[Federal Register Volume 85, Number 139 (Monday, July 20, 2020)]
[Notices]
[Pages 43923-43932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15551]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89308; File No. SR-CBOE-2020-034]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change Relating To Authorize for Trading 
Flexible Exchange Options (``FLEX options'') on Full-Value Indexes With 
a Contract Multiplier of One

July 14, 2020.
    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 June 30, 2020, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to authorize for trading flexible exchange options (``FLEX options'') 
on full-value indexes with a contract multiplier of one. The text of 
the proposed rule change is provided in Exhibit 5.
    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 proposed rule change authorizes for trading on the Exchange 
FLEX Options on full-value indexes with a contract multiplier of one. 
Currently, Rule 4.21(b)(1) states the index multiplier for FLEX Index 
Options is 100. The proposed rule change deletes the parenthetical with 
that provision from current Rule 4.21(b)(1), and instead proposes to 
describe the index multiplier for FLEX Index Options in proposed Rule 
4.20(b). Options with the same underlying but different units of 
trading or index multipliers, as applicable, are different classes.\3\ 
An index multiplier is a term of a class (and thus applicable to all 
series in the

[[Page 43924]]

class) \4\ rather than a term individual to a series. The Exchange, 
therefore, believes including the provision regarding the index 
multiplier of FLEX Index Options in Rule 4.20, which describes which 
classes the Exchange may authorize for trading, is more appropriate.
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    \3\ For example, the Exchange may list for trading on five 
securities mini-options, which are options with a unit of trading of 
ten shares, which is ten times lower than the standard-sized option 
of 100 shares. See Rule 4.5, Interpretation and Policy .18. While a 
mini-option has the same underlying as a standard-sized option, they 
are separate products. See Securities Exchange Act Release No. 68656 
(January 15, 2013), 78 FR 4526 (January 22, 2013) (SR-CBOE-2013-
001).
    \4\ In other words, options on the S&P 500 Index (``SPX 
options'') with a multiplier of one are a different class than 
options on the S&P 500 with a multiplier of 100, just as options on 
the S&P 500 Index with a multiplier of 100 are a different class 
than options on the reduced-value S&P 500 Index (with one-tenth the 
value of the of the S&P 500 Index) with a multiplier of 100.
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    The proposed provisions in Rule 4.20(b) that state the index 
multiplier may be 100 for FLEX Index Options on full-value indexes 
(proposed clause (1)) and is 100 for FLEX Index Options on reduced-
value indexes (proposed clause (2)) merely restate the parenthetical 
from current Rule 4.21(b)(1) in a more appropriate part of the Rules, 
and thus are nonsubstantive changes.\5\ Additionally, proposed Rule 
4.20(a) states that the unit of trading for FLEX Equity Options is the 
same as the unit of trading for non-FLEX Equity Options overlying the 
same equity security. The unit of trading for equity options (both FLEX 
and non-FLEX) that may be listed on the Exchange is 100,\6\ except for 
mini-options, which have a unit of trading of 10.\7\ This is not a 
substantive change, but rather is merely a clarification in the Rules 
regarding the current unit of trading for FLEX Equity Options. 
Therefore, the proposed rule change has no impact on which FLEX Equity 
Options may be traded on the Exchange. The ``unit of trading'' in 
respect of any series of options means the number of units (i.e., 
shares in the case of equity options) of the underlying interest 
subject to a single option contract in the series.\8\
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    \5\ The separation of this provision for FLEX Index Options on 
full-value and reduced-value indexes relates to the proposed rule 
change to permit FLEX Index Options on full-value indexes to also 
have a multiplier of one.
    \6\ See Options Clearing Corporation (``OCC'') By-Laws Article 
I, Section I(U)(5), which defines ``unit of trading'' in respect of 
any series of options as the number of units of the underlying 
interest designated by OCC as the minimum number to be the subject 
of a single option contract in such series, and stating that in the 
absence of any such designation for a series of options in which the 
underlying security is a common stock, the unit of trading is 100 
shares.
    \7\ See Rule 4.5, Interpretation and Policy .18(a).
    \8\ See Rule 4.21(b)(1); and Options Clearing Corporation 
(``OCC'') Bylaws Article I, Section 1, U(5).
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    Rule 4.11 defines an ``index multiplier'' as the amount specified 
in the contract by which the current index value is to be multiplied to 
arrive at the value required to be delivered to the holder of a call or 
by the holder of a put upon valid exercise of the contract. Currently, 
the Exchange has specified the index multiplier for index options it 
currently lists as 100.\9\ While the Exchange has no current plans to 
designate an index multiplier of one for non-FLEX index options, Rule 
4.11 permits the Exchange to specify what the index multiplier for an 
index option is contract and thus provides the Exchange with authority 
to list an index option with a multiplier of one.\10\ Similarly, 
Article I, Section 1, I(3) of the OCC By-Laws defines ``index 
multiplier'' as the dollar amount (as specified by the Exchange on 
which such contract is traded) by which the current index value is to 
be multiplied to obtain the aggregate current index value. Unlike the 
definition of a unit of trading in the OCC By-Laws, which states the 
unit of trading in is designated by OCC but is 100 shares if not 
otherwise specified, the definition of index multiplier includes no 
such default.\11\ Therefore, given the inclusion of a default unit of 
trading for equity options but the lack of a default index multiplier 
for index options, the Exchange believes the current index multiplier 
definition in the OCC By-Laws (which would have previously been filed 
with the Commission) permits any index multiplier specified by the 
listing Exchange. This is consistent with the lack of default number in 
Exchange's definition of index multiplier and the ability for the 
Exchange to specify the index multiplier, as noted above.
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    \9\ See index option specifications, available at http://www.cboe.com/products/stock-index-options-spx-rut-msci-ftse.
    \10\ Such listing would be subject to any applicable filing 
requirements, such as a Form 19b-4(e).
    \11\ See OCC Bylaws Article I, Section 1, U(5)
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    The current index multiplier for all FLEX Index Options is 100, and 
thus does not provide the same flexibility as the broader Exchange and 
OCC definitions. The proposed rule change provides that the index 
multiplier for FLEX Index options on full-value indexes may also be one 
(in addition to the current index multiplier of 100).\12\ One-hundred 
contracts for a FLEX Index Option with a multiplier of one are 
economically equivalent to one contract for a FLEX Index Option with a 
multiplier of 100.\13\ Rule 4.20 permits the Exchange to authorize for 
trading a FLEX Option class on any equity security or index if it may 
authorize for trading a non-FLEX Option class on that equity security 
or index pursuant to Rules 4.3 and 4.10, respectively, even if the 
Exchange does not list that non-FLEX Option class for trading. As 
discussed above, the Rules (and OCC By-Laws) authorize the Exchange to 
specify an index multiplier of one for an index option, subject to any 
applicable rule filing requirements. Therefore, while the Exchange does 
not list a non-FLEX Index Option with a multiplier of one, the Exchange 
may authorize for trading a FLEX Index Option with a multiplier of one 
for any index it may authorize for non-FLEX trading pursuant to Rule 
4.10.
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    \12\ See proposed Rule 4.20(b)(1).
    \13\ The proposed rule change also amends Rule 5.74(a)(4) to 
provide that the minimum size of an agency order for a FLEX 
solicitation auction mechanism (``SAM'') will be 50,000 FLEX Index 
Option contracts if the multiplier is one, which is proportionately 
equivalent to 500 FLEX Index Option contracts if the multiplier is 
100, the current minimum size of agency orders for SAM auctions. 
This corresponds to the minimum size of 5,000 mini-options.
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    When submitting a FLEX Order, the submitting FLEX Trader \14\ must 
include all required terms of a FLEX Option series.\15\ Pursuant to 
current Rule 4.21(b)(1), the submitting FLEX Trader must include the 
underlying equity security or index (i.e., the FLEX Option class) on 
the FLEX Order. The proposed rule change amends Rule 4.21(b)(1) to 
state that if a FLEX Trader specifies a full-value index on a FLEX 
Order, the FLEX Trader must also include whether the index option has 
an index multiplier of 100 or 1 when identifying the class of FLEX 
Order. While the concept of a flexible index multiplier is permissible 
under OCC's By-Laws, the Exchange does not propose to make the index 
multiplier a flexible term that a FLEX Trader can designate (unlike the 
other terms of FLEX Options (strike price, settlement, expiration date, 
and exercise style) that are designated by the FLEX Trader rather than 
by the Exchange).\16\ Instead, as discussed above, the Exchange is 
specifying the index multiplier for FLEX Options on full-value indexes 
may be one or 100, as permitted by the current definition of index 
multiplier in Rule 4.11, and is therefore authorizing new classes of 
FLEX Index Options. Therefore, each FLEX Index Option series in a FLEX 
Index Option class with a multiplier of

