[Federal Register Volume 83, Number 177 (Wednesday, September 12, 2018)]
[Notices]
[Pages 46230-46237]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-19773]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84045; File No. SR-CBOE-2018-062]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend Rule 6.2, Interpretation and 
Policy .01 Concerning Strategy Orders

September 6, 2018.
    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 August 24, 2018, 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 Options proposes a rule change to amend and clarify the 
definition of a strategy order, clarify other definitions related to 
the modified HOSS procedure, and permit the entry of orders that offset 
imbalances after the strategy order cut-off time.

(additions are italicized; deletions are [bracketed])
* * * * *
Rules of Cboe Exchange, Inc.
* * * * *
Rule 6.2. Hybrid Opening (and Sometimes Closing) System (``HOSS'')
    (a)-(h) No change.

. . . Interpretations and Policies:

    .01 Modified Opening Procedure for Series Used to Calculate the 
Exercise[/] or Final Settlement Value[s] of Expiring Volatility 
Index[es] Derivatives.
    (a) Definitions. For purposes of this Interpretation and Policy 
.01, the following terms have the meanings below:

Volatility Index Derivatives

    The term ``volatility index derivatives'' means volatility index 
options listed for trading on the Exchange (as determined under Rule 
24.9(a)(5) and (6)), (security) futures

[[Page 46231]]

listed for trading on an affiliated designated contract market, or 
over-the-counter derivatives overlying a volatility index whose 
exercise or final settlement values, as applicable, are calculated 
pursuant to, or by reference to, as applicable, the modified opening 
procedure described in this Interpretation and Policy .01.

Exercise Settlement Value Determination Day

    The term ``exercise settlement value determination day'' means a 
day on which the Exchange determines the exercise or final settlement 
value, as applicable, of expiring volatility index derivatives.

Constituent Option Series

    The term ``constituent option series'' means all option series 
listed on the Exchange that are used to calculate the exercise or final 
settlement value, as applicable, of expiring volatility index 
derivatives.

Strategy Order

    The Exchange deems individual orders (considered collectively) a 
market participant submits for participation in the modified opening 
procedure to be a ``strategy order,'' based on related facts and 
circumstances considered by the Exchange, only if the orders:
    (1) Relate to the market participant's positions in expiring 
volatility index derivatives;
    (2) are for option series with the expiration that the Exchange 
will use to calculate the exercise or final settlement value, as 
applicable, of the applicable volatility index derivative;
    (3) are for option series with strike prices approximating the 
range of series that are later determined to constitute the constituent 
option series for the applicable expiration;
    (4) are for put (call) options with strike prices equal to or less 
(greater) than the ``at-the-money'' strike price; and
    (5) have quantities approximating the weighting formula used to 
determine the exercise or final settlement value, as applicable, in 
accordance with the applicable volatility index methodology.

Non-Strategy Order

    The term ``non-strategy order'' means any order (including an order 
in a constituent option series) a market participant submits for 
participation in the modified opening procedure that is not a strategy 
order (or a change to or cancellation of a strategy order). Examples of 
non-strategy orders include, but are not limited to:
    (1) A buy (sell) order in a constituent options series if an EOI 
disseminated no more than two minutes prior to the time a market 
participant submitted the order included a sell (buy) imbalance and the 
size of the order is no larger than the size of the imbalance in the 
EOI, regardless of whether the market participant previously submitted 
a strategy order or has positions in expiring volatility index 
derivatives; or
    (2) a Market-Maker bid or offer in a constituent option series, as 
set forth in paragraph (e) below.
    (b) Use of Modified Opening Procedure. [All provisions set forth in 
Rule 6.2 remain in effect unless superseded or modified by this 
Interpretation and Policy .01.] On [the dates on which the] exercise 
[and final] settlement value determination days [are calculated for 
options (as determined under Rule 24.9(a)(5) or (6)) or (security) 
futures contracts on a volatility index (i.e., expiration and final 
settlement dates)], the Exchange [utilizes]uses the [modified] opening 
procedure described in Rule 6.2, as modified by this Interpretation and 
Policy .01, for constituent option series[below for all series used to 
calculate the exercise/final settlement value of the volatility index 
for expiring options and (security) futures contracts (these option 
series referred to as ``constituent options'')].
    ([a]c) Strategy Order[s] Cut-Off Time. [All orders for 
participation in the modified opening procedure that are related to 
positions in, or a trading strategy involving, expiring volatility 
index options or (security) futures (``strategy orders'')]Market 
participants must submit strategy orders (which orders must be entered 
into the Exchange by a Trading Permit Holder), and [any] changes to or 
cancellations of [any such]strategy orders, prior to the strategy order 
cut-off time. Market participants[:]
    [(i) must be received prior to the applicable strategy order cut-
off time for the constituent option series (as determined by the 
Exchange on a class-by-class basis), which may be no earlier than 8:00 
a.m. and no later than the opening of trading in the series. The 
Exchange will announce all determinations regarding changes to the 
applicable strategy order cut-off time at least one day prior to 
implementation.
    (ii)] may not [be cancelled or changed]change or cancel strategy 
orders after the strategy order cut-off time, unless the market 
participant submits the change or cancellation:
    (1) [after the applicable strategy order cut-off time, unless the 
strategy order is not executed in the modified opening procedure and 
the cancellation or change is submitted] after the [modified opening 
procedure is concluded]series is open for trading; or
    (2) [(provided that any such strategy order may be changed or 
cancelled after the applicable strategy order cut-off time and] prior 
to the [applicable] non-strategy order cut-off time in order to correct 
a legitimate error, in which case the [Trading Permit Holder]market 
participant submitting the change or cancellation [will]must prepare 
and maintain a memorandum setting forth the circumstances that resulted 
in the change or cancellation and [will file]submit a copy of the 
memorandum [with]to the Exchange no later than the next business day in 
a form and manner prescribed by the Exchange[)].
    The Exchange determines the strategy order cut-off time on a class-
by-class basis, which may be no earlier than 8:00 a.m. Chicago time and 
no later than the opening of trading in a series. The Exchange will 
announce any changes to the strategy order cut-off time at least one 
day prior to implementation.
    [In general, the Exchange will consider orders to be strategy 
orders for purposes of this Rule 6.2.01 if the orders possess the 
following three characteristics:
    (A) The orders are for option series with the expiration that will 
be used to calculate the exercise or final settlement value of the 
applicable volatility index option or futures contract.
    (B) The orders are for option series spanning the full range of 
strike prices for the appropriate expiration for option series that 
will be used to calculate the exercise or final settlement value of the 
applicable volatility index option or futures contract, but not 
necessarily every available strike price.
    (C) The orders are for put options with strike prices less than the 
``at-the-money'' strike price and for call options with strike prices 
greater than the ``at-the-money'' strike price. The orders may also be 
for put and call options with ``at-the-money'' strike prices.
    Whether orders are strategy orders for purposes of this Rule 6.2.01 
depends upon specific facts and circumstances. The Exchange may also 
deem order types other than those provided above as strategy orders if 
the Exchange determines that to be the case based upon the applicable 
facts and circumstances.]
    ([b]d) Non-Strategy Order[s] Cut-Off Time. [All other orders for 
participation in the modified opening procedure (``non-strategy 
orders''), and any change to or cancellation of any such order, must be 
received]Market participants must submit non-strategy orders (which

