[Federal Register Volume 83, Number 210 (Tuesday, October 30, 2018)]
[Notices]
[Pages 54635-54641]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-23624]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84480; File No. SR-CboeBZX-2018-066]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Permit the Listing and Trading of 
P.M.-Settled Series on Certain Broad-Based Index Options on a Pilot 
Basis

October 24, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 11, 2018, Cboe BZX Exchange, Inc. filed with the 
Securities and Exchange Commission (the ``Commission'' or ``SEC'') 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 BZX Exchange, Inc. (the ``Exchange'' or ``BZX Options'') 
proposes to permit the listing and trading of P.M.-settled series on 
certain broad-based index options on a pilot basis.
    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

[[Page 54636]]

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The proposed rule change permits the listing and trading of P.M.-
settled series on certain broad-based index options on a pilot 
basis.\3\ First, the proposed rule change would permit the listing and 
trading of XSP options with third-Friday-of-the-month expiration dates, 
whose exercise settlement value will be based on the closing index 
value on the expiration day (``P.M.-settled'') for an initial period of 
twelve months (the ``XSPPM Pilot Program'') from the date of approval 
of this proposed rule change. Second, the proposed rule change would 
permit the listing and trading of P.M.-settled options on broad-based 
indexes with weekly expirations (``Weeklys'') and end-of-month 
expirations (``EOMs'') for an initial period of 12 months (the 
``Nonstandard Expirations Pilot Program'') from the date of approval of 
this proposed rule change.
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    \3\ The Exchange is authorized to list for trading options that 
overlie the Mini-SPX Index (``XSP'') and the Russell 2000 Index 
(``RUT''). See Rule 29.11(a).
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XSPPM Pilot Program
    Proposed Rule 29.11(a)(6) permits the listing and trading, in 
addition to A.M.-settled XSP options, of P.M.-settled XSP options with 
third-Friday-of-the-month expiration dates on a pilot basis for an 
initial period of 12 months from the date of approval of this proposed 
rule change. XSP options are A.M.-settled pursuant to the generic 
listing criteria in Rule 29.11(a)(5). The Exchange believes permitting 
the trading of XSP options on a P.M.-settled basis will encourage 
greater trading in XSP options.
    Other than settlement and closing time on the last trading day (as 
discussed below), contract terms for P.M.-settled XSP options will be 
the same as the A.M.-settled XSP options. The proposed contract would 
use a $100 multiplier. The minimum trading increments, strike price 
intervals, and expirations would be the same as the A.M.-settled XSP 
option series. P.M.-settled XSP options would have European-style 
exercise. The Exchange will also have flexibility to open for trading 
additional series in response to customer demand.
    The proposed rule change amends Rule 29.10(a) to state that, on 
their last trading day, transactions in P.M.-settled XSP options may be 
effected on the Exchange between the hours of 9:30 a.m. and 4:00 p.m. 
Eastern time (as opposed to the normal trading hours for non-expiring 
P.M.-settled XSP options, which are from 9:30 a.m. to 4:15 p.m. Eastern 
time). XSP options are typically priced in the market based on 
corresponding futures values. The primary listing markets for the 
component securities that comprise the S&P 500 Index close trading in 
those securities at 4:00 p.m. The primary listing exchanges for the 
component securities disseminate closing prices of the component 
securities, which are used to calculate the exercise settlement value 
of the S&P 500 Index. The Exchange believes that, under normal trading 
circumstances, the primary listing markets have sufficient bandwidth to 
prevent any data queuing that would cause any trades that are executed 
