[Federal Register Volume 85, Number 139 (Monday, July 20, 2020)]
[Notices]
[Pages 43923-43932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15551]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89308; File No. SR-CBOE-2020-034]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change Relating To Authorize for Trading
Flexible Exchange Options (``FLEX options'') on Full-Value Indexes With
a Contract Multiplier of One
July 14, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on June 30, 2020, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to authorize for trading flexible exchange options (``FLEX options'')
on full-value indexes with a contract multiplier of one. The text of
the proposed rule change is provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (http://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 proposed rule change authorizes for trading on the Exchange
FLEX Options on full-value indexes with a contract multiplier of one.
Currently, Rule 4.21(b)(1) states the index multiplier for FLEX Index
Options is 100. The proposed rule change deletes the parenthetical with
that provision from current Rule 4.21(b)(1), and instead proposes to
describe the index multiplier for FLEX Index Options in proposed Rule
4.20(b). Options with the same underlying but different units of
trading or index multipliers, as applicable, are different classes.\3\
An index multiplier is a term of a class (and thus applicable to all
series in the
[[Page 43924]]
class) \4\ rather than a term individual to a series. The Exchange,
therefore, believes including the provision regarding the index
multiplier of FLEX Index Options in Rule 4.20, which describes which
classes the Exchange may authorize for trading, is more appropriate.
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\3\ For example, the Exchange may list for trading on five
securities mini-options, which are options with a unit of trading of
ten shares, which is ten times lower than the standard-sized option
of 100 shares. See Rule 4.5, Interpretation and Policy .18. While a
mini-option has the same underlying as a standard-sized option, they
are separate products. See Securities Exchange Act Release No. 68656
(January 15, 2013), 78 FR 4526 (January 22, 2013) (SR-CBOE-2013-
001).
\4\ In other words, options on the S&P 500 Index (``SPX
options'') with a multiplier of one are a different class than
options on the S&P 500 with a multiplier of 100, just as options on
the S&P 500 Index with a multiplier of 100 are a different class
than options on the reduced-value S&P 500 Index (with one-tenth the
value of the of the S&P 500 Index) with a multiplier of 100.
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The proposed provisions in Rule 4.20(b) that state the index
multiplier may be 100 for FLEX Index Options on full-value indexes
(proposed clause (1)) and is 100 for FLEX Index Options on reduced-
value indexes (proposed clause (2)) merely restate the parenthetical
from current Rule 4.21(b)(1) in a more appropriate part of the Rules,
and thus are nonsubstantive changes.\5\ Additionally, proposed Rule
4.20(a) states that the unit of trading for FLEX Equity Options is the
same as the unit of trading for non-FLEX Equity Options overlying the
same equity security. The unit of trading for equity options (both FLEX
and non-FLEX) that may be listed on the Exchange is 100,\6\ except for
mini-options, which have a unit of trading of 10.\7\ This is not a
substantive change, but rather is merely a clarification in the Rules
regarding the current unit of trading for FLEX Equity Options.
Therefore, the proposed rule change has no impact on which FLEX Equity
Options may be traded on the Exchange. The ``unit of trading'' in
respect of any series of options means the number of units (i.e.,
shares in the case of equity options) of the underlying interest
subject to a single option contract in the series.\8\
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\5\ The separation of this provision for FLEX Index Options on
full-value and reduced-value indexes relates to the proposed rule
change to permit FLEX Index Options on full-value indexes to also
have a multiplier of one.
\6\ See Options Clearing Corporation (``OCC'') By-Laws Article
I, Section I(U)(5), which defines ``unit of trading'' in respect of
any series of options as the number of units of the underlying
interest designated by OCC as the minimum number to be the subject
of a single option contract in such series, and stating that in the
absence of any such designation for a series of options in which the
underlying security is a common stock, the unit of trading is 100
shares.
\7\ See Rule 4.5, Interpretation and Policy .18(a).
\8\ See Rule 4.21(b)(1); and Options Clearing Corporation
(``OCC'') Bylaws Article I, Section 1, U(5).
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Rule 4.11 defines an ``index multiplier'' as the amount specified
in the contract by which the current index value is to be multiplied to
arrive at the value required to be delivered to the holder of a call or
by the holder of a put upon valid exercise of the contract. Currently,
the Exchange has specified the index multiplier for index options it
currently lists as 100.\9\ While the Exchange has no current plans to
designate an index multiplier of one for non-FLEX index options, Rule
4.11 permits the Exchange to specify what the index multiplier for an
index option is contract and thus provides the Exchange with authority
to list an index option with a multiplier of one.\10\ Similarly,
Article I, Section 1, I(3) of the OCC By-Laws defines ``index
multiplier'' as the dollar amount (as specified by the Exchange on
which such contract is traded) by which the current index value is to
be multiplied to obtain the aggregate current index value. Unlike the
definition of a unit of trading in the OCC By-Laws, which states the
unit of trading in is designated by OCC but is 100 shares if not
otherwise specified, the definition of index multiplier includes no
such default.\11\ Therefore, given the inclusion of a default unit of
trading for equity options but the lack of a default index multiplier
for index options, the Exchange believes the current index multiplier
definition in the OCC By-Laws (which would have previously been filed
with the Commission) permits any index multiplier specified by the
listing Exchange. This is consistent with the lack of default number in
Exchange's definition of index multiplier and the ability for the
Exchange to specify the index multiplier, as noted above.
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\9\ See index option specifications, available at http://www.cboe.com/products/stock-index-options-spx-rut-msci-ftse.
\10\ Such listing would be subject to any applicable filing
requirements, such as a Form 19b-4(e).
\11\ See OCC Bylaws Article I, Section 1, U(5)
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The current index multiplier for all FLEX Index Options is 100, and
thus does not provide the same flexibility as the broader Exchange and
OCC definitions. The proposed rule change provides that the index
multiplier for FLEX Index options on full-value indexes may also be one
(in addition to the current index multiplier of 100).\12\ One-hundred
contracts for a FLEX Index Option with a multiplier of one are
economically equivalent to one contract for a FLEX Index Option with a
multiplier of 100.\13\ Rule 4.20 permits the Exchange to authorize for
trading a FLEX Option class on any equity security or index if it may
authorize for trading a non-FLEX Option class on that equity security
or index pursuant to Rules 4.3 and 4.10, respectively, even if the
Exchange does not list that non-FLEX Option class for trading. As
discussed above, the Rules (and OCC By-Laws) authorize the Exchange to
specify an index multiplier of one for an index option, subject to any
applicable rule filing requirements. Therefore, while the Exchange does
not list a non-FLEX Index Option with a multiplier of one, the Exchange
may authorize for trading a FLEX Index Option with a multiplier of one
for any index it may authorize for non-FLEX trading pursuant to Rule
4.10.