[[Page 46232]]

orders must be entered into the Exchange by a Trading Permit Holder) 
prior to the [applicable]non-strategy order cut-off time. [(as 
determined by t]The Exchange determines the non-strategy order cut-off 
time on a class-by-class basis[) in order to participate at the opening 
price for the applicable series], which may be no earlier than 8:25 
a.m. and no later than the opening of trading in [the option]a series. 
The Exchange will announce [all determinations regarding]any changes to 
the [applicable] non-strategy order cut-off time at least one day prior 
to implementation.
    ([c]e) Market-Makers. A Market-Maker with an appointment in a class 
with constituent option series may submit bids and offers in those 
series for bona fide market-making purposes in accordance with Rule 8.7 
and the Exchange Act for its market-maker account prior to the open of 
trading for participation in the modified opening procedure. The 
Exchange will deem these bids and offers to be non-strategy orders, and 
will not deem them to be changes to or cancellations of previously 
submitted strategy orders, if:
    (i) the Trading Permit Holder with which the Market-Maker is 
affiliated has established, maintains, and enforces reasonably designed 
written policies and procedures (including information barriers, as 
applicable), taking into consideration the nature of the Trading Permit 
Holder's business and other facts and circumstances, to prevent the 
misuse of material nonpublic information (including the submission of 
strategy orders); and
    (ii) when submitting these bids and offers, the Market-Maker has no 
actual knowledge of any previously submitted strategy orders.
* * * * *
    (b) Not applicable.
    (c) Not applicable.
* * * * *
    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

