[Federal Register Volume 88, Number 83 (Monday, May 1, 2023)]
[Notices]
[Pages 26621-26629]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-09079]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97371; File No. SR-CBOE-2023-020]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Make the Nonstandard Expirations
Pilot Program Permanent
April 25, 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 April 11, 2023, Cboe Exchange, Inc. (``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to make permanent the operation of its program that allows the Exchange
to list broad-based index options with nonstandard expirations
(``Nonstandard Expirations Pilot Program''). The text of the proposed
rule change is provided below.
(additions are italicized; deletions are [bracketed])
* * * * *
Rules of Cboe Exchange, Inc.
* * * * *
Rule 4.13. Series of Index Options
(a)-(d) No change.
(e) Nonstandard Expirations [Pilot] Program.
(1)-(2) No change.
(3) [Duration of Nonstandard Expirations Pilot Program. The
Nonstandard Expirations Pilot Program shall be through May 8, 2023.
(4)] Weekly Expirations and EOM Trading Hours on the Last Trading
Day. On the last trading day, Regular Trading Hours for expiring Weekly
Expirations and EOMs are from 9:30 a.m. and 4:00 p.m.
(f) No change.
[[Page 26622]]
Interpretations and Policies
.01 The procedures for adding and deleting strike prices for index
options are provided in Rule 4.5 and Interpretations and Policies
related thereto, as otherwise generally provided by Rule 4.13, and
include the following:
(a) No change.
(b) Notwithstanding the above paragraph, the interval between
strike prices may be no less than $0.50 for options based on one-one
hundredth of the value of the DJIA, including for series listed under
either the Short Term Options Series Program in Rule 4.13(a)(2)(A) or
the Nonstandard Expirations [Pilot] Program in Rule 4.13(e).
(c)-(h) No change.
(i) Notwithstanding Interpretation and Policies .01(a), .01(d) and
.04 to Rule 4.13, the exercise prices for new and additional series of
Mini-RUT options shall be listed subject to the following:
(1)-(2) No change.
(3) The lowest strike price interval that may be listed for
standard Mini-RUT options, including LEAPS, is $1, and the lowest
strike price interval that may be listed for series of Mini-RUT listed
under the Nonstandard Expirations [Pilot] Program in Rule 4.13(e) and
for QIX Mini-RUT options is $0.50.
* * * * *
.10 Notwithstanding Interpretations and Policies .01(a), .01(d) and
.04 to Rule 4.13, the exercise prices for new and additional series of
Mini-SPX options shall be listed subject to the following:
(a)-(b) No change.
(c) The lowest strike price interval that may be listed for
standard Mini-SPX options is $1, including for LEAPS, and the lowest
strike price interval that may be listed for series of Mini-SPX listed
under either the Short Term Option Series Program in Rule 4.13(a)(2)(A)
or the Nonstandard Expirations [Pilot] Program in Rule 4.13(e) is
$0.50.
* * * * *
Rule 5.4. Minimum Increments for Bids and Offers
(a) Simple Orders for Equity and Index Options. The minimum
increments for bids and offers on simple orders for equity and index
options are as follows:
* * * * *
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Class Increment Series trading price
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* * * * * * *
Series of VIX options (if $0.01. Lower than $3.00.
the Exchange does not list 0.05 $3.00 and higher.
VIX on a group basis
pursuant to Rule 4.13) and
series of VIX Options not
listed under the
Nonstandard Expirations
[Pilot] Program (if the
Exchange lists VIX on a
group basis pursuant to
Rule 4.13).
Series of VIX Options listed 0.01 All prices.
under the Nonstandard
Expirations [Pilot] Program
(if the Exchange lists VIX
on a group basis pursuant
to Rule 4.13).
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* * * * *
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 Exchange proposes to make permanent its Nonstandard Expirations
Pilot Program. Specifically, the Exchanges proposes to be permitted to
list P.M.-settled options on broad-based indexes that expire (1) on any
Monday, Wednesday, or Friday (other than the third Friday-of-the-month
or days that coincide with an end-of-month (``EOM'') expiration) and,
with respect to options on the S&P 500 Index (``SPX options'') and the
Mini-S&P 500 Index (``XSP options''), on any Tuesday or Thursday (other
than days that coincide with an EOM expiration) (``Weekly
Expirations'') and (2) on the last day of the trading month (``EOM
Expirations'').\3\ The Securities and Exchange Commission (the
``Commission'') approved a rule change that established a pilot program
under which the Exchange is permitted to list P.M.-settled options on
broad-based indexes to expire on (a) any Friday of the month, other
than the third Friday-of-the-month, and (b) the last trading day of the
month.\4\ On January 14, 2016, the Commission approved a Cboe Options
proposal to expand the pilot program to allow P.M.-settled options on
broad-based indexes to expire on any Wednesday of month, other than
those that coincide with an EOM.\5\ On August 10, 2016, the Commission
approved a Cboe Options proposal to expand the pilot program to allow
P.M.-settled options on broad-based indexes to expire on any Monday of
month, other than those that coincide with an EOM.\6\ On April 12,
2022, the Commission approved a Cboe Options proposal to expand the
pilot program to allow P.M.-settled SPX options to also expire on
Tuesday or Thursday.\7\ On September 15, 2022, the Commission approved
a Cboe Options proposal to expand the pilot program to allow P.M.-
settled XSP options to similarly expire on Tuesday or Thursday.\8\
Under the terms of the Nonstandard Expirations Pilot Program, Weekly
Expirations and EOMs are permitted on any broad-based index that is
eligible for regular options trading. Weekly Expirations and EOMs are
cash-settled and have European-style
[[Page 26623]]
exercise. The proposal became effective on a pilot basis for a period
of fourteen months that commenced on the next full month after approval
was received to establish the Program \9\ and was subsequently
extended.\10\ Pursuant to Rule 4.13(e)(3), the Program is scheduled to
expire on May 8, 2023. The Exchange hereby requests that the Commission
approve the Nonstandard Expirations Pilot Program on a permanent basis.
