[Federal Register Volume 85, Number 111 (Tuesday, June 9, 2020)]
[Notices]
[Pages 35351-35356]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12381]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88997; File No. SR-CBOE-2020-014]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of Amendment No. 1 and Order Instituting Proceedings To 
Determine Whether To Approve or Disapprove a Proposed Rule Change, as 
Modified by Amendment No. 1, To Adopt a Delta-Adjusted at Close Order 
Instruction

June 3, 2020.

I. Introduction

    On February 18, 2020, Cboe Exchange, Inc. (``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to introduce a Delta-Adjusted at 
Close (``DAC'') Order Instruction on Cboe Options. The proposed rule 
change was published for comment in the Federal Register on March 9, 
2020.\3\ On April 13, 2020, the Commission designated a longer period 
within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether the 
proposed rule change should be disapproved.\4\ On May 12, 2020, the 
Exchange submitted Amendment No. 1 to the proposed rule change.\5\ The 
Commission has received no comments on the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 88312 (March 3, 
2020), 85 FR 13686 (``Notice'').
    \4\ See Securities Exchange Act Release No. 88622, 85 FR 21490 
(April 17, 2020).
    \5\ See https://www.sec.gov/comments/sr-cboe-2020-014/srcboe2020014-7180918-216787.pdf
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    The Commission is publishing this notice and order to solicit 
comments on the proposed rule change, as modified by Amendment No. 1, 
from interested persons and to institute proceedings pursuant to 
Section 19(b)(2)(B) of the Exchange Act \6\ to determine whether to 
approve or disapprove the proposed rule change, as modified by 
Amendment No. 1.
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    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. -Exchange's Description of the Proposal, as Modified by Amendment 
No. 1

    As amended, the Exchange proposes to adopt a Delta-Adjusted at 
Close or DAC order instruction that a User \7\ may apply to an order 
for an option on an ETP or index when entering it into the System for 
execution in a FLEX electronic or open outcry auction. In particular, 
if a DAC order executes during the trading day, upon receipt of the 
official closing price or value for the underlying from the primary 
listing exchange or index provider, respectively, the System will 
adjust the original execution price of a DAC order based on a delta 
value applied to the change in the underlying reference price between 
the time of execution and the market close. As proposed, DAC orders 
will allow Users the opportunity to incorporate into the pricing of 
their FLEX Options the closing price or value of the underlying on the 
transaction date based on how much the price or value changed during 
the trading day.
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    \7\ The term ``User'' means any TPH or Sponsored User who is 
authorized to obtain access to the System pursuant to Rule 5.5. See 
Rule 1.1.
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    Near the market close, the Exchange has observed that significant 
numbers of market participants interact in the equity markets, which 
may substantially impact the price or value, as applicable, of the 
underlying at the market close. For example, shares of exchange-traded 
funds (``ETFs'') that track indexes, which are increasingly popular, 
often trade at or near the market close in order to better align with 
the indexes they track and attempt to align the market price of shares 
of the ETF as close to the net asset value (``NAV'') \8\ per share as 
possible. Further, the Exchange understands that market makers and 
other liquidity providers seek to balance their books before the market 
close and contribute to increased price discovery surrounding the 
market close. The Exchange also believes it is common for other market 
participants to seek to offset intraday positions and mitigate exposure 
risks based on their predictions of the closing underlying prices or 
underlying indexes (which represent the settlement prices of options on 
those underlyings). The Exchange understands this substantial activity 
near the market close may create wider spreads and increased price 
volatility, which may attract further trading activity from those 
participants seeking arbitrage opportunities and further drive prices. 
In light of the significant liquidity and price/value movements in 
equity shares that can occur near the market close, option closing and 
settlement prices may deviate significantly from option execution 
prices earlier that trading day.
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    \8\ The NAV is an ETF's total assets minus its total 
liabilities. ETFs generally must calculate their NAV at least once 
every business day, and typically do so after market close. See 17 
CFR 270.2a-4.
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    The proposed DAC order instruction is designed to allow investors 
to incorporate any upside market moves that may occur following 
execution of the order up to the market close while limiting downside 
risk. Additionally, the Exchange has noted that there have been a 
number of managed funds that recognize the benefits to their investors 
in employing certain strategies that allow for their investors to 
mitigate risk at the market close while also participating in 
beneficial market moves at the close. The proposed DAC order would 
provide such funds with an additional method to attempt to meet their 
objectives through FLEX options strategies, thereby benefitting their 
investors. The Exchange understands that, for example, defined-outcome 
ETF issuers \9\ often times use multi-leg strategy orders when seeding 
their