(a) Purpose
    Cboe Options and Cboe Futures Exchange, LLC (``CFE'') list options 
and futures, respectively, on different volatility indexes that are 
calculated using prices of options traded on Cboe Options.\3\ The 
exercise settlement value for these volatility index derivatives is 
determined on the morning of their expiration date through a special 
opening quotation (``SOQ'') of the volatility index using the opening 
prices of a portfolio of options (for example, the exercise settlement 
value of VIX options and futures uses the opening prices of a portfolio 
of S&P 500 Index options (``SPX options'') that expire approximately 30 
days later). On the days when the exercise settlement values for these 
volatility index derivatives are determined, Cboe Options opens the 
constituent options \4\ for these volatility indexes using the modified 
Hybrid Opening System (``HOSS'') procedure.\5\ The main feature of the 
modified HOSS procedure used to calculate the exercise settlement value 
for expiring volatility index options and (security) futures that 
distinguishes it from the normal opening procedure used on all other 
days is a cutoff time for the entry of strategy orders.\6\ By providing 
market participants with a mechanism to buy and sell constituent 
options at prices used to calculate the exercise settlement value of 
the volatility index derivatives, the volatility index settlement 
process is ``tradable.''
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    \3\ These volatility indexes include the Cboe Volatility Index 
(``VIX'') and the Russell 2000 Volatility Index (``RVX''). Options 
expire on an expiration date and settle to an exercise settlement 
value, and futures settle on a final settlement date to a final 
settlement value. For ease of reference, the Exchange will use the 
options terminology throughout this filing when referring to the 
``expiration/final settlement date'' and ``expiration/final 
settlement value'' for volatility index derivatives.
    \4\ ``Constituent options'' are the series used to calculate the 
exercise/final settlement value of the volatility index for expiring 
options and (security) futures contracts.
    \5\ See Rule 6.2, Interpretation and Policy .01.
    \6\ Currently, strategy orders are defined as all orders 
(defined in Rule 1.1(ooo) as a firm commitment to buy or sell option 
contracts) for participation in the modified opening procedure that 
are related to positions in, or a trading strategy involving, 
volatility index options or (security) futures (as discussed below, 
the proposed rule change is adding ``expiring'' to this definition). 
In general, the Exchange currently considers orders to be strategy 
orders if they are for (a) option series with the expiration that 
will be used to calculate the exercise or final settlement value of 
the applicable volatility index option or futures contract; (b) 
option series spanning the full range of strike prices for the 
appropriate expiration for option series that will be used to 
calculate the exercise or final settlement value of the applicable 
volatility index option or futures contract (not necessarily every 
available strike price); and (c) put options with strike prices at 
or less than the ``at-the-money'' strike price and for call options 
with strike prices greater than or at the ``at-the-money'' strike 
price. Whether orders are strategy orders depends upon specific 
facts and circumstances. The Exchange may also deem order types 
other than those provided above as strategy orders if the Exchange 
determines that to be the case based upon the applicable facts and 
circumstances. The strategy order cut-off time may be no earlier 
than 8:00 a.m. and no later than the opening of trading in the 
series, and is currently 8:20 a.m. Chicago time. See Rule 6.2, 
Interpretation and Policy .01.
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    The volatility index settlement process is patterned after the 
process used to calculate the exercise settlement value of SPX options. 
On the days SPX options expire, S&P calculates an SOQ of the S&P 500 
Index using the opening prices of the component stocks in their primary 
markets. Market participants can replicate the exposure of their 
expiring SPX options by entering orders to buy and sell the component 
stocks of the S&P 500 Index at their opening prices. If they are 
successful, market participants can effectively construct a portfolio 
that matches the value of the SOQ. At this point, the derivatives and 
cash markets converge.
    In a very similar way, the exercise settlement value for volatility 
index derivatives is an SOQ of the volatility index using opening 
prices of the constituent options used to determine the value of the 
index. With respect to VIX, the VIX exercise settlement value is 
calculated using the opening prices of SPX options that expire 
approximately 30 days later. Analogous to the settlement process for 
SPX options, market participants can replicate the exposure of their 
expiring VIX derivatives by entering buy and sell orders in constituent 
SPX options. If they are successful, market participants can 
effectively construct a portfolio of SPX options whose value matches 
the value of the VIX SOQ. By doing so, market participants may make or 
take delivery of the SPX options that will be used to calculate the 
exercise settlement value of their VIX derivatives.
    A tradable settlement creates the opportunity to convert the 
exposure of an expiring VIX derivative into the portfolio of SPX 
options that will be used to calculate the exercise settlement

[[Page 46233]]