prior to the closing time from being reported after 4:00 p.m. Despite 
the fact that the exercise settlement value will be fixed at or soon 
after 4:00 p.m., if the Exchange did not close trading in expiring 
P.M.-settled XSP options at 4:00 p.m. on their last trading day, 
trading in expiring P.M.-settled XSP options would continue for an 
additional fifteen minutes until 4:15 p.m. and would not be able to be 
priced on corresponding futures values, but rather the known cash 
value. At the same time, the prices of non-expiring P.M.-settled XSP 
option series would continue to move and be priced in response to 
changes in corresponding futures prices.
    A potential pricing divergence could occur between 4:00 p.m. and 
4:15 p.m. on the final trading day in expiring P.M.-settled XSP options 
(e.g. switch from pricing off of futures to cash). Further, the switch 
from pricing off of futures to cash can be a difficult and risky 
switchover for liquidity providers. As a result, without closing 
expiring contracts at 4:00 p.m., it is foreseeable that Market-Makers 
could react by widening spreads in order to compensate for the 
additional risk. Therefore, the Exchange believes that, in order to 
mitigate potential investor confusion and the potential for increased 
costs to investors, it is appropriate to cease trading in the expiring 
P.M.-settled XSP contracts at 4:00 p.m. The Exchange does not believe 
the proposed change will impact volatility on the underlying cash 
market at the close on third Fridays. Further, other options exchanges 
close trading in certain options on the last trading day for certain 
classes.\4\
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    \4\ See Cboe Options Rule 24.6, Interpretations and Policies .01 
(options with Quarterly Index Expirations), .03 (Cboe S&P 500 A.M./
P.M. Basis options), .04 (P.M.-settled SPX options with third 
Friday-of-the-month expiration and P.M.-settled XSP options), and 
.05 (MSCI EAFE Index options).
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    If the Exchange were to propose an extension of the XSPPM Pilot 
Program or should the Exchange propose to make the XSPPM Pilot Program 
permanent, the Exchange would submit a filing proposing such amendments 
to the XSPPM Pilot Program. Further, any positions established under 
the XSPPM Pilot Program would not be impacted by the expiration of the 
XSPPM Pilot Program. For example, if the Exchange lists a P.M.-settled 
XSP option that expires after the XSPPM Pilot Program expires (and is 
not extended), then those positions would continue to exist. If the 
pilot were not extended, then the positions could continue to exist. 
However, any further trading in those series would be restricted to 
transactions where at least one side of the trade is a closing 
transaction.
    As part of the XSPPM Pilot Program, the Exchange will submit a 
pilot report to the Commission at least two months prior to the 
expiration date of the pilot. This annual report will contain an 
analysis of volume, open interest, and trading patterns. The analysis 
would examine trading in the proposed option product as well as trading 
in the securities that comprise the S&P 500 Index. In addition, for 
series that exceed certain minimum open interest parameters, the annual 
report will provide analysis of index price volatility and, if needed, 
share trading activity.
    The annual report will contain the following volume and open 
interest data:
    (1) Monthly volume aggregated for all trades;
    (2) monthly volume aggregated by expiration date;
    (3) monthly volume for each individual series;
    (4) month-end open interest aggregated for all series;
    (5) month-end open interest aggregated by expiration date; and
    (6) month-end open interest for each individual series.
    The annual report will also contain the information noted above for 
expiration Friday A.M.-settled XSP option series, if applicable, for 
the period covered in the annual report. In addition to the annual 
report, the Exchange will provide the Commission with interim reports 
of the information listed in (1) through (6) above.

