[Federal Register Volume 85, Number 66 (Monday, April 6, 2020)]
[Notices]
[Pages 19182-19184]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-07090]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88530; File No. SR-CBOE-2020-031]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
To Amend Rule 5.24

March 31, 2020.
    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 March 31, 2020, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend Rule 5.24.\3\ The text of the proposed rule change is provided 
in Exhibit 5.
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    \3\ The Exchange originally submitted a substantially similar 
rule change on March 30, 2020 (SR-CBOE-2020-030). On March 31, 2020, 
the Exchange withdrew that filing and submitted this filing.
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    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

1. Purpose
    The Exchange proposes to amend Rule 5.24 regarding the Exchange's 
business continuity and disaster recovery plans. Rule 5.24 describes 
which Trading Permit Holders (``TPHs'') are required to connect to the 
Exchange's backup systems as well as certain actions the Exchange may 
take as part of its business continuity plans so that it may maintain 
fair and orderly markets if unusual circumstances occurred that could 
impact the Exchange's ability to conduct business. This includes what 
actions the Exchange would take if its trading floor became inoperable. 
Specifically, Rule 5.24(e) states if the Exchange trading floor becomes 
inoperable, the Exchange will continue to operate in a screen-based 
only environment using a floorless configuration of the System that is 
operational while the trading floor facility is inoperable. The 
Exchange would operate using that configuration only until the 
Exchange's trading floor facility became operational. Open outcry 
trading would not be available in the event the trading floor becomes 
inoperable.\4\ Rule 5.24(e)(1) also currently states in the event that 
the trading floor becomes inoperable, trading will be conducted 
pursuant to all applicable System Rules, except that open outcry Rules 
would not be in force, including but not limited to the Rules (or 
applicable portions) in Chapter 5, Section G,\5\ and that all non-
trading rules of the Exchange would continue to apply. The Exchange 
recently proposed additional exceptions to Rules that would not apply 
during a time in which the trading floor in inoperable.\6\
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    \4\ Pursuant to Rule 5.26, the Exchange may enter into a back-up 
trading arrangement with another exchange, which could allow the 
Exchange to use the facilities of a back-up exchange to conduct 
trading of certain of its products. The Exchange currently has no 
back-up trading arrangement in place with another exchange.
    \5\ Chapter 5, Section G of the Exchange's rulebook sets forth 
the rules and procedures for manual order handling and open outcry 
trading on the Exchange.
    \6\ See Securities Exchange Act Release Nos. 88386 (March 13, 
2020), 85 FR 15823 (March 19, 2020) (SR-CBOE-2020-019); and 88447 
(March 20, 2020) (SR-CBOE-2020-023). The rule changes adopted in 
that filing are effective until May 15, 2020, unless extended. See 
Rule 5.24(e)(1).
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    As of March 16, 2020, the Exchange suspended open outcry trading to 
help prevent the spread of the novel coronavirus and is currently 
operating in an all-electronic configuration. While the trading floor 
was open, the Exchange facilitated compression forums on the trading 
floor at the end of each calendar week, month, and quarter in which 
Trading Permit Holders reduce open positions in series of SPX options 
in order to mitigate the effects of capital constraints on market 
participants and help ensure continued depth of liquidity in the SPX 
options market.
    The Exchange recently adopted Rule 5.24(e)(1)(E) to permit the 
Exchange to offer electronic compression forums while the trading floor 
is closed.\7\ Pursuant to Rule 5.24(e)(1)(E), the Exchange will make 
available an electronic ``compression forum'' in the same manner as an 
open outcry ``compression forum'' as set forth in Rule 5.88, except as 
provided in subparagraph (E). In both electronic and open outcry 
compression forums, TPHs may submit lists of open positions to the 
Exchange that they wish to close against opposing (long/short) 
positions of other TPHs, which the Exchange would then aggregate into a 
single list that would allow TPHs to more easily identify those 
positions with counterparty interest on the Exchange. The list provided 
by the Exchange includes a complete list of all possible combinations 
of offsetting multi-leg positions to each TPH that submitted 
compression-list positions to the Exchange.\8\
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    \7\ See Securities Exchange Act Release No. 88490 (March 26, 
2020) (SR-CBOE-2020-026).
    \8\ See Rule 5.88(a)(4); see also Rule 5.24(e)(1)(E)(ii).
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    Rule 5.88, Interpretation and Policy .01 provides that for purposes 
of Rule 5.88, multi-leg positions include vertical call spreads, 
vertical put spreads, and box spreads, which interpretation and policy 
applies to both electronic and open outcry compression forums. The 
proposed rule change would add Rule 5.24(e)(1)(E)(iv), which states 
that notwithstanding Interpretation and Policy .01 in Rule 5.88, for 
purposes of subparagraph (E) (and thus for purposes of electronic 
compression forums held while the trading floor is inoperable), multi-
leg positions include vertical call spreads, vertical put spreads, 
combos (i.e., purchase (sale) of a call and a sale (purchase) of a put 
with the same expiration date and strike price), and box spreads. 
Because a combo is essentially a ``synthetic future,'' it is a common 
multi-leg strategy among market participants. Market participants