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funds.\10\ The goal of these strategies is to price the execution of 
these orders at the close of the underlying; however, there is 
operational execution risk in attempting to fill an order late in the 
day to capture the underlying closing price. As such, a DAC complex 
order would allow the User to execute the order prior to the close and 
have its price adjusted at the close. Because multi-leg strategies 
themselves have delta offsets, the User is hedged, meaning that the 
User may realize a negative movement versus the initial execution on 
some legs, which is offset by a positive move in other legs. The 
Exchange notes that the strategies may or may not define an exact delta 
offset (``delta neutrality'' occurs where the strategy defines an exact 
delta offset). Given the delta neutral nature of an order with exact 
offset, a User would be indifferent to any movement in the underlying 
from the time of execution to the close. Whether or not a User defines 
an exact delta offset, a User would anticipate a given amount of market 
exposure, either partial or none, depending on the strategy and 
combinations of buy/sell, call/put and quantity. A DAC complex order 
allows the order to be executed anytime, eliminating the execution 
risk, while realizing the objective of pricing based on the exact 
underlying close for those strategies that require pricing at the close 
or a defined amount of market exposure through the close.
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    \9\ The Exchange notes that defined outcome ETF issuers do not 
buy stocks directly, but instead, use options contracts to deliver 
the price gain or loss of an index (such as the S&P 500) over the 
course of a year, up to a preset cap.
    \10\ Amendment No. 1 provides additional description regarding 
DAC complex order strategies and the purpose of such orders.
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    As stated, the System will adjust the original execution price of a 
DAC order based on a delta value applied to the change in the price of 
the underlying from the time of order execution to the market close. 
Delta is the measure of the change in the option price as it relates to 
a change in the price of the underlying security or value of the 
underlying index, as applicable. For example, an option with a 50 delta 
(which is generally represented as 0.50) would result in the option 
moving $0.50 per $1.00 move in the underlying (i.e., price move in the 
underlying x delta value = anticipated price move in the option). Delta 
changes as the price or value of the underlying stock or index changes 
and as time changes, thus giving a User an estimate of how an option 
will behave if the price of the underlying moves in either direction. 
Call option deltas are positive (ranging from 0 to 1), because as the 
underlying increases in price so does a call option. Conversely, put 
option deltas are negative (ranging from -1 to 0), because as the 
underlying increases in price the put option decreases in price. The 
Exchange understands that investors use delta as an important hedging 
and risk management tool in options trading. For example, by trading an 
option with a lower delta, an investor's underlying position will be 
exposed to more downside risk if price or value of the underlying fall. 
Therefore, the Exchange believes the proposed DAC order instruction 
will allow a market participant to maintain a full hedge of its 
position taken upon intraday execution of a DAC order throughout the 
remainder of the trading day, which ultimately reduces the market 
participant's portfolio risk.
    The Exchange proposes to make the DAC pricing instruction available 
for orders submitted in FLEX ETP and index options in Rule 
5.70(a)(2).\11\ As proposed, Rule 5.6(c) (Order Types, Order 
Instructions, and Times-in-Force) provides that a DAC order is an order 
for which the System delta-adjusts its execution price after the market 
close. Specifically, the delta-adjusted execution price equals the 
original execution price plus the delta value times the difference 
between the official closing price or value of the underlying on the 
transaction date and the reference price or index value of the 
underlying (``reference price''). Upon order entry for electronic 
execution, a User must designate a delta value and may designate a 
reference price. If no reference price is designated, the System will 
include the price or value, as applicable, of the underlying at the 
time of order entry as the reference price. Upon order entry for open 
outcry execution, a User may designate a delta value and/or a reference 
price. During the open outcry auction, in-crowd market participants 
will determine the final delta value and/or reference price, which may 
differ from any delta value or reference price designated by the 
submitting User. The final delta value and reference price would be 
reflected in the final terms of the execution.
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    \11\ Amendment No. 1 amends the Initial Rule Filing to provide 
that DAC orders are available only for ETP and index options and 
amends the Initial Rule Filing to remove the proposed availability 
of DAC orders for entry into non-FLEX auctions (electronic and open 
outcry). Thus, Amendment No. 1 removes from the proposed DAC 
definitions in Rule 5.6(c) and 5.33(b)(5) that DAC may trade in an 
electronic auction or in open outcry trading pursuant to specific 
non-FLEX auction Rules, as well as the provision that a DAC order is 
not eligible to rest in the Book (as there is no electronic book for 
resting FLEX Orders), and the provision regarding bulk messages (as 
bulk messages are not applicable to trading in FLEX Options). The 
Exchange intends to submit a proposal at a later date to permit the 
entry of DAC orders into non-FLEX auctions.
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    Likewise, the proposed definition in Rule 5.33(b)(5) (Types of 
Complex Orders) provides for essentially the same definition, differing 
only in that: it applies to complex orders; upon order entry for 
electronic execution a User must designate a delta value per leg, and 
for open outcry execution may designate a delta value for one or more 
legs; a DAC complex order may only be submitted for execution in a FLEX 
complex electronic auction or open outcry auction on the Exchange's 
trading floor pursuant to Rule 5.72.
    Users will enter into the System all DAC orders as they would any 
other FLEX Order pursuant to 5.72(b) (governing the order entry of FLEX 
orders) and the applicable FLEX auction rules. As such, the Exchange 
points out that FLEX DAC orders may only be submitted for series 
consistent with the FLEX rules.\12\ As defined above, a User may 
designate the reference price of the underlying upon submitting a DAC 
order. Proposed Rule 5.34(c)(12) (Order and Quote Price Protection 
Mechanisms and Risk Controls) provides that a User-designated reference 
price will be subject to a reasonability check. Specifically, if a User 
submits a DAC order to the System with a reference price more than an 
Exchange-determined amount away from the underlying price or value at 
the time of submission of the DAC order, the System cancels or rejects 
the order.\13\ Moreover, if a User chooses to submit a DAC order 
without a reference price, the System will automatically input the 
price or value of the underlying at the time of order entry as the 
reference price.
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    \12\ See Rules 5.72(b), (c), and (d).
    \13\ The System will use the most recent last sale (or 
disseminated index value) as the reference price.
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    For a DAC order submitted into a FLEX electronic auction, a User 
will be required to designate a delta value upon order entry (including 
for each leg of a DAC complex order as set forth in proposed Rule 
5.33(b)(5)).\14\ A User may designate a delta value upon entry of a DAC 
order submitted into a FLEX open outcry auction. As noted above, delta 
is either between 0 and 1 for calls, and 0 and -1 for puts.\15\ The 
Exchange notes that 1.0000 is the equivalent of a 100 delta. Pursuant 
to the general principles by which deltas function, the delta for a 
call leg(s) must be greater than zero

