange believes some of these market participants would prefer to
trade comparable instruments on an exchange, where they would be
cleared and settled through a regulated clearing agency. The Exchange
expects that users of these OTC products would be among the primary
users of exchange-traded cash-settled FLEX ETF Options. The Exchange
also believes that the trading of cash-settled FLEX ETF Options would
allow these same market participants to better manage the risk
associated with the volatility of underlying equity positions given the
enhanced liquidity that an exchange-traded product would bring.
---------------------------------------------------------------------------
\17\ As noted above, another option exchange received approval
to list certain cash-settled FLEX ETF Options. See supra note 12.
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In the Exchange's view, cash-settled FLEX ETF Options traded on the
Exchange would have three important advantages over the contracts that
are traded in the OTC market. First, as a result of greater
standardization of contract terms, exchange-traded contracts should
develop more liquidity. Second, counter-party credit risk would be
mitigated by the fact that the contracts are issued and guaranteed by
OCC. Finally, the price discovery and dissemination provided by the
Exchange and its members would lead to more transparent markets. The
Exchange believes that its ability to offer cash-settled FLEX ETF
Options would aid it in competing with the OTC market and at the same
time expand the universe of products available to interested market
participants. The Exchange believes that an exchange-traded alternative
may provide a useful risk management and trading vehicle for market
participants and their customers. Further, the Exchange believes
listing cash-settled FLEX ETF Options would provide investors with
competition on an exchange platform, as another exchange as received
Commission approval to list the same options.\18\
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\18\ See supra note 12.
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The Exchange notes that OCC has received approval from the
Commission for rule changes that will accommodate the clearance and
settlement of cash-settled ETF Options.\19\ The Exchange has also
analyzed its capacity and represents that it and The Options Price
Reporting Authority (OPRA) have the necessary systems capacity to
handle the additional traffic associated with the listing of cash-
settled FLEX ETF Options. The Exchange believes any additional traffic
that would be generated from the introduction of cash-settled FLEX ETF
Options would be manageable. The Exchange expects that Trading Permit
Holders (``TPHs'') will not have a capacity issue as a result of this
proposed rule change. The Exchange also does not believe this proposed
rule change will cause fragmentation of liquidity. The Exchange will
monitor the trading volume associated with the additional options
series listed as a result of this proposed rule change and the effect
(if any) of these additional series on market fragmentation and on the
capacity of the Exchange's automated systems.
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\19\ See Securities Exchange Act Release No. 34-94910 (May 13,
2022), 87 FR 30531 (May 19, 2022) (SR-OCC-2022-003).
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The Exchange does not believe that allowing cash settlement as a
contract term would render the marketplace for equity options more
susceptible to manipulative practices. The Exchange believes that
manipulating the settlement price of cash-settled FLEX ETF Options
would be difficult based on the size of the market for the underlying
ETFs that are the subject of this proposed rule change. The Exchange
notes that each underlying ETF in the table above is sufficiently
active to alleviate concerns about potential manipulative activity.
Further, in the Exchange's view, the vast liquidity in the 39
underlying ETFs that would currently be eligible to be traded as cash-
settled FLEX options under the proposal ensures a multitude of market
participants at any given time. Moreover, given the high level of
participation among market participants that enter quotes and/or orders
in physically settled options on these ETFs, the Exchange believes it
would be very difficult for a single participant to alter the price of
the underlying ETF or options overlying such ETF in any significant way
without exposing the would-be manipulator to regulatory scrutiny. The
Exchange further believes any attempt to manipulate the price of
[[Page 53552]]
the underlying ETF or options overlying such ETF would also be cost
prohibitive. As a result, the Exchange believes there is significant
participation among market participants to prevent manipulation of
cash-settled FLEX ETF Options.
Still, the Exchange believes it has an adequate surveillance
program in place and intends to apply the same program procedures to
cash-settled FLEX ETF Options that it applies to the Exchange's other
options products.\20\ FLEX options products and their respective
symbols are integrated into the Exchange's existing surveillance system
architecture and are thus subject to the relevant surveillance
processes. The Exchange believes that the existing surveillance
procedures at the Exchange are capable of properly identifying unusual
and/or illegal trading activity, which procedures the Exchange would
utilize to surveil for aberrant trading in cash-settled FLEX ETF
Options.
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\20\ For example, the regulatory program for the Exchange
includes surveillance designed to identify manipulative and other
improper options trading, including, spoofing, marking the close,
front running, wash sales, etc.