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\12\ See proposed Rule 4.20(b)(1).
\13\ The proposed rule change also amends Rule 5.74(a)(4) to
provide that the minimum size of an agency order for a FLEX
solicitation auction mechanism (``SAM'') will be 50,000 FLEX Index
Option contracts if the multiplier is one, which is proportionately
equivalent to 500 FLEX Index Option contracts if the multiplier is
100, the current minimum size of agency orders for SAM auctions.
This corresponds to the minimum size of 5,000 mini-options.
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When submitting a FLEX Order, the submitting FLEX Trader \14\ must
include all required terms of a FLEX Option series.\15\ Pursuant to
current Rule 4.21(b)(1), the submitting FLEX Trader must include the
underlying equity security or index (i.e., the FLEX Option class) on
the FLEX Order. The proposed rule change amends Rule 4.21(b)(1) to
state that if a FLEX Trader specifies a full-value index on a FLEX
Order, the FLEX Trader must also include whether the index option has
an index multiplier of 100 or 1 when identifying the class of FLEX
Order. While the concept of a flexible index multiplier is permissible
under OCC's By-Laws, the Exchange does not propose to make the index
multiplier a flexible term that a FLEX Trader can designate (unlike the
other terms of FLEX Options (strike price, settlement, expiration date,
and exercise style) that are designated by the FLEX Trader rather than
by the Exchange).\16\ Instead, as discussed above, the Exchange is
specifying the index multiplier for FLEX Options on full-value indexes
may be one or 100, as permitted by the current definition of index
multiplier in Rule 4.11, and is therefore authorizing new classes of
FLEX Index Options. Therefore, each FLEX Index Option series in a FLEX
Index Option class with a multiplier of
[[Page 43925]]
one will include the same flexible terms as any other FLEX Option
series, including strike price, settlement, expiration date, and
exercise style as required by Rule 4.21(b).\17\
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\14\ A ``FLEX Trader'' is a Trading Permit Holder the Exchange
has approved to trade FLEX Options on the Exchange.
\15\ These terms include, in addition to the underlying equity
security or index, the type of options (put or call), exercise
style, expiration date, settlement type, and exercise price. See
Rule 4.21(b). A ``FLEX Order'' is an order submitted in FLEX
Options. The submission of a FLEX Order makes the FLEX Option series
in that order eligible for trading. See Rule 5.72(b).
\16\ Pursuant to the OCC By-Laws, which would have previously
been filed with the Commission, the Exchange could make the
multiplier a flexible term, as the index multiplier is listed as a
variable term in the case of a flexibly structured index option. See
OCC By-Laws Article I, Section 1, V(1).
\17\ As discussed below, these are the terms designated by the
Commission as those that constitute standardized options, and
therefore, the Exchange believes the proposed rule change is
consistent with Section 9(b) of the Act. See Securities Exchange Act
Release No. 31910 (February 23, 1993), 58 FR 12056 (March 2, 1993)
(``1993 FLEX Approval Order'').
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The table below demonstrates the proposed differences between a
FLEX Index Option contract if the multiplier is one and a FLEX Index
Option if the multiplier is 100 on the S&P 500 Index. If the intraday
value of the S&P 500 Index is 3,109.50, one S&P 500 Index option (``SPX
option'') contract has a notional value of $310,950 (100 times
3,109.50). Suppose at that time, an SPX July 3200 call option is
trading at $21.80, making the cost of that contract overlying 100 units
of the index $2,180. Proportionately equivalent FLEX Index Option
contracts if the multiplier is one on an SPX July 3200 call would
provide investors with the ability to manage and hedge their positions
and portfolio risk on their underlying investment, at a price of $21.80
per contract.
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Index Index
Term multiplier of multiplier of
100 1
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Strike Price............................ 3200 3200
Bid/offer............................... 21.80 21.80
-------------------------------
Total Value of Deliverable.......... $320,000 $3,200
Total Value of Contract............. 2,180 21.80
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The Exchange believes there is demand from investors for FLEX Index
Options with an index multiplier of one, and that the proposed rule
change will expand investors' choices and flexibility with respect to
the trading of index options. Permitting investors to trade FLEX Index
Option contracts on full-value indexes with an index multiplier of one
will provide investors with additional granularity with respect to the
prices at which they may execute and exercise their FLEX Options on the
Exchange, as investors may execute and exercise over-the-counter
options with this smaller contract multiplier. The Exchange believes
this additional granularity will appeal to investors, as it will
provide them with an additional tool to manage the positions and
associated risk in their portfolios based on notional value, which
currently may equal a fraction of a standard contract.
For example, suppose a FLEX Trader holds a security portfolio of
$10,000,000. The FLEX Trader desires to hedge its portfolio with FLEX
SPX Index Options with an index multiplier of 100. Assume the current
value of the S&P 500 Index is 3,253.82. With a 100 multiplier, a FLEX
SPX Index Option contract with an index multiplier of 100 would have a
notional value of $325,382.00. In order to hedge the entire portfolio,
the FLEX Trader would need to trade 30.73 contracts ($10,000,000/
$325,382). The nearest whole number of contracts would be 31 contracts,
which would have a total notional value of $10,086,842. As a result,
the FLEX Trader could only hedge within $86,842 of its portfolio value
with FLEX Index Options. A FLEX SPX Index Option contract with an index
multiplier of one would have a notional value of $3,253.82. In order to
hedge the entire $10,000,000 portfolio, the FLEX Trader would need to
trade 3,073.3 contracts ($10,000,000/$3,253.82). The nearest whole
number of contracts would be 3,073 FLEX SPX Index Option contracts with
an index multiplier of one, which would have a total notional value of
$9,998,988.86.\18\ This will allow the FLEX Trader to hedge within
$1,011.14 of its portfolio value. Therefore, the proposed rule change
would permit this FLEX Trader to hedge its portfolio more effectively
with far greater precision ($85,830.86).
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\18\ The FLEX Trader could also trade 30 FLEX SPX Index Option
contracts (for a total notional value of $9,761,460) for SPX (with a
multiplier of 100) and 73 FLEX SPX Index Option contracts (with a
multiplier of one) for a total notional value of $237,528.86), which
would have the same total notional value. However, executing these
two separate transactions introduces price risk, as each could
execute at separate prices, which may interfere with the FLEX
Trader's investment objective.