[[Page 43925]]

one will include the same flexible terms as any other FLEX Option 
series, including strike price, settlement, expiration date, and 
exercise style as required by Rule 4.21(b).\17\
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    \14\ A ``FLEX Trader'' is a Trading Permit Holder the Exchange 
has approved to trade FLEX Options on the Exchange.
    \15\ These terms include, in addition to the underlying equity 
security or index, the type of options (put or call), exercise 
style, expiration date, settlement type, and exercise price. See 
Rule 4.21(b). A ``FLEX Order'' is an order submitted in FLEX 
Options. The submission of a FLEX Order makes the FLEX Option series 
in that order eligible for trading. See Rule 5.72(b).
    \16\ Pursuant to the OCC By-Laws, which would have previously 
been filed with the Commission, the Exchange could make the 
multiplier a flexible term, as the index multiplier is listed as a 
variable term in the case of a flexibly structured index option. See 
OCC By-Laws Article I, Section 1, V(1).
    \17\ As discussed below, these are the terms designated by the 
Commission as those that constitute standardized options, and 
therefore, the Exchange believes the proposed rule change is 
consistent with Section 9(b) of the Act. See Securities Exchange Act 
Release No. 31910 (February 23, 1993), 58 FR 12056 (March 2, 1993) 
(``1993 FLEX Approval Order'').
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    The table below demonstrates the proposed differences between a 
FLEX Index Option contract if the multiplier is one and a FLEX Index 
Option if the multiplier is 100 on the S&P 500 Index. If the intraday 
value of the S&P 500 Index is 3,109.50, one S&P 500 Index option (``SPX 
option'') contract has a notional value of $310,950 (100 times 
3,109.50). Suppose at that time, an SPX July 3200 call option is 
trading at $21.80, making the cost of that contract overlying 100 units 
of the index $2,180. Proportionately equivalent FLEX Index Option 
contracts if the multiplier is one on an SPX July 3200 call would 
provide investors with the ability to manage and hedge their positions 
and portfolio risk on their underlying investment, at a price of $21.80 
per contract.

------------------------------------------------------------------------
                                               Index           Index
                  Term                     multiplier of   multiplier of
                                                100              1
------------------------------------------------------------------------
Strike Price............................            3200            3200
Bid/offer...............................           21.80           21.80
                                         -------------------------------
    Total Value of Deliverable..........        $320,000          $3,200
    Total Value of Contract.............           2,180           21.80
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    The Exchange believes there is demand from investors for FLEX Index 
Options with an index multiplier of one, and that the proposed rule 
change will expand investors' choices and flexibility with respect to 
the trading of index options. Permitting investors to trade FLEX Index 
Option contracts on full-value indexes with an index multiplier of one 
will provide investors with additional granularity with respect to the 
prices at which they may execute and exercise their FLEX Options on the 
Exchange, as investors may execute and exercise over-the-counter 
options with this smaller contract multiplier. The Exchange believes 
this additional granularity will appeal to investors, as it will 
provide them with an additional tool to manage the positions and 
associated risk in their portfolios based on notional value, which 
currently may equal a fraction of a standard contract.
    For example, suppose a FLEX Trader holds a security portfolio of 
$10,000,000. The FLEX Trader desires to hedge its portfolio with FLEX 
SPX Index Options with an index multiplier of 100. Assume the current 
value of the S&P 500 Index is 3,253.82. With a 100 multiplier, a FLEX 
SPX Index Option contract with an index multiplier of 100 would have a 
notional value of $325,382.00. In order to hedge the entire portfolio, 
the FLEX Trader would need to trade 30.73 contracts ($10,000,000/
$325,382). The nearest whole number of contracts would be 31 contracts, 
which would have a total notional value of $10,086,842. As a result, 
the FLEX Trader could only hedge within $86,842 of its portfolio value 
with FLEX Index Options. A FLEX SPX Index Option contract with an index 
multiplier of one would have a notional value of $3,253.82. In order to 
hedge the entire $10,000,000 portfolio, the FLEX Trader would need to 
trade 3,073.3 contracts ($10,000,000/$3,253.82). The nearest whole 
number of contracts would be 3,073 FLEX SPX Index Option contracts with 
an index multiplier of one, which would have a total notional value of 
$9,998,988.86.\18\ This will allow the FLEX Trader to hedge within 
$1,011.14 of its portfolio value. Therefore, the proposed rule change 
would permit this FLEX Trader to hedge its portfolio more effectively 
with far greater precision ($85,830.86).
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    \18\ The FLEX Trader could also trade 30 FLEX SPX Index Option 
contracts (for a total notional value of $9,761,460) for SPX (with a 
multiplier of 100) and 73 FLEX SPX Index Option contracts (with a 
multiplier of one) for a total notional value of $237,528.86), which 
would have the same total notional value. However, executing these 
two separate transactions introduces price risk, as each could 
execute at separate prices, which may interfere with the FLEX 
Trader's investment objective.
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    The Exchange notes a FLEX Trader currently has the option to trade 
a reduced-value contract on the S&P 500 Index in the form of XSP 
options.\19\ Given the circumstances in the previous paragraph, a FLEX 
SPX Index Option contract with a multiplier of 100 would have a 
notional value of $325,382.00, while a FLEX XSP Index Option contract 
(which also has an index multiplier of 100) \20\ would have a notional 
value of $32,538.20. In order to hedge the FLEX Trader's entire 
portfolio, the FLEX Trader would need to trade 307.3 XSP contracts 
($10,000,000/$32,538.20). The nearest whole number of contracts would 
be 300, which would have a total notional value of $9,989,227.40. As a 
result, the FLEX Trader could hedge within $10,772.60 of its portfolio 
value. While the multipliers of reduced-value indexes are $100, the 
reduced value has a similar effect as a smaller multiplier. A FLEX 
Index Option with an index multiplier of one corresponds to a reduced-
valued index that is 1/100th the value of the full-value index (as 
noted above, the Exchange is currently authorized to list options on 
certain reduced-value indexes with such value). It just uses a 
different multiplier rather than a different value of the underlying 
index.
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    \19\ Not all indexes on which the Exchange lists options have 
equivalent reduced-value indexes.
    \20\ Because XSP is a reduced-value index, FLEX XSP Index 
Options may not have an index multiplier of one under the proposed 
rule change.
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    The Rules permit trading in a put or call FLEX Option series only 
if it does not have the same exercise style, same expiration date, and 
same exercise price as a non-FLEX Option series on the same underlying 
security or index that is already available for trading.\21\ In other 
words, a FLEX Option series may not have identical terms as a non-FLEX 
Option series listed for trading. Rule 1.1 defines the term ``series'' 
as all option contracts of the same class that are the same type of 
option and have the same exercise price and expiration date. Therefore, 
a FLEX Option series in one class may have the same exercise style, 
same expiration date, settlement, and same exercise price as a non-FLEX 
Option series in a different class, even if they are on the same 
underlying security or index. For example, pursuant to the Exchange's 
rules, a FLEX Option overlying Apple stock that is a mini-option (i.e. 
a multiplier of 10) may be listed with the same exercise style, same 
expiration date, settlement,