value of the expiring contract. Specifically, some market participants 
may desire to maintain the vega, or volatility, risk exposure of 
expiring VIX derivatives. Since VIX derivatives expire 30 days prior to 
the SPX options used to calculate their settlement value, a market 
participant may have a vega risk from its portfolio of index positions 
that the participant wants to continue to hedge after the participant's 
VIX derivatives expire. To continue that vega coverage following 
expiration of a VIX derivative, a market participant may determine to 
trade the portfolio of SPX options used to calculate the exercise 
settlement value of an expiring VIX derivative, since those SPX options 
still have 30 more days to expiration. This trade essentially replaces 
the uncovered vega exposure ``hole'' created by an expiring VIX 
derivative.
    Since the VIX settlement value converges with the value of the 
portfolio of SPX options used to calculate that VIX settlement value, 
trading this SPX option portfolio mitigates settlement risk.\7\ This is 
because, if done properly, the vega exposure obtained in the SPX option 
portfolio will replicate the vega exposure of the expiring VIX 
derivative. Because a market participant is converting vega exposure 
from one instrument (expiring VIX derivative) to another (portfolio of 
SPX options expiring in 30 days), the market participant is likely to 
be indifferent to the settlement price received for the expiring VIX 
derivative. Importantly, trading the next VIX derivative expiration 
(i.e., rolling) will not accomplish the conversion of vega exposure 
since that VIX derivative contract would necessarily cover a different 
period of expected volatility and would be based on an entirely 
different portfolio of SPX options.
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    \7\ In the absence of a tradeable settlement, settlement risk 
refers to the difference between the exercise settlement value of 
the expiring volatility index derivatives and the value of the 
portfolio of the option series used to calculate the exercise 
settlement value. The potential disparity between the exercise 
settlement value for expiring volatility index derivatives and the 
value of the replicating portfolio of constituent options series is 
referred to as ``slippage.'' A tradeable settlement provides 
convergence between the value of the exercise settlement value and 
the value of the portfolio of option series used to calculate the 
exercise settlement value (i.e., eliminates slippage). With respect 
to expiring VIX derivatives, for example, while it is possible to 
construct a replicating portfolio of SPX options, it is highly 
unlikely that traders would be able to trade constituent SPX options 
at prices that would match the final settlement price.
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    To replicate expiring volatility index derivatives on their 
expiration dates with portfolios of constituent options, market 
participants generally submit strategy orders to participate in the 
modified HOSS procedure on exercise settlement value determination 
dates. The Exchange understands that the entry of strategy orders may 
lead to order imbalances in the option series being used to determine 
the exercise settlement value. To the extent (1) market participants 
seeking to replicate an expiring VIX derivative position are on one 
side of the market (e.g., strategy order to buy SPX options) and (2) 
those market participants' orders predominate over other orders during 
the modified HOSS procedure, those trades may contribute to an order 
imbalance prior to the open.
    To provide market participants with time to enter additional orders 
and quotes to offset any such imbalances prior to the opening of these 
series, the Exchange established a strategy order cut-off time.\8\ The 
time period after this cut-off time also permits market participants 
to, among other things, update prices of orders and quotes (except, as 
discussed below, changes to or cancellations of non-strategy orders may 
not be submitted after this cut-off time) in response to changing 
market conditions until the open of trading.\9\ Generally, if a series 
(1) has a market order imbalance, or (2) is at a price that is outside 
the Exchange prescribed opening width (as described in Rule 6.2(d)), 
the series will not open for trading. Prior to the open, the Exchange 
disseminates messages to market participants indicating the expected 
opening price for a series or imbalance information for that series (as 
applicable) to further encourage market participants to enter orders 
and quotes to offset any imbalances and to promote a fair and orderly 
opening.
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    \8\ See Securities Exchange Act Release Nos. 52367 (August 31, 
2005), 70 FR 53401 (September 8, 2005) (SR-CBOE-2004-86) 
(established initially for rapid opening system procedure, which is 
no longer used). The Commission stated it believed that the proposed 
rule change may serve the intended benefits of the strategy order 
cut-off time without imposing an undue burden on market 
participants. Id. at 53402.
    \9\ Pursuant to Rule 6.2, Interpretation and Policy .01(b), the 
Exchange may determine a non-strategy order cut-off time, which may 
be no earlier than 8:25 a.m. and no later than the opening of 
trading. The current non-strategy order cut-off time is the opening 
of trading.
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    The proposed rule change first moves all defined terms in 
Interpretation and Policy .01 to proposed paragraph (a), adds certain 
defined terms, and revises and clarifies existing defined terms as each 
is used in Interpretation and Policy .01. Cboe Options proposes to add 
and modify the following defined terms in Interpretation and Policy .01 
with respect to the modified HOSS procedure:
     Volatility Index Derivatives: The proposed term 
``volatility index derivatives'' means volatility index options listed 
for trading on the Exchange (as determined under Rule 24.9(a)(5) and 
(6)), (security) futures listed for trading on an affiliated designated 
contract market, or over-the-counter (``OTC'') derivatives overlying a 
volatility index whose exercise or final settlement values, as 
applicable, are calculated pursuant to, or by reference to, as 
applicable, the modified opening procedure described in Interpretation 
and Policy .01. The current introductory paragraph to Interpretation 
and Policy .01 states the modified opening procedure is used on the 
dates on which the exercise and final settlement values are calculated 
for options (as determined under Rule 24.9(a)(5) or (6)) or (security) 
futures contracts on a volatility index (i.e., expiration and final 
settlement dates), which is consistent with the proposed definition. 
Additionally, the proposed definition includes OTC derivatives 
overlying a volatility index, as these derivatives often reference the 
exercise settlement value the Exchange determines using the modified 
HOSS procedure.
     Exercise Settlement Value Determination Day: The proposed 
term ``exercise settlement value determination day'' means a day on 
which the Exchange determines the exercise or final settlement value, 
as applicable, of expiring volatility index derivatives. This proposed 
definition is consistent with the current introductory paragraph in 
Interpretation and Policy .01, which refers to the date on which the 
exercise and final settlement values are calculated for options (as 
determined under Rule 24.9(a)(5) or (6)) or (security) futures 
contracts on a volatility index (i.e., expiration and final settlement 
dates) as the dates on which the Exchange uses the modified HOSS 
procedure set forth in Interpretation and Policy .01.
     Constituent Option Series: The proposed term ``constituent 
option series'' means all option series listed on the Exchange that are 
used to calculate the exercise or final settlement value, as 
applicable, of expiring volatility index derivatives. The current 
definition of ``constituent options'' in the current introductory 
paragraph to Interpretation and Policy .01 is all series used to 
calculate the exercise/final settlement value of the volatility index 
for expiring options and (security) futures contracts, which is 
consistent with the proposed definition. The proposed definition makes 
nonsubstantive changes to the definition and incorporates new defined 
terms.