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and the delta for a put option leg(s) must be less than zero. 
Additionally, the delta for call (put) legs must be less (greater) than 
or equal to the delta for the adjacent call (put) leg (i.e. the leg 
with the next largest strike price) of the same expiration as the 
strike price increases. This is also consistent with the general manner 
in which deltas function, and ensures that the deltas on the same leg 
type within the same expiration trend away from zero as the strike 
value increases.
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    \14\ See proposed Rule 5.72(b)(2)(A).
    \15\ Note the Exchange will permit delta values to be input up 
to four decimals, as prices for the underlying securities and index 
values may be expressed in four decimals. However, bids and offers 
may only be input in accordance with Rule 5.4, which bids and offers 
the System will use to rank and allocate orders and auction 
responses.
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    Typically, a User submits an electronic complex order (including a 
DAC complex order, as proposed) with a net price, and, for a FLEX 
complex order, a User must include a price for each leg upon electronic 
submission.\16\ Therefore, upon electronic submission a User must also 
designate a delta value per leg along with the leg prices. At market 
close, the System will then be able to apply the delta value per each 
of the leg prices to properly calculate the DAC by adjusting the 
execution price of each leg.
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    \16\ See Rule 5.72(b)(2)(A).
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    A User may apply the DAC order instruction to a FLEX order 
submitted into an electronic FLEX auction,\17\ the FLEX Automated 
Improvement Auction (``FLEX AIM'' or FLEX AIM Auction'') \18\ or the 
FLEX Solicitation Auction Mechanism (``FLEX SAM'' or ``FLEX SAM 
Auction''); \19\ or a FLEX order submitted for manual handling in an 
open outcry auction on the Exchange's trading floor.\20\ A DAC order 
will be handled and executed in the FLEX auctions in the same manner as 
any other FLEX order pursuant to the applicable FLEX auction rules, 
including pricing, priority, and allocation rules.\21\ Similarly, a 
FLEX DAC order submitted for open outcry trading will execute in the 
same manner as any other FLEX order executed in open outcry pursuant to 
Rule 5.72(d). The Exchange also notes that DAC orders submitted to the 
Exchange will have unique message characteristics, indicative that the 
order is a DAC order. Therefore, contra-side interest will be aware of 
the specific order type and may then choose whether or not they wish to 
interact with DAC orders.\22\
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    \17\ See Rule 5.72(c).
    \18\ See Rule 5.73.
    \19\ See Rule 5.74.
    \20\ See Rule 5.72(d).
    \21\ See Rules 5.72(d).
    \22\ Amendment No. 1 provides this additional detail to the 
Initial Regarding Filing regarding how a DAC order message will be 
indicative that an order is DAC.
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    Pursuant to Rules 5.72, 5.73, and 5.74, FLEX Orders (including 
proposed DAC orders) may only execute in a FLEX electronic or open 
outcry auction. The Exchange believes it is appropriate for DAC orders 
to only execute in auctions. The delta and reference price appended to 
a DAC order would be based on data regarding the underlying at the time 
of order entry. As those values change as the price or value of the 
underlying change, the reference price and delta at the time of 
submission would achieve the desired delta-adjusted price result only 
if the DAC order executes almost immediately upon submission. To allow 
a DAC order to potentially execute after a significant amount of time 
has passed since entry, underlying price and related delta at the time 
a DAC order would eventually execute would be different and thus not 
achieve the User's desired result. If a DAC orders executes in an 
auction, it will do so within a short time following submission. 
Indeed, the Exchange's electronic and open outcry FLEX auctions last 
for a brief, defined period, the length of which is currently between 
three seconds to five minutes as designated by the Submitting/
Initiating FLEX Trader.\23\ As such, the Exchange believes that the 
execution of DAC orders in FLEX auctions is consistent with the 