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\3\ In addition to proposing to delete the language in Rule
4.13(e)(3) regarding the expiration date of the pilot program (and
renumbering subparagraph (4) to be subparagraph (3)), the Exchange
proposes to delete the word ``pilot'' from the heading of Rule
4.13(e)(3) and make corresponding changes to Rules 4.13,
Interpretations and Policies .01(b) and (i)(3), .10(c), and 5.4(a).
\4\ See Securities Exchange Act Release 62911 (September 14,
2010), 75 FR 57539 (September 21, 2010) (order approving SR-CBOE-
2009-075).
\5\ See Securities Exchange Act Release 76909 (January 14,
2016), 81 FR 3512 (January 21, 2016) (order approving SR-CBOE-2015-
106).
\6\ See Securities Exchange Act Release 78531 (August 10, 2016),
81 FR 54643 (August 16, 2016) (order approving SR-CBOE-2016-046).
\7\ See Securities Exchange Act Release 94682 (April 12, 2022)
(order approving SR-CBOE-2022-005).
\8\ See Securities Exchange Act Release 95795 (September 21,
2022) (order approving SR-CBOE-2022-039).
\9\ See supra note 4.
\10\ See Securities Exchange Act Release 65741 (November 14,
2011), 76 FR 72016 (November 21, 2011) (immediately effective rule
change extending the Program through February 14, 2013); see also
Securities Exchange Act Release 68933 (February 14, 2013), 78 FR
12374 (February 22, 2013) (immediately effective rule change
extending the Program through April 14, 2014); 71836 (April 1,
2014), 79 FR 19139 (April 7, 2014) (immediately effective rule
change extending the Program through November 3, 2014); 73422
(October 24, 2014), 79 FR 64640 (October 30, 2014) (immediately
effective rule change extending the Program through May 3, 2016);
76909 (January 14, 2016), 81 FR 3512 (January 21, 2016) (extending
the Program through May 3, 2017); 80387 (April 6, 2017), 82 FR 17706
(April 12, 2017) (extending the Program through May 3, 2018); 83165
(May 3, 2018), 83 FR 21316 (May 9, 2018) (SR-CBOE-2018-038)
(extending the Program through November 5, 2018); 84534 (November 5,
2019), 83 FR 56119 (November 9, 2018) (SR-CBOE-2018-070) (extending
the Program through May 6, 2019); 85650 (April 15, 2019), 84 FR
16552 (April 19, 2019) (SR-CBOE-2019-022) (extending the Program
through November 4, 2019); 87462 (November 5, 2019), 84 FR 61108
(November 12, 2019) (SR-CBOE-2019-104) (extending the Program
through May 4, 2020); 88673 (April 16, 2020), 85 FR 22507 (April 22,
2020) (SR-CBOE-2020-035) (extending the Program through November 2,
2020); 90262 (October 23, 2020) 85 FR 68616 (October 29, 2020) (SR-
CBOE-2020-101); 91697 (April 28, 2021), 86 FR 23775 (May 4, 2021)
(SR-CBOE-2021-026) (extending the Program through November 1, 2021);
93459 (October 28, 2021), 86 FR 60663 (November 3, 2021) (SR-CBOE-
2021-063) (extending the Program through May 2, 2022); and 94800
(April 27, 2022) 87 FR 26248 (May 3, 2022) (SR-CBOE-2022-021
(extending the Program through November 7, 2022).
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By way of background, when cash-settled \11\ index options were
first introduced in the 1980s, settlement was based on the closing
value of the underlying index on the option's expiration date. The
Commission later became concerned about the impact of P.M.-settled,
cash-settled index options on the markets for the underlying stocks at
the close on expiration Fridays. Specifically, certain episodes of
price reversals around the close on quarterly expiration dates
attracted the attention of regulators to the possibility that the
simultaneous expiration of index futures, futures options, and options
might be inducing abnormal volatility in the index value around the
close.\12\ Academic research at the time provided at least some
evidence suggesting that futures and options expirations contributed to
excess volatility and reversals around the close on those days.\13\ In
light of the concerns with P.M. settlement and to help ameliorate the
price effects associated with expirations of P.M.-settled, cash-settled
index products, in 1987, the Commodity Futures Trading Commission
(``CFTC'') approved a rule change by the Chicago Mercantile Exchange
(``CME'') to provide for A.M. settlement \14\ for index futures,
including futures on the S&P 500.\15\ The Commission subsequently
approved a rule change by Cboe Options to list and trade A.M.-settled
SPX options.\16\ In 1992, the Commission approved Cboe Options'
proposal to transition all of its European-style cash-settled options
on the S&P 500 Index to A.M. settlement; \17\ however, in 1993, the
Commission approved a rule allowing Cboe Options to list P.M.-settled
options on certain broad-based indices, including the S&P 500, expiring
at the end of each calendar quarter (``Quarterly Index Expirations'')
(since adopted as permanent).\18\ Starting in 2006, the Commission
approved numerous rule changes, on a pilot basis, permitting the Cboe
Options to introduce other index options, including SPX options, with
P.M.-settlement. These include P.M.-settled index options expiring
weekly (other than the third Friday) and at the end of each month
(``EOM''),\19\ SPXPM, as well as P.M.-settled Mini-SPX Index (``XSP'')
options and Mini-Russell 2000 Index (``MRUT'') options expiring on the
third Friday.\20\
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\11\ The seller of a ``cash-settled'' index option pays out the
cash value of the applicable index on expiration or exercise. A
``physically settled'' option, like equity and ETF options, involves
the transfer of the underlying asset rather than cash. See
Characteristics and Risks of Standardized Options, available at:
https://www.theocc.com/Company-Information/Documents-and-Archives/Options-Disclosure-Document.