[[Page 46234]]

     Strategy Orders: Pursuant to the proposed rule change, the 
Exchange will deem individual orders (considered collectively) a market 
participant submits for participation in the modified opening procedure 
to be a ``strategy order,'' based on related facts and circumstances 
\10\ considered by the Exchange, only if the orders:
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    \10\ The Exchange will evaluate facts and circumstances to 
determine whether the five criteria are satisfied. For example, the 
Exchange will consider whether orders are for option series with 
strike prices approximating the range of series that are later 
determined to constitute the constituent option series for the 
applicable expiration based on facts and circumstances. Approximate 
range includes not only the beginning and end points of the range, 
but also the population of strikes within the range.
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    [cir] Relate to the market participant's positions in expiring 
volatility index derivatives;
    [cir] are for option series with the expiration that the Exchange 
will use to calculate the exercise or final settlement value, as 
applicable, of the applicable volatility index derivative;
    [cir] are for option series with strike prices approximating the 
range of series that are later determined to constitute the constituent 
option series for the applicable expiration;
    [cir] are for put (call) options with strike prices equal to or 
less (greater) than the ``at-the-money'' strike price; and
    [cir] have quantities approximating the weighting formula used to 
determine the exercise or final settlement value, as applicable, in 
accordance with the applicable volatility index methodology.
    Current paragraph (a) defines strategy orders as all orders for 
participation in the modified opening procedure that are related to 
positions in, or a trading strategy involving, expiring volatility 
index options or (security) futures. The current rule also says, in 
general, the Exchange will consider orders to be strategy orders for 
purposes of Rule 6.2, Interpretation and Policy .01 if the orders 
possess three characteristics:
     The orders are for option series with the expiration that 
will be used to calculate the exercise or final settlement value of the 
applicable volatility index option or futures contract;
     the orders are for option series spanning the full range 
of strike prices for the appropriate expiration for option series that 
will be used to calculate the exercise or final settlement value of the 
applicable volatility index option or futures contract, but not 
necessarily every available strike; and
     the orders are for put options with strike prices less 
than the ``at-the-money'' strike price and for call options with strike 
prices greater than the ``at-the-money'' strike price. The orders may 
also be for put and call options with ``at-the-money'' strike prices. 
The current rule also states whether orders are strategy orders for 
purposes of Rule 6.2, Interpretation and Policy .01 depends upon 
specific facts and circumstances. Currently, the Exchange may also deem 
order types other than those provided above as strategy orders if the 
Exchange determines that to be the case based upon the applicable facts 
and circumstances.
    When the definition of strategy order was adopted, volatility index 
derivatives had only just begun trading. The Exchange believed some 
flexibility within the rules regarding what constituted a strategy 
order was appropriate to permit market participants to submit strategy 
orders in a manner consistent with their businesses. Additionally, 
flexibility within the rule provided the Exchange with the ability to 
gain experience in monitoring trading in these products and evaluating 
the use of strategy orders.\11\ However, the Exchange understands this 
flexibility has created some confusion among market participants 
regarding what orders constitute a strategy order. As a result of this 
confusion, the Exchange understands certain market participants may 
hesitate to submit orders in the modified opening procedure out of 
concern that such orders could be deemed either a new strategy order or 
a modification to or cancellation of an existing strategy order. This 
perceived risk may lead to reduced liquidity and may increase the time 
it takes to open a series at a competitive price.\12\
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    \11\ See note 6.
    \12\ See Rule 6.2(d).
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    The proposed definition of strategy order limits strategy orders to 
strips of orders in constituent options series submitted by a market 
participant that contain the characteristics of orders that would 
replicate the exposure of the market participant's expiring volatility 
index derivatives. This is consistent with how market participants use 
strategy orders, as discussed above, and is also consistent with the 
initial purpose of the strategy order cut-off time.\13\ The rule 
specifies that a group of orders must contain the five specific 
characteristics to be deemed a strategy order. The first characteristic 
in the proposed strategy order definition, which requires orders to be 
related to the market participant's positions in expiring volatility 
index derivatives, is a factor under the current rule for orders to be 
deemed a strategy order.\14\ Similarly, under the current rule, if 
orders possess the second through fourth characteristics in the 
proposed definition of strategy order, the Exchange will generally 
consider those orders to be strategy orders for purposes of Rule 6.2, 
Interpretation and Policy .01.\15\ The fifth characteristic in the 
proposed definition of strategy orders is not listed in the current 
rule as a requirement for orders to be deemed strategy orders. However, 
currently, the Exchange generally looks for orders to be in quantities 
that approximate the weighting formula used in the volatility index 
methodology when determining whether orders are strategy orders. In 
order for groups of orders in constituent options series to replicate 
the vega exposure of related expiring volatility index derivatives, the 
orders in constituent options series would need to possess these 
quantities.
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    \13\ See Securities Exchange act Release No. 52367 (August 31, 
2005), 70 FR 53401 (September 8, 2005) (SR-CBOE-2004-86) (order 
approving modified ROS opening procedure).
    \14\ See current Rule 6.2, Interpretation and Policy .01(a). The 
proposed rule change deletes the concept of being related to a 
trading strategy, as that is a broad term, and ultimately, as 
described in this rule filing, strategy orders relate specifically 
to positions in expiring volatility index derivatives, thus making 
the term ``trading strategy'' unnecessary.
    \15\ See current Rule 6.2, Interpretation and Policy .01(A)-(C). 
The Exchange notes the proposed rule change modifies the 
characteristic in current .01(B) to provide that the orders must 
approximate the range of series that later are determined to 
constitute the constituent option series rather than be for the full 
range. The purpose of this change is to account for the fact that, 
while many market participants can determine what the full range and 
population of strike prices will be, they may not be exact. Bids and 
offers of series may change in response to market conditions between 
the strategy order cut-off time and the opening of trading, which 
may impact which series ultimately constitute the constituent option 
series. For example, with respect to VIX, participants may not have 
certainty prior to the strategy order cut-off time regarding which 
series will have zero-bid prices and thus be excluded from the 
settlement calculation. See VIX methodology at http://www.cboe.com/micro/vix/vix-index-rules-and-methodology.pdf. Additionally, this 
will ensure that market participants cannot purposefully not enter 
an order for one strike within the range to avoid their orders being 
subject to the strategy order cut-off time. As the current rule 
provides the Exchange with significant flexibility to determine what 
constitutes a strategy order, this flexibility is consistent with 
the current rules.
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    The proposed rule change deletes the provision stating that the 
Exchange may also deem order types other than those provided in the 
rule as strategy orders if the Exchange determines it to be the cased 
based upon the applicable facts and circumstances. Ultimately, based on 
the Exchange's experience of monitoring trading in volatility index 
derivatives and the modified opening procedure used on exercise 
settlement value determination days, orders intending to replicate the 
vega of expiring volatility index derivatives (or to liquidate a hedge) 
possess the five specified