[[Page 54637]]

    In the annual report, the annual report would contain the following 
analysis of trading patterns in expiration Friday, P.M.-settled XSP 
option series in the XSPPM Pilot Program:
    (1) A time series analysis of open interest; and
    (2) an analysis of the distribution of trade sizes.
    Also, for series that exceed certain minimum parameters, the annual 
report will also contain the following analysis related to index price 
changes and, if needed, underlying share trading volume at the close on 
expiration Fridays:
    (1) A comparison of index price changes at the close of trading on 
a given expiration Friday with comparable price changes from a control 
sample. The data will include a calculation of percentage price changes 
for various time intervals and compare that information to the 
respective control sample. Raw percentage price change data as well as 
percentage price change data normalized for prevailing market 
volatility, as measured by an appropriate index as agreed by the 
Commission and the Exchange, would be provided; and
    (2) a calculation of share volume for a sample set of the component 
securities representing an upper limit on share trading that could be 
attributable to expiring in-the-money series. The data, if needed, will 
include a comparison of the calculated share volume for securities in 
the sample set to the average daily trading volumes of those securities 
over a sample period.
    The minimum open interest parameters, control sample, time 
intervals, method for randomly selecting the component securities, and 
sample periods would be determined by the Exchange and the Commission.
    Additionally, the Exchange will provide the Commission with any 
additional data or analyses the Commission requests because it deems 
such data or analyses necessary to determine whether the XSPPM Pilot 
Program is consistent with the Exchange Act. The Exchange will make 
public all data and analyses it submits to the Commission under the 
XSPPM Pilot Program.
    Other exchanges currently have pilots that permit P.M.-settled 
index options.\5\
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    \5\ See Cboe Options Rule 24.9, Interpretation and Policy .14 
and Phlx Rule 1101A, Commentary .05.
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Nonstandard Expirations Pilot Program
    The proposed rule change permits the listing and trading, on a 
pilot basis, of P.M.-settled options on broad-based indexes with 
nonstandard expiration dates for an initial period of 12 months from 
the date of approval of this proposed rule change. The Nonstandard 
Expirations Pilot Program will permit both Weeklys and EOMs as 
discussed below. Contract terms for the Weekly and EOM expirations will 
be similar to those of the A.M.-settled broad-based index options, 
except that the Weekly and EOM expirations will be P.M.-settled.
    Proposed Rule 29.11(j)(1) permits the Exchange to open for trading 
Weeklys on any broad-based index eligible for standard options trading 
to expire on any Monday, Wednesday, or Friday (other than the third 
Friday-of-the-month or days that coincide with an EOM). Weeklys will be 
subject to all provisions of Rule 29.11 and will be treated the same as 
options on the same underlying index that expire on the third Friday of 
the expiration month. However, Weeklys will be P.M.-settled, and new 
Weekly series may be added up to and including on the expiration date 
for an expiring Weekly.
    The maximum number of expirations that may be listed for each 
Weekly (i.e., a Monday expiration, a Wednesday expiration, or Friday 
expiration, as applicable) in a given class will be the same as the 
maximum number of expirations permitted in Rule 29.11(a)(3) for 
standard options on the same broad-based index.\6\ Weeklys would not 
need to be for consecutive Monday, Wednesday, or Friday expirations, as 
applicable. However, the expiration date of a non-consecutive 
expiration would not be permitted beyond what would be considered the 
last expiration date if the maximum number of expirations were listed 
consecutively. Weeklys that are first listed in a given class could 
expire up to four weeks from the actual listing date. If the last 
trading day of a month is a Monday, Wednesday, or Friday and the 
Exchange lists EOMs and Weeklys, as applicable, in a given class, the 
Exchange will list an EOM instead of a Weekly in the given class. Other 
expirations in the same class are not counted as part of the maximum 
number of Weeklys for a broad-based index class. If the Exchange is not 
open for business on a respective Monday, the normally Monday expiring 
Weeklys would 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 will expire on the previous 
business day.
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    \6\ Pursuant to Rule 29.11(a)(3), the Exchange may list up to 
six expiration months at any one time. Therefore, pursuant to the 
proposed rule change, the Exchange may list a maximum of six Weekly 
expirations under the Nonstandard Expirations Pilot Program.
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    Proposed Rule 29.11(a)(2) [sic] permits the Exchange to open for 
trading EOMs on any broad-based index eligible for standard options 
trading to expire on the last trading day of the month. EOMs will be 
subject to all provisions of Rule 29.11 and treated the same as options 
on the same underlying index that expire on the third Friday of the 
expiration month. However, EOMs will be P.M.-settled, and new series of 
EOMs may be added up to and including on the expiration date for an 
expiring EOM.
    The maximum number of expirations that may be listed for EOMs in a 
given class is the same as the maximum number of expirations permitted 
in Rule 29.11(a)(3) for standard options on the same broad-based 
index.\7\ EOMs need not be for consecutive end-of-month expirations. 
However, the expiration date of a non-consecutive expiration may not be 
beyond what would be considered the last expiration date if the maximum 
number of expirations were listed consecutively. EOMs that are first 
listed in a given class may expire up to four weeks from the actual 
listing date. Other expirations in the same class are not counted as 
part of the maximum number of EOMs for a broad-based index class.
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    \7\ Id.
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    The proposed rule change amends Rule 29.11(c)(5)(C) to provide that 
the lowest strike interval for series of XSP options listed under the 
Nonstandard Expirations Pilot Program will be $0.50. With respect to 
XSP, this is consistent with the minimum strike interval for XSP 
options listed under the Short Term Series Program.\8\ Additionally, 
this is consistent with the minimum strike interval for options on the 
Standard & Poor's Depository Receipts Trust (SPY), which is an ETF that 
like XSP tracks the performance of 1/10th the value of the S&P 500 
Index, with weekly expirations.\9\
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    \8\ See Rule 29.11(c)(5)(C).
    \9\ See Rule 19.6, Interpretation and Policy .05(f).
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    Weeklys and EOMs will be subject to the same rules that currently 
govern the trading of standard monthly broad-based index options, 
including sales practice rules, margin requirements, and floor trading 
procedures. Contract terms for Weeklys and EOMs will be the same as 
those for standard monthly broad-based index options. Since Weeklys and 
EOMs will be new types of series, and not a new class, the Exchange 
proposes that Weeklys and EOMs will be aggregated for any applicable 
reporting

