
[Federal Register Volume 81, Number 13 (Thursday, January 21, 2016)]
[Notices]
[Pages 3512-3514]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-01059]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76909; File No. SR-CBOE-2015-106]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change To Permit P.M.-
Settled Options on Broad-Based Indexes To Expire on Any Wednesday of 
the Month by Expanding the End of Week/End of Month Pilot Program

January 14, 2016.

I. Introduction

    On November 17, 2015, Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to expand the End of Week/End of 
Month Pilot Program to permit P.M.-settled options on broad-based 
indexes to expire on any Wednesday of the month and extend the duration 
of the pilot program. The proposed rule change was published for 
comment in the Federal Register on December 3, 2015.\3\ The Commission 
received no comments on the proposal. This order approves the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 76529 (November 30, 
2015), 80 FR 75695 (December 3, 2015) (``Notice'').
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II. Description of the Proposal

    CBOE proposes to expand and extend the duration of its existing End 
of Week/End of Month Pilot Program (the

[[Page 3513]]

``Pilot'').\4\ Under the terms of the current Pilot, 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 (``EOW''), and (b) the last trading day of the month 
(``EOM'').\5\ Under the proposal, the Exchange will expand the Pilot to 
permit P.M.-settled options on broad-based indexes to expire on any 
Wednesday of the month (``WED''), other than Wednesdays that are EOM, 
and extend the duration of the Pilot to May 3, 2017.\6\
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    \4\ See Securities Exchange Act Release No. 62911 (September 14, 
2010), 75 FR 57539 (September 21, 2010) (order approving SR-CBOE-
2009-075) (``Pilot Approval Order''). See also Securities Exchange 
Act Release No. 73422 (October 24, 2014), 79 FR 64640 (October 30, 
2014) (SR-CBOE-2014-079) (notice of filing and immediate 
effectiveness extending the Pilot). The Pilot is currently set to 
expire on May 3, 2016. See id.
    \5\ EOWs and EOMs are permitted on any broad-based index that is 
eligible for regular options trading. EOWs and EOMs are cash-settled 
expirations with European-style exercise, and are subject to the 
same rules that govern the trading of standard index options. See 
CBOE Rule 24.9(e).
    \6\ The Exchange also proposes to retitle the Pilot, which will 
cover EOW, EOM, and WED expirations, as the ``Nonstandard 
Expirations Pilot Program.''
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A. Wednesday Expirations

    The Exchange's proposed rule change will allow it to open for 
trading WEDs on any broad-based index eligible for standard options 
trading to expire on any Wednesday of the month, other than a Wednesday 
that is EOM.\7\ WEDs will be treated the same as options on the same 
underlying index that expire on the third Friday of the expiration 
month, except that they will be P.M.-settled,\8\ and will be subject to 
the same rules that currently govern the trading of traditional index 
options, including sales practice rules, margin requirements, and floor 
trading procedures.\9\ In addition, WEDs on the same broad-based index 
will be aggregated for position limits, if any, and any applicable 
reporting and other requirements.\10\ Contract terms for WEDs will be 
similar to EOWs, as described below.\11\
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    \7\ See proposed CBOE Rule 24.9(e)(3).
    \8\ See id.
    \9\ See Notice, supra note 3, at 75696.
    \10\ See proposed CBOE Rule 24.4(b).
    \11\ See Notice, supra note 3, at 75696.
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    The maximum number of expirations that may be listed for WEDs is 
the same as the maximum number of expirations permitted in CBOE Rule 
24.9(a)(2) for standard options on the same broad-based index, and CBOE 
proposes that other expirations in the same class will not be counted 
as part of the maximum number of WED expirations for a particular 
broad-based index class.\12\ Other than expirations that coincide with 
an EOM expiration, CBOE's proposed rule will require that WED 
expirations expire on consecutive Wednesdays.\13\ Further, a new group 
of WEDs that are first listed in a given class may begin with an 
initial expiration up to four weeks from the date that CBOE first lists 
the group of WEDs.\14\
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    \12\ See proposed CBOE Rule 24.9(e)(3).
    \13\ See id.
    \14\ See id. The Exchange also proposes conforming language for 
EOWs. It provides that other than expirations that are third Friday-
of-the-month or that coincide with an EOM expiration, EOW 
expirations shall be for consecutive Friday expirations. It also 
provides that EOWs that are first listed in a given class may expire 
up to four weeks from the actual listing date. See proposed CBOE 
Rule 24.9(e)(1).
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    With respect to listing, if the last trading day of a month is a 
Wednesday, the Exchange will list an EOM and not a WED. This hierarchy 
will only apply if the Exchange lists an EOM in a particular class; if 
the Exchange does not list an EOM in that class on a last trading day 
of a month that is a Wednesday, it may list a WED.\15\
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    \15\ See proposed CBOE Rule 24.9(e)(3). The Exchange proposes to 
add language to clarify a similar listing hierarchy for EOW 
expirations: if the last trading day of a month is a Friday, the 
Exchange will list an EOM and not an EOW, but this hierarchy will 
only apply if the Exchange actually lists an EOM in a particular 
class. If the Exchange does not list an EOM in that class on a last 
trading day of a month that is a Friday, it may list a EOW. See 
proposed CBOE Rule 24.9(e)(1).
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B. Annual Pilot Program Report