[[Page 43926]]

and same exercise price as a non-FLEX Option overlying Apple stock that 
is not a mini-option (i.e. a multiplier of 100). The terms of these 
series are not identical, as they are in different classes, and thus 
are permissible under Rule 4.21(a)(1). Similarly, pursuant to the 
proposed rule change, a FLEX Option series overlying the S&P 500 with a 
multiplier of one may have the same exercise style, same expiration 
date, settlement, and same exercise price as a non-FLEX Option series 
overlying the S&P 500 with a multiplier of 100, as they are series in 
different classes.
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    \21\ See Rule 4.21(a)(1).
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    FLEX Index Options with a multiplier of one will be traded in the 
same manner as all other FLEX Options pursuant to Chapter 5, Section F 
of the Rules. As demonstrated above, there are two important 
distinctions between FLEX Index Options with a multiplier of 100 and 
FLEX Index Options with a multiplier of one due to the difference in 
multipliers. The proposed rule change amends certain Rules describing 
the exercise prices and bids and offers of FLEX Options to reflect 
these distinctions. The proposed rule change amends Rule 4.21(b)(6) to 
describe the difference between the meaning of the exercise price of a 
FLEX Index Option with a multiplier of 100 and a FLEX Index Option with 
a multiplier of one. Specifically, the proposed rule change states that 
the exercise price for a FLEX Index Option series in a class with a 
multiplier of one is set at the same level as the exercise price for a 
FLEX Index Option series in a class with a multiplier of 100. The 
proposed rule change also adds the following examples to Rule 
4.21(b)(6) regarding how the deliverable for a FLEX Index Option with a 
multiplier of one will be calculated (as well as for a FLEX Index 
Option with a multiplier of 100 and a FLEX Equity Option, for 
additional clarity and transparency): If the exercise price of a FLEX 
Option series is a fixed price of 50, it will deliver: (A) 100 shares 
of the underlying security at $50 (with a total deliverable of $5,000) 
if a FLEX Equity Option; (B) cash equal to 100 (i.e. the index 
multiplier) times 50 (with a total deliverable value of $5,000) if a 
FLEX Index Option with a multiplier of 100; and (C) cash equal to one 
(i.e. the index multiplier) times 50 (with a total deliverable value of 
$50) if a FLEX Index Option with a multiplier of one. If the exercise 
price of a FLEX Option series is 50% of the closing value of the 
underlying security or index, as applicable, on the trade date, it will 
deliver: (A) 100 shares of the underlying security at a price equal to 
50% of the closing value of the underlying security on the trade date 
(with a total deliverable of 100 times that percentage amount) if a 
FLEX Equity Option; (B) cash equal to 100 (i.e. the index multiplier) 
times a value equal to 50% of the closing value of the underlying index 
on the trade date (with a total deliverable of 100 times that 
percentage amount) if a FLEX Index Option with a multiplier of 100; and 
(C) cash equal to one (i.e. the index multiplier) times a value equal 
to 50% of the closing value of the underlying index on the trade date 
(with a total deliverable of one times that percentage amount) if a 
FLEX Index Option with a multiplier of one.\22\ The descriptions of 
exercise prices for FLEX Equity Options and FLEX Index Options with a 
multiplier of 100 are true today, and merely add for purposes of 
clarity examples to the rule regarding the exercise price of a FLEX 
Equity Option or a FLEX Index Option with a multiplier of 100, the 
deliverables for which are equal to the exercise price times the 100 
contract multiplier to determine the deliverable dollar value. Because 
a FLEX Index Option with a multiplier of one has a multiplier of 1/100 
of the multiplier of a FLEX Index Option with a multiplier of 100, the 
value of the deliverable of a FLEX Index Option with a multiplier of 
one as a result is 1/100 of the value of the deliverable of a FLEX 
Index Option with a deliverable of 100.
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    \22\ This corresponds to the calculation of exercise prices for 
other types of options with a reduced multiplier. For example, Rule 
4.5, Interpretation and Policy .18(b) provides that strike prices 
(i.e., exercise prices) for mini-options (which have multipliers of 
10 rather than 100, as set forth in Rule 4.5, Interpretation and 
Policy .18(a)) are set at the same level as for standard options. 
For example, a call series strike price to deliver 10 shares of 
stock at $125 per share has a total deliverable value of $1,250 (10 
x 125) if the strike is 125. A standard non-FLEX option with a 
strike price of 125 would have a total deliverable value of $12,500 
(100 x 125).
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    Similarly, the proposed rule change amends Rule 5.3(e)(3) to 
describe the difference between the meaning of bids and offers for FLEX 
Equity Options, FLEX Index Options with a multiplier of 100, and FLEX 
Index Options with a multiplier of one. Currently, that rule states 
that bids and offers for FLEX Options must be expressed in (a) U.S. 
dollars and decimals if the exercise price for the FLEX Option series 
is a fixed price, or (b) a percentage, if the exercise price for the 
FLEX Option series is a percentage of the closing value of the 
underlying equity security or index on the trade date, per unit.\23\ As 
noted above, a FLEX Option contract unit consists of 100 shares of the 
underlying security or 100 times the value of the underlying index, as 
they currently have a 100 contract multiplier.\24\ The proposed rule 
change clarifies that bids and offers are expressed per unit, if a FLEX 
Equity Option or a FLEX Index Option with a multiplier of 100, and adds 
an example (as set forth below). This is true today, and merely adds 
clarity to the Rules.
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    \23\ The proposed rule change reorganizes the language in this 
provision to make clear that the phrase ``if the exercise price for 
the FLEX Option series is a percentage of the closing value of the 
underlying equity security or index on the trade date'' applies to 
the entire clause (B) of 5.4(e)(3).
    \24\ See current Rule 4.21(b)(1).
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    The proposed rule change also adds to Rule 5.3(e)(3) the meaning of 
bids and offers for FLEX Index Option with a multiplier of one. 
Specifically, bids and offers for FLEX Index Options with a multiplier 
of one must be expressed in (a) U.S. dollars and decimals if the 
exercise price for the FLEX Option series is a fixed price, or (b) a 
percentage, if the exercise price for the FLEX Option series is a 
percentage of the closing value of the underlying equity security or 
index on the trade date, per 1/100th unit.\25\ Additionally, the 
proposed rule change adds examples of the meaning of bids and offers of 
FLEX Options: If the exercise price of a FLEX Option series is a fixed 
price, a bid of ``0.50'' represents a bid of (A) $50 (0.50 times 100 
shares) for a FLEX Equity Option; (B) $50 (0.50 times an index 
multiplier of 100) for a FLEX Index Option with a multiplier of 100; 
and (C) $0.50 (0.50 times an index multiplier of one) for a FLEX Index 
Option with a multiplier of one.
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    \25\ This corresponds to the meaning of bids and offers for 
other types of options with reduced multiplier. For example, Rule 
5.3(c) provides that bids and offers for an option contract 
overlying 10 shares (i.e., mini-options) must be expressed in terms 
of dollars per 1/10th part of the total value of the contract (for 
example, an offer of 0.50 represents an offer of $5.00 for an option 
contract having a unit of trading consisting of 10 shares, as 
opposed to $50 for a standard option contract having a unit of 
trading consisting of 100 shares).
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    If the exercise price of a FLEX Option series is a percentage of 
the closing value of the underlying equity security, a bid of ``0.50'' 
represents a bid of (A) 50% (0.50 times 100 shares) of the closing 
value of the underlying equity security on the trade date if a FLEX 
Equity Option; (B) 50% (0.50 times an index multiplier of 100) of the 
closing value of the underlying index on the trade date if a FLEX Index 
Option with a multiplier of 100; and (C) 0.50% (0.50 times an index 
multiplier of one) of the closing value of the underlying index on the 
trade date if a FLEX Index Option with a multiplier of one. The 
Exchange believes this approach identifies a clear, transparent 
description of the