[[Page 54638]]

and other requirements.\10\ Pursuant to new proposed Rule 29.11(j)(4), 
transactions in expiring Weeklys and EOMs may be effected on the 
Exchange between the hours of 9:30 a.m. and 4:00 p.m. (Eastern time).
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    \10\ Rule 29.5(a) requires Options Members to comply with the 
applicable rules of Cboe Options with respect to position limits for 
broad-based index options for options traded on Cboe Options. Cboe 
Options Rule 24.4, Interpretation and Policy .03 sets forth the 
reporting requirements for certain market indexes that do not have 
position limits, including XSP and RUT, and would apply to XSP and 
RUT options traded on the Exchange pursuant to Rule 29.5(a); see 
also Cboe Options Rule 24.4(b), which provides that Weeklys and EOMs 
will be aggregated with option contracts on the same broad-based 
index and will be subject to the overall position limit, and would 
apply to Weeklys/EOMs traded on the Exchange pursuant to Rule 
29.5(a). The Exchange notes that the proposed aggregation is 
consistent with the aggregation requirements or other types of 
option series (e.g., quarterly expiring options) that may be listed 
on the Exchange and that do not expire on the customary ``third 
Friday'' (see Cboe Options Rule 24.4(e)).
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    As stated above, this proposed rule change establishes a 
Nonstandard Expirations Pilot Program for broad-based index options on 
a pilot basis, for an initial period of 12 months from the date of 
approval of this proposed rule change. If the Exchange were to propose 
an extension of the Nonstandard Expirations Pilot Program or should the 
Exchange propose to make it permanent, the Exchange would submit a 
filing proposing such amendments. Further, any positions established 
under the Nonstandard Expirations Pilot Program would not be impacted 
by the expiration of the pilot. For example, if the Exchange lists a 
Weekly or EOM that expires after the Nonstandard Expirations Pilot 
Program expires (and is not extended), then those positions would 
continue to exist. However, any further trading in those series would 
be restricted to transactions where at least one side of the trade is a 
closing transaction.
    As part of the Nonstandard Expirations Pilot Program, the Exchange 
will submit a pilot report to the Commission at least two months prior 
to the expiration date of the pilot (the ``annual report''). The annual 
report will contain an analysis of volume, open interest, and trading 
patterns. In addition, for series that exceed certain minimum open 
interest parameters, the annual report will provide analysis of the 
index price volatility, and, if needed, share trading activity.
    For all Weekly and EOM series, the annual report will contain the 
following volume and open interest data for each broad-based index 
overlying Weekly and EOM options:
    (1) Monthly volume aggregated for all Weekly and EOM series;
    (2) Volume in Weekly and EOM series aggregated by expiration date;
    (3) Month-end open interest aggregated for all Weekly and EOM 
series;
    (4) Month-end open interest for EOM series aggregated by expiration 
date and open interest for Weekly series aggregated by expiration date;
    (5) Ratio of monthly aggregate volume in Weekly and EOM series to 
total monthly class volume; and
    (6) Ratio of month-end open interest in EOM series to total month-
end class open interest and ratio of open interest in each Weekly 
series to total class open interest.
    In addition, the annual report will contain the information noted 
above for standard expiration Friday, A.M.-settled series, if 
applicable, for the period covered in the annual report as well as for 
the six-month period prior to the initiation of the pilot.
    Upon request by the SEC, the Exchange will provide a data file 
containing:
    (1) Weekly and EOM option volume data aggregated by series, and
    (2) Weekly open interest for each expiring series and EOM month-end 
open interest for expiring series.
