
[Federal Register Volume 81, Number 158 (Tuesday, August 16, 2016)]
[Notices]
[Pages 54643-54645]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-19441]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78531; File No. SR-CBOE-2016-046]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change To Expand the 
Nonstandard Expirations Pilot Program To Include Monday Expirations

August 10, 2016.

I. Introduction

    On June 14, 2016, 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 Monday of the month. The proposed rule change 
was published for comment in the Federal Register on June 28, 2016.\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. 78132 (June 22, 
2016), 81 FR 42018 (June 28, 2016) (``Notice'').
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II. Description of the Proposal

    CBOE proposes to expand its existing Nonstandard Expirations Pilot 
Program (the ``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''), (b) the last trading day of the month 
(``EOM''), and (c) any Wednesday of the month, other than a Wednesday 
that coincides with an EOM (``WED'').\5\ Under the proposal, the 
Exchange will expand the Pilot to permit P.M.-settled options on broad-
based indexes to

[[Page 54644]]

expire on any Monday of the month other than Mondays that coincide with 
an EOM (``Monday Expirations''). The Exchange also proposes to 
reorganize the rules relating to existing EOW and WED expirations 
together with the proposed Monday Expirations into a new category 
called ``Weekly Expirations.'' \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. 76909 (January 14, 2016), 81 FR 3512 (January 21, 
2016) (SR-CBOE-2015-106) (order approving an expansion and extension 
of the Pilot) (``WED Approval Order''). The Pilot is currently set 
to expire on May 3, 2017. See id.
    \5\ EOWs, EOMs, and WEDs are permitted on any broad-based index 
that is eligible for regular options trading. EOWs, EOMs, and WEDs 
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 conforming changes to CBOE Rule 
24.9(e)(2), which the Exchange represents are non-substantive in 
nature. See Notice, supra note 3, at n. 6.
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A. Monday Expirations

    The Exchange's proposed rule change will allow it to open for 
trading Monday Expirations on any broad-based index eligible for 
standard options trading to expire on any Monday of the month, other 
than a Monday that is EOM.\7\ Monday Expirations 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, Monday Expirations on the same broad-based index will be 
aggregated with option contracts on the same broad-based index for 
position limits, if any, and any applicable reporting and other 
requirements.\10\ Contract terms for Monday Expirations will be similar 
to the current EOWs and WEDs, as described below.\11\
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    \7\ See proposed CBOE Rule 24.9(e)(1).
    \8\ See id.
    \9\ See Notice, supra note 3, at 42019.
    \10\ See proposed CBOE Rule 24.4(b).
    \11\ See Notice, supra note 3, at 42019.
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B. Weekly Expirations

    The proposal would eliminate the designations ``EOW'' and ``WED'' 
but preserve the existing concepts of EOWs and WEDs by combining them 
with the proposed Monday Expirations into a new category, Weekly 
Expirations. The maximum number of expirations that may be listed for 
Weekly Expirations (including the proposed Monday Expirations) 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 Weekly Expirations 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 
Weekly Expirations (including the proposed Monday Expirations) expire 
on consecutive Mondays, Wednesdays, or Fridays, as applicable.\13\ 
Further, a new group of Weekly Expirations (including the proposed 
Monday Expirations) 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.\14\
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    \12\ See proposed CBOE Rule 24.9(e)(1).
    \13\ See id.
    \14\ See id.
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    With respect to listing, if the last trading day of a month falls 
on a day on which the exchange would normally list an EOM and a Weekly 
Expiration (including the proposed Monday Expirations), the Exchange 
will list an EOM and not a Weekly Expiration.\15\
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    \15\ See id.
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    Finally, the exchange proposes to address the expiration of Weekly 
Expirations on days that the Exchange is not open for business: If the 
exchange is not open for business on a respective Monday, the normally 
Monday-expiring Weekly Expirations will expire on the following 
business day. If the Exchange is not open for business on a respective 
Wednesday or Friday, the normally Wednesday- or Friday-expiring Weekly 
Expirations will expire on the previous business day.\16\
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    \16\ See id.
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C. Annual Pilot Program Report

    The Exchange has previously undertaken to submit 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 the proposed Monday Expirations (encompassed by the proposed Weekly 
Expirations category) as is currently provided for EOW, EOM, and WED 
expirations.\17\
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    \17\ See Notice, supra note 3, at 42020-21.
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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.\18\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\19\ 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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    \18\ 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).
    \19\ 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 \20\ and expanding it to 
include WEDs,\21\ 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.\22\ In 2010, the Commission approved CBOE's 
listing of P.M.-settled FLEX options on a pilot basis.\23\ The 
Commission also approved the listing of P.M.-settled SPX index options 
on a pilot basis.\24\
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    \20\ See Pilot Approval Order, supra note 4.
    \21\ See WED Approval Order, supra note 4.
    \22\ 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).
    \23\ See Securities Exchange Act Release No. 61439 (January 28, 
2010), 75 FR 5831 (February 4, 2010) (SR-CBOE-2009-087).
    \24\ 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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    The Commission believes that it is appropriate to approve the 
Monday Expirations proposal (as encompassed by the proposed Weekly 
Expirations category) on a pilot basis in order to allow the Exchange 
to gain experience with the new Monday Expirations and collect data 
concerning Monday

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Expirations. The addition of Monday Expirations would offer additional 
investment options to investors and may be useful for their investment 
or hedging objectives, including the ability to hedge over-the-weekend 
risk. 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, including the new Monday Expirations in the 
Pilot should allow for both the Exchange and the Commission to continue 
monitoring 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 EOMs and Weekly 
Expirations (including the proposed Monday Expirations), which will 
also contain information and analysis of EOMs and Weekly Expirations 
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 EOMs and Weekly Expirations 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,\25\ that the proposed rule change (SR-CBOE-2016-046) be, and it 
hereby is, approved.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-19441 Filed 8-15-16; 8:45 am]
BILLING CODE 8011-01-P