intended purpose of a DAC order.
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    \23\ See Rules 5.72(c), 5.73(c)(3) and 5.74(c)(3).
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    In addition to this, the Exchange also believes that making DAC 
orders available only for options on ETPs and indexes is consistent 
with the intended purpose of a DAC order. As stated above, DAC orders 
are intended to allow investors to incorporate any market moves that 
may occur following execution of the order up to the market close while 
limiting risk and to allow funds to employ certain strategies that 
would enable their investors to mitigate risk at the market close while 
also participating in beneficial market moves at the close. That is, a 
DAC order may assist investors that participate in defined-outcome 
investment strategies, including defined-outcome ETFs, other managed 
funds, unit investment trusts (``UITs''), index funds, structured 
annuities, and other such funds or instruments that are indexed. 
Therefore, the Exchange believes it is appropriate to, at present, 
limit the use of DAC orders to options on ETPs and indexes.\24\
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    \24\ The Exchange notes that if, at a later date, User demand 
warrants the availability of DAC orders for equity options and non-
FLEX options, the Exchange could submit a proposal to make DAC 
orders available for equity options.
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    Pursuant to the proposed definitions in Rules 5.6(c), 5.33(b)(5), 
and Rule 5.72(b)(2)(B), for DAC orders submitted for execution in a 
FLEX open outcry auction, a User has the option to designate a delta 
value (per one or more legs for DAC complex orders) and/or a reference 
price. In-crowd market participants then determine the final delta 
value(s) \25\ and/or reference price during the open outcry auction. 
That is, they would negotiate the delta value(s)/reference price as 
terms of the order (in conjunction with their negotiation of the price 
of the order) and reflect the ultimately agreed upon delta value(s)/
reference price in the final terms of the DAC order. This is consistent 
with the manner that the terms (including execution price) of any other 
FLEX Order are currently negotiated and ultimately reflected for open 
outcry executions. For similar reasons why the Exchange believes 
execution of DAC orders in FLEX auctions is appropriate, the proposed 
rule change does not require a User to include a delta value or 
reference price when submitting a DAC order for open outcry execution. 
A floor broker may be unable to execute an order until well after it 
received the order for manual handling. Given that the delta and 
reference price may move during that time, the proposed rule provides 
the ability of market participants to agree to appropriate terms given 
the then-current underlying price or value at the time of execution. 
Unlike in the electronic market, in-crowd market participants are able 
to negotiate and agree to these terms as part of open outcry trading. 
As a result, the delta-adjusted price may achieve the desired result of 
the broker's customer.
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    \25\ The Exchange notes that in-crowd participants currently 
have delta values built into their own analytics and pricing tools 
and that generally such values only slightly differ across 
participants.
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    For any DAC order that executes during a trading day, upon receipt 
of the official closing price for the underlying from the primary 
listing exchange or index provider, the System will adjust the original 
execution price based on the delta applied to the absolute change in 
the underlying between the time of execution and the market close. The 
Exchange notes that, like the execution price of any option, a delta-
adjusted price may never be zero or negative. If this occurs as a 
result of the DAC calculation, the System will set the delta-adjusted 
price to the minimum permissible increment.
    The delta adjustment formula that will be applied at the close will 
be as follows: \26\
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    \26\ Amendment No. 1 adds Example 3 and Example 4 below in order 
to provide additional detail and clarity regarding the execution and 
adjustment process in connection with complex strategies.