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The Exchange notes a FLEX Trader currently has the option to trade
a reduced-value contract on the S&P 500 Index in the form of XSP
options.\19\ Given the circumstances in the previous paragraph, a FLEX
SPX Index Option contract with a multiplier of 100 would have a
notional value of $325,382.00, while a FLEX XSP Index Option contract
(which also has an index multiplier of 100) \20\ would have a notional
value of $32,538.20. In order to hedge the FLEX Trader's entire
portfolio, the FLEX Trader would need to trade 307.3 XSP contracts
($10,000,000/$32,538.20). The nearest whole number of contracts would
be 300, which would have a total notional value of $9,989,227.40. As a
result, the FLEX Trader could hedge within $10,772.60 of its portfolio
value. While the multipliers of reduced-value indexes are $100, the
reduced value has a similar effect as a smaller multiplier. A FLEX
Index Option with an index multiplier of one corresponds to a reduced-
valued index that is 1/100th the value of the full-value index (as
noted above, the Exchange is currently authorized to list options on
certain reduced-value indexes with such value). It just uses a
different multiplier rather than a different value of the underlying
index.
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\19\ Not all indexes on which the Exchange lists options have
equivalent reduced-value indexes.
\20\ Because XSP is a reduced-value index, FLEX XSP Index
Options may not have an index multiplier of one under the proposed
rule change.
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The Rules permit trading in a put or call FLEX Option series only
if it does not have the same exercise style, same expiration date, and
same exercise price as a non-FLEX Option series on the same underlying
security or index that is already available for trading.\21\ In other
words, a FLEX Option series may not have identical terms as a non-FLEX
Option series listed for trading. Rule 1.1 defines the term ``series''
as all option contracts of the same class that are the same type of
option and have the same exercise price and expiration date. Therefore,
a FLEX Option series in one class may have the same exercise style,
same expiration date, settlement, and same exercise price as a non-FLEX
Option series in a different class, even if they are on the same
underlying security or index. For example, pursuant to the Exchange's
rules, a FLEX Option overlying Apple stock that is a mini-option (i.e.
a multiplier of 10) may be listed with the same exercise style, same
expiration date, settlement,
[[Page 43926]]
and same exercise price as a non-FLEX Option overlying Apple stock that
is not a mini-option (i.e. a multiplier of 100). The terms of these
series are not identical, as they are in different classes, and thus
are permissible under Rule 4.21(a)(1). Similarly, pursuant to the
proposed rule change, a FLEX Option series overlying the S&P 500 with a
multiplier of one may have the same exercise style, same expiration
date, settlement, and same exercise price as a non-FLEX Option series
overlying the S&P 500 with a multiplier of 100, as they are series in
different classes.
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\21\ See Rule 4.21(a)(1).
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FLEX Index Options with a multiplier of one will be traded in the
same manner as all other FLEX Options pursuant to Chapter 5, Section F
of the Rules. As demonstrated above, there are two important
distinctions between FLEX Index Options with a multiplier of 100 and
FLEX Index Options with a multiplier of one due to the difference in
multipliers. The proposed rule change amends certain Rules describing
the exercise prices and bids and offers of FLEX Options to reflect
these distinctions. The proposed rule change amends Rule 4.21(b)(6) to
describe the difference between the meaning of the exercise price of a
FLEX Index Option with a multiplier of 100 and a FLEX Index Option with
a multiplier of one. Specifically, the proposed rule change states that
the exercise price for a FLEX Index Option series in a class with a
multiplier of one is set at the same level as the exercise price for a
FLEX Index Option series in a class with a multiplier of 100. The
proposed rule change also adds the following examples to Rule
4.21(b)(6) regarding how the deliverable for a FLEX Index Option with a
multiplier of one will be calculated (as well as for a FLEX Index
Option with a multiplier of 100 and a FLEX Equity Option, for
additional clarity and transparency): If the exercise price of a FLEX
Option series is a fixed price of 50, it will deliver: (A) 100 shares
of the underlying security at $50 (with a total deliverable of $5,000)
if a FLEX Equity Option; (B) cash equal to 100 (i.e. the index
multiplier) times 50 (with a total deliverable value of $5,000) if a
FLEX Index Option with a multiplier of 100; and (C) cash equal to one
(i.e. the index multiplier) times 50 (with a total deliverable value of
$50) if a FLEX Index Option with a multiplier of one. If the exercise
price of a FLEX Option series is 50% of the closing value of the
underlying security or index, as applicable, on the trade date, it will
deliver: (A) 100 shares of the underlying security at a price equal to
50% of the closing value of the underlying security on the trade date
(with a total deliverable of 100 times that percentage amount) if a
FLEX Equity Option; (B) cash equal to 100 (i.e. the index multiplier)
times a value equal to 50% of the closing value of the underlying index
on the trade date (with a total deliverable of 100 times that
percentage amount) if a FLEX Index Option with a multiplier of 100; and
(C) cash equal to one (i.e. the index multiplier) times a value equal
to 50% of the closing value of the underlying index on the trade date
(with a total deliverable of one times that percentage amount) if a
FLEX Index Option with a multiplier of one.\22\ The descriptions of
exercise prices for FLEX Equity Options and FLEX Index Options with a
multiplier of 100 are true today, and merely add for purposes of
clarity examples to the rule regarding the exercise price of a FLEX
Equity Option or a FLEX Index Option with a multiplier of 100, the
deliverables for which are equal to the exercise price times the 100
contract multiplier to determine the deliverable dollar value. Because
a FLEX Index Option with a multiplier of one has a multiplier of 1/100
of the multiplier of a FLEX Index Option with a multiplier of 100, the
value of the deliverable of a FLEX Index Option with a multiplier of
one as a result is 1/100 of the value of the deliverable of a FLEX
Index Option with a deliverable of 100.
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\22\ This corresponds to the calculation of exercise prices for
other types of options with a reduced multiplier. For example, Rule
4.5, Interpretation and Policy .18(b) provides that strike prices
(i.e., exercise prices) for mini-options (which have multipliers of
10 rather than 100, as set forth in Rule 4.5, Interpretation and
Policy .18(a)) are set at the same level as for standard options.
For example, a call series strike price to deliver 10 shares of
stock at $125 per share has a total deliverable value of $1,250 (10
x 125) if the strike is 125. A standard non-FLEX option with a
strike price of 125 would have a total deliverable value of $12,500
(100 x 125).
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Similarly, the proposed rule change amends Rule 5.3(e)(3) to
describe the difference between the meaning of bids and offers for FLEX
Equity Options, FLEX Index Options with a multiplier of 100, and FLEX
Index Options with a multiplier of one. Currently, that rule states
that bids and offers for FLEX Options must be expressed in (a) U.S.
dollars and decimals if the exercise price for the FLEX Option series
is a fixed price, or (b) a percentage, if the exercise price for the
FLEX Option series is a percentage of the closing value of the
underlying equity security or index on the trade date, per unit.\23\ As
noted above, a FLEX Option contract unit consists of 100 shares of the
underlying security or 100 times the value of the underlying index, as
they currently have a 100 contract multiplier.\24\ The proposed rule
change clarifies that bids and offers are expressed per unit, if a FLEX
Equity Option or a FLEX Index Option with a multiplier of 100, and adds
an example (as set forth below). This is true today, and merely adds
clarity to the Rules.