[[Page 46235]]

characteristics,\16\ and thus orders intended to be strategy orders 
would possess the proposed characteristics.\17\ The Exchange believes 
the proposed definition provides market participants with more clarity 
with respect to what constitutes strategy orders. The Exchange believes 
this added clarity may increase liquidity on volatility settlement 
dates, as it provides more certainty with respect to which orders they 
need to submit prior to the strategy order cut-off time and which 
orders they may submit after that time.
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    \16\ For example, the VIX methodology describes how a portfolio 
of options may provide a constant exposure to the variance of an 
asset, which is what strategy orders attempt to do. See http://www.cboe.com/micro/vix/vix-index-rules-and-methodology.pdf.
    \17\ As discussed above, the proposed rule retains some 
flexibility pursuant to which the Exchange may consider facts and 
circumstances to determine whether orders possess the five proposed 
criteria for what constitutes a strategy order, and a modification 
of a strategy order.
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     Non-Strategy Orders: The proposed term ``non-strategy 
order'' means any order (including an order in a constituent option 
series) a market participant submits for participation in the modified 
opening procedure that is not a strategy order (or a change to or 
cancellation of a strategy order). Examples of non-strategy orders 
include, but are not limited to:
    [cir] A buy (sell) order in a constituent options series if an 
expected opening information message (``EOI'') \18\ is disseminated no 
more than two minutes prior to the time a market participant submitted 
the order included a sell (buy) imbalance and the size of the order is 
no larger than the size of the imbalance in the EOI, regardless of 
whether the market participant previously submitted a strategy order or 
has positions in expiring volatility index derivatives; or
---------------------------------------------------------------------------

    \18\ See Rule 6.2(a)(ii).
---------------------------------------------------------------------------

    [cir] a Market-Maker bid or offer in a constituent option series, 
as set forth in proposed paragraph (e) (current paragraph (c)).
    As discussed above, the Exchange understands the entry of strategy 
orders may create imbalances in the constituent option series. To 
provide market participants with time to enter additional orders and 
quotes to offset any such imbalances prior to the opening of these 
series, the Exchange established a strategy order cut-off time.\19\ 
Imbalances may prevent a series from opening, such as if it is a market 
order imbalance (as described in Rule 6.2(d)). Prior to the open, the 
Exchange disseminates EOIs to market participants indicating, among 
other things, imbalance information for series to further encourage 
market participants to enter orders to offset any imbalances and 
promote a fair and orderly opening.\20\ However, Rule 6.2 currently 
does not permit market participants that submitted strategy orders 
prior to the cut-off time to submit orders that would address order 
imbalances after the strategy order cut-off time in series used to 
calculate the exercise settlement value.
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    \19\ See Securities Exchange Act Release Nos. 52367 (August 31, 
2005), 70 FR 53401 (September 8, 2005) (SR-CBOE-2004-86) 
(established initially for rapid opening system procedure, which his 
no longer used).
    \20\ See Rule 6.2(a)(ii).
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    However, if a market participant enters a strategy order prior to 
the strategy order cut-off time, the Exchange understands such market 
participant may refrain from entering orders to offset imbalances 
because of the perceived risk that such an order may be deemed to be a 
new strategy order or a change to the existing strategy order, which is 
activity the current rule does not permit. This perceived risk may 
reduce liquidity at the opening on exercise settlement value 
determination days and may increase the risk that some series do not 
open because of an imbalance.\21\
---------------------------------------------------------------------------