[[Page 43927]]

differences between FLEX Index Options with a multiplier of 100 and 
FLEX Index Options with a multiplier of one. Additionally, the Exchange 
believes the proposed terms of FLEX Index Options with a multiplier of 
one are consistent with the terms of the Options Disclosure Document 
(``ODD'').\26\ The proposed rule change also provides additional 
clarity regarding the meaning of bids and offers of FLEX Equity Options 
and FLEX Index Options with a multiplier of 100.
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    \26\ The ODD is available at https://www.theocc.com/about/publications/character-risks.jsp. The ODD states that the exercise 
price of a stock option is multiplied by the number of shares 
underlying the option to determine the aggregate exercise price and 
aggregate premium of that option. See ODD at 18. Similarly, the ODD 
states that the total exercise price for an index option is the 
exercise price multiplied by the multiplier, and the aggregate 
premium is the premium multiplied by the multiplier. See ODD at 8, 
9, and 125. Per the ODD, the amount of the underlying interest may 
be a variable term with respect to flexibly structured options 
(i.e., FLEX Options).
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    The proposed rule change also clarifies that the System rounds bids 
and offers and offers of FLEX Options to the nearest minimum increment 
following application of the designated percentage to the closing value 
of the underlying security or index. This is consistent with current 
functionality and is merely a clarification in the Rules. For example, 
suppose a FLEX Trader enters a bid of 0.27 for a FLEX Equity Option, 
and the underlying security has a closing value of 24.52 on the trade 
date. Following the close on the trade date, the System calculates the 
bid to be 6.6204 (0.27 x 24.52). Because the minimum increment for bids 
and offers in a FLEX Option class is $0.01, the System rounds 6.6204 to 
the nearest penny, which would be a bid of $6.62.
    Pursuant to Rule 4.22(a), a FLEX Option position becomes fungible 
with a non-FLEX option that becomes listed with identical terms. As 
noted above, while the Exchange Rules and OCC By-Laws imply that an 
index multiplier of one is permissible, subject to any other applicable 
filing requirements, the Exchange does not currently, and currently has 
no plans to, list for trading any non-FLEX Index Option class with a 
multiplier of one. Therefore, initially it would not be possible for a 
FLEX Index Option series with a multiplier of one to have the same 
terms as a non-FLEX Index Option series, and thus it would not be 
possible for a FLEX Index Option series with a multiplier of 100 to be 
identical to, and fungible with, any non-FLEX Option pursuant to Rule 
4.22(a). As discussed above, options with different multipliers are 
different classes, and an option series in one class cannot be fungible 
with an option series in another classes, even if they are economically 
equivalent. Fungibility is only possible for series with identical 
terms. This is similar to how a FLEX XSP Index Option series is not 
fungible to an economically equivalent non-FLEX SPX Option series. If 
the Exchange determines to list non-FLEX Index options with a one 
multiplier in the future, then a FLEX Index Option with a multiplier of 
one would become fungible with any non-FLEX Index Option with a 
multiplier of one with the same terms pursuant to Rule 4.22(a).
    The proposed rule change amends Rule 8.35(a) regarding position 
limits for FLEX Options to describe how FLEX Index Options with a 
multiplier of one will be counted for purposes of determining 
compliance with position limits. Because 100 FLEX Index Options with a 
multiplier of one are equivalent to one FLEX Index Option with a 
multiplier of 100 overlying the same index due to the difference in 
contract multipliers, proposed Rule 8.35(a)(7) states that for purposes 
of determining compliance with the position limits under Rule 8.35, 100 
FLEX Index Option contracts with a multiplier of one equal one FLEX 
Index Option contract with a multiplier of 100 with the same underlying 
index.\27\ This is consistent with the current treatment of other 
reduced-value FLEX Index Options with respect to position limits. The 
proposed rule change adds paragraph (g) to Rule 8.42 to make a 
corresponding statement regarding the application of exercise limits to 
FLEX Index Options with a multiplier of one. The margin requirements 
set forth in Chapter 10 of the Rules will apply to FLEX Index Options 
with a multiplier of one (as they currently do to all FLEX 
Options).\28\
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    \27\ The proposed rule change makes a corresponding change to 
Rule 8.35(b) to clarify that, like reduced-value FLEX contracts, 
FLEX Index Option contracts with a multiplier of one will be 
aggregated with full-value contracts and counted by the amount by 
which they equal a full-value contract for purposes of the reporting 
obligation in that provision (i.e., 100 FLEX Index Options with a 
multiplier of one will equal one FLEX Index Option contract with a 
multiplier of 100 overlying the same index).
    \28\ Pursuant to Rule 8.43(j), FLEX Index Options with a 
multiplier of one will be aggregated with non-FLEX Index Options on 
the same underlying index in the same manner as all other FLEX Index 
Options.
---------------------------------------------------------------------------