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\23\ The proposed rule change reorganizes the language in this
provision to make clear that the phrase ``if the exercise price for
the FLEX Option series is a percentage of the closing value of the
underlying equity security or index on the trade date'' applies to
the entire clause (B) of 5.4(e)(3).
\24\ See current Rule 4.21(b)(1).
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The proposed rule change also adds to Rule 5.3(e)(3) the meaning of
bids and offers for FLEX Index Option with a multiplier of one.
Specifically, bids and offers for FLEX Index Options with a multiplier
of one must be expressed in (a) U.S. dollars and decimals if the
exercise price for the FLEX Option series is a fixed price, or (b) a
percentage, if the exercise price for the FLEX Option series is a
percentage of the closing value of the underlying equity security or
index on the trade date, per 1/100th unit.\25\ Additionally, the
proposed rule change adds examples of the meaning of bids and offers of
FLEX Options: If the exercise price of a FLEX Option series is a fixed
price, a bid of ``0.50'' represents a bid of (A) $50 (0.50 times 100
shares) for a FLEX Equity Option; (B) $50 (0.50 times an index
multiplier of 100) for a FLEX Index Option with a multiplier of 100;
and (C) $0.50 (0.50 times an index multiplier of one) for a FLEX Index
Option with a multiplier of one.
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\25\ This corresponds to the meaning of bids and offers for
other types of options with reduced multiplier. For example, Rule
5.3(c) provides that bids and offers for an option contract
overlying 10 shares (i.e., mini-options) must be expressed in terms
of dollars per 1/10th part of the total value of the contract (for
example, an offer of 0.50 represents an offer of $5.00 for an option
contract having a unit of trading consisting of 10 shares, as
opposed to $50 for a standard option contract having a unit of
trading consisting of 100 shares).
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If the exercise price of a FLEX Option series is a percentage of
the closing value of the underlying equity security, a bid of ``0.50''
represents a bid of (A) 50% (0.50 times 100 shares) of the closing
value of the underlying equity security on the trade date if a FLEX
Equity Option; (B) 50% (0.50 times an index multiplier of 100) of the
closing value of the underlying index on the trade date if a FLEX Index
Option with a multiplier of 100; and (C) 0.50% (0.50 times an index
multiplier of one) of the closing value of the underlying index on the
trade date if a FLEX Index Option with a multiplier of one. The
Exchange believes this approach identifies a clear, transparent
description of the
[[Page 43927]]
differences between FLEX Index Options with a multiplier of 100 and
FLEX Index Options with a multiplier of one. Additionally, the Exchange
believes the proposed terms of FLEX Index Options with a multiplier of
one are consistent with the terms of the Options Disclosure Document
(``ODD'').\26\ The proposed rule change also provides additional
clarity regarding the meaning of bids and offers of FLEX Equity Options
and FLEX Index Options with a multiplier of 100.
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\26\ The ODD is available at https://www.theocc.com/about/publications/character-risks.jsp. The ODD states that the exercise
price of a stock option is multiplied by the number of shares
underlying the option to determine the aggregate exercise price and
aggregate premium of that option. See ODD at 18. Similarly, the ODD
states that the total exercise price for an index option is the
exercise price multiplied by the multiplier, and the aggregate
premium is the premium multiplied by the multiplier. See ODD at 8,
9, and 125. Per the ODD, the amount of the underlying interest may
be a variable term with respect to flexibly structured options
(i.e., FLEX Options).
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The proposed rule change also clarifies that the System rounds bids
and offers and offers of FLEX Options to the nearest minimum increment
following application of the designated percentage to the closing value
of the underlying security or index. This is consistent with current
functionality and is merely a clarification in the Rules. For example,
suppose a FLEX Trader enters a bid of 0.27 for a FLEX Equity Option,
and the underlying security has a closing value of 24.52 on the trade
date. Following the close on the trade date, the System calculates the
bid to be 6.6204 (0.27 x 24.52). Because the minimum increment for bids
and offers in a FLEX Option class is $0.01, the System rounds 6.6204 to
the nearest penny, which would be a bid of $6.62.
Pursuant to Rule 4.22(a), a FLEX Option position becomes fungible
with a non-FLEX option that becomes listed with identical terms. As
noted above, while the Exchange Rules and OCC By-Laws imply that an
index multiplier of one is permissible, subject to any other applicable
filing requirements, the Exchange does not currently, and currently has
no plans to, list for trading any non-FLEX Index Option class with a
multiplier of one. Therefore, initially it would not be possible for a
FLEX Index Option series with a multiplier of one to have the same
terms as a non-FLEX Index Option series, and thus it would not be
possible for a FLEX Index Option series with a multiplier of 100 to be
identical to, and fungible with, any non-FLEX Option pursuant to Rule
4.22(a). As discussed above, options with different multipliers are
different classes, and an option series in one class cannot be fungible
with an option series in another classes, even if they are economically
equivalent. Fungibility is only possible for series with identical
terms. This is similar to how a FLEX XSP Index Option series is not
fungible to an economically equivalent non-FLEX SPX Option series. If
the Exchange determines to list non-FLEX Index options with a one
multiplier in the future, then a FLEX Index Option with a multiplier of
one would become fungible with any non-FLEX Index Option with a
multiplier of one with the same terms pursuant to Rule 4.22(a).
The proposed rule change amends Rule 8.35(a) regarding position
limits for FLEX Options to describe how FLEX Index Options with a
multiplier of one will be counted for purposes of determining
compliance with position limits. Because 100 FLEX Index Options with a
multiplier of one are equivalent to one FLEX Index Option with a
multiplier of 100 overlying the same index due to the difference in
contract multipliers, proposed Rule 8.35(a)(7) states that for purposes
of determining compliance with the position limits under Rule 8.35, 100
FLEX Index Option contracts with a multiplier of one equal one FLEX
Index Option contract with a multiplier of 100 with the same underlying
index.\27\ This is consistent with the current treatment of other
reduced-value FLEX Index Options with respect to position limits. The
proposed rule change adds paragraph (g) to Rule 8.42 to make a
corresponding statement regarding the application of exercise limits to
FLEX Index Options with a multiplier of one. The margin requirements
set forth in Chapter 10 of the Rules will apply to FLEX Index Options
with a multiplier of one (as they currently do to all FLEX
Options).\28\
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\27\ The proposed rule change makes a corresponding change to
Rule 8.35(b) to clarify that, like reduced-value FLEX contracts,
FLEX Index Option contracts with a multiplier of one will be
aggregated with full-value contracts and counted by the amount by
which they equal a full-value contract for purposes of the reporting
obligation in that provision (i.e., 100 FLEX Index Options with a
multiplier of one will equal one FLEX Index Option contract with a
multiplier of 100 overlying the same index).