\12\ The close of trading on the quarterly expiration Friday
(i.e., the third Friday of March, June, September and December),
when options, index futures, and options on index futures all expire
simultaneously, became known as the ``triple witching hour.''
\13\ See Securities and Exchange Commission, Division of
Economic Risk and Analysis, Memorandum, Cornerstone Analysis of PM
Cash-Settled Index Option Pilots (February 2, 2021) (``DERA Staff PM
Pilot Memo'') at 5, available at: https://www.sec.gov/files/Analysis_of_PM_Cash_Settled_Index_Option_Pilots.pdf.
\14\ The exercise settlement value for an A.M.-settled index
option is determined by reference to the reported level of the index
as derived from the opening prices of the component securities on
the business day before expiration.
\15\ See Securities Exchange Act Release No. 24367 (April 17,
1987), 52 FR 13890 (April 27, 1987) (SR-CBOE-87-11) (noting that CME
moved S&P 500 futures contract's settlement value to opening prices
on the delivery date).
\16\ See id.
\17\ See Securities Exchange Act Release No. 30944 (July 21,
1992), 57 FR 33376 (July 28, 1992) (SR-CBOE-92-09). Thereafter, the
Commission approved proposals by the options markets to transfer
most of their cash-settled index products to A.M. settlement.
\18\ See Securities Exchange Act Release No. 31800 (February 1,
1993), 58 FR 7274 (February 5, 1993) (SR-CBOE-92-13); and see Rule
4.13(a)(2)(B); see also Securities Exchange Act Release Nos. 54123
(July 11, 2006), 71 FR 40558 (July 17, 2006) (SR-CBOE-2006-65); and
60164 (June 23, 2009), 74 FR 31333 (June 30, 2009) (SR-CBOE-2009-
029).
\19\ See Securities Exchange Act Release Nos. 62911 (September
14, 2010), 75 FR 57539 (September 21, 2010) (SR-CBOE-2009-075);
76529 (November 30, 2015), 80 FR 75695 (December 3, 2015) (SR-CBOE-
2015-106); 78132 (June 22, 2016), 81 FR 42018 (June 28, 2016) (SR-
CBOE-2016-046); and 78531 (August 10, 2016), 81 FR 54643 (August 16,
2016) (SR-CBOE-2016-046).
\20\ See Securities Exchange Act Release Nos. 70087 (July 31,
2013), 78 FR 47809 (August 6, 2013) (SR-CBOE-2013-055); and 91067
(February 5, 2021) 86 FR 9108 (February 11, 2021) (SR-CBOE-2020-
116).
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As stated above, since its inception in 2010, the Exchange has
continuously extended the Nonstandard Expirations Pilot Program period
and, during the course of the Nonstandard Expirations Pilot Program and
in support of the extensions of the Nonstandard Expirations Pilot
Program, the Exchange has submitted reports to the Commission regarding
the Pilot Program that detail the Exchange's experience with the Pilot
Program, pursuant to the Nonstandard Expirations Pilot Program Approval
Order.\21\ Specifically, the Exchange has submitted annual Pilot
Program reports to the Commission that contain an analysis of volume,
open interest, and trading patterns. In addition, for series that
exceed certain minimum open interest parameters, the annual report
would provide analysis of index price volatility and, if needed, share
trading activity. The Exchange has also submitted periodic interim
reports that contain some, but not all, of the information contained in
the annual reports (together with the periodic interim reports, the
``pilot reports'').\22\
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\21\ See supra note 4.
\22\ In providing the pilot reports to the Commission, the
Exchange previously requested confidential treatment of the pilot
reports under the Freedom of Information Act (``FOIA''). See 5
U.S.C. 552.
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The pilot reports contained the following volume and open interest
data:
(1) monthly volume aggregated for all Weekly and EOM trades;
(2) volume in Weekly and EOM series aggregated by expiration
date;
(3) month-end open interest aggregated for all Weekly and EOM
series;
(4) month-end open interest for EOM series aggregated by
expiration date and week-ending open interest for Weekly series
aggregated by expiration date;
(5) ratio of monthly aggregate volume in Weekly and EOM series
to total monthly class volume; and
[[Page 26624]]
(6) ratio of month-end open interest in EOM series to total
month-end class open interest and ratio of week-ending open interest
in EOW series to total week-ending open interest.
The annual reports also contained the information noted in Items
(1) through (6) above for Expiration Friday, A.M.-settled series, if
applicable, for the period covered in the pilot report as well as for
the six-month period prior to the initiation of the pilot. Upon request
by the Commission, the Exchange provided data files containing: (1)
Weekly and EOM option volume data aggregated by series, and (2) Weekly
week-ending open interest for expiring series and EOM month-end open
interest for expiring series. In the annual reports, the Exchange also
provided a monthly analysis of Weekly and EOM trading patterns by
undertaking a time series analysis of open interest in Weekly and EOM
series aggregated by expiration date compared to open interest in near-
term standard Expiration Friday A.M.-settled series in order to
determine whether users were shifting positions from standard series to
Weekly and Monthly series.
Finally, for series that exceed certain minimum parameters,\23\ the
annual reports contained the following analysis related to index price
changes and underlying share trading volume at the close on Expiration
Fridays:
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\23\ The Exchange and the Commission determined the minimum open
interest parameters, control sample, time intervals, method for
randomly selecting the component securities, and sample periods.