    The proposed rule change also corrects an administrative error in 
Rule 8.35(a). Currently, there are two subparagraphs numbered as 
(a)(5). The proposed rule change amends paragraph (a) to renumber the 
second subparagraph (a)(5) to be subparagraph (a)(6).
    With regard to the impact of this proposal on system capacity, the 
Exchange has analyzed its capacity and represents that it and the 
Options Price Reporting Authority have the necessary systems capacity 
to handle the potential additional traffic associated with the listing 
and trading of FLEX Index Options with a multiplier of one. The 
Exchange also understands that the OCC will be able to accommodate the 
listing and trading of FLEX Index Options with a multiplier of one. 
FLEX Index Options with a multiplier of one will be listed with 
different trading symbols than FLEX Index Options with a multiplier of 
100 with the same underlying to reduce any potential confusion.\29\
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    \29\ For example, a FLEX Index Option for index ABC with a 
multiplier of 100 may have symbol 4ABC (the ``4'' is the designation 
generally used for FLEX Options to distinguish from the non-FLEX 
Option with the same underlying), while a FLEX Index Option for 
class ABC with a multiplier of one may have symbol 4ABC9.
---------------------------------------------------------------------------

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.\30\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \31\ 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) \32\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78f(b).
    \31\ 15 U.S.C. 78f(b)(5).
    \32\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes the proposed rule change will 
benefit investors by expanding investors' choices and flexibility with 
respect to the trading of FLEX Options. These options will provide 
investors with additional granularity with respect to the prices at 
which they may execute and exercise their FLEX Index Options on the 
Exchange, as investors may

[[Page 43928]]

execute and exercise unregulated over-the-counter options with this 
smaller contract multiplier. The Exchange believes this additional 
granularity will provide investors with an additional tool to manage 
more efficiently their positions and associated risk based on notional 
value so that they equal whole contracts, as opposed to fractions of a 
standard contract as currently may happen. Given the various trading 
and hedging strategies employed by investors, this additional 
granularity may provide investors with more control over the trading of 
their FLEX strategies and management of their positions and risk 
associated with FLEX option positions in their portfolios. FLEX Index 
Options with a multiplier of one are substantially similar to FLEX 
Index Options on reduced-value indexes, but will provide investors with 
further granularity with respect to options for which there already is 
a reduced-valued index and also a granular option with respect to 
options for which there is no reduced-value index.
    FLEX Index Options with a multiplier of one will trade in the same 
manner as all other FLEX Options, with premiums (i.e., bids and offers) 
and deliverables adjusted proportionately to reflect the difference in 
multiplier, and thus the difference in the deliverable value of the 
underlying. The Exchange believes the proposed rule change adds 
transparency and clarity to the Rules regarding the distinctions 
between FLEX Index Options with a multiplier of 100 and FLEX Index 
Options with a multiplier of one due to the different multipliers will 
benefit investor, as well as with respect to current terms of FLEX 
Options. This proposal is similar to rules regarding other reduced-
value options.\33\
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    \33\ See, e.g., Rules 4.5, Interpretation and Policy .18 
(description of strike prices for mini-options, which have a 
multiplier of 10), 5.3(c) (description of bids and offers for mini-
options), and 5.74(a)(4) (description of minimum size of FLEX Agency 
Order for mini-options). Just as terms for mini-options, which have 
a multiplier of 1/10th the size of standard options, equal 1/10th of 
the same terms for standard options, the proposed terms for FLEX 
Index Options with a multiplier of one, which have a multiplier 1/
100th the size of FLEX Index Options with a multiplier of 100, equal 
1/100th of the same terms as FLEX Index Options with a multiplier of 
100.
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change will further benefit 
investors, as it also provides clarity regarding bids and offers, and 
exercise prices, of FLEX Index Options with a multiplier of 100 and 
FLEX Equity Options (but makes no changes to the terms of these options 
or how they trade). These proposed rule changes include (1) providing 
examples of the meaning of the exercise prices and bids and offers of 
both FLEX Index Options with a multiplier of 100 and FLEX Index Options 
with a multiplier of one (as well as FLEX Equity Options) and (2) 
including the corresponding minimum size for a FLEX SAM Agency Order 
consisting of FLEX Index Options with a multiplier of one. This 
additional clarity and transparency in the Rules will benefit 
investors. The Exchange believes the proposed nonsubstantive changes 
(to clarify the current contract multiplier for FLEX Index Options with 
a multiplier of 100 and FLEX Equity Options in Rule 4.21(b), to add 
examples regarding exercise prices and the meaning of bids and offers 
of FLEX Index Options with a multiplier of 100 and FLEX Equity Options, 
and to correct the numbering of subparagraphs in Rule 8.35(a)) will 
protect investors, as they enhance transparency and clarity in the 
Rules but make no changes to the terms of these options or how they 
trade. Additionally, the correction to subparagraph numbering will 
enable investors to more easily reference rule provisions in different 
subparagraphs.
    The Exchange believes the proposed rule change regarding the 
treatment of FLEX Index Options with a multiplier of one with respect 
to determining compliance with position and exercise limits is designed 
to prevent fraudulent and manipulative acts and practices and promote 
just and equitable principles of trade, as FLEX Index Options with a 
multiplier of one will be counted for purposes of those limits in a 
proportional manner to FLEX Index Options with a multiplier of 100 and 
aggregated with non-FLEX Options overlying the same index manner as 
FLEX Index Options currently are. This is similar to limits imposed on 
reduced-value options. As noted above, while the multipliers of 
reduced-value indexes are $100, the reduced value has a similar effect 
as a smaller multiplier. A FLEX Index Option with a multiplier of one 
corresponds to a reduced-valued index that is 1/100th the value of the 
full-value index (as noted above, the Exchange is currently authorized 
to list options on certain reduced-value indexes with such value).\34\ 
It just uses a different multiplier rather than a different value of 
the underlying index.\35\ The Exchange believes its enhanced 
surveillances continue to be designed to deter and detect violations of 
Exchange Rules, including position and exercise limits and possible 
manipulative behavior, and those surveillance will apply to FLEX Index 
Options with a multiplier of one.
---------------------------------------------------------------------------

    \34\ See Rule 4.10(h) through (m) and Rule 4.13(a)(3) (which 
lists European-style options currently approved for trading on the 
Exchange). The Exchange notes Rule 4.10 describes generic listing 
criteria for index options, which apply to reduced-value index 
options as well.
    \35\ This is also similar to position limits for other options 
with multipliers less than 100. See, e.g., Rule 8.30, Interpretation 
and Policy .08 (describing position limits for mini-options).
---------------------------------------------------------------------------