\28\ Pursuant to Rule 8.43(j), FLEX Index Options with a
multiplier of one will be aggregated with non-FLEX Index Options on
the same underlying index in the same manner as all other FLEX Index
Options.
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The proposed rule change also corrects an administrative error in
Rule 8.35(a). Currently, there are two subparagraphs numbered as
(a)(5). The proposed rule change amends paragraph (a) to renumber the
second subparagraph (a)(5) to be subparagraph (a)(6).
With regard to the impact of this proposal on system capacity, the
Exchange has analyzed its capacity and represents that it and the
Options Price Reporting Authority have the necessary systems capacity
to handle the potential additional traffic associated with the listing
and trading of FLEX Index Options with a multiplier of one. The
Exchange also understands that the OCC will be able to accommodate the
listing and trading of FLEX Index Options with a multiplier of one.
FLEX Index Options with a multiplier of one will be listed with
different trading symbols than FLEX Index Options with a multiplier of
100 with the same underlying to reduce any potential confusion.\29\
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\29\ For example, a FLEX Index Option for index ABC with a
multiplier of 100 may have symbol 4ABC (the ``4'' is the designation
generally used for FLEX Options to distinguish from the non-FLEX
Option with the same underlying), while a FLEX Index Option for
class ABC with a multiplier of one may have symbol 4ABC9.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\30\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \31\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \32\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\30\ 15 U.S.C. 78f(b).
\31\ 15 U.S.C. 78f(b)(5).
\32\ Id.
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In particular, the Exchange believes the proposed rule change will
benefit investors by expanding investors' choices and flexibility with
respect to the trading of FLEX Options. These options will provide
investors with additional granularity with respect to the prices at
which they may execute and exercise their FLEX Index Options on the
Exchange, as investors may
[[Page 43928]]
execute and exercise unregulated over-the-counter options with this
smaller contract multiplier. The Exchange believes this additional
granularity will provide investors with an additional tool to manage
more efficiently their positions and associated risk based on notional
value so that they equal whole contracts, as opposed to fractions of a
standard contract as currently may happen. Given the various trading
and hedging strategies employed by investors, this additional
granularity may provide investors with more control over the trading of
their FLEX strategies and management of their positions and risk
associated with FLEX option positions in their portfolios. FLEX Index
Options with a multiplier of one are substantially similar to FLEX
Index Options on reduced-value indexes, but will provide investors with
further granularity with respect to options for which there already is
a reduced-valued index and also a granular option with respect to
options for which there is no reduced-value index.
FLEX Index Options with a multiplier of one will trade in the same
manner as all other FLEX Options, with premiums (i.e., bids and offers)
and deliverables adjusted proportionately to reflect the difference in
multiplier, and thus the difference in the deliverable value of the
underlying. The Exchange believes the proposed rule change adds
transparency and clarity to the Rules regarding the distinctions
between FLEX Index Options with a multiplier of 100 and FLEX Index
Options with a multiplier of one due to the different multipliers will
benefit investor, as well as with respect to current terms of FLEX
Options. This proposal is similar to rules regarding other reduced-
value options.\33\
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\33\ See, e.g., Rules 4.5, Interpretation and Policy .18
(description of strike prices for mini-options, which have a
multiplier of 10), 5.3(c) (description of bids and offers for mini-
options), and 5.74(a)(4) (description of minimum size of FLEX Agency
Order for mini-options). Just as terms for mini-options, which have
a multiplier of 1/10th the size of standard options, equal 1/10th of
the same terms for standard options, the proposed terms for FLEX
Index Options with a multiplier of one, which have a multiplier 1/
100th the size of FLEX Index Options with a multiplier of 100, equal
1/100th of the same terms as FLEX Index Options with a multiplier of
100.
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The Exchange believes the proposed rule change will further benefit
investors, as it also provides clarity regarding bids and offers, and
exercise prices, of FLEX Index Options with a multiplier of 100 and
FLEX Equity Options (but makes no changes to the terms of these options
or how they trade). These proposed rule changes include (1) providing
examples of the meaning of the exercise prices and bids and offers of
both FLEX Index Options with a multiplier of 100 and FLEX Index Options
with a multiplier of one (as well as FLEX Equity Options) and (2)
including the corresponding minimum size for a FLEX SAM Agency Order
consisting of FLEX Index Options with a multiplier of one. This
additional clarity and transparency in the Rules will benefit
investors. The Exchange believes the proposed nonsubstantive changes
(to clarify the current contract multiplier for FLEX Index Options with
a multiplier of 100 and FLEX Equity Options in Rule 4.21(b), to add
examples regarding exercise prices and the meaning of bids and offers
of FLEX Index Options with a multiplier of 100 and FLEX Equity Options,
and to correct the numbering of subparagraphs in Rule 8.35(a)) will
protect investors, as they enhance transparency and clarity in the
Rules but make no changes to the terms of these options or how they
trade. Additionally, the correction to subparagraph numbering will
enable investors to more easily reference rule provisions in different
subparagraphs.
The Exchange believes the proposed rule change regarding the
treatment of FLEX Index Options with a multiplier of one with respect
to determining compliance with position and exercise limits is designed
to prevent fraudulent and manipulative acts and practices and promote
just and equitable principles of trade, as FLEX Index Options with a
multiplier of one will be counted for purposes of those limits in a
proportional manner to FLEX Index Options with a multiplier of 100 and
aggregated with non-FLEX Options overlying the same index manner as
FLEX Index Options currently are. This is similar to limits imposed on
reduced-value options. As noted above, while the multipliers of
reduced-value indexes are $100, the reduced value has a similar effect
as a smaller multiplier. A FLEX Index Option with a multiplier of one
corresponds to a reduced-valued index that is 1/100th the value of the
full-value index (as noted above, the Exchange is currently authorized
to list options on certain reduced-value indexes with such value).\34\
It just uses a different multiplier rather than a different value of
the underlying index.\35\ The Exchange believes its enhanced
surveillances continue to be designed to deter and detect violations of
Exchange Rules, including position and exercise limits and possible
manipulative behavior, and those surveillance will apply to FLEX Index
Options with a multiplier of one.
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\34\ See Rule 4.10(h) through (m) and Rule 4.13(a)(3) (which
lists European-style options currently approved for trading on the
Exchange). The Exchange notes Rule 4.10 describes generic listing
criteria for index options, which apply to reduced-value index
options as well.
