
[Federal Register Volume 81, Number 247 (Friday, December 23, 2016)]
[Notices]
[Pages 94469-94473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30937]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79589; File No. SR-CBOE-2016-086]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the Debit/Credit Price Reasonability 
Checks for Complex Orders

December 19, 2016.
    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 December 9, 2016, Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.

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[[Page 94470]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the debit/credit price reasonability 
check for complex orders. The text of the proposed rule change is 
provided below.

(additions are italicized; deletions are [bracketed])
* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *

Rule 6.53C. Complex Orders on the Hybrid System

    (a)-(d) No change.

. . . Interpretations and Policies:
    .01-.07 No change.
    .08 Price Check Parameters: On a class-by-class basis, the Exchange 
may determine (and announce to the Trading Permit Holders via 
Regulatory Circular) which of the following price check parameters will 
apply to eligible complex orders. Paragraphs (b) and (e) will not be 
applicable to stock-option orders.
    For purposes of this Interpretation and Policy .08:
    Vertical Spread. A ``vertical'' spread is a two-legged complex 
order with one leg to buy a number of calls (puts) and one leg to sell 
the same number of calls (puts) with the same expiration date but 
different exercise prices.
    Butterfly Spread. A ``butterfly'' spread is a three-legged complex 
order with two legs to buy (sell) the same number of calls (puts) and 
one leg to sell (buy) twice as many calls (puts), all with the same 
expiration date but different exercise prices, and the exercise price 
of the middle leg is between the exercise prices of the other legs. If 
the exercise price of the middle leg is halfway between the exercise 
prices of the other legs, it is a ``true'' butterfly; otherwise, it is 
a ``skewed'' butterfly.
    Box Spread. A ``box'' spread is a four-legged complex order with 
one leg to buy calls and one leg to sell puts with one strike price, 
and one leg to sell calls and one leg to buy puts with another strike 
price, all of which have the same expiration date and are for the same 
number of contracts.
    To the extent a price check parameter is applicable, the Exchange 
will not automatically execute an eligible complex order that is:
    (a)-(b) No change.
    (c) Debit/Credit Price Reasonability Checks:
    (1) No change.
    (2) The System defines a complex order as a debit or credit as 
follows:
    (A)-(B) No change.
    (C) an order for which all pairs and loners are debits (credits) is 
a debit (credit). For purposes of this check, a ``pair'' is a pair of 
legs in an order for which both legs are calls or both legs are puts, 
one leg is a buy and one leg is a sell, and [both]the legs have the 
same expiration date but different exercise prices or, for all options 
except European-style index options, [the same exercise price but 
]different expiration dates and the exercise price for the call (put) 
with the farther expiration date is the same as or lower (higher) than 
the exercise price for the nearer expiration date. A ``loner'' is any 
leg in an order that the System cannot pair with another leg in the 
order (including legs in orders for European-style index options that 
have the same exercise price but different expiration dates). The 
System treats the stock leg of a stock-option order as a loner.
    (i) No change.
    (ii) The System then, for options except European-style index 
options, pairs legs to the extent possible [with the same exercise 
prices ]across expiration dates, pairing one [leg]call (put) with the 
[leg]call (put) that has the next nearest expiration date and the same 
or next lower (higher) exercise price.
    (iii) A pair of calls is a credit (debit) if the exercise price of 
the buy (sell) leg is higher than the exercise price of the sell (buy) 
leg (if the pair has the same expiration date) or if the expiration 
date of the sell (buy) leg is farther than the expiration date of the 
buy (sell) leg (if the [pair has the same ]exercise price of the sell 
(buy) leg is the same as or lower than the exercise price of the buy 
(sell) leg).
    (iv) A pair of puts is a credit (debit) if the exercise price of 
the sell (buy) leg is higher than the exercise price of the buy (sell) 
leg (if the pair has the same expiration date) or if the expiration 
date of the sell (buy) leg is farther than the expiration date of the 
buy (sell) leg (if the [pair has the same ]exercise price of the sell 
(buy) leg is the same as or higher than the exercise price of the buy 
(sell) leg).
    (v) No change.
    The System does not apply the check in subparagraph (1) to an order 
for which the System cannot define whether it is a debit or credit.
    (3)-(6) No change.
    (d)-(g) No change.
    .09-.12 No change.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's Web site (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 amends the debit/credit price 
reasonability check for complex orders in Rule 6.53C, Interpretation 
and Policy .08(c) to expand its applicability. Pursuant to the debit/
credit price reasonability check, the System rejects back to the 
Trading Permit Holder any limit order for a debit strategy with a net 
credit price or any limit order for a credit strategy with a net debit 
price, and cancels any market order (or any remaining size after 
partial execution of the order) for a credit strategy that would be 
executed at a net debit price. The System defines a complex order as a 
debit (credit) if all pairs and loners are debits (credits).\3\ For 
purposes of this check, a ``pair'' is a pair of legs in an order for 
which both legs are calls or both legs are puts, one leg is a buy and 
one leg is a sell, and both legs have the same expiration date but 
different exercise prices or, for all options except European-style 
index options, the same exercise price but different expiration dates. 
A ``loner'' is any leg in an order that the System cannot pair with 
another leg in the order (including legs in orders for European-style 
index options that have the same exercise price but different 
expiration dates).\4\
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    \3\ Rule 6.53C, Interpretation and Policy .08(c)(2)(C). The 
System also determines certain call and put butterfly spreads as 
debits and credits. See Rule 6.53C, Interpretation and Policy 
.08(c)(2)(A) and (B).
    \4\ The System treats the stock leg of a stock-option order as a 
loner.
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    (1) The System first pairs legs to the extent possible within each 
expiration