    The Exchange does not believe the propose rule change raises price 
protection concerns that market participants may submit FLEX Index 
Options with a multiplier of one rather than the economically 
equivalent non-FLEX Index Options in order to get better pricing, or 
that a trade of a FLEX Index Option with a multiplier of one may occur 
at a price that would trade through the book of the non-FLEX full-value 
index option.\36\ The Exchange believes the risk (if any) of a market 
participant trading a FLEX Index Option with a multiplier of one rather 
than a non-FLEX Index Option with a multiplier of 100 with the same 
underlying to use the FLEX market as a substitute for the non-FLEX 
market and achieve such a result is minimal. As further described 
below, this possibility exists today with respect to indexes on which 
the Exchange may list full- and reduced-value index options as well as 
economically equivalent index and ETF options, as a market participant 
could trade FLEX reduced-value index option series (as long as not 
listed as non-FLEX option series) as opposed to non-FLEX full-value 
index option series. Similarly, a market participant could trade FLEX 
Equity Options on an ETF overlying an index as opposed to a non-FLEX 
option overlying the same index (as long as not listed as a non-FLEX 
option series).\37\
---------------------------------------------------------------------------

    \36\ The same concern would have been raised if a market 
participant submits a FLEX Order for a mini-option for one of the 
securities specified in the rules rather than an economically 
equivalent non-FLEX mini-option overlying the same security.
    \37\ The Exchange notes there are no price protections in the 
non-FLEX market for economically equivalent options listed for 
trading. For example, suppose the Aug SPX 3300 call and Aug XSP 330 
call are both listed for trading. A market participant could 
purchase the XSP call at a price that is through the market of the 
SPX option, which is economically equivalent. Similarly, an Aug SPY 
330 call may trade at a price through the market of the Aug XSP 330 
call, which is economically equivalent. Trade-throughs are only 
prohibited for identical series, not economically equivalent series.
---------------------------------------------------------------------------

    The Exchange believes attempting to execute an order in the FLEX 
market as a substitute for the non-FLEX market would minimize execution 
opportunities for that order. Such trading would be inefficient for 
market participants and could introduce price and execution risk to 
market participants' trading strategies given the

[[Page 43929]]

reduced liquidity, participation, and price discovery in the FLEX 
market compared to the non-FLEX market.\38\ Additionally, if a FLEX 
Index Option with a multiplier of one traded through the book of the 
equivalent non-FLEX Index Option with a multiplier of 100, while that 
would be a better price for one transaction participant, it would be a 
worse price for the participant on the opposite side, and thus it may 
be more difficult for the initiating participant to obtain an 
execution. For example, suppose the market for Aug ABC 800 call with a 
multiplier of 100 is 10.20-11.00. If a market participant submitted a 
FLEX Order to buy Aug ABC 800 call with a multiplier of one with a bid 
of 0.10 (equivalent to a bid of 10.00 in the non-FLEX market for the 
series with a multiplier of 100), it is unlikely another market 
participant would sell at that price, given that participant could sell 
the economically equivalent non-FLEX Option series at 10.20, which 
would be a better price for that seller. Given the likely difficulties 
(such as reduced liquidity and potentially longer timeframe to receive 
execution) of trading in the FLEX market as a substitute for trading an 
economically equivalent option in the non-FLEX market (such as to 
obtain a better execution price), the Exchange believes the risk of 
this occurring is de minimis. The Exchange has not observed market 
participants attempting to trade in the FLEX market rather than the 
non-FLEX market for this purpose in classes in which this is possible 
today.
---------------------------------------------------------------------------

    \38\ See Sections VII and X of the ODD regarding risks 
associated with FLEX Options.
---------------------------------------------------------------------------

    Additionally, as noted above, the Exchange's surveillance program 
will incorporate FLEX Index Options with a multiplier of one. If the 
Exchange identifies FLEX Orders that appear to be attempts to use FLEX 
Index Options with a multiplier of one to avoid trading in the non-FLEX 
market, the Exchange may determine those orders to be inconsistent with 
just and equitable principles of trading and thus a violation of Rule 
8.1. In addition, broker-dealers are also subject to due diligence and 
best execution obligations, which obligations may require broker-
dealers to consider the prices of economically equivalent options when 
executing customer orders. The Exchange notes that market participants 
may currently, and currently do, execute orders like the ones being 
proposed in the unregulated OTC market, where neither the Exchange nor 
the Commission has oversight over market participants that may be 
purposely trading at prices through the listed market. As discussed 
below, the proposed rule change may encourage these orders to be 
submitted to the Exchange, which could bring these orders into a 
regulated market and be subject to surveillance and oversight to which 
they are currently not subject with respect to execution of these 
option orders.
    As noted above, the Exchange may currently authorize for listing 
and trading on the Exchange options on indexes that are either full-
value or reduced-value (subject to any applicable regulatory 
requirements).\39\ Some reduced-value indexes are 1/10th the value of 
the full-value index (for example, the FTSE 100 Index), while others 
are 1/100th the value of the full-value-index (for example, the FTSE 
China 50 Index). The Exchange notes there are not reduced-value indexes 
and full-value indexes for all indexes on which the Exchange currently 
lists options for trading. For indexes on which the Exchange may 
currently list full- and reduced-value options, while the index 
multipliers of reduced-value indexes are $100, the reduced value has a 
similar effect as a smaller multiplier. As a result, the Exchange may 
currently authorize for trading a FLEX Index Option on a reduced-value 
index that is an economic equivalent of a non-FLEX Index Option on the 
full-value index, as long as the FLEX Index Option on the reduced-value 
index is not listed as a non-FLEX Index Option. For example, suppose 
the Exchange lists for trading a non-FLEX SPX Index Option call with an 
August expiration and exercise price of 3300. Assuming there is no non-
FLEX XSP Index Option call with an August expiration and exercise price 
of 330 listed for trading, a FLEX Trader may submit a FLEX Order for a 
FLEX XSP Index Option call with an August expiration and exercise price 
of 330.
---------------------------------------------------------------------------

    \39\ See Rule 4.10.
---------------------------------------------------------------------------

    The Exchange notes there are numerous examples of economically 
equivalent options that trade on options exchanges today that create 
the possibility that a trade in a full (or reduced) contract would be 
through the book of the reduced (or full) contract (either in the FLEX 
or non-FLEX market). For example, the Exchange currently lists SPX 
options and XSP options, which are 1/10th the size of SPX options. It 
is possible for transactions in XSP options to occur through the price 
of an economically equivalent SPX option. Similarly, SPY options are 
economically equivalent to XSP options, as each are based on 1/10th the 
S&P 500 Index. It is possible for a SPY option to trade through the 
book of an equivalent XSP (and SPX) option. Suppose the Exchange lists 
for trading a non-FLEX XSP Index Option call with an August expiration 
and exercise price of 330. Assuming there is no non-FLEX SPY Option 
call with an August expiration and exercise price of 330 listed for 
trading, a FLEX Trader may submit a FLEX Order for a FLEX SPY Equity 
Option call with an August expiration and exercise price of 330. 
Additional examples of economically equivalent options (which can be 
FLEX and non-FLEX, thus making it possible that a FLEX Option could 
trade through the book of an economically equivalent non-FLEX option) 
that may be listed on options exchanges include options on the Russell 
2000 Index, Mini-Russell 2000 Index, and IWM exchange-traded fund 
(``ETF'') and options on the Nasdaq 100, the Mini-Nasdaq 100, and the 
QQQ ETF, among others. Further, the Exchange permits FLEX Traders to 
apply Asian and Cliquet style settlement to FLEX Broad-Based Index 
options to provide investors with additional trading and hedging tools. 
It is possible, for example, for a FLEX SPX option to have the same 
strike and expiration date as a non-FLEX SPX option, and thus have an 
economic equivalent listed for trading, but the FLEX option could trade 
through the book of the non-FLEX option.\40\
---------------------------------------------------------------------------