\35\ This is also similar to position limits for other options
with multipliers less than 100. See, e.g., Rule 8.30, Interpretation
and Policy .08 (describing position limits for mini-options).
---------------------------------------------------------------------------
The Exchange does not believe the propose rule change raises price
protection concerns that market participants may submit FLEX Index
Options with a multiplier of one rather than the economically
equivalent non-FLEX Index Options in order to get better pricing, or
that a trade of a FLEX Index Option with a multiplier of one may occur
at a price that would trade through the book of the non-FLEX full-value
index option.\36\ The Exchange believes the risk (if any) of a market
participant trading a FLEX Index Option with a multiplier of one rather
than a non-FLEX Index Option with a multiplier of 100 with the same
underlying to use the FLEX market as a substitute for the non-FLEX
market and achieve such a result is minimal. As further described
below, this possibility exists today with respect to indexes on which
the Exchange may list full- and reduced-value index options as well as
economically equivalent index and ETF options, as a market participant
could trade FLEX reduced-value index option series (as long as not
listed as non-FLEX option series) as opposed to non-FLEX full-value
index option series. Similarly, a market participant could trade FLEX
Equity Options on an ETF overlying an index as opposed to a non-FLEX
option overlying the same index (as long as not listed as a non-FLEX
option series).\37\
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\36\ The same concern would have been raised if a market
participant submits a FLEX Order for a mini-option for one of the
securities specified in the rules rather than an economically
equivalent non-FLEX mini-option overlying the same security.
\37\ The Exchange notes there are no price protections in the
non-FLEX market for economically equivalent options listed for
trading. For example, suppose the Aug SPX 3300 call and Aug XSP 330
call are both listed for trading. A market participant could
purchase the XSP call at a price that is through the market of the
SPX option, which is economically equivalent. Similarly, an Aug SPY
330 call may trade at a price through the market of the Aug XSP 330
call, which is economically equivalent. Trade-throughs are only
prohibited for identical series, not economically equivalent series.
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The Exchange believes attempting to execute an order in the FLEX
market as a substitute for the non-FLEX market would minimize execution
opportunities for that order. Such trading would be inefficient for
market participants and could introduce price and execution risk to
market participants' trading strategies given the
[[Page 43929]]
reduced liquidity, participation, and price discovery in the FLEX
market compared to the non-FLEX market.\38\ Additionally, if a FLEX
Index Option with a multiplier of one traded through the book of the
equivalent non-FLEX Index Option with a multiplier of 100, while that
would be a better price for one transaction participant, it would be a
worse price for the participant on the opposite side, and thus it may
be more difficult for the initiating participant to obtain an
execution. For example, suppose the market for Aug ABC 800 call with a
multiplier of 100 is 10.20-11.00. If a market participant submitted a
FLEX Order to buy Aug ABC 800 call with a multiplier of one with a bid
of 0.10 (equivalent to a bid of 10.00 in the non-FLEX market for the
series with a multiplier of 100), it is unlikely another market
participant would sell at that price, given that participant could sell
the economically equivalent non-FLEX Option series at 10.20, which
would be a better price for that seller. Given the likely difficulties
(such as reduced liquidity and potentially longer timeframe to receive
execution) of trading in the FLEX market as a substitute for trading an
economically equivalent option in the non-FLEX market (such as to
obtain a better execution price), the Exchange believes the risk of
this occurring is de minimis. The Exchange has not observed market
participants attempting to trade in the FLEX market rather than the
non-FLEX market for this purpose in classes in which this is possible
today.
---------------------------------------------------------------------------
\38\ See Sections VII and X of the ODD regarding risks
associated with FLEX Options.
---------------------------------------------------------------------------
Additionally, as noted above, the Exchange's surveillance program
will incorporate FLEX Index Options with a multiplier of one. If the
Exchange identifies FLEX Orders that appear to be attempts to use FLEX
Index Options with a multiplier of one to avoid trading in the non-FLEX
market, the Exchange may determine those orders to be inconsistent with
just and equitable principles of trading and thus a violation of Rule
8.1. In addition, broker-dealers are also subject to due diligence and
best execution obligations, which obligations may require broker-
dealers to consider the prices of economically equivalent options when
executing customer orders. The Exchange notes that market participants
may currently, and currently do, execute orders like the ones being
proposed in the unregulated OTC market, where neither the Exchange nor
the Commission has oversight over market participants that may be
purposely trading at prices through the listed market. As discussed
below, the proposed rule change may encourage these orders to be
submitted to the Exchange, which could bring these orders into a
regulated market and be subject to surveillance and oversight to which
they are currently not subject with respect to execution of these
option orders.
As noted above, the Exchange may currently authorize for listing
and trading on the Exchange options on indexes that are either full-
value or reduced-value (subject to any applicable regulatory
requirements).\39\ Some reduced-value indexes are 1/10th the value of
the full-value index (for example, the FTSE 100 Index), while others
are 1/100th the value of the full-value-index (for example, the FTSE
China 50 Index). The Exchange notes there are not reduced-value indexes
and full-value indexes for all indexes on which the Exchange currently
lists options for trading. For indexes on which the Exchange may
currently list full- and reduced-value options, while the index
multipliers of reduced-value indexes are $100, the reduced value has a
similar effect as a smaller multiplier. As a result, the Exchange may
currently authorize for trading a FLEX Index Option on a reduced-value
index that is an economic equivalent of a non-FLEX Index Option on the
full-value index, as long as the FLEX Index Option on the reduced-value
index is not listed as a non-FLEX Index Option. For example, suppose
the Exchange lists for trading a non-FLEX SPX Index Option call with an
August expiration and exercise price of 3300. Assuming there is no non-
FLEX XSP Index Option call with an August expiration and exercise price
of 330 listed for trading, a FLEX Trader may submit a FLEX Order for a
FLEX XSP Index Option call with an August expiration and exercise price
of 330.
---------------------------------------------------------------------------
\39\ See Rule 4.10.
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The Exchange notes there are numerous examples of economically
equivalent options that trade on options exchanges today that create
the possibility that a trade in a full (or reduced) contract would be
through the book of the reduced (or full) contract (either in the FLEX
or non-FLEX market). For example, the Exchange currently lists SPX
options and XSP options, which are 1/10th the size of SPX options. It
is possible for transactions in XSP options to occur through the price
of an economically equivalent SPX option. Similarly, SPY options are
economically equivalent to XSP options, as each are based on 1/10th the
S&P 500 Index. It is possible for a SPY option to trade through the
book of an equivalent XSP (and SPX) option. Suppose the Exchange lists
for trading a non-FLEX XSP Index Option call with an August expiration
and exercise price of 330. Assuming there is no non-FLEX SPY Option
call with an August expiration and exercise price of 330 listed for
trading, a FLEX Trader may submit a FLEX Order for a FLEX SPY Equity
Option call with an August expiration and exercise price of 330.