(1) a comparison of index price changes at the close of trading
on a given expiration date with comparable price changes from a
control sample. The data includes a calculation of percentage price
changes for various time intervals and compare that information to
the respective control sample. Raw percentage price change data as
well as percentage price change data normalized for prevailing
market volatility, as measured by the Cboe Volatility Index (VIX),
is provided; and
(2) a calculation of share volume for a sample set of the
component securities representing an upper limit on share trading
that could be attributable to expiring in-the-money Weekly and EOM
expirations. The data includes a comparison of the calculated share
volume for securities in the sample set to the average daily trading
volumes of those securities over a sample period.
Also, during the course of the Nonstandard Expirations Pilot
Program, the Exchange provided the Commission with any additional data
or analyses the Commission requested if it deemed such data or analyses
necessary to determine whether the Nonstandard Expirations Pilot
Program was consistent with the Exchange Act. The Exchange has made
public on its website all data and analyses previously submitted to the
Commission under the Nonstandard Expirations Pilot Program,\24\ and
will continue to make public any data and analyses it submits to the
Commission while the Nonstandard Expirations Pilot Program is still in
effect.
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\24\ Available at https://www.cboe.com/aboutcboe/legal-regulatory/national-market-system-plans/pm-settlement-spxpm-data.
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The Exchange has concluded that the Nonstandard Expirations Pilot
Program does not negatively impact market quality or raise any unique
or prohibitive regulatory concerns. The Exchange has not identified any
evidence from the pilot data indicating that the trading of Weekly and
EOM options has any adverse impact on fair and orderly markets on
Expiration Fridays for the underlying indexes or the underlying
securities comprising those indexes, nor have there been any
observations of abnormal market movements attributable to Weekly and
EOM options from any market participants that have come to the
attention of the Exchange. Based on a study conducted by the
Commission's Division of Economic and Risk Analysis (``DERA'') staff on
the pilot data from 2006 through 2018,\25\ and the Exchange's review of
the pilot data from 2019 through 2021, the size of the market for P.M.-
settled SPX options (including quarterly, weekly, EOM and third Friday
expirations) since 2007 has grown from a trivial portion of the overall
market to a substantial share (from around 0.1% of open interest in
2007 to 30% in 2021).\26\ Notional value of open interest in P.M.-
settled SPX options increased from approximately a median of $1.5
billion in 2007 to $1.9 trillion in 2021, approximately 1260 times its
value in 2007. Notional open interest in A.M.-settled SPX options was
already hovering around a median of $1.4 trillion in 2007, and it has
since increased to approximately $4.4 trillion in 2021. It is also
important to note that open interest on expiring P.M.-settled SPX
options, as compared to A.M.-settled options, is spread out across a
greater number of expiration dates, which results in a smaller
percentage of open interest expiring on any one date, thus mitigating
concerns that SPXPM option expiration may have a disruptive effect on
the market.\27\ Daily trading volume in P.M.-settled SPX options has
increased from a median of about 700 contracts in 2007 to nearly 1.9
million contracts in 2021,\28\ and now exceeds trading volume in A.M.-
settled SPX options.
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\25\ See DERA Staff PM Pilot Memo, at 13 (``Option settlement
quantity data for A.M.- and P.M.-settled options were obtained from
the Cboe, including the number of contracts that settled in-the-
money for each exchange-traded option series on the S&P 500 index. .
.on expiration days from January 20, 2006 through December 31, 2018.
Daily open interest and volume data for [SPX] option series were
also obtained from Cboe, including open interest data from January
3, 2006 through December 31, 2018 and trading volume data from
January 3, 2006 through December 31, 2018.'')
\26\ The DERA staff study reviewed and provided statistics for
market share, median notional value of open interest and median
volume in 2007 and in 2018. The Exchange provides updated statistics
for market share, median notional value of open interest and median
volume in 2021, replacing the 2018 statistics provided in the
Commission staff study.
\27\ See DERA Staff PM Pilot Memo, at 2.
\28\ The Exchange notes that the DERA staff study used two-sided
volume data for the median volume in 2007 and in 2018; therefore,
the Exchange provides two-sided volume data for the median volume in
2021.
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Moreover, the DERA staff study of the P.M.-settled SPX options
pilot data (2006 through 2018) did not identify any significant
economic impact on S&P 500 futures,\29\ the S&P 500, or the underlying
component securities of the S&P 500 surrounding the close. For purposes
of the study, volatility was by and large measured by using the
standard deviation \30\ of one-minute returns of S&P 500 futures values
and the index value during regular hours on each day reviewed
(excluding the first and last 15 minutes of trading) and then compared
with the standard deviation of one-minute returns (for S&P 500 futures,
the S&P 500, and the underlying component securities of the S&P 500)
over the last 15 minutes of a trading day.\31\ Using this as a general
measure,\32\ the DERA staff study then reviewed
[[Page 26625]]
whether, and to what extent, the settlement quantity of SPXPM options
and the levels of open interest in SPXPM options on expiration days (as
compared to non-expiration days) may be associated with general price
volatility and price reversals for S&P 500 futures, the S&P 500, and
the underlying component securities of the S&P 500 near the close. From
its review of the study, the Exchange agrees that, although volatility
before the market close is generally higher than during the rest of the
trading day, there is no evidence of any significant adverse economic
impact to the futures, index, or underlying index component securities
markets as a result of the quantity of P.M.-settled SPX options that
settle at the close or the amount of expiring open interest in P.M.-
settled SPX options. For example, the largest settlement event that
occurred during the time period of the study (a settlement of $100.4
billion of notional on December 29, 2017) had an estimated impact on
the futures price of only approximately 0.02% (a predicted impact of
$0.54 relative to a closing futures price of $2,677).