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    The delta-adjusted price = the original execution price + (the 
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change in the underlying price x delta) or P2 = P1 + (U--R) * D, where:

 P1 = Original execution price
 P2 = Delta-adjusted price calculated at the close
 R = Reference price
 U = price of the underlying at the market close
 D = Delta
    Example 1: A DAC call order is submitted for execution in an 
electronic auction or PAR and the price of the underlying increases 
from the time of execution to the market close.

 P1 = $1.00
 R = $100.00
 U = $101.00
 D = .4000
Therefore, P2 = ($1.00 + (($101-$100) * .4000) = $1.40
    Example 2: A DAC put order in a penny increment is submitted for 
execution in an electronic auction or PAR and the price of the 
underlying increases from the time of execution to the market close.
 P1 = $1.00
 R = $100.00
 U = $103.00
 D = -.4000
    Therefore, P2 = ($1.00 + ((103-$100) * -.4000) = -$0.20. However, 
because an execution price, including a delta-adjusted execution price, 
may not be negative, the System would adjust P2 = $0.01 (the minimum 
permissible increment).

    Example 3: A DAC complex order has two legs, where leg 1 is buy 
call and leg 2 is buy put (straddle).\27\
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    \27\ The Exchange notes that the data in Example 3 is based on 
actual market data pulled for SPX with: An April 30, 2020 
expiration; an initial SPX index value of 2875; a closing SPX index 
value of 2878; 2900 call at $18; and a 2900 put at $42.
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Leg 1

 P1 = $18.00
 R = $2875.00
 U = $2878.00
 D = .5000
Therefore, P2 = ($18.00 + (($2878-$2875) * .5000) = $19.50

Leg 2

P1 = $42.00
R = $2875.00
U = $2878.00
D = -.5000
Therefore, P2 = ($42.00 + (($2878-$2875) * -.5000) = $40.50

    As described above, the User would be indifferent to the move in 
the underlying due to the offsetting nature of the two legs. The 
initial execution price for the DAC complex order (P1) would be $18.00 
+ $42.00 = $60.00, and the adjusted price calculated at the close (P2) 
for the DAC complex order would be $19.50 + $40.50 = $60.00. As a 
result, the User in this Example 3 would be able to execute a hedged 
strategy earlier in the trading day and have it priced exactly in line 
with the underlying close without incurring any market risk or 
operational risk of trying to time the execution exactly at the close.
    Example 4: A defined outcome ETF uses a simple buffer protect 
strategy in connection with a seed trade. The User buys the at the 
money put and sells the 10% out of the money put while selling the 5% 
out of the money call.
    Leg 1: Buy SPX May 2875 put at $69.00 with 50 delta.

 P1 = $69.00
 R = $2875.00
 U = $2878.00
 D = -.5000

Therefore, P2 = ($69.00 + (($2878-$2875) * -.5000) = $67.50
    Leg 2: Sell SPX May 2590 put at $15.00 with 12 delta.

 P1 = $15.00
 R = $2875.00
 U = $2878.00
 D = -.1200
Therefore, P2 = ($15.00 + (($2878--$2875) * -.1200) = $14.64

    Leg 3: Sell SPX May 3020 call at $11.50 with 16 Delta.