[[Page 94471]]

date, pairing one leg with the leg that has the next highest exercise 
price.
    (2) The System then, for options except European-style index 
options, pairs legs to the extent possible with the same exercise 
prices across expiration dates, pairing one leg with the leg that has 
the next nearest expiration date.
    (3) A pair of calls is a credit (debit) if the exercise price of 
the buy (sell) leg is higher than the exercise price of the sell (buy) 
leg (if the pair has the same expiration date) or if the expiration 
date of the sell (buy) leg is farther than the expiration date of the 
buy (sell) leg (if the pair has the same exercise price).
    (4) A pair of puts is a credit (debit) if the exercise price of the 
sell (buy) leg is higher than the exercise price of the buy (sell) leg 
(if the pair has the same expiration date) or if the expiration date of 
the sell (buy) leg is farther than the expiration date of the buy 
(sell) leg (if the pair has the same exercise price).
    (5) A loner to buy is a debit, and a loner to sell is a credit.
    The System does not apply the check in subparagraph (1) to an order 
for which the System cannot define whether it is a debit or credit.
    As discussed in the rule filing proposing the current check, the 
System determines whether an order is a debit or credit based on 
general options volatility and pricing principles, which the Exchange 
understands are used by market participants in their option pricing 
models.\5\ With respect to options with the same underlying:
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    \5\ Securities Exchange Act Release No. 34-76960 (January 21, 
2016), 81 FR 4728 (January 27, 2016) (SR-CBOE-2015-107) (Notice of 
Filing of Amendment No. 2 and Order Granting Accelerated Approval of 
Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 Thereto, 
Relating to Price Protection Mechanisms for Quotes and Orders).
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     If two calls have the same expiration date, the price of 
the call with the lower exercise price is more than the price of the 
call with the higher exercise price;
     if two puts have the same expiration date, the price of 
the put with the higher exercise price is more than the price of the 
put with the lower exercise price; and
     if two calls (puts) have the same exercise price, the 
price of the call (put) with the nearer expiration is less than the 
price of the call (put) with the farther expiration.
    In other words, a call (put) with a lower (higher) exercise price 
is more expensive than a call (put) with a higher (lower) exercise 
price, because the ability to buy stock at a lower price is more 
valuable than the ability to buy stock at a higher price, and the 
ability to sell stock at a higher price is more valuable than the 
ability to sell stock at a lower price. A call (put) with a farther 
expiration is more expensive than the price of a call (put) with a 
nearer expiration, because locking in a price further into the future 
involves more risk for the buyer and seller and thus is more valuable, 
making an option (call or put) with a farther expiration more expensive 
than an option with a nearer expiration.
    Under the current check, the System only pairs calls (puts) if they 
have the same expiration date but different exercise prices or the same 
exercise price but different expiration dates. With respect to pairs 
with different expiration dates but the same exercise price,\6\ a pair 
of calls is a credit (debit) strategy if the expiration date of the 
sell (buy) leg is farther than the expiration date of the buy (sell) 
leg)[sic], and a pair of puts is a credit (debit) strategy if the 
expiration date of the sell (buy) leg is farther than the expiration 
date of the buy (sell) leg)[sic]. However, based on the principles 
described above, if the sell (buy) leg of a pair of calls has a farther 
expiration date (and thus is more expensive) than the expiration date 
of the buy (sell) leg as well as a lower exercise price (and thus is 
more expensive) than the exercise price of the sell (buy) leg, then the 
pair is a credit (debit) (as is the case if the exercise prices of each 
call were the same under the current rule). Similarly, if the sell 