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\29\ Futures on the S&P 500 experience high volume and liquidity
both before and after the close of the underlying market. Therefore,
futures are a useful measure of abnormal volatility surrounding the
close and the open. See DERA Staff PM Pilot Memo, at 14. The
Exchange agrees with this approach.
\30\ Standard deviation applied to a rate of return (in this
case, one-minute) of an instrument can indicate that instrument's
historical volatility. The greater the standard deviation, the
greater the variance between price and the mean, which indicates a
larger price range, i.e., higher volatility.
\31\ For example, if on a particular day the standard deviation
of one-minute returns between 3:45 p.m. ET and 4:00 p.m. ET is 0.004
and the standard deviation of returns from 9:45 a.m. ET to 3:45 p.m.
ET is 0.002, this metric would take on a value of 2 for that day,
indicating that volatility during the last 15 minutes of the trading
day was twice as high as it was during the rest of the trading day.
See DERA Staff PM Pilot Memo, at 15; see also DERA Staff PM Pilot
Memo, at Section V, which discusses in detail the metrics used to
measure, for the purposes of the study, the extent to which the
market may experience abnormal volatility surrounding SPXPM option
settlement.
\32\ See DERA Staff PM Pilot Memo, at Section V, which discusses
in detail the metrics used to measure, for the purposes of the
study, the extent to which the market may experience abnormal
volatility surrounding SPXPM option settlement.
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In particular, the DERA staff study found that an additional P.M.-
settled SPX options settlement quantity equal to $10 billion in
notional value is associated with a marginal impact on futures prices
during the last 15 minutes of the trading day of only about $0.06
(where the hypothetical index level is 2,500), additional expiring open
interest in P.M.-settled SPX options equal to $10 billion in notional
value is associated with a marginal impact on futures prices during the
last 15 minutes of the trading day of only about $0.05 (assumed index
level is 2,500). Also, an additional increase in settlement quantity or
in expiring open interest, each equal to $20 million in notional value,
did not result in any meaningful futures price reversals near the close
(neither was found to cause a price reversal of over one standard
deviation \33\).
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\33\ See supra note 26.
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Likewise, the study identified that an additional total P.M.-
settled SPX options settlement quantity equal to $10 billion in
notional value corresponds to price movement in the S&P 500 of only
about $0.08 (assuming an index level of 2,500) during the last 15
minutes of the trading day, and that additional expiring open interest
equal to $10 billion in notional value corresponds to a price movement
in the S&P 500 of only about $0.06 (assuming an index level of 2,500)
during the last 15 minutes of the trading day. The study also
identified that it would take an increase of $34 billion in notional
value of total settlement quantity and of expiring open interest for
one additional S&P 500 price reversal of greater than two standard
deviations to occur in the last 15 minutes before the market close.
Also, regarding potential impact to S&P 500 component securities, it
would take an increase in total P.M.-settled SPX options settlement
quantity equal to $20 billion to effect a price movement of only
approximately $0.03 for a $200 stock, an increase in expiring open
interest in P.M.-settled SPX options equal to $10 billion to effect a
price movement less than half a standard deviation, and an increase in
total P.M.-settled SPX settlement quantity equal to $7 billion to
achieve a price reversal greater two standard deviations.
The study employed the same metrics to determine whether there is
greater price volatility for S&P 500 futures, the S&P 500, and the
component securities of the S&P 500 related to SPXPM option settlements
during an environment of high market volatility (i.e., on days in which
the VIX Index was in the top 10% of closing index values) and did not
identify indicators of any significant economic impact on these markets
near the close as a result of the P.M.-settled SPX options
settlement.\34\ In addition to this, the DERA staff study, applying the
same metrics and analysis as for P.M.-settled SPX options to A.M.-
settled SPX options, did not identify any evidence of a statistically
significant relationship between settlement quantity or expiring open
interest of A.M.-settled options and volatility near the open.
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\34\ The Exchange also notes that the study did not identify any
evidence that less liquid S&P 500 constituent securities experienced
any greater impact from the settlement of P.M.-settled SPX options.
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Upon review of the results of the DERA staff study, the Exchange
agrees that each of the above-described marginal price movements in S&P
500 futures, the S&P 500, and the S&P 500 component securities affected
by increases in P.M.-settled SPX options settlement quantity and
expiring open interest appear to be de minimis pricing changes from
those that occur over regular trading hours (outside of the last 15
minutes of the trading day). Further, the Exchange has not observed any
significant economic impact or other adverse effects on the market from
similar reviews of its pilot reports and data submitted after 2018.\35\
In its review of a sample of the pilot data from 2019 through 2021, the
Exchange similarly measured volatility over the final fifteen minutes
of each trading day by taking the standard deviation of rolling one-
minute returns of the S&P 500 level (excluding the first and last
fifteen minutes of trading) and comparing such with the standard
deviation of one-minute returns \36\ of the S&P 500 level, over the
last 15 minutes of a trading day. The Exchange identified an average
standard deviation ratio of 1.42 for the S&P 500 on non-expiration days
and an average standard deviation ratio of 1.54 for the S&P 500 on
expiration days (a ratio between expiration days and non-expiration
days of 1.09). The Exchange also notes that, using the same
methodology, it observed that, from 2015 through 2019,\37\ the average
standard deviation ratio for the S&P 500 on non-expiration days was
1.11 and the average standard deviation ratio for the S&P 500 on
expiration days was 1.22 (a ratio between expiration days and non-
expiration days of 1.10). While the average standard deviation ratio on
both expiration and non-expiration days was higher in 2019 through 2021
due to overall market volatility, the ratios between the standard
deviation ratios on expiration days and non-expirations days remained
nearly identical between the 2015 through 2019 timeframe and the 2019
through 2021. This shows that, in cases where overall market volatility
may increase, the normalized impact on expiration days to non-
expiration days generally remains consistent.