    The Exchange currently submits a Pilot report to the Commission at 
least two months prior to the expiration date of the Pilot (the 
``Annual Report''). The Exchange represents that it will expand the 
Annual Report to provide the same data and analysis related to WED 
expirations as is currently provided for EOW and EOM expirations.\16\ 
Because the Pilot is currently set to expire on May 3, 2016, and the 
Annual Report is provided at least two months prior the expiration date 
of the Pilot, the Exchange proposes to extend the Pilot to May 3, 2017 
\17\ to provide a greater volume of data concerning WED expirations in 
the Annual Report due in 2017.\18\ The Exchange represents that it will 
provide an Annual Report in 2016 that covers EOWs, EOMs, and WEDs.\19\
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    \16\ See Notice, supra note 3, at 75697.
    \17\ Any positions established under the Pilot would not be 
impacted by the expiration of the Pilot. For example, if the 
Exchange lists an EOW, EOM, or WED expiration that expires after the 
Pilot expires (and is not extended) then those positions would 
continue to exist. However, any further trading in those series 
would be restricted to transactions where at least one side of the 
trade is a closing transaction. See Notice, supra note 3, at 75696.
    \18\ See Notice, supra note 3, at 75697.
    \19\ See id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b) of the Act.\20\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\21\ which requires, among other things, 
that a national securities exchange have rules designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \20\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \21\ 15 U.S.C. 78f(b)(5).
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    The Commission has had concerns about the adverse effects and 
impact of P.M. settlement upon market volatility and the operation of 
fair and orderly markets on the underlying cash market at or near the 
close of trading. Only in limited instances has the Commission 
previously approved P.M. settlement for cash-settled options. In 
addition to approving the original Pilot,\22\ in 1993, the Commission 
approved CBOE's listing of P.M.-settled, cash-settled options on 
certain broad-based indexes expiring on the first business day of the 
month following the end of each calendar quarter.\23\ In 2010, the 
Commission approved CBOE's listing of P.M.-settled FLEX options on a 
pilot basis.\24\ The Commission also approved the listing of P.M.-
settled SPX index options on a pilot basis.\25\
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    \22\ See Pilot Approval Order, supra note 4.
    \23\ See Securities Exchange Act Release No. 31800 (February 1, 
1993), 58 FR 7274 (February 5, 1993) (SR-CBOE-92-13). In 2006, CBOE 
implemented, on a pilot basis, listing of P.M.-settled index options 
expiring on the last business day of a calendar quarter. See 
Securities Exchange Act Release No. 54123 (July 11, 2006), 71 FR 
40558 (July 17, 2006) (SR-CBOE-2006-65).
    \24\ See Securities Exchange Act Release No. 61439 (January 28, 
2010), 75 FR 5831 (February 4, 2010) (SR-CBOE-2009-087).
    \25\ The Commission initially approved P.M.-settled SPX index 
options (``SPXPM'') on a 14-month pilot basis (the ``SPXPM Pilot'') 
on C2 Options Exchange, Incorporated (``C2''). See Securities 
Exchange Act Release No. 65256 (September 2, 2011), 76 FR 55969 
(September 9, 2011) (SR-C2-2011-008). The SPXPM Pilot was 
subsequently transferred from C2 to CBOE and reset to a new 12-month 
pilot period. See Securities Exchange Act Release No. 68888 
(February 8, 2013), 78 FR 10668 (February 14, 2013) (SR-CBOE-2012-
120). In 2013, the Commission approved the addition of P.M.-settled 
mini-SPX index options to the SPXPM Pilot and the pilot's extension. 
See Securities Exchange Act Release No. 70087 (July 31, 2013), 78 FR 
47809 (August 6, 2013) (SR-CBOE-2013-055).

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[[Page 3514]]

    The Commission believes that it is appropriate to approve the WEDs 
proposal on a pilot basis and extend the existing Pilot in order to 
allow the Exchange to gain experience with the new WEDs and collect 
data concerning WEDs. The addition of WEDs would offer additional 
investment options to investors and may be useful for their investment 
or hedging objectives. The Commission believes that the proposal 
strikes a reasonable balance between the Exchange's desire to offer a 
wider array of investment opportunities and the need to avoid 
unnecessary proliferation of options series that may burden some 
liquidity providers and further stress options quotation and 
transaction infrastructure. Further, CBOE's proposed extended Pilot 
period should allow for both the Exchange and the Commission to 
continue to monitor the potential for adverse market effects of P.M. 
settlement on the market, including the underlying cash equities 
markets at the expiration of these options.
    The Commission notes that CBOE will provide the Commission with the 
Annual Report analyzing volume and open interest of EOWs, EOMs, and 
WEDs, which will also contain information and analysis of EOWs, EOMs, 
and WED trading patterns and index price volatility and share trading 
activity for series that exceed minimum parameters. This information 
should be useful to the Commission as it evaluates whether allowing 
P.M. settlement for EOWs, EOMs, and WEDs has resulted in increased 
market and price volatility in the underlying component stocks, 
particularly at expiration. The Pilot information should help the 
Commission and CBOE assess the impact on the markets and determine 
whether changes to these programs are necessary or appropriate. 
Furthermore, the Exchange's ongoing analysis of the Pilot should help 
it monitor any potential risks from large P.M.-settled positions and 
take appropriate action if warranted.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-CBOE-2015-106) be, and it 
hereby is, approved.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-01059 Filed 1-20-16; 8:45 am]
 BILLING CODE 8011-01-P