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With respect to regulatory scrutiny, the Exchange believes its
existing surveillance technologies and procedures adequately address
potential concerns regarding possible manipulation of the settlement
value at or near the close of the market. The Exchange notes that the
regulatory program operated by and overseen by the Cboe Global Markets,
the Exchange's parent company (``Cboe''), Regulatory Division (which
regulates the Exchange and its affiliated national securities
exchanges) \21\ includes cross-market surveillance designed to identify
manipulative and other improper trading, including spoofing, algorithm
gaming, marking the close and open, as well as more general, abusive
behavior related to front running, wash sales, quoting/routing, and Reg
SHO violations, that may occur on the Exchange or other markets. These
cross-market patterns incorporate relevant data from various markets
beyond the Exchange and its affiliates and from markets not affiliated
with the Exchange. The Exchange represents that its existing trading
surveillances and those of its affiliated markets are adequate to
monitor trading in the underlying ETFs and subsequent trading of
options on those securities on the Exchange, including cash-settled
FLEX ETF Options.\22\
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\21\ Cboe and its affiliated securities exchanges maintain
regulatory services agreements with Financial Industry Regulatory
Authority, Inc. (``FINRA'') whereby FINRA provides certain
regulatory services to the exchanges, including cross-market
surveillance, investigation, and enforcement services.
\22\ Such surveillance procedures generally focus on detecting
securities trading subject to opening price manipulation, closing
price manipulation, layering, spoofing or other unlawful activity
impacting an underlying security, the option, or both. The Exchange
has price movement alerts, unusual market activity and order book
alerts active for all trading symbols.
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Additionally, for options, the Exchange utilizes an array of
patterns that monitor manipulation of options, or manipulation of
equity securities (regardless of venue) for the purpose of impacting
options prices on the Exchange (i.e., mini-manipulation strategies).
That surveillance coverage is initiated once options begin trading on
the Exchange. Accordingly, the Exchange believes that the cross-market
surveillance performed by the Exchange or FINRA, on behalf of the
Exchange, coupled with the Cboe Regulatory Division's own monitoring
for violative activity on the Exchange comprise a comprehensive
surveillance program that is adequate to monitor for manipulation of
the underlying ETF and overlying option. Furthermore, the Exchange
believes that the existing surveillance procedures at the Exchange are
capable of properly identifying unusual and/or illegal trading
activity, which the Exchange would utilize to surveil for aberrant
trading in cash-settled FLEX ETF Options.
In addition to the surveillance procedures and processes described
above, improvements in audit trails (i.e., the Consolidated Audit
Trail), recordkeeping practices, and inter-exchange cooperation over
the last two decades have greatly increased the Exchange's ability to
detect and punish attempted manipulative activities. In addition, the
Exchange is a member of the Intermarket Surveillance Group (``ISG'').
The ISG members work together to coordinate surveillance and
investigative information sharing in the stock and options markets.\23\
For surveillance purposes, the Exchange would therefore have access to
information regarding trading activity in the pertinent underlying
securities.
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\23\ See, e.g., Cboe Regulatory Circular 20-028, Establishment
of the CMRWG. (April 8, 2020)
---------------------------------------------------------------------------
The proposed rule change is designed to allow investors seeking to
effect cash-settled FLEX ETF Options with the opportunity for a
different method of settling option contracts at expiration if they
choose to do so. As noted above, market participants may choose cash
settlement because physical settlement possesses certain risks with
respect to volatility and movement of the underlying security at
expiration that market participants may need to hedge against. The
Exchange believes that offering innovative products flows to the
benefit of the investing public. A robust and competitive market
requires that exchanges respond to members' evolving needs by
constantly improving their offerings. Such efforts would be stymied if
exchanges were prohibited from offering innovative products for reasons
that are generally debated in academic literature. The Exchange
believes that introducing cash-settled FLEX ETF Options would further
broaden the base of investors that use FLEX Options to manage their
trading and investment risk, including investors that currently trade
in the OTC market for customized options, where settlement restrictions
do not apply. The proposed rule change is also designed to encourage
market makers to shift liquidity from the OTC market onto the Exchange,
which, it believes, would enhance the process of price discovery
conducted on the Exchange through increased order flow. The Exchange
also believes that this may open up cash-settled FLEX ETF Options to
more retail investors. The Exchange does not believe that this proposed
rule change raises any unique regulatory concerns because existing
safeguards--such as position limits (and the aggregation of cash-
settled positions with physically-settled positions), exercise limits
(and the aggregation of cash-settled positions with physically-settled
positions), and reporting requirements--would continue to apply. The
Exchange believes the proposed position and exercise limits may further
help mitigate the concerns that the limits are designed to address
about the potential for manipulation and market disruption in the
options and the underlying securities.\24\
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\24\ See supra note 16.