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\35\ Total SPX open interest volumes were examined for
expiration dates over a roughly two-year period between October 2019
and November 2021.
\36\ Calculated at every tick for the prior minute.
\37\ November 2015 through November 2021.
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In addition to this, the Exchange notes that the S&P 500 Index is
rebalanced quarterly. The changes resulting from each rebalancing
coincide with the third-Friday of the quarterly rebalancing month
(i.e., March, June, September, October and December) \38\ and generally
drive an increase in trading activity from investors that seek to track
the S&P 500. As such, The Exchange measured volatility on quarterly
rebalancing dates and found that the average standard deviation ratio
was 1.62, which suggests more closing volatility on quarterly rebalance
dates compared to non-quarterly expiration dates (for which the average
standard deviation ratio was 1.22), thus indicating that the impact
rebalancing may have on the S&P 500 is greater than any impact that
P.M.-settled SPX options may have on the S&P 500.
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\38\ See S&P Dow Jones Indices, Equity Indices Policies &
Practices, Methodology (August 2021), at 15, available at https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-equity-indices-policies-practices.pdf.
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The Exchange additionally focused its study of the post-2018 sample
pilot data
[[Page 26626]]
on reviewing for potential correlation between excess market volatility
and price reversals and the hedging activity of liquidity providers. As
explained in the DERA staff study, potential impact of P.M.-settled SPX
options on the correlated equity markets is thought to stem from the
hedging activity of liquidity providers in such options.\39\ To
determine any such potential correlation, the Exchange studied the
expected action of liquidity providers that are the primary source of
the hedging on settlement days. These liquidity providers generally
delta-hedge their S&P 500 index exposure via S&P 500 futures and on
settlement day unwind their futures positions that correspond with the
delta of their in-the-money (ITM) expiring P.M.-settled SPX options.
Assuming such behavior, the Exchange estimated the Market-On-Close
(``MOC'') \40\ volume for the shares of the S&P 500 component
securities (i.e., ``MOC share volume'') that could ultimately result
from the unwinding of the liquidity providers' futures positions by
equating the notional value of the futures positions that correspond to
expiring ITM open interest to the number S&P 500 component security
contracts (based on the weight of each S&P 500 component security).
That is, the Exchange calculated (an estimate) of the amount of MOC
volume in the S&P 500 component markets attributable hedging activity
as a result of expiring ITM P.M.-settled SPX options (i.e., ``hedging
MOC''). The Exchange then: (1) compared the hedging MOC share volume to
all MOC share volume on expiration days and non-expiration trading
days; and (2) compared the notional value of the hedging futures
positions (i.e., that correspond to expiring ITM P.M.-settled SPX
options open interest) to the notional value of expiring ITM P.M.-
settled SPX options open interest, the notional value of all expiring
P.M.-settled SPX options open interest and the notional value of all
P.M.-settled SPX options open interest.
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\39\ See DERA Staff PM Pilot Memo, at 10-12.
\40\ MOC orders allow a market participant to trade at the
closing price. Market participants generally utilize MOC orders to
ensure they exit positions at the end of the trading day.
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The Exchange observed that, on average, there were approximately
25% more MOC shares executed on expiration days (332 expiration days)
than non-expiration days (209 non-expiration days). While, at first
glance, the volume of MOC shares executed on expiration days seems much
greater than the volume executed on non-expiration days, the Exchange
notes that much of this difference is attributable to just eight
expiration days--the quarterly index rebalancing dates captured within
the scope of the post-2018 sample pilot data. The average MOC share
volume on the eight quarterly rebalancing dates was approximately 4.8
times the average MOC share volume on the non-quarterly rebalancing
expiration dates; again, indicating that the impact rebalancing may
have on the S&P 500 Index is greater than any impact that P.M.-settled
SPX options may have on the S&P 500 Index. That is, the Exchange
observed that the majority of closing volume on quarterly rebalance
dates is driven by rebalancing of shares in in the S&P 500, and not by
P.M.-settled SPX options expiration-related hedging activity.
Notwithstanding the MOC share volume on quarterly rebalancing dates,
the volume of MOC shares executed on expiration days (324 expiration
days) was only approximately 13% more than that on non-expiration days,
substantially less than the increase in volume over non-expiration days
wherein the eight index rebalancing dates are included in expiration
day volume. In addition to this, the Exchange observed that the hedging
MOC share volume (i.e., the expected MOC share volume resulting from
hedging activity in connection with expiring ITM P.M.-settled SPX
options) was, on average, less than the MOC share volume on non-
expiration days, and was only approximately 20% of the total MOC share
volume on expiration days, indicating that other sources of MOC share
volume generally exceed the volume resulting from hedging activity of
expiring ITM P.M.-settled SPX options and would more likely be a source
of any potential market volatility.
The Exchange also observed that, across all third-Friday
expirations, the notional value of the hedging futures positions was
approximately 25% of the notional value of expiring ITM P.M.-settled
SPX options, approximately 3.8% of the notional value of all expiring
P.M.-settled SPX options, and approximately only 0.5% of the notional
value of all P.M.-settled SPX options. As such, the estimated hedging
activity from liquidity providers on expiration days is a fraction of
the expiring open interest in P.M.-settled SPX options, which, the
Exchange notes, is only 14% of the total open interest in P.M.-settled
SPX options; thus, indicating negligible capacity for hedging activity
to increase volatility in the underlying markets.