    \40\ The Exchange notes the approval of Asian and Cliquet style 
options included no reference to price protection concerns.
---------------------------------------------------------------------------

    As these examples demonstrate, it is currently possible for many 
economically equivalent options to be listed on the Exchange, both in 
the FLEX and non-FLEX markets. The Exchange has not observed market 
participants attempting to trade in the FLEX market rather than the 
non-FLEX market by using economically equivalent options. The proposed 
rule change similarly permits the possibility that FLEX Index Options 
with a multiplier of one may have a non-FLEX Index Option with a 
multiplier of 100 that is an economic equivalent listed for 
trading.\41\ Like other FLEX products, the Exchange believes the 
proposed rule change may provide an additional trading and hedging tool 
to market participants to individual tailor certain terms of options to 
address their investment needs. The Exchange believes the benefits of 
this additional tool in the listed options market

[[Page 43930]]

outweigh the de minimis (if any) risk of market participants using FLEX 
Index Options with a multiplier of one to trade through the markets for 
any economically equivalent non-FLEX option. The Exchange is not aware 
of any negative impact on execution prices as a result of the listing 
of economically equivalent options on the Exchange today, nor is the 
Exchange aware of any data or analysis suggesting that trading of FLEX 
Options has acted as a substitute for the trading of standardized non-
FLEX options as a result of the ability to list FLEX Options that are 
economically equivalent to non-FLEX Options listed for trading on the 
Exchange. The Exchange understands that market participants generally 
use the same information when pricing economically equivalent options, 
which the Exchange believes further addresses any price protection 
concerns.
---------------------------------------------------------------------------

    \41\ The Exchange notes that FLEX Options that are Asian or 
Cliquet-settled, like FLEX Index Options with a multiplier of one, 
can never be fungible with non-FLEX options, as those settlement 
styles are not currently available for non-FLEX options. See 
Securities Exchange Act Release No. 75425 (July 10, 2015), 80 FR 
42152 (July 16, 2015) (SR-CBOE-2015-044).
---------------------------------------------------------------------------

    By permitting FLEX Index Options to trade with the same multiplier 
currently available to customized options in the OTC market, the 
Exchange believes the proposed rule change will remove impediments to 
and perfects the mechanism of a free and open market and a national 
market system by further improving a comparable alternative to the OTC 
market in customized options. By enhancing our FLEX trading platform to 
provide additional flexible terms available in the OTC market but not 
currently available in the listed options market, the Exchange believes 
it may be a more attractive alternative to the OTC market. The Exchange 
believes market participants benefit from being able to trade 
customized options in an exchange environment in several ways, 
including but not limited to the following: (1) Enhanced efficiency in 
initiating and closing out positions; (2) increased market 
transparency; and (3) heightened contra-party creditworthiness due to 
the role of the OCC as issuer and guarantor of FLEX Options.
    The proposed rule change is also consistent with Section 9(b) of 
the Act \42\ and Rule 9b-1 thereunder.\43\ Rule 9b-1 provides that 
standardized options are options contracts trading on a national 
securities exchange that relate to options classes the terms of which 
are limited to specific expiration dates and exercise prices, or such 
other securities as the Commission may, by order, designate. 
Additionally, Rule 9b-1 requires an options disclosure document 
(``ODD'') be provided to customers, which includes a glossary of 
relevant terms and identification of instruments underlying options 
classes and classes covered by the ODD. The current ODD, available on 
the OCC website (and previously filed with the Commission), describes 
flexibly structured options (i.e., FLEX Options) that may be issued and 
traded on exchanges. Specifically, Chapter VII of the ODD states that 
the terms of a flexibly structured option that may be fixed by the 
parties are called variable terms, which is what makes these options 
different from other options. The ODD further states that included 
among the terms that an options market may identify as variable terms 
are the specification and amount of the underlying interest (i.e., the 
multiplier associated with the underlying security or index). 
Therefore, the ODD currently includes a description of and risks 
associated with flexibly structured options, which may have an amount 
of the underlying interest that differs from the amount of the 
underlying interest associated with non-FLEX options overlying the same 
index, such as FLEX Index Options with a multiplier of one.
---------------------------------------------------------------------------

    \42\ See 15 U.S. Code Sec.  78i.
    \43\ See 17 CFR 240.9b-1.
---------------------------------------------------------------------------

    Additionally, as discussed above, the Exchange believes the OCC 
Bylaws imply that the Exchange may designate a multiplier of one for an 
index option class because the Bylaws are silent on a default index 
multiplier for index options but not for a default unit of trading for 
equity options. As further discussed above, the Exchange's rules 
currently permit it to specify the index multiplier of an option 
contract. Those rules would have been previously filed with the 
Commission. Therefore, the Exchange believes the proposed rule change 
will remove impediments to and perfect the mechanism of a free and open 
market and a national market system, as it is consistent with the rules 
of another self-regulatory organization.
    The Commission has not historically issued orders designating new 
classes as ``standardized options'' pursuant to Rule 9b-1.\44\ This 
includes listing of options that contain multipliers other than 100. 
For example, when the Commission approved mini-options,\45\ there was 
no Commission ``designation'' of mini-options as being standardized 
options available for trading on national securities exchanges. The 
multiplier of an option relates to the value of the underlying, and 
thus is part of the class designation rather than a term of the series. 
Each series of a FLEX Index Option with a multiplier of one will 
contain the terms designated by the Commission as those that constitute 
standardized options, and therefore, are consistent with Section 9(b) 
of the Act. Specifically, the Commission provided that ``[a]part from 
the flexibility with respect to strike prices, settlement, expiration 
dates, and exercise style, all of the other terms of FLEX Options are 
standardized pursuant to OCC and CBOE rules. Standardized terms include 
matters such as exercise procedures, contract adjustments, time of 
issuance, effect of closing transactions, restrictions on exercise 
under OCC rules, margin requirements, and other matters pertaining to 
the rights and obligations of holders and writers.'' \46\ The number of 
shares or amount of cash received or paid, as applicable, upon 
settlement of an option relate is a right or obligation, respectively 
of a holder or writer. Therefore, like all FLEX Options, in accordance 
with the 1993 FLEX Approval Order, investors will have the ability to 
designate the strike price, settlement, expiration date, and exercise 
style of FLEX Index Options with a multiplier of one, and all other 
terms (including matters such as exercise procedures, contract 
adjustments, time of issuance, effect of closing transactions, 
restrictions on exercise under OCC rules, margin requirements, and 
other matters pertaining to the rights and obligations of holders and 
writers (such as the index multiplier)) will be standardized pursuant 
to OCC and CBOE Rules (specifically, OCC Bylaw Article I, Section 1, 
I(3) and Cboe Rule 4.11, as discussed above, pursuant to which the 
Exchange specifies the index multiplier for an index). When submitting 
a FLEX Order for a FLEX Index Option with a multiplier of one, a FLEX 
Trader will designate each of the strike price, settlement, expiration 
date, and exercise style for option contract it seeks to trade, and the 
other terms will be the same as the standardized terms on the same 
underlying indexes as designated by the Exchange. A FLEX Trader 
electing to submit a FLEX Order for a FLEX Index Option on an index 
with a multiplier of one as opposed to for a FLEX Index Option on the 
same index with a multiplier of 100 is no different than a FLEX Trader 
electing to submit a FLEX Order for a FLEX Index Option on one index as 
opposed to a FLEX Index Option on another index. If the Exchange 
determines to list non-FLEX index options with a multiplier of one, a 
FLEX Index Option with a multiplier of one with the same terms would 
become fungible with such options.
---------------------------------------------------------------------------