(buy) leg of a pair of puts has a farther expiration date (and thus is 
more expensive) than the expiration date of the buy (sell) leg as well 
as a higher exercise price (and thus is more expensive) than the 
exercise price of the buy (sell) leg, then the pair of puts is a credit 
(as is the case if the exercise prices of each put were the same under 
the current rule).
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    \6\ A complex order consisting of a buy leg and a sell leg with 
different expiration dates are commonly referred to in the industry 
as ``calendar spreads.''
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    Therefore, the proposed rule change expands this check to pair 
calls (puts) with different expiration dates if the exercise price for 
the call (put) with the farther expiration date is lower (higher) than 
the exercise price for the nearer expiration date in addition to those 
with different expiration dates and the same exercise price. 
Specifically, the proposed rule change amends subparagraph (c)(2)(C) to 
state, for purposes of this check, a ``pair'' is a pair of legs in an 
order for which both legs are calls or both legs are puts, one leg is a 
buy and one leg is a sell, and the legs have different expiration dates 
and the exercise price for the call (put) with the farther expiration 
date is the same as or lower (higher) than the exercise price for the 
nearer expiration date. The proposed rule change also amends 
subparagraphs (c)(2)(C)(ii) through (iv) to incorporate these 
additional pairs of calls (puts). When pairing legs across expiration 
dates, the System will pair one call (put) with the call (put) that has 
the next nearest expiration date and the same or next lower (higher) 
exercise price. Based on the pricing principles described above, a pair 
of calls is a credit (debit) strategy if the expiration date of the 
sell (buy) leg is farther than the expiration date of the buy (sell) 
leg (if the exercise price of the sell (buy) leg is the same as or 
lower than the exercise price of the buy (sell) leg). A pair of puts is 
a credit (debit) strategy if the expiration date of the sell (buy) leg 
is farther than the expiration date of the buy (sell) leg (if the 
exercise price of the sell (buy) leg is the same as or higher than the 
exercise price of the buy (sell) leg).\7\ Entering a calendar spread 
with a credit (debit) strategy at a debit (credit) price (or that would 
execute at a debit (credit) price), which price is inconsistent with 
the strategy, may result in executions at prices that are extreme and 
potentially erroneous.
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    \7\ The proposed rule change makes no changes to this check with 
respect to pairs of orders with the same expiration date but 
different exercise prices. Therefore, the rule filing omits 
references to the portions of the current rule related to those 
pairs to focus on the changes made to pairs with different 
expiration dates.
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    Below are examples demonstrating how the System determines whether 
a complex order with two legs, which have different expiration dates 
and exercise prices, is a debit or credit, and whether the System will 
reject the order pursuant to the debit/credit price reasonability 
check.\8\
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    \8\ The same principles would apply to complex orders with more 
than two legs, which include two legs that can be paired in this 
way.
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Example #1--Limit Call Spread
    A Trading Permit Holder enters a spread to buy 10 Sept 30 XYZ calls 
and sell 10 Oct 20 XYZ calls at a net debit price of -$10.00. The 
System defines this order as a credit, because the buy leg is for the 
call with the nearer expiration date and higher exercise price (and is 
thus the less expensive leg). The System rejects the order back to the 
Trading Permit Holder because it is a limit order for a credit strategy 
that contains a net debit price.
Example #2--Limit Put Spread
    A Trading Permit Holder enters a spread to buy 20 Oct 30 XYZ puts 
and sell 20 Sept 20 XYZ puts at a net credit price of $9.00. The System 
defines this