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Given the novel characteristics of cash-settled FLEX ETF Options,
the Exchange will conduct a review of the trading in cash-settled FLEX
ETF Options over an initial five-year period. The Exchange will furnish
five reports to the Commission based on this review, the first of which
would be provided within 60 days after the first anniversary of the
initial listing date of the first cash-settled FLEX ETF Option under
the proposed rule and each subsequent annual report to be provided
within 60 days after the second, third, fourth and fifth anniversary of
such initial listing. At a minimum, each report will provide a
comparison between the trading volume of all cash-settled FLEX ETF
Options listed under the proposed rule and physically settled options
on the
[[Page 53553]]
same underlying security, the liquidity of the market for such options
products and the underlying ETF, and any manipulation concerns arising
in connection with the trading of cash-settled FLEX ETF Options under
the proposed rule. The Exchange will also provide additional data as
requested by the Commission during this five-year period. The reports
will also discuss any recommendations the Exchange may have for
enhancements to the listing standards based on its review. The Exchange
believes these reports will allow the Commission and the Exchange to
evaluate, among other things, the impact such options have, and any
potential adverse effects, on price volatility and the market for the
underlying ETFs, the component securities underlying the ETFs, and the
options on the same underlying ETFs and make appropriate
recommendations, if any, in response to the reports.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\25\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \26\ 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.
Specifically, the Exchange believes that introducing cash-settled FLEX
ETF Options will increase order flow to the Exchange, increase the
variety of options products available for trading, and provide a
valuable tool for investors to manage risk.
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78f(b).
\26\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposal to permit cash settlement
as a contract term for options on the specified group of equity
securities would remove impediments to and perfect the mechanism of a
free and open market as cash-settled FLEX ETF Options would enable
market participants to receive cash in lieu of shares of the underlying
security, which would, in turn, provide greater opportunities for
market participants to manage risk through the use of a cash-settled
product to the benefit of investors and the public interest. The
Exchange does not believe that allowing cash settlement as a contract
term for options on the specified group of equity securities would
render the marketplace for equity options more susceptible to
manipulative practices. As illustrated in the table above, each of the
qualifying underlying securities is actively traded and highly liquid
and thus would not be susceptible to manipulation because, over a six-
month period, each security had an average daily notional value of at
least $500 million and an ADV of at least 4,680,000 shares, which
indicates that there is substantial liquidity present in the trading of
these securities, and that there is significant depth and breadth of
market participants providing liquidity and of investor interest. The
Exchange believes the proposed bi-annual review to determine
eligibility for an underlying ETF to have cash settlement as a contract
term would remove impediments to and perfect the mechanism of a free
and open market as it would permit the Exchange to select only those
underlying ETFs that are actively traded and have robust liquidity as
each qualifying ETF would be required to meet the average daily
notional value and average daily volume requirements, as well as to
select the same underlying ETFs on which another exchange may list
cash-settled FLEX ETF Options.\27\
---------------------------------------------------------------------------
\27\ See supra note 12.
---------------------------------------------------------------------------
The Exchange believes the proposed change that, for FLEX ETF
Options, at least one of exercise style, expiration date, and exercise
price must differ from options in the non-FLEX market will provide
clarity and eliminate confusion regarding permissible terms of FLEX ETF
Options, including the proposed cash-settled FLEX ETF Options.
The Exchange believes that the data provided by the Exchange
supports the supposition that permitting cash settlement as a FLEX term
for the 39 underlying ETFs that would currently qualify to have cash
settlement as a contract term would broaden the base of investors that
use FLEX Options to manage their trading and investment risk, including
investors that currently trade in the OTC market for customized
options, where settlement restrictions do not apply.
The Exchange believes that the proposal to permit cash settlement
for certain FLEX ETF options would remove impediments to and perfect
the mechanism of a free and open market because the proposed rule
change would provide TPHs with enhanced methods to manage risk by
receiving cash if they choose to do so instead of the underlying
security. In addition, this proposal would promote just and equitable
principles of trade and protect investors and the general public
because cash settlement would provide investors with an additional tool
to manage their risk. Further, the Exchange notes that other exchanges
have previously received approval that allow for the trading of cash-
settled options \28\ and, specifically, cash-settled FLEX ETF Options
in an identical manner as the Exchange proposes to list them pursuant
to this rule filing.\29\ The proposed rule change therefore should not
raise issues for the Commission that it has not previously addressed.