Additional examples of economically equivalent options (which can be
FLEX and non-FLEX, thus making it possible that a FLEX Option could
trade through the book of an economically equivalent non-FLEX option)
that may be listed on options exchanges include options on the Russell
2000 Index, Mini-Russell 2000 Index, and IWM exchange-traded fund
(``ETF'') and options on the Nasdaq 100, the Mini-Nasdaq 100, and the
QQQ ETF, among others. Further, the Exchange permits FLEX Traders to
apply Asian and Cliquet style settlement to FLEX Broad-Based Index
options to provide investors with additional trading and hedging tools.
It is possible, for example, for a FLEX SPX option to have the same
strike and expiration date as a non-FLEX SPX option, and thus have an
economic equivalent listed for trading, but the FLEX option could trade
through the book of the non-FLEX option.\40\
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\40\ The Exchange notes the approval of Asian and Cliquet style
options included no reference to price protection concerns.
---------------------------------------------------------------------------
As these examples demonstrate, it is currently possible for many
economically equivalent options to be listed on the Exchange, both in
the FLEX and non-FLEX markets. The Exchange has not observed market
participants attempting to trade in the FLEX market rather than the
non-FLEX market by using economically equivalent options. The proposed
rule change similarly permits the possibility that FLEX Index Options
with a multiplier of one may have a non-FLEX Index Option with a
multiplier of 100 that is an economic equivalent listed for
trading.\41\ Like other FLEX products, the Exchange believes the
proposed rule change may provide an additional trading and hedging tool
to market participants to individual tailor certain terms of options to
address their investment needs. The Exchange believes the benefits of
this additional tool in the listed options market
[[Page 43930]]
outweigh the de minimis (if any) risk of market participants using FLEX
Index Options with a multiplier of one to trade through the markets for
any economically equivalent non-FLEX option. The Exchange is not aware
of any negative impact on execution prices as a result of the listing
of economically equivalent options on the Exchange today, nor is the
Exchange aware of any data or analysis suggesting that trading of FLEX
Options has acted as a substitute for the trading of standardized non-
FLEX options as a result of the ability to list FLEX Options that are
economically equivalent to non-FLEX Options listed for trading on the
Exchange. The Exchange understands that market participants generally
use the same information when pricing economically equivalent options,
which the Exchange believes further addresses any price protection
concerns.
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\41\ The Exchange notes that FLEX Options that are Asian or
Cliquet-settled, like FLEX Index Options with a multiplier of one,
can never be fungible with non-FLEX options, as those settlement
styles are not currently available for non-FLEX options. See
Securities Exchange Act Release No. 75425 (July 10, 2015), 80 FR
42152 (July 16, 2015) (SR-CBOE-2015-044).
---------------------------------------------------------------------------
By permitting FLEX Index Options to trade with the same multiplier
currently available to customized options in the OTC market, the
Exchange believes the proposed rule change will remove impediments to
and perfects the mechanism of a free and open market and a national
market system by further improving a comparable alternative to the OTC
market in customized options. By enhancing our FLEX trading platform to
provide additional flexible terms available in the OTC market but not
currently available in the listed options market, the Exchange believes
it may be a more attractive alternative to the OTC market. The Exchange
believes market participants benefit from being able to trade
customized options in an exchange environment in several ways,
including but not limited to the following: (1) Enhanced efficiency in
initiating and closing out positions; (2) increased market
transparency; and (3) heightened contra-party creditworthiness due to
the role of the OCC as issuer and guarantor of FLEX Options.
The proposed rule change is also consistent with Section 9(b) of
the Act \42\ and Rule 9b-1 thereunder.\43\ Rule 9b-1 provides that
standardized options are options contracts trading on a national
securities exchange that relate to options classes the terms of which
are limited to specific expiration dates and exercise prices, or such
other securities as the Commission may, by order, designate.
Additionally, Rule 9b-1 requires an options disclosure document
(``ODD'') be provided to customers, which includes a glossary of
relevant terms and identification of instruments underlying options
classes and classes covered by the ODD. The current ODD, available on
the OCC website (and previously filed with the Commission), describes
flexibly structured options (i.e., FLEX Options) that may be issued and
traded on exchanges. Specifically, Chapter VII of the ODD states that
the terms of a flexibly structured option that may be fixed by the
parties are called variable terms, which is what makes these options
different from other options. The ODD further states that included
among the terms that an options market may identify as variable terms
are the specification and amount of the underlying interest (i.e., the
multiplier associated with the underlying security or index).
Therefore, the ODD currently includes a description of and risks
associated with flexibly structured options, which may have an amount
of the underlying interest that differs from the amount of the
underlying interest associated with non-FLEX options overlying the same
index, such as FLEX Index Options with a multiplier of one.
---------------------------------------------------------------------------
\42\ See 15 U.S. Code Sec. 78i.
\43\ See 17 CFR 240.9b-1.
---------------------------------------------------------------------------
Additionally, as discussed above, the Exchange believes the OCC
Bylaws imply that the Exchange may designate a multiplier of one for an
index option class because the Bylaws are silent on a default index
multiplier for index options but not for a default unit of trading for
equity options. As further discussed above, the Exchange's rules
currently permit it to specify the index multiplier of an option
contract. Those rules would have been previously filed with the
Commission. Therefore, the Exchange believes the proposed rule change
will remove impediments to and perfect the mechanism of a free and open
market and a national market system, as it is consistent with the rules
of another self-regulatory organization.
The Commission has not historically issued orders designating new
classes as ``standardized options'' pursuant to Rule 9b-1.\44\ This
includes listing of options that contain multipliers other than 100.
For example, when the Commission approved mini-options,\45\ there was
no Commission ``designation'' of mini-options as being standardized
options available for trading on national securities exchanges. The
multiplier of an option relates to the value of the underlying, and
thus is part of the class designation rather than a term of the series.