[[Page 94472]]

order as a debit, because the buy leg is for the put with the farther 
expiration date and the higher exercise price (and thus the more 
expensive leg). The System rejects the order back to the Trading Permit 
Holder because it is a limit order for a debit strategy that contains a 
net credit price.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\9\ Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \10\ 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) \11\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ Id.
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    In particular, the proposed rule change expands the applicability 
of the current debit/credit price reasonability check to additional 
complex orders for which the Exchange can determine whether the order 
is a debit or credit. By expanding the orders to which these checks 
apply, the Exchange can further assist with the maintenance of a fair 
and orderly market by mitigating the potential risks associated with 
additional complex orders trading at prices that are inconsistent with 
their strategies (which may result in executions at prices that are 
extreme and potentially erroneous), which ultimately protects 
investors. This proposed expansion of the debit/credit price 
reasonability check promotes just and equitable principles of trade, as 
it is based on the same general option and volatility pricing 
principles the System currently uses to pair calls and puts, which 
principles the Exchange understands are used by market participants in 
their option pricing models.

B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE 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 proposed rule change will 
not impose any burden on intramarket competition, because the debit/
credit price reasonability check will continue to apply to all incoming 
complex orders of all Trading Permit Holders in the same manner. The 
proposed rule change expands the applicability of the current check to 
additional complex orders for which the Exchange can determine whether 
the order is a debit or credit, which will help further prevent 
potentially erroneous executions and benefits all market participants. 
The proposed rule change does not impose any burden on intercompany 
competition, as it is intended to prevent potentially erroneously 
priced orders from entering CBOE's system and executing on CBOE's 
market. The Exchange believes the proposed rule change would ultimately 
provide all market participants with additional protection from 
anomalous or erroneous executions.
    The individual firm benefits of enhanced risk protections flow 
downstream to counterparties both at the Exchange and at other options 
exchanges, which increases systemic protections as well. The Exchange 
believes enhancing risk protections will allow Trading Permit Holders 
to enter orders and quotes with further reduced fear of inadvertent 
exposure to excessive risk, which will benefit investors through 
increased liquidity for the execution of their orders. Without adequate 
risk management tools, such as the one proposed to be enhanced in this 
filing, Trading Permit Holders could reduce the amount of order flow 
and liquidity they provide. Such actions may undermine the quality of 
the markets available to customers and other market participants. 
Accordingly, the proposed rule change is designed to encourage Trading 
Permit Holders to submit additional order flow and liquidity to the 
Exchange, which may ultimately promote competition. In addition, 
providing Trading Permit Holders with more tools for managing risk will 
facilitate transactions in securities because, as noted above, Trading 
Permit Holders will have more confidence protections are in place that 
reduce the risks from potential system errors and market events.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6) thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and the text of the proposed rule change, 
at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (1) 
Necessary or appropriate in the public interest; (2) for the protection 
of investors; or (3) otherwise in furtherance of the purposes of the 
Act. If the Commission takes such action, the Commission shall 
institute proceedings to determine whether the proposed rule change 
should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2016-086 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.


[[Page 94473]]


All submissions should refer to File Number SR-CBOE-2016-086. 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 Web site (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 Web site 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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2016-086 and should be 
submitted on or before January 13, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-30937 Filed 12-22-16; 8:45 am]
 BILLING CODE 8011-01-P