 P1 = $11.50
 R = $2875.00
 U = $2878.00
 D = -.1600
Therefore, P2 = ($11.50 + (($2878--$2875) * -.1600) = $11.98

    The initial execution price for the order would be $69.00 - $15.00 
- $11.50 = $42.50. The adjusted execution price would be $67.50 - 
$14.64 - $11.98 = $40.88. The strategy would have an overall delta of 
-.54 (-.5000 + .1200 -.16). As a result, the fund would be seeded 
exactly at the closing price with exactly the delta exposure defined by 
the strategy, without incurring any operational execution risk. The 
User would be able to execute a hedged strategy earlier in the trading 
day and have it priced exactly in line with the underlying close 
without incurring any unanticipated market risk or operational risk of 
trying to time the execution exactly at the close.
    The Exchange notes a User may only apply the DAC order instruction 
to a FLEX Order for a FLEX Option series with an exercise price 
expressed as a fixed price in dollars and decimals. The proposed change 
to Rule 5.70(a)(2) specifies that a User may not apply the DAC order 
instruction to a FLEX Order for a FLEX Option series with an exercise 
price formatted as a percentage of the closing value of the underlying 
on the trade date, as this functionality is not compatible with the DAC 
order instruction.\28\ The System will need a fixed execution price at 
the time of order execution that will be delta-adjusted (which delta 
value is based on dollar price movements in the underlying) following 
the market close. However, a FLEX Order for a series with an exercise 
price formatted as a percentage of the closing value will execute at a 
percentage rather than a fixed price, which would not be determined 
until the market close. Therefore, execution price of such a FLEX Order 
will incorporate the closing price or value of the underlying in a 
different manner, and the System would not have an execution price to 
adjust. Similarly, the proposed change to Rule 5.70(a)(2) specifies a 
User will not be able to designate a FLEX Order in a FLEX Option series 
that is Asian- or Cliquet-settled. The settlement prices for these 
options are determined by averaging a pre-set number of closing index 
values or summing the monthly returns, respectively, on specified 
monthly observation dates.\29\ The transaction prices for these options 
reflect these terms, and delta-adjustment of those transaction prices 
would be based on the movement of the underlying on only the 
transaction date. These settlement types are, as a result, inconsistent 
with the DAC order instruction.
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    \28\ See Rule 4.21(b)(6)(A). The Exchange notes that the 
proposed language in connection with FLEX Option exercise prices as 
a percentage of the closing value and Asian-/Cliquet-settled series 
was originally proposed in Rules 5.83(a)(2) and (b)(2), however, the 
Exchange believes that moving the proposed language to Rule 
5.70(a)(2), as well as the definition of complex orders, provides 
better clarity regarding the application of this proposed limitation 
on proposed DAC orders submitted to FLEX auctions.
    \29\ See Rule 4.21(b)(5)(B). See also id.
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    The proposed definition of DAC orders in Rule 5.6(c) also states 
that a DAC order submitted through PAR has a Time-in-Force of Day.\30\ 
A Time-in-force of Day for an order so designated means that the order, 
if not executed, expires at RTH market close. Thus, this proposed Time-
in-Force for DAC orders submitted for execution in open outcry ensures 
that such orders will execute in line with their intended purpose--