While unrelated to the initial concerns of P.M.-settlement as
described above, at the request of the Commission, the Exchange
recently completed an analysis intended to evaluate whether the SPXPM
Program impacted the quality of the SPX option market. Specifically,
the Exchange compared values of key market quality indicators
(specifically, the bid-ask spread \41\ and effective spread \42\) in
SPXW options both before and after the introduction of Tuesday
expirations and Thursday expirations for SPXW options on April 18 and
May 11, 2022, respectively.\43\ Options on the Standard & Poor's
Depositary Receipts S&P 500 ETF (``SPY'') were used as a control group
to account for any market factors that might influence key market
quality indicators. The Exchange used data from January 3, 2022 through
March 4, 2022 (the two-month period prior to the introduction of SPXW
options with Tuesday expirations) and data from May 11, 2022 to July
10, 2022 (the two-month period following the introduction of SPXW
options with Thursday expirations).\44\
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\41\ The Exchange calculated for each of SPXW options (with
Monday, Wednesday, and Friday expirations) and SPY Weekly options
(with Monday, Wednesday, and Friday expirations) the daily time-
weighted bid-ask spread on the Exchange during its regular trading
hours session, adjusted for the difference in size between SPXW
options and SPY options (SPXW options are approximately ten times
the value of SPY options).
\42\ The Exchange calculated the volume-weighted average daily
effective spread for simple trades for each of SPXW options (with
Monday, Wednesday, and Friday expirations) and SPY Weekly options
(with Monday, Wednesday, and Friday expirations) as twice the amount
of the absolute value of the difference between an order execution
price and the midpoint of the national best bid and offer at the
time of execution, adjusted for the difference in size between SPXW
options and SPY options.
\43\ For purposes of comparison, the Exchange paired SPXW
options and SPY options with the same moneyness and same days to
expiration.
\44\ The Exchange observed comparable market volatility levels
during the pre-intervention and post-intervention time ranges.
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Given the time that as passed since the introduction of Weekly and
EOM options, the Exchange is unable to analyze whether the introduction
of Weekly and EOM options significantly impacted the market quality of
corresponding A.M.-settled options. The Exchange believes analyzing
whether the introduction of new SPXW P.M.-settled expirations (i.e.,
SPXW options with Tuesday and Thursday expirations) impacted the market
quality of then-existing SPXW P.M.-settled expirations (i.e., SPXW
options with Monday, Wednesday, and Friday expirations) provides a
reasonable substitute to evaluate whether the introduction of Weekly
and EOM options impacted the market quality of any corresponding A.M.-
settled options when the pilot began.\45\
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\45\ The full analysis is included in Exhibit 3 of this rule
filing.
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As a result of this analysis, the Exchange believes the
introduction of
[[Page 26627]]
SPX options with Tuesday and Thursday options had no significant impact
on the market quality of SPXW options with Monday, Wednesday, and
Friday expirations. With respect to the majority of series analyzed,
the Exchange observed no statistically significant difference in the
bid-ask spread or the effective spread of the series in the period
prior to introduction of the Tuesday and Thursday expirations and the
period following the introduction of the Tuesday and Thursday
expirations. While statistically insignificant, the Exchange notes that
in many series, particularly as they were closer to expiration, the
Exchange observed that the values of these spreads decreased during the
period following the introduction of the Tuesday and Thursday
expirations.\46\
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\46\ In any series in which the Exchange observed an increase in
the market quality indicators, the Exchange notes any such increase
was also statistically insignificant.
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To further note, given the significant changes in the closing
procedures of the primary markets in recent decades, including
considerable advances in trading systems and technology, the Exchange
believes that the risks of any potential impact of Weekly and EOM
options on the underlying cash markets are also de minimis.
The Exchange proposes to make the Nonstandard Expirations Pilot
Program permanent as P.M.-settled index products, particularly Weekly
and EOM options, have become an integral part of the Exchange's product
offerings, providing investors with greater trading opportunities and
flexibility. As indicated by the significant growth in the size of the
market for P.M.-settled Weekly and EOM options, such options have been,
and continue to be, well-received and widely used by market
participants. Therefore, the Exchange wishes to be able to continue to
provide investors with the ability to trade Weekly and EOM options on a
permanent basis. The Exchange believes that the permanent continuation
of the Nonstandard Expirations Pilot Program will serve to maintain the
status quo by continuing to offer a product to which investors have
become accustomed and have incorporated into their business models and
day-to-day trading methodologies for approximately 13 years. As such,
the Exchange also believes that ceasing to offer Weekly and EOM options
may result in significant market disruption and investor confusion. The
Exchange has not identified any significant impact on market quality
nor any unique or prohibitive regulatory concerns as a result of the
Nonstandard Expirations Pilot Program, and, as such, the Exchange
believes that the continuation of the Nonstandard Expirations Pilot
Program as a pilot, including the use of time and resources to compile
and analyze quarterly and annual pilot reports and pilot data, is no
longer necessary and that making the Nonstandard Expirations Pilot
Program permanent will allow the Exchange to otherwise allocate time
and resources to other industry initiatives.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\47\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \48\ 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.
---------------------------------------------------------------------------
\47\ 15 U.S.C. 78f(b).
\48\ 15 U.S.C. 78f(b)(5).
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In particular, the Exchange believes that the making the
Nonstandard Expirations Pilot Program permanent will allow the Exchange
to be able to continue to offer Weekly and EOM options--a product of
which has become an integral part of the Exchange's offerings--on a
continuous and permanent basis. Since their reintroduction beginning in
2006,\49\ P.M.-settled options have been, and continue to be, well-
received and widely used by market participants, providing investors
with greater trading opportunities and flexibility. The Exchange
believes that the permanent continuation of the Nonstandard Expirations
Pilot Program will remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general,
protect investors and the public interest by continuing to offer a
product to which investors have become accustomed and have incorporated
into their business models and day-to-day trading strategies for
approximately 13 years. As indicated by the significant growth in the
size of the market for P.M.-settled options, such options have been,
and continue to be, well-received and widely used by market
participants. Conversely, the Exchange believes ceasing to offer the
Nonstandard Expirations Pilot Program may result in significant market
disruption and investor confusion, as P.M.-settled index products,
particularly Weekly and EOM options, have become an integral part of
the Exchange's product offerings, providing investors with greater
trading opportunities and flexibility.