    In the annual report, the Exchange also proposes to identify Weekly 
and EOM trading patterns by undertaking a time series analysis of open 
interest in Weekly and EOM series aggregated by expiration date 
compared to open interest in near-term standard expiration Friday A.M.-
settled series in order to determine whether users are shifting 
positions from standard series to Weekly and EOM series. In addition, 
to the extent that data on other weekly or monthly P.M.-settled 
products from other exchanges is publicly available, the report will 
also compare open interest with these options in order to determine 
whether users are shifting positions from other weekly or monthly P.M.-
settled products to the Weekly and EOM series. Declining open interest 
in standard series or the weekly or monthly P.M.-settled products of 
other exchanges accompanied by rising open interest in Weekly and EOM 
series would suggest that users are shifting positions.
    For each Weekly and EOM expiration that has open interest that 
exceeds certain minimum thresholds, the annual report will contain the 
following analysis related to index price changes and, if needed, 
underlying share trading volume at the close on expiration dates:
    (1) A comparison of index price changes at the close of trading on 
a given expiration date with comparable price changes from a control 
sample. The data will include a calculation of percentage price changes 
for various time intervals and compare that information to the 
respective control sample. Raw percentage price change data as well as 
percentage price change data normalized for prevailing market 
volatility, as measured by an appropriate index agreed to by the 
Commission and the Exchange, will be provided; and
    (2) If needed, a calculation of share volume for a sample set of 
the component securities representing an upper limit on share trading 
that could be attributable to expiring in-the-money Weekly and EOM 
series. The data, if needed, will include a comparison of the 
calculated share volume for securities in the sample set to the average 
daily trading volumes of those securities over a sample period.
    The minimum open interest parameters, control sample, time 
intervals, method for selecting the component securities, and sample 
periods will be determined by the Exchange and the Commission.
    Additionally, the Exchange will provide the Commission with any 
additional data or analyses the Commission requests because it deems 
such data or analyses necessary to determine whether the Nonstandard 
Expirations Pilot Program is consistent with the Exchange Act. The 
Exchange will make public all data and analyses it submits to the 
Commission under the Nonstandard Expirations Pilot Program. Other 
exchanges currently have pilots that have weekly and end-of-month 
expirations.\11\
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    \11\ See Cboe Options Rule 24.9(e); and Phlx Rule 1101A(b)(vii).
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Additional Information
    Precedent exists for P.M.-settled broad-based index options, as 
other options exchanges list P.M.-settled broad-based index 
options.\12\ The Exchange does not believe that any market disruptions 
will be encountered with the introduction of listing P.M.-settled 
options on the Exchange. The Exchange will monitor for any such 
disruptions or the development of any factors that would cause such 
disruptions.
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    \12\ See, e.g., Cboe Options Rule 24.9(a)(4) (OEX not listed as 
A.M.-settled) and Interpretation and Policy .14 (permits listing of 
P.M.-settled SPX and XSP options); and PHLX Rule 1101A, Commentary 
.05 (permits listing of P.M.-settled NDX options).
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    The Exchange notes that P.M.-settled options predominate in the 
over-the-counter (``OTC'') market, and the Exchange is not aware of any 
adverse effects in the stock market attributable to the P.M.-settlement 
feature. The

[[Page 54639]]