[[Page 19183]]

often establish market neural hedges by purchasing (selling) a number 
of combos with an offsetting SPX option position.\9\ As a result, 
market participants maintain a significant number of combos in their 
portfolios. Additionally, when markets are volatile (as they have been 
recently), market participants often take on positions in a larger 
range of strikes, which positions can be put together as combos. The 
Exchange believes closing combo positions will be advantageous because 
such positions can be risk neutral, which means the closing of the 
entire combo has little or no impact on a TPH's risk profile. However, 
the current compression forum framework limits multi-leg positions to 
vertical call \10\ and put \11\ spreads and boxes. The Exchange notes 
that just as one put spread and one call spread combine to create a box 
spread, two combos similarly create a box spread.\12\ For example, a 
box spread would be entered by purchasing 100 DEC 2040 calls and 
selling 100 DEC 2070 calls (i.e., bull call spread) and selling 100 DEC 
2040 puts and purchasing 100 DEC 2070 puts (i.e., bear put spread). The 
purchase of 100 DEC 2040 calls and sale of 100 DEC 2040 puts comprises 
a combo (as does the sale of 100 DEC 2070 calls and purchase of 100 DEC 
2070 puts). The Exchange believes that providing TPHs with this 
additional way to identify multi-leg positions with offsetting interest 
will enable more efficient closing of such common strategy positions.
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    \9\ See, e.g., Rule 5.85(e).
    \10\ A vertical call spread involves the purchasing and selling 
of an equal number of call options with the same expiration date but 
different strike prices.
    \11\ A vertical put spread involves the purchasing and selling 
of an equal number of put options with the same expiration date but 
different strike prices.
    \12\ A box spread involves purchasing (selling) a bull call 
spread and purchasing (selling) a bear put spread. In other words, a 
box spread is composed of a long (short) call and short (long) put 
position at one strike price and a short (long) call and long 
(short) put position at another strike price.
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    Like the other multi-leg strategies currently covered by the rule, 
the Exchange will compile a list of all possible combos. The lists 
generated by the Exchange pursuant to Rule 5.24(e)(1)(E) are provided 
to TPHs for informational purposes only. Individual TPHs continue to 
determine whether to submit compression-list positions; whether to 
participate in the compression forum process; and whether to submit 
orders for execution in a compression forum. The Exchange's provision 
of the list does not constitute advice, guidance, a commitment to 
trade, an execution, or a recommendation to trade.
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.\13\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \14\ 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) \15\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ Id..
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    In particular, the proposed rule change will 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 by adding a strategy for which the Exchange will make 
positions available during compression forums will benefit investors, 
which the Exchange believes will increase positions that market 
participants may close during compression forums. The Exchange believes 
the additional information that may be provided to TPHs in compression 
forums may encourage TPHs to close additional positions via the 
compression process. The Exchange believes this will enable TPHs to 
more efficiently and effectively close positions comprising a common 
multi-leg strategy in the SPX market via the compression forums, which, 
in general, helps to protect investors and the public interest because 
closing positions via the compression process serves to alleviate the 
adverse impact of bank capital requirements. As noted above, the 
information regarding combo positions is currently included in the 
compression position lists the Exchange provides to TPHs, as two combos 
create a box spread. The proposed rule change merely provides the 
Exchange with the ability to list combo positions separately, as it 
currently does for vertical call and put spreads (which also comprise 
box spreads).

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. The proposed rule change has 
no impact on the trading process used in compression forums, but 
rather, adds to the information the Exchange may provide to TPHs as 
part of its efforts to facilitate market participants' reduction in 
open interest. The Exchange does not believe the proposed rule change 
will impose any burden on intramarket competition, as compression 
forums will continue to be available to all market participants with 
SPX open interest. The Exchange will make available a list of all 
possible offsetting combos, which will be available to all TPHs that 
submit compression-list positions (similar to all other information in 
these lists). The Exchange does not believe the proposed rule change 
will impose any burden on intermarket competition, as it will apply 
only to SPX options, which are currently listed for trading only on the 
Exchange. The proposed rule change is intended to permit market 
participants to further reduce open SPX interest to free up additional 
capital that will permit those parties to continue to provide liquidity 
to the market, which the Exchange believes benefits the entire market.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \16\ and Rule 19b-4(f)(6) thereunder.\17\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate, if

[[Page 19184]]

consistent with the protection of investors and the public interest, 
the proposed rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \18\ and Rule 19b-4(f)(6) thereunder.\19\
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    \16\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6). Pursuant to Rule 19b- 4(f)(6)(iii) 
under the Act, the Exchange is required to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \20\ normally 
does not become operative for 30 days after the date of the filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\21\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposed 
rule change may become operative immediately. As explained above, the 
Exchange believes that the proposed rule change has no impact on the 
trading process for compression forums. The Exchange believes that 
providing the additional information proposed herein with respect to 
combos, in addition to the other information the Exchange regularly 
provides, may increase the ability of firms to find other firms with 
offsetting positions and maximize the impact of the quarter-end 
compression forum. Furthermore, the Exchange believes providing TPHs 
with separate combo information, as it provides separate vertical 
spread information, will provide TPHs with additional flexibility to 
locate offsetting positions against which they may execute in 
compression forums, which will permit them to further reduce open SPX 
interest and free up additional capital, which benefits all investors 
in the SPX market. Accordingly, the Exchange asserts that waiver of the 
operative delay would permit the Exchange to provide TPHs with this 
information in time for them to engage in compression transactions in 
connection with the expected first quarter CTPH capital recalculation. 
For these reasons, the Commission believes that waiver of the 30-day 
operative delay is consistent with the protection of investors and the 
public interest. Accordingly, the Commission hereby waives the 30-day 
operative delay and designates the proposal operative upon filing.\22\
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    \20\ 17 CFR 240.19b-4(f)(6).
    \21\ 17 CFR 240.19b-4(f)(6)(iii).
    \22\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2020-031 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-2020-031. 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 offices 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-2020-031, and should be submitted 
on or before April 27, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12), (59).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-07090 Filed 4-3-20; 8:45 am]
 BILLING CODE 8011-01-P