    \21\ See Rule 6.2(d).
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    In order to promote a fair and orderly opening process, the 
Exchange seeks to encourage all market participants to enter orders 
following the strategy order cut-off time for the purpose of offsetting 
imbalances in constituent option series until the opening of trading., 
[sic] Accordingly, the Exchange proposes to add to the definition of 
non-strategy orders a buy (sell) order in a constituent options series 
if an EOI disseminated no more than two minutes prior to the time a 
market participant submitted the order included a sell (buy) imbalance 
and the size of the order is no larger than the size of the imbalance 
in the EOI,\22\ regardless of whether the market participant previously 
submitted a strategy order or has positions in expiring volatility 
derivatives.
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    \22\ Currently, EOIs are disseminated every five seconds. 
Therefore, for example, if an EOI disseminated at 8:27:00 indicated 
a sell order imbalance of 500 contracts, a market participant's 
submission of a buy order of 100 contracts at 8:28 would not be a 
strategy order or modification of a previously submitted strategy 
order. The two-minute time period is intended to provide market 
participants with sufficient time to manually enter an order in 
response to an EOI message.
---------------------------------------------------------------------------

    The purpose of permitting market participants to enter orders to 
offset order imbalances is not to permit them to modify strategy 
orders, but rather to encourage them to respond to EOIs that indicate 
an imbalance in a series exists. The Exchange believes explicitly 
permitting market participants to offset order imbalances in response 
to EOIs, as set forth in the proposed definition of non-strategy 
orders, may increase liquidity in series, including in constituent 
option series, which would contribute to a fair and orderly opening in 
those series. The Exchange disseminates these messages for the purpose 
of encouraging submission of orders to address order imbalances. 
Therefore, the Exchange does not believe such orders are ``related to'' 
expiring volatility index derivatives, and thus would not constitute a 
strategy order under the current or proposed definition, as discussed 
above. The Exchange believes the proposed rule change is consistent 
with the definition of strategy order because the proposed rule 
explicitly excludes orders submitted for this imbalance offsetting 
purpose from falling within the strategy order definition.
    The remainder of the proposed definition, including subparagraphs 
(1) and (3), is consistent with the current definition of non-strategy 
orders in current paragraph (b), and just clarifies examples of non-
strategy orders that exist in the current rule. The proposed definition 
also makes nonsubstantive changes and incorporates new defined terms.
    Proposed paragraph (b) provides that, on exercise settlement value 
determination days, the Exchange uses the opening procedure described 
in Rule 6.2, as modified by Interpretation and Policy .01, for 
constituent option series. This clarifies that the opening procedure 
the Exchange uses for constituent option series on exercise settlement 
value determination days is the same as the opening procedure used for 
all option series on all other days, except as set forth in 
Interpretation and Policy .01. This proposed provision is consistent 
with the current introductory paragraph, and makes nonsubstantive 
changes and incorporates new defined terms.
    Proposed paragraph (c) states market participants must submit 
strategy orders, and changes to or cancellations of strategy orders, 
prior to the strategy order cut-off time (which the Exchange has 
currently set as 8:20 a.m. Chicago time). Market participants may not 
change or cancel strategy orders after the strategy order cut-off time, 
unless the market participant submits the change or cancellation (1) 
after the modified opening procedure is concluded; or (2) to correct a 
legitimate error, in which case the market participant submitting the 
change or cancellation must prepare and maintain a memorandum setting 
forth the

[[Page 46236]]

circumstances that resulted in the change or cancellation and submit a 
copy of the memorandum to the Exchange no later than the next business 
day in a form and manner prescribed by the Exchange. The Exchange 
determines the strategy order cut-off time on a class-by-class basis, 
which may be no earlier than 8:00 a.m. Chicago time and no later than 
the opening of trading in a series. The Exchange has currently set the 
strategy order cut-off time as 8:20 a.m. Chicago time. The Exchange 
will announce any changes to the strategy order cut-off time at least 
one day prior to implementation. Proposed paragraph (c) is 
substantively the same as information in current paragraph (a), and 
makes nonsubstantive changes and incorporates defined terms. Proposed 
paragraph (c) also excludes the description of what constitutes a 
strategy order, which was included in current paragraph (a) and has 
been moved to proposed paragraph (a) as a defined term, as discussed 
above.
    Proposed paragraph (d) states market participants must submit non-
strategy orders prior to the non-strategy order cut-off time. The 
Exchange determines the non-strategy order cut-off time on a class-by-
class basis, and it may be no earlier than 8:25 a.m. Chicago time and 
no later than the opening of trading in a series. The Exchange has 
currently set the non-strategy order cut-off time to be the opening of 
trading. The Exchange will announce any changes to the non-strategy 
order cut-off time at least one day prior to implementation. Proposed 
paragraph (d) is substantively the same as current paragraph (b), and 
makes nonsubstantive changes and incorporates defined terms. Proposed 
paragraph (d) also excludes the description of what constitutes a non-
strategy order, which is currently included in current paragraph (a) 
and has been moved to proposed paragraph (a) as a defined term, as 
discussed above.
    The proposed rule change makes additional nonsubstantive changes, 
including revising the heading for Interpretation and Policy .01 and 
updating the paragraph lettering.
    The Exchange notes the proposed rule change would not impact a 
Trading Permit Holder's requirements to abide by Exchange Rules 4.1 
(Just and Equitable Principles of Trade), 4.7 (Manipulation), and 4.18 
(Prevention of the Misuse of Material, Nonpublic Information). The 
Exchange believes the proposed rule change may contribute to additional 
liquidity during the modified HOSS procedure, and thus a fair and 
orderly opening on exercise settlement value determination days. A fair 
and orderly opening in these series benefits all market participants 
who trade in the volatility index derivatives and the constituent 
series. The Exchange will continue to conduct surveillance procedures 
to monitor trading in the constituent option series, including but not 
limited to compliance with the strategy order cut-off time (in 
accordance with the proposed rule change).
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.\23\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \24\ 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) \25\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(5).
    \25\ Id.
---------------------------------------------------------------------------