Exchange is merely proposing to offer a P.M.-settled product in an 
exchange environment that offers the benefit of added transparency, 
price discovery, and stability. In response to any potential concerns 
that disruptive trading conduct could occur as a result of the 
concurrent listing and trading of two index option products based on 
the same index but for which different settlement methodologies exist 
(i.e., one is A.M.-settled and one is P.M.-settled), the Exchange notes 
that Cboe Options lists and trades both A.M.-settled and P.M.-settled 
SPX options, and Phlx lists and trades both A.M.-settled and P.M.-
settled NDX options. The Exchange is not aware of any market 
disruptions occurring as a result of these exchanges offering both 
products.
    The adoption of P.M.-settled options on an exchange that lists 
A.M.-settled options in the same class would provide greater spread 
opportunities. This manner of trading in different products allows a 
market participant to take advantage of the different expiration times, 
providing expanded trading opportunities. In the options market 
currently, market participants regularly trade similar or related 
products in conjunction with each other, which contributes to overall 
market liquidity.
    The Exchange represents it has an adequate surveillance program in 
place for index options. The Exchange is a member of the Intermarket 
Surveillance Group (``ISG''), which is comprised of an international 
group of exchanges, market centers, and market regulators. The purpose 
of ISG is to provide a framework for the sharing of information and the 
coordination of regulatory efforts among exchanges trading securities 
and related products to address potential intermarket manipulations and 
trading abuses. ISG plays a crucial role in information sharing among 
markets that trade securities, options on securities, security futures 
products, and futures and options on broad-based security indexes. A 
list of identifying current ISG members is available at https://www.isgportal.org/isgPortal/public/members.htm.
    The Exchange has analyzed its capacity and represents that it 
believes the Exchange and OPRA have the necessary systems capacity to 
handle the additional traffic associated with the listing of P.M.-
settled XSP and Weekly/EOM option series up to the proposed number of 
possible expirations and strike prices. The Exchange believes any 
additional traffic that would be generated from the introduction of 
P.M.-settled XSP and Weekly/EOM options series will be manageable. The 
Exchange believes its Members will not have a capacity issue as a 
result of this proposed rule change. The Exchange also represents that 
it does not believe this expansion will cause fragmentation of 
liquidity. The Exchange will monitor the trading volume associated with 
the additional options series listed as a result of this proposed rule 
change and the effect (if any) of these additional series on market 
fragmentation and on the capacity of the Exchange's automated systems.
    P.M.-settled options would be subject to all provisions of Rule 
29.11. P.M.-settled options would be subject to the same rules that 
govern the trading of A.M.-settled options overlying the same indexes, 
including sales practice rules, margin requirements, and floor trading 
procedures. P.M.-settled options will be subject to the margin 
requirements set forth in Chapter 28 and the position limits set forth 
in Rule 29.5. Chapter 28 imposes the margin requirements of either Cboe 
Options or the New York Stock Exchange on Exchange Options Members. 
Similarly, Rule 29.5 imposes position (and exercise) limits for broad-
based index options of Cboe Options on Exchange Options Members. Since 
P.M.-settled options will be a new type of series, and not a new class, 
the Exchange proposes that the P.M.-settled options will be aggregated 
for any applicable reporting and other requirements.\13\ Currently, 
there are no position limits on RUT and XSP options.\14\ Therefore, 
there will be no position limits on P.M.-settled RUT and XSP options. 
P.M.-settled XSP options and Weekly/EOM broad-based index options are 
currently authorized for listing on Cboe Options,\15\ and thus the same 
margin requirements and position and exercise limits that apply to 
these products as listed and traded on Cboe Options will apply to these 
products when listed and traded on the Exchange. The proposed rule 
change will also result in similar regulatory treatment for similar 
option products.
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    \13\ See Rule 29.5(a), which requires Options Members to comply 
with the applicable rules of Cboe Options with respect to position 
limits for broad-based index options for options traded on Cboe 
Options. Cboe Options Rule 24.4(b), which applies to index options 
traded on the Exchange pursuant to Rule 29.5(a), provides that 
Nonstandard Expirations will be aggregated with option contracts on 
the same broad-based index and subject to the overall position 
limit. Additionally, Cboe Options Rule 24.4(d), which applies to 
index options traded on the Exchange pursuant to Rule 29.5(a), 
positions in reduced-value index options will be aggregated with 
positions in full-value indices. The Exchange notes that the 
proposed aggregation is consistent with the aggregation requirements 
for other types of option series (e.g. quarterly expiring options) 
that are listed on the Exchange and that do not expire on the 
customary ``third Friday.'' See Cboe Options Rule 24.4 (which 
applies to the Exchange pursuant to Rule 29.5(a)).
    \14\ See Cboe Options Rule 24.4(a) (which applies to the 
Exchange pursuant to Rule 29.5(a)).
    \15\ Similarly, pursuant to Cboe Options Chapter 12, Cboe 
Options Trading Permit Holders may request to have New York Stock 
Exchange margin requirements apply to their trading.
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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.\16\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \17\ 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.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes the proposed rule change will attract order 
flow to the Exchange, increase the variety of listed options to 
investors, and provide a valuable hedge tool to investors. The Exchange 
believes the proposed rule change will also remove impediments to and 
perfect the mechanism of a free and open market, and in general protect 
investors by expanding the ability of investors to hedge risks against 
market movements stemming from economic releases or market events that 
occur during the month and at the end of the month. Accordingly, the 
Exchange believes that P.M.-settled options will create greater trading 
and hedging opportunities and flexibility, and provide customers with 
the ability to more closely tailor their investment objectives.
    The Commission has previously stated that when cash-settled index 
options were first introduced in the 1980s, they generally utilized 
closing-price settlement procedures (i.e., P.M. settlement). The 
Commission stated it became concerned about the impact of P.M. 
settlement on cash-settled index options on the markets for the 
underlying stocks at the close on expiration Fridays, especially during 
the quarterly expirations of the third Friday of March, June, 
September, and December when options, index futures,