Each series of a FLEX Index Option with a multiplier of one will
contain the terms designated by the Commission as those that constitute
standardized options, and therefore, are consistent with Section 9(b)
of the Act. Specifically, the Commission provided that ``[a]part from
the flexibility with respect to strike prices, settlement, expiration
dates, and exercise style, all of the other terms of FLEX Options are
standardized pursuant to OCC and CBOE rules. Standardized terms include
matters such as exercise procedures, contract adjustments, time of
issuance, effect of closing transactions, restrictions on exercise
under OCC rules, margin requirements, and other matters pertaining to
the rights and obligations of holders and writers.'' \46\ The number of
shares or amount of cash received or paid, as applicable, upon
settlement of an option relate is a right or obligation, respectively
of a holder or writer. Therefore, like all FLEX Options, in accordance
with the 1993 FLEX Approval Order, investors will have the ability to
designate the strike price, settlement, expiration date, and exercise
style of FLEX Index Options with a multiplier of one, and all other
terms (including matters such as exercise procedures, contract
adjustments, time of issuance, effect of closing transactions,
restrictions on exercise under OCC rules, margin requirements, and
other matters pertaining to the rights and obligations of holders and
writers (such as the index multiplier)) will be standardized pursuant
to OCC and CBOE Rules (specifically, OCC Bylaw Article I, Section 1,
I(3) and Cboe Rule 4.11, as discussed above, pursuant to which the
Exchange specifies the index multiplier for an index). When submitting
a FLEX Order for a FLEX Index Option with a multiplier of one, a FLEX
Trader will designate each of the strike price, settlement, expiration
date, and exercise style for option contract it seeks to trade, and the
other terms will be the same as the standardized terms on the same
underlying indexes as designated by the Exchange. A FLEX Trader
electing to submit a FLEX Order for a FLEX Index Option on an index
with a multiplier of one as opposed to for a FLEX Index Option on the
same index with a multiplier of 100 is no different than a FLEX Trader
electing to submit a FLEX Order for a FLEX Index Option on one index as
opposed to a FLEX Index Option on another index. If the Exchange
determines to list non-FLEX index options with a multiplier of one, a
FLEX Index Option with a multiplier of one with the same terms would
become fungible with such options.
---------------------------------------------------------------------------
\44\ See 17 CFR 240.9b-1.
\45\ See supra note 3.
\46\ See 1993 FLEX Approval Order.
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The Exchange notes that FLEX Options listed on the Exchange were
initially listed on only two indexes--the
[[Page 43931]]
S&P 500 (SPX) and the S&P 100 (XSP)--and were subject to minimum size
requirements.\47\ FLEX Options may now be listed on the Exchange on any
underlying equity or index and in any size, demonstrating the broader
demand and benefits of FLEX Options and the innovation that has
continued to occur with respect to these options. When Congress charged
the Commission with supervising the development of a ``national market
system'' for securities, Congress stated its intent that the ``national
market system evolve through the interplay of competitive forces as
unnecessary regulatory restrictions are removed.\48\ Consistent with
this purpose, Congress and the Commission have repeatedly stated their
preference for competition, rather than regulatory intervention to
determine products and services in the securities markets.\49\ This
consistent and considered judgment of Congress and the Commission is
correct, particularly in light of evidence of robust competition in the
options trading industry. The fact that an exchange proposed something
new is a reason to be receptive, not skeptical--innovation is the life-
blood of a vibrant competitive market--and that is particularly so
given the continued internalization of the securities markets, as
exchanges continue to implement new products and services to compete
not only in the United States but throughout the world. Options
exchanges continuously adopt new and different products and trading
services in response to industry demands in order to attract order flow
and liquidity to increase their trading volume. This competition has
led to a growth in investment choices, which ultimately benefits the
marketplace and the public. The Exchange believes that the proposed
rule change will help further competition by providing market
participants with yet another investment option for the listed options
market.
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\47\ As noted above, it is possible for a FLEX XSP option to be
economically equivalent to a non-FLEX SPX option. However, the 1993
FLEX Approval Order made no reference to any concerns regarding the
listing of FLEX Options economically equivalent to non-FLEX Options.
See id.
\48\ See H.R. Rep. No. 94-229, at 92 (1975) (Conf. Rep.).
\49\ See S. Rep. No. 94-75, 94th Cong., 1st Sess. 8 (1975)
(``The objective [in enacting the 1975 amendments to the Exchange
Act] would be to enhance competition and to allow economic forces,
interacting within a fair regulatory field, to arrive at appropriate
variations in practices and services.''); Order Approving Proposed
Rule Change Relating to NYSE Arca Data, Securities Exchange Act
Release No. 59039 (December 2, 2008), 73 FR 74770 (December 9, 2008)
(``The Exchange Act and its legislative history strongly support the
Commission's reliance on competition, whenever possible, in meeting
its regulatory responsibilities for overseeing the [self-regulatory
organizations] and the national market system. Indeed, competition
among multiple markets and market participants trading the same
products is the hallmark of the national market system.''); and
Regulation NMS, 70 FR at 37499 (observing that NMS regulation ``has
been remarkably successful in promoting market competition in [the]
forms that are most important to investors and listed companies'').
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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
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. The Exchange does not believe 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,
because all FLEX Index Options with a multiplier of one will be
available for all indexes currently eligible for FLEX trading, and all
FLEX Traders may trade FLEX Index Options with a multiplier of one.
FLEX Index Options with a multiplier of one will trade in the same
manner as FLEX Index Options with a multiplier of 100, with certain
terms proportionately adjusted to reflect the different contract
multipliers. The Exchange believes it is appropriate to limit FLEX
Index Options with a multiplier of one to full-value indexes, as
several indexes have large notional values, which makes the precision
afforded by FLEX Index Options with a multiplier of one the most
beneficial to market participants.
The Exchange does not believe 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, because the
proposed rule change relates solely to FLEX options listed solely for
trading on the Exchange. Other options exchanges may determine to offer
flexible options, including with a different contract multiplier. To
the extent the proposed rule change makes the Exchange a more
attractive trading venue for market participants on other exchanges,
those market participants may elect to become Exchange market
participants.
The Exchange believes that the proposed rule change may relieve any
burden on, or otherwise promote, competition. The Exchange believes
this is an enhancement to a comparable alternative to the OTC market in
customized options. By enhancing our FLEX trading platform to provide
additional contract granularity that available in the OTC market but
not currently available in the listed options market, the Exchange
believes it may be a more attractive alternative to the OTC market. The
Exchange believes market participants will benefit from being able to
trade customized options in an exchange environment in several ways,
including but not limited to the following: (1) Enhanced efficiency in
initiating and closing out position; (2) increased market transparency;
and (3) heightened contra-party creditworthiness due to the role of OCC
as issuer and guarantor of FLEX Options.
The proposed nonsubstantive changes (to move and clarify the
current contract multiplier for FLEX Equity Options and FLEX Index
Options with a multiplier of 100 in Rule 4.21(b) and to correct the
numbering of subparagraphs in Rule 8.35(a), as well as examples of the
exercise prices and the meanings of bids and offers) will have no
impact on competition, as they merely clarify or correct, as
applicable, information in the Rules and make no changes to how FLEX
Options trade.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
[[Page 43932]]
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2020-034 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-2020-034. 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 (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2020-034, and should be submitted
on or before August 10, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\50\
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\50\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-15551 Filed 7-17-20; 8:45 am]
BILLING CODE 8011-01-P