    In particular, the proposed definition of a strategy order provides 
market participants with additional clarity regarding what orders 
constitute strategy orders, and the Exchange believes this added 
clarity benefits investors and promotes just and equitable principles 
of trades. The proposed rule change with respect to the definition of 
strategy orders is consistent with the current definition of strategy 
orders and the Exchange's view of what orders constitute a strategy 
order, as well as the legitimate purposes of strategy orders, because 
orders submitted for the purposes of constituting a strategy order 
generally possess the five specified characteristics (four of which are 
in current Rule 6.2, Interpretation and Policy .01(a)).
    Additionally, the proposed definition of non-strategy order 
provides market participants with additional clarity regarding orders 
that do not constitute strategy orders (and thus that may be submitted 
after the strategy-order cut-off time and prior to the non-strategy 
order cut-off time). The Exchange believes explicitly permitting market 
participants to enter orders to offset order imbalances in response to 
EOIs that indicate an imbalance in a series exists will encourage entry 
of orders when there is an imbalance in a series, even if market 
participants previously submitted strategy orders. This proposed rule 
change allows the maximum number of participants to address order 
imbalances during the opening process for the constituent option series 
while executing their investment and hedging strategies. The Exchange 
believes these changes may increase liquidity in series, including in 
constituent option series, to offset imbalances. This result would 
contribute to a fair and orderly opening process and would benefit all 
market participants who trade in the volatility index derivatives or 
the constituent option series. The Exchange also believes these changes 
are consistent with the original purpose of the strategy order cut-off 
time. The Exchange believes this additional clarity with respect to 
what is and is not a strategy order will provide market participants 
with more certainty with respect to which orders constitute strategy 
orders, and thus which orders need to be submitted prior to the 
strategy order cut-off time. It also clarifies for market participants 
the activity in which they may engage after the strategy order cut-off 
time. The Exchange believes the proposed reorganization of 
Interpretation and Policy .01, including defining all relevant terms at 
the beginning of Interpretation and Policy .01, also benefits market 
participants by providing additional clarity with respect to all 
defined terms for the modified HOSS procedure.
    The Exchange notes the proposed rule change would not impact a 
Trading Permit Holder's requirements to abide by Exchange Rules 4.1 
(Just and Equitable Principles of Trade), 4.7 (Manipulation), and 4.18 
(Prevention of the Misuse of Material, Nonpublic Information). The 
Exchange believes the proposed rule change may contribute to additional 
liquidity during the modified HOSS procedure, and thus to a fair and 
orderly opening in constituent option series on exercise settlement 
value determination days. A fair and orderly opening in these series 
benefits all market participants who trade in the volatility index 
derivatives and the

[[Page 46237]]

constituent series. The Exchange will continue to conduct surveillance 
procedures to monitor trading in the constituent option series, 
including but not limited to compliance with the strategy order cut-off 
time (in accordance with the proposed rule change).

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 proposed rule change 
applies in the same manner to all market participants who submit orders 
to the Exchange in constituent option series on exercise settlement 
value determination days. The proposed rule change, and the proposed 
definition of strategy order in particular, provides market 
participants with clarity for market participants with respect to what 
constitutes a strategy order and is generally consistent with the 
current rules and the Exchange's view of what orders constitute a 
strategy order. Additionally, the proposed definition of non-strategy 
order, particularly the explicit permission to enter orders in response 
to EOIs that indicate an imbalance in a series, is consistent with the 
original intent of the strategy order cut-off time.\26\ The proposed 
rule change has no impact on intermarket competition, as it applies to 
orders submitted for participation in the Exchange's modified opening 
procedure used to calculate settlement values for expiring volatility 
index derivatives. The Exchange believes the proposed rule change 
provides market participants with more certainty with respect to which 
orders they need to submit prior to the strategy order cut-off time and 
which orders they may be submit after that time, which may increase 
liquidity in constituent option series on volatility settlement dates.
---------------------------------------------------------------------------

    \26\ See supra note 8.
---------------------------------------------------------------------------

    Cboe Options believes that the proposed rule change will relieve 
any burden on, or otherwise promote, competition. The Exchange believes 
the proposed rule change may contribute to liquidity in constituent 
option series during the modified HOSS procedure, and thus a fair and 
orderly opening on exercise settlement value determination days. A fair 
and orderly opening in these series benefits all market participants 
who trade in the volatility index derivatives and the constituent 
option series.

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-2018-062 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-2018-062. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2018-062 and should be submitted on 
or before October 3, 2018.
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    \27\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-19773 Filed 9-11-18; 8:45 am]
 BILLING CODE 8011-01-P