---------------------------------------------------------------------------
\28\ See supra note 11.
\29\ See supra note 12.
---------------------------------------------------------------------------
The proposed rule change to permit cash settlement as a contract
term for options on up to 50 ETFs is designed to promote just and
equitable principles of trade in that the availability of cash
settlement as a contract term would give market participants an
alternative to trading similar products in the OTC market. By trading a
product in an exchange-traded environment (that is currently traded in
the OTC market), the Exchange would be able to compete more effectively
with the OTC market. The Exchange believes the proposed rule change is
designed to prevent fraudulent and manipulative acts and practices in
that it would lead to the migration of options currently trading in the
OTC market to trading on the Exchange. Also, any migration to the
Exchange from the OTC market would result in increased market
transparency. Additionally, the Exchange believes the proposed rule
change is designed to remove impediments to and to perfect the
mechanism for a free and open market and a national market system, and,
in general, to protect investors and the public interest in that it
should create greater trading and hedging opportunities and
flexibility. The proposed rule change should also result in enhanced
efficiency in initiating and closing out positions and heightened
contra-party creditworthiness due to the role of OCC as issuer and
guarantor of the proposed cash-settled options. Further, the proposed
rule change would result in increased competition by permitting the
Exchange to offer products that are currently available for trading
only in the OTC market and are approved to trade on another options
exchange.
[[Page 53554]]
The Exchange believes that establishing position limits for cash-
settled FLEX ETF Options to be the same as physically settled options
on the same underlying security, and aggregating positions in cash-
settled FLEX ETF Options with physically settled options on the same
underlying security for purposes of calculating position limits is
reasonable and consistent with the Act. By establishing the same
position limits for cash-settled FLEX ETF Options as for physically
settled options on the same underlying security and, importantly,
aggregating such positions, the Exchange believes that the position
limit requirements for cash-settled FLEX ETF Options should help to
ensure that the trading of cash-settled FLEX ETF Options would not
increase the potential for manipulation or market disruption and could
help to minimize such incentives. For the same reasons, the Exchange
believes the proposed exercise limits are reasonable and consistent
with the Act.
Finally, the Exchange represents that it has an adequate
surveillance program in place to detect manipulative trading in cash-
settled FLEX ETF Options and the underlying ETFs. Regarding the
proposed cash settlement, the Exchange would use the same surveillance
procedures currently utilized for the Exchange's other FLEX Options.
For surveillance purposes, the Exchange would have access to
information regarding trading activity in the pertinent underlying
ETFs. The Exchange believes that limiting cash settlement to no more
than 50 underlying ETFs (currently, 39 ETFs would be eligible to have
cash-settlement as a contract term) would minimize the possibility of
manipulation due to the robust liquidity in both the equities and
options markets.
As a self-regulatory organization, the Exchange recognizes the
importance of surveillance, among other things, to detect and deter
fraudulent and manipulative trading activity as well as other
violations of Exchange rules and the federal securities laws. As
discussed above, the Cboe Regulatory Division has adequate surveillance
procedures in place to monitor trading in cash-settled FLEX ETF Options
and the underlying securities, including to detect manipulative trading
activity in both the options and the underlying ETF.\30\ The Exchange
further notes the liquidity and active markets in the underlying ETFs,
and the high number of market participants in both the underlying ETFs
and existing options on the ETFs, helps to minimize the possibility of
manipulation. The Exchange further notes that under Section 19(g) of
the Act, the Exchange, as a self-regulatory organization, is required
to enforce compliance by its members and persons associated with its
members with the Act, the rules and regulations thereunder, and the
rules of the Exchange.\31\ The Exchange believes its surveillance,
along with the liquidity criteria and position and exercise limits
requirements, are reasonably designed to mitigate manipulation and
market disruption concerns and will permit it to enforce compliance
with the proposed rules and other Exchange rules in accordance with
Section 19(g) of the Act. The Exchange performs ongoing evaluations of
its surveillance program to ensure its continued effectiveness and will
continue to review its surveillance procedures on an ongoing basis and
make any necessary enhancements and/or modifications that may be needed
for the cash settlement of FLEX ETF Options.