    \44\ See 17 CFR 240.9b-1.
    \45\ See supra note 3.
    \46\ See 1993 FLEX Approval Order.
---------------------------------------------------------------------------

    The Exchange notes that FLEX Options listed on the Exchange were 
initially listed on only two indexes--the

[[Page 43931]]

S&P 500 (SPX) and the S&P 100 (XSP)--and were subject to minimum size 
requirements.\47\ FLEX Options may now be listed on the Exchange on any 
underlying equity or index and in any size, demonstrating the broader 
demand and benefits of FLEX Options and the innovation that has 
continued to occur with respect to these options. When Congress charged 
the Commission with supervising the development of a ``national market 
system'' for securities, Congress stated its intent that the ``national 
market system evolve through the interplay of competitive forces as 
unnecessary regulatory restrictions are removed.\48\ Consistent with 
this purpose, Congress and the Commission have repeatedly stated their 
preference for competition, rather than regulatory intervention to 
determine products and services in the securities markets.\49\ This 
consistent and considered judgment of Congress and the Commission is 
correct, particularly in light of evidence of robust competition in the 
options trading industry. The fact that an exchange proposed something 
new is a reason to be receptive, not skeptical--innovation is the life-
blood of a vibrant competitive market--and that is particularly so 
given the continued internalization of the securities markets, as 
exchanges continue to implement new products and services to compete 
not only in the United States but throughout the world. Options 
exchanges continuously adopt new and different products and trading 
services in response to industry demands in order to attract order flow 
and liquidity to increase their trading volume. This competition has 
led to a growth in investment choices, which ultimately benefits the 
marketplace and the public. The Exchange believes that the proposed 
rule change will help further competition by providing market 
participants with yet another investment option for the listed options 
market.
---------------------------------------------------------------------------

    \47\ As noted above, it is possible for a FLEX XSP option to be 
economically equivalent to a non-FLEX SPX option. However, the 1993 
FLEX Approval Order made no reference to any concerns regarding the 
listing of FLEX Options economically equivalent to non-FLEX Options. 
See id.
    \48\ See H.R. Rep. No. 94-229, at 92 (1975) (Conf. Rep.).
    \49\ See S. Rep. No. 94-75, 94th Cong., 1st Sess. 8 (1975) 
(``The objective [in enacting the 1975 amendments to the Exchange 
Act] would be to enhance competition and to allow economic forces, 
interacting within a fair regulatory field, to arrive at appropriate 
variations in practices and services.''); Order Approving Proposed 
Rule Change Relating to NYSE Arca Data, Securities Exchange Act 
Release No. 59039 (December 2, 2008), 73 FR 74770 (December 9, 2008) 
(``The Exchange Act and its legislative history strongly support the 
Commission's reliance on competition, whenever possible, in meeting 
its regulatory responsibilities for overseeing the [self-regulatory 
organizations] and the national market system. Indeed, competition 
among multiple markets and market participants trading the same 
products is the hallmark of the national market system.''); and 
Regulation NMS, 70 FR at 37499 (observing that NMS regulation ``has 
been remarkably successful in promoting market competition in [the] 
forms that are most important to investors and listed companies'').
---------------------------------------------------------------------------

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 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 Exchange does not believe the proposed rule 
change will impose any burden on intramarket competition that is not 
necessary or appropriate in furtherance of the purposes of the Act, 
because all FLEX Index Options with a multiplier of one will be 
available for all indexes currently eligible for FLEX trading, and all 
FLEX Traders may trade FLEX Index Options with a multiplier of one. 
FLEX Index Options with a multiplier of one will trade in the same 
manner as FLEX Index Options with a multiplier of 100, with certain 
terms proportionately adjusted to reflect the different contract 
multipliers. The Exchange believes it is appropriate to limit FLEX 
Index Options with a multiplier of one to full-value indexes, as 
several indexes have large notional values, which makes the precision 
afforded by FLEX Index Options with a multiplier of one the most 
beneficial to market participants.
    The Exchange does not believe the proposed rule change will impose 
any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, because the 
proposed rule change relates solely to FLEX options listed solely for 
trading on the Exchange. Other options exchanges may determine to offer 
flexible options, including with a different contract multiplier. To 
the extent the proposed rule change makes the Exchange a more 
attractive trading venue for market participants on other exchanges, 
those market participants may elect to become Exchange market 
participants.
    The Exchange believes that the proposed rule change may relieve any 
burden on, or otherwise promote, competition. The Exchange believes 
this is an enhancement to a comparable alternative to the OTC market in 
customized options. By enhancing our FLEX trading platform to provide 
additional contract granularity that available in the OTC market but 
not currently available in the listed options market, the Exchange 
believes it may be a more attractive alternative to the OTC market. The 
Exchange believes market participants will benefit from being able to 
trade customized options in an exchange environment in several ways, 
including but not limited to the following: (1) Enhanced efficiency in 
initiating and closing out position; (2) increased market transparency; 
and (3) heightened contra-party creditworthiness due to the role of OCC 
as issuer and guarantor of FLEX Options.
    The proposed nonsubstantive changes (to move and clarify the 
current contract multiplier for FLEX Equity Options and FLEX Index 
Options with a multiplier of 100 in Rule 4.21(b) and to correct the 
numbering of subparagraphs in Rule 8.35(a), as well as examples of the 
exercise prices and the meanings of bids and offers) will have no 
impact on competition, as they merely clarify or correct, as 
applicable, information in the Rules and make no changes to how FLEX 
Options trade.

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

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

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

[[Page 43932]]

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-2020-034 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-2020-034. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2020-034, and should be submitted 
on or before August 10, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\50\
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    \50\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-15551 Filed 7-17-20; 8:45 am]
BILLING CODE 8011-01-P