---------------------------------------------------------------------------
\49\ See supra notes 27-39. As described above, the Exchange's
conclusion is consistent with the analysis in the DERA Staff PM
Pilot Memo.
---------------------------------------------------------------------------
The Exchange further believes that making the Nonstandard
Expirations Pilot Program permanent will remove impediments to and
perfect the mechanism of a free and open market and a national market
system and protect investors, while maintaining a fair and orderly
market, as the Exchange believes that previous concerns (arising in the
1980s) regarding options expirations potentially contributing to excess
volatility and reversals around the close have been adequately
diminished. As described in detail above, the Exchange has observed no
significant adverse market impact or identified any meaningful
regulatory concerns during the approximately 13-year operation of the
Nonstandard Expirations Pilot Program as a pilot nor during the 15
years since P.M.-settled SPX options were reintroduced to the
marketplace.\50\ Notably, the Exchange did not identify any significant
economic impact (including on pricing or volatility or in connection
with reversals) on related futures, the underlying indexes, or the
underlying component securities of the underlying indexes surrounding
the close as a result of the quantity of Weekly and EOM options that
settle at the close or the amount of expiring open interest in Weekly
and EOM options, nor any demonstrated capacity for options hedging
activity to impact volatility in the underlying markets. While the DERA
staff study and corresponding Exchange study described above
specifically evaluated SPX options, because Weekly and EOM options may
only overly broad-based index options, the Exchange believes it is
appropriate to extrapolate the data to apply to the Weekly and EOM
options (which include SPX options). This is particularly true given
that the reports submitted by the Exchange during the pilot period have
similarly demonstrated no significant economic
[[Page 26628]]
impact on the respective underlying indexes or other products.
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\50\ See supra notes 26-39.
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The Exchange also believes the introduction of Weekly and EOM
options had no significant impact on the market quality of
corresponding A.M.-settled options or other options. The Exchange
believes this as a result of its analysis conducted after the
introduction of SPXW options with Tuesday and Thursday expirations,
which demonstrated no statistically significant impact on the bid-ask
or effective spreads of SPXW options with Monday, Wednesday, and Friday
expirations after trading in the SPXW options with Tuesday and Thursday
expirations began. While SPXW options are P.M.-settled and SPX options
are A.M.-settled, they are otherwise nearly identical products. As
noted above, Weekly and EOM options may only overly broad-based
indexes, including the S&P 500. Therefore, the Exchange believes
analyzing the impact of new SPXW options on then-existing SPXW options
permit the Exchange to extrapolate from this data that it is unlikely
the introduction of any other Weekly or EOM options significantly
impacted the market quality of corresponding A.M.-settled SPX options
when the pilot began. Additionally, the significant changes in the
closing procedures of the primary markets in recent decades, including
considerable advances in trading systems and technology, has
significantly minimized risks of any potential impact of Weekly or EOM
options on the underlying cash markets. As such, the Exchange believes
that a permanent Nonstandard Expirations Pilot Program does not raise
any unique or prohibitive regulatory concerns and that such trading has
not, and will not, adversely impact fair and orderly markets on
Expiration Fridays for the underlying indexes and their component
securities. Further, as the Exchange has not identified any significant
impact on market quality or any unique or prohibitive regulatory
concerns as a result of offering Weekly and EOM options, the Exchange
believes that the continuation of the Nonstandard Expirations Pilot
Program as a pilot, including the gathering, submission and review of
the pilot reports and data, is no longer necessary and that making the
Nonstandard Expirations Pilot Program permanent will allow the Exchange
to otherwise allocate time and resources to other industry initiatives.
B. Self-Regulatory Organization's Statement on Burden on Competition
Cboe Options does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe that making the Nonstandard Expirations Pilot Program permanent
will impose any unnecessary or inappropriate burden on intramarket
competition because Weekly and EOM options will continue to be
available to all market participants who wish to participate in the
Weekly and EOM options market. The Exchange believes that the
significant and sustained growth the Weekly and EOM options market has
experienced since their reintroduction through pilot programs indicates
strong, continued investor interest and demand, warranting a permanent
Nonstandard Expirations Pilot Program. The Exchange believes that, for
the period that Weekly and EOM options have been in operation as pilot
programs, they have provided investors with a desirable product with
which to trade and wishes to permanently offer this product to
investors. Furthermore, during the pilot period, the Exchange has not
observed any significant adverse market effects nor identified any
regulatory concerns as a result of the Weekly and EOM Program, and, as
such, the continuation of the Nonstandard Expirations Pilot Program as
a pilot, including the gathering, submission and review of the pilot
reports and data, is no longer necessary--a permanent Nonstandard
Expirations Pilot Program will allow the Exchange to otherwise allocate
time and resources to other industry initiatives.
The Exchange further does not believe that making the Nonstandard
Expirations Pilot Program permanent will impose any burden on
intermarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act because it applies to a class of
options listed only for trading on Cboe Options. The Exchange notes
that other exchanges are free to and do offer competing products. To
the extent that the permanent offering and continued trading of Weekly
and EOM options may make Cboe Options a more attractive marketplace to
market participants at other exchanges, such market participants may
elect to become Cboe Options market participants.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2023-020 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-2023-020. 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
[[Page 26629]]
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-2023-020, and should be
submitted on or before May 22, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\51\
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\51\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-09079 Filed 4-28-23; 8:45 am]
BILLING CODE 8011-01-P