[[Page 54640]]

and options on index futures all expire simultaneously. The Commission 
expressed concerns that P.M. settlement was believed to have 
contributed to above-average volume and added market volatility on 
those days, which sometimes led to sharp price movements during the 
last hour of trading, as a consequence of which the close of trading on 
the quarterly expiration Friday became known as the ``triple witching 
hour.'' The Commission observed that besides contributing to investor 
anxiety, heightened volatility during the expiration periods created 
the opportunity for manipulation and other abusive trading practices in 
anticipation of the liquidity constraints.\18\
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    \18\ See Securities Exchange Act Release No. 65256 (September 2, 
2011), 76 FR 55569 (September 9, 2011) (SR-C2-2011-008) (order 
approving listing of SPXPM options on C2); see also Securities 
Exchange Act Release No. 81293 (August 2, 2017), 82 FR 151 (August 
8, 2017) (SR-Phlx-2017-04) (or approving listing of NDXPM options on 
Phlx).
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    However, the Exchange believes that the above concerns that have 
led to the transition to A.M. settlement for index derivatives have 
been largely mitigated. It believes that expiration pressure in the 
underlying cash markets at the close has been greatly reduced with the 
advent of multiple primary listing and unlisted trading privilege 
markets, and that trading is now widely dispersed among many market 
centers. Additionally, the Exchange notes that opening procedures in 
the 1990s were deemed acceptable to mitigate one-sided order flow 
driven by index option expiration and that the New York Stock Exchange 
and Nasdaq Stock Market, LLC each use an automated closing cross 
procedures and has a closing order type that facilitates orderly 
closings. These closing procedures on the exchanges on which the 
components of the S&P 500 Index trade are well-equipped to mitigate 
imbalance pressure at the close. In addition, after-hours trading now 
provides market participants with an alternative to help offset market-
on-close imbalances.\19\
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    \19\ See id.
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    Other exchanges currently have pilots that permit P.M.-settled 
index options \20\ and Weekly/EOM options.\21\
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    \20\ See Cboe Options Rule 24.9, Interpretation and Policy .14; 
and Phlx Rule 1101A, Commentary .05.
    \21\ See Cboe Options Rule 24.9(e); and Phlx Rule 1101A(b)(vii).
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    The proposed rule change to permit transactions on the Exchange in 
P.M.-settled XSP and Weekly/EOM options on their last trading day 
between the hours of 9:30 a.m. and 4:00 p.m. Eastern time (as opposed 
to the normal trading hours for non-expiring P.M.-settled XSP and 
Weekly/EOM options, which are from 9:30 a.m. to 4:15 p.m. Eastern time) 
will prevent potential pricing divergence that could occur between 4:00 
p.m. and 4:15 p.m. on the final trading day in expiring P.M.-settled 
XSP options. Without closing expiring contracts at 4:00 p.m., it is 
foreseeable that Market-Makers would react by widening spreads in order 
to compensate for the additional risk. Therefore, the Exchange believes 
that, in order to mitigate potential investor confusion and the 
potential for increased costs to investors, it is appropriate to cease 
trading in the expiring P.M.-settled XSP and Weekly/EOM contracts at 
4:00 p.m. The Exchange does not believe the proposed change will impact 
volatility on the underlying cash market at the close on third Fridays. 
Further, the other options exchanges close trading in certain options 
on the last trading day for certain classes.\22\
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    \22\ See Cboe Options Rule 24.6, Interpretations and Policies 
.01 (options with Quarterly Index Expirations), .03 (Cboe S&P 500 
AM/PM Basis options), .04 (P.M.-settled SPX options with third 
Friday-of-the-month expiration and P.M.-settled XSP options), and 
.05 (MSCI EAFE Index options).
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    The Exchange has analyzed its capacity and represents that it 
believes the Exchange and OPRA have the necessary systems capacity to 
handle the additional traffic associated with the listing of P.M.-
settled options. The Exchange believes any additional traffic that may 
be generated from the introduction of P.M.-settled options will be 
manageable. The Exchange represents that it has in place adequate 
surveillance procedures to monitor trading in these options thereby 
helping to ensure the maintenance of a fair and orderly market.