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intraday and as close in time as possible to the time in which it was 
submitted to achieve the desired result of the broker's customer. 
Moreover, the proposed DAC definition provides that a User may not 
designate a DAC order as All Sessions (i.e. eligible for Regular 
Trading Hours (``RTH'') and Global Trading Hours (``GTH'')),\31\ as the 
adjustment calculation for DAC orders is linked to the RTH market close 
for the underlying securities and indexes. Additionally, equities are 
not traded during the entire GTH session, and not all indexes have 
values disseminated during GTH, so there would not be a then-current 
reference price for DAC orders outside of RTH.
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    \30\ The Exchange again notes that electronically submitted DAC 
orders will be submitted through the electronic auctions, and either 
executed or cancelled upon the conclusion of an auction, making an 
instruction regarding the time the System will hold an order 
unnecessary. Therefore, a requirement to apply a Time-in-Force of 
Day is not necessary for electronic DAC orders.
    \31\ See Rule 1.1.
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    The reference price and delta value, as well as the execution 
price, will be provided to all transaction parties on all fill reports 
at the time of the execution of a DAC order (i.e. an ``unadjusted DAC 
trade''). Unadjusted DAC trade information will also be sent to the 
Options Clearing Corporation (``OCC'') and disseminated to Options 
Price Reporting Agency (``OPRA''). Specifically for FLEX DAC orders, 
like for all FLEX Orders, trade information will be reported via a text 
message to OPRA. The Exchange notes that text messages for FLEX DAC 
orders will contain an indicator that the order was executed as DAC, as 
well as the delta and the reference price.\32\ The Exchange also notes 
that individual legs of a FLEX DAC complex order will be reported with 
an identifier that they are part of a complex order just like any 
complex order legs are reported today.\33\ Upon conclusion of the 
delta-adjustment of the execution price following the market close, 
fill restatements will be sent to all transaction parties. Matched 
trades will be sent to the OCC and OPRA once the restatement process is 
complete with the delta-adjusted price. The prior unadjusted trade 
reported to the OCC and disseminated to OPRA will be cancelled and 
replaced with a trade report with all of the same information, except 
the original execution price will be replaced with the delta-adjusted 
price.\34\ A new FLEX DAC order text message will be disseminated to 
OPRA with the same information included in the original text plus the 
closing price. The Exchange has discussed with both the OCC and OPRA of 
its plans to adopt DAC orders and confirmed that adopting the proposed 
restatement process is acceptable.
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    \32\ Amendment No. 1 adds detail regarding the specific 
information that will be included in the FLEX text message report to 
OPRA in connection with the proposed DAC orders.
    \33\ See id.
    \34\ The Exchange notes that this restatement process is the 
same for an order that has been adjusted or nullified and 
subsequently restated pursuant to the Exchange's obvious error 
rules. See Rule 6.5.
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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 additional any additional order traffic, and the associated 
restatements, that may result from the adoption of DAC orders. Further, 
the Exchange represents it has an adequate surveillance program in 
place to monitor orders with DAC pricing and that the proposed pricing 
instruction will not have an adverse impact on surveillance capacity. 
Finally, the Exchange does not believe the proposed order instruction 
will have any impact on pricing or price discovery at or near the 
market close. A DAC order will execute intraday in the same manner as 
any other order, and its price will merely be automatically adjusted 
following determination of the final closing price or value of the 
underlying security or index, respectively.

III. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change, as Modified by Amendment No. 1

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act \35\ to determine whether the proposed 
rule change, as modified by Amendment No. 1, should be approved or 
disapproved. Institution of such proceedings is appropriate at this 
time in view of the legal and policy issues raised by the amended 
proposal. Institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved. Rather, as stated below, the Commission seeks and 
encourages interested persons to provide comments on the proposed rule 
change, as modified by Amendment No. 1, to inform the Commission's 
analysis of whether to approve or disapprove the proposal.
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    \35\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\36\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. The Commission is instituting proceedings to allow for 
additional analysis of the proposed rule change's consistency with 
Section 6(b)(5) of the Exchange Act, which requires 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.\37\ Section 6(b)(5) of the Exchange Act also requires that 
the rules of an exchange not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.\38\
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    \36\ Id.
    \37\ 15 U.S.C. 78f(b)(5).
    \38\ Id.
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IV. Proccedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning the proposed rule change, as 
modified by Amendment No. 1, including whether the proposal is 
consistent with Sections 6(b)(5) of the Exchange Act, any other 
provision of the Exchange Act, or any other rule or regulation under 
the Exchange Act. Although there do not appear to be any issues 
relevant to approval or disapproval that would be facilitated by an 
oral presentation of views, data, and arguments, the Commission will 
consider, pursuant to Rule 19b-4, any request for an opportunity to 
make an oral presentation.\39\
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    \39\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Act Amendments of 
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 
75, 94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments concerning the proposed rule change, as modified by Amendment 
No. 1, including whether the proposal should be approved or disapproved 
by June 30, 2020. Any person who wishes to file a rebuttal to any other 
person's submission must file that rebuttal by July 14, 2020. The 
Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposed rule change, as 
modified by Amendment No. 1, in addition to any other comments they may 
wish to submit about the proposed rule change.

[[Page 35356]]

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-2020-014 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-2020-014. 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 these filings 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-2020-014 and should be submitted on 
or before June 30, 2020. Rebuttal comments should be submitted by July 
14, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-12381 Filed 6-8-20; 8:45 am]
 BILLING CODE 8011-01-P