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\30\ Among other things, the Cboe Regulatory Division's
regulatory program include cross-market surveillance designed to
identify manipulative and other improper trading, including
spoofing, algorithm gaming, marking the close and open, as well as
more general abusive behavior related to front running, wash sales,
quoting/routing, and Reg SHO violations, that may occur on the
Exchange and other markets. Furthermore, the Exchange stated that it
has access to information regarding trading activity in the
pertinent underlying securities as a member of ISG.
\31\ 15 U.S.C. 78s(g).
---------------------------------------------------------------------------
Additionally, the Exchange will monitor any effect additional
options series listed under the proposed rule change will have on
market fragmentation and the capacity of the Exchange's automated
systems. The Exchange will take prompt action, including timely
communication with the Commission and with other self-regulatory
organizations responsible for oversight of trading in options, the
underlying ETFs, and the ETFs' component securities, should any
unanticipated adverse market effects develop.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe that the proposed rule change will impose any burden on
intramarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as all TPHs that are registered
as FLEX Traders in accordance with the Exchange's Rules will be able to
trade cash-settled FLEX ETF Options in the same manner. This includes
the proposed change that, for FLEX ETF Options, at least one of
exercise style, expiration date, and exercise price must differ from
options in the non-FLEX market, which will provide clarity and
eliminate confusion regarding permissible terms of FLEX ETF Options,
including the proposed cash-settled FLEX ETF Options, with which all
FLEX Traders must comply. Additionally, positions in cash-settled FLEX
ETF Options of all FLEX Traders will be subject to the same position
limits, and such positions will be aggregated with positions in
physically settled options on the same underlying in the same manner.
The Exchange does not believe that the proposed rule change will
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as the proposal
is designed to increase competition for order flow on the Exchange in a
manner that is beneficial to investors because it is designed to
provide investors seeking to transact in FLEX ETF Options with the
opportunity for an alternative method of settling their option
contracts at expiration. The Exchange believes the proposed rule change
will encourage competition, as it may broaden the base of investors
that use FLEX Options to manage their trading and investment risk,
including investors that currently trade in the OTC market for
customized options, where settlement restrictions do not apply. The
proposed rule change would give market participants an alternative to
trading similar products in the OTC market. By trading a product in an
exchange-traded environment (that is currently traded in the OTC
market), the Exchange would be able to compete more effectively with
the OTC market. The Exchange believes the proposed rule change may
increase competition as it may lead to the migration of options
currently trading in the OTC market to trading on the Exchange. Also,
any migration to the Exchange from the OTC market would result in
increased market transparency and thus increased price competition.
The Exchange further notes that it operates in a highly competitive
market in which market participants can readily direct order flow to
competing venues who offer similar functionality. The Exchange believes
the proposed rule change encourages competition amongst market
participants to provide tailored cash-settled FLEX ETF Option
contracts, as another exchange has received approval to list these
contracts (subject to the same position and
[[Page 53555]]
exercise limits as proposed).\32\ Therefore, the Exchange believes the
proposed rule change will enhance intermarket competition by providing
investors with a choice of exchange venues on which to trade cash-
settled FLEX ETF Options.
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\32\ See supra note 12.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \33\ and Rule 19b-
4(f)(6)(iii) thereunder.\34\
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\33\ 15 U.S.C. 78s(b)(3)(A).
\34\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) \35\ normally
does not become operative prior to 30 days after the date of filing.
However, pursuant to Rule 19b-4(f)(6)(iii),\36\ the Commission may
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposed
rule change may become operative upon filing. The Exchange states,
among other things, that waiver of the 30-day operative delay will
protect investors by providing them with an immediate choice and an
additional venue where they can trade cash-settled FLEX ETF Options.
The Commission approved a substantially similar proposal by another
exchange that was subject to notice and comment and found consistent
with the Act.\37\ For these reasons, and because the proposed rule
change does not raise any novel regulatory issues that have not been
addressed, the Commission believes waiving the 30-day operative delay
is consistent with the protection of investors and the public interest.
Therefore, the Commission hereby waives the operative delay and
designates the proposal operative upon filing.\38\
---------------------------------------------------------------------------
\35\ 17 CFR 240.19b-4(f)(6).
\36\ 17 CFR 240.19b-4(f)(6)(iii).
\37\ See supra note 12.
\38\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
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-2023-036 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-2023-036. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-CBOE-2023-036 and should be
submitted on or before August 29, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-16885 Filed 8-7-23; 8:45 am]
BILLING CODE 8011-01-P