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

    The Exchange 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. P.M.-settled options would 
be available for trading on the Exchange to all market participants. 
The Exchange believes the proposed rule change will increase the 
variety of listed options to investors, and provide valuable hedge 
tools to investors. The listing of P.M.-settled options will enhance 
competition by providing investors with an additional investment 
vehicle, through which investors can gain and hedge exposure to the 
stocks that compose the applicable broad-based indexes. Additionally, 
markets participants are welcome to become Members and trade at the 
Exchange if they determine this proposed rule change has made the 
Exchange more attractive or favorable. Further, this product could 
offer a competitive alternative to other existing investment products 
that seek to allow Members to gain broad market exposure. Finally, all 
options exchanges are free to compete by listing and trading index 
options that are P.M.-settled. Other exchanges currently have pilots 
that permit P.M.-settled index options \23\ or Weeklys/EOMs.\24\
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    \23\ See Cboe Options Rule 24.9, Interpretation and Policy .14 
and Phlx Rule 1101A, Interpretation and Policy .05.
    \24\ See Cboe Options Rule 24.9(e); and Phlx Rule 1101A(b)(vii).
---------------------------------------------------------------------------

    The proposed rule change to permit transactions on the Exchange in 
P.M.-settled XSP and Weekly/EOM options on their last trading day 
between the hours of 9:30 a.m. and 4:00 p.m. Eastern time (as opposed 
to the normal trading hours for non-expiring P.M.-settled XSP and 
Weekly/EOM options, which are from 9:30 a.m. to 4:15 p.m. Eastern time) 
will prevent potential pricing divergence that could occur between 4:00 
p.m. and 4:15 p.m. on the final trading day in expiring P.M.-settled 
XSP and Weekly/EOM options. Without closing expiring contracts at 4:00 
p.m., it is foreseeable that Market-Makers would react by widening 
spreads in order to compensate for the additional risk. Therefore, the 
Exchange believes that, in order to mitigate potential investor 
confusion and the potential for increased costs to investors, it is 
appropriate to cease trading in the expiring P.M.-settled XSP and 
Weekly/EOM contracts at 4:00 p.m. The Exchange does not believe the 
proposed change will impact volatility on the underlying cash market at 
the close on third Fridays. Further, the other options exchanges close 
trading in certain options on the last trading day for certain 
classes.\25\
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    \25\ See Cboe Options Rule 24.6, Interpretations and Policies 
.01 (options with Quarterly Index Expirations), .03 (Cboe S&P 500 
AM/PM Basis options), .04 (P.M.-settled SPX options with third 
Friday-of-the-month expiration and P.M.-settled XSP options), and 
.05 (MSCI EAFE Index options).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change will relieve 
any burden on, or otherwise promote, competition, as the rules are 
substantially the same as those of other options exchanges, as noted 
above.

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.

[[Page 54641]]

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-CboeBZX-2018-066 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-CboeBZX-2018-066. 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-CboeBZX-2018-066, and should be 
submitted on or before November 20, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
Eduardo A. Aleman,
Assistant Secretary.
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    \26\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2018-23624 Filed 10-29-18; 8:45 am]
 BILLING CODE 8011-01-P


