[Federal Register Volume 85, Number 202 (Monday, October 19, 2020)]
[Notices]
[Pages 66391-66393]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23016]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90165; File No. SR-CBOE-2020-098]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Extend 
the Pilot Period Related to the Market-Wide Circuit Breaker in Rule 
5.22

October 13, 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 October 8, 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 
and II below, which Items have been prepared by the Exchange. The 
Exchange filed the proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 
19b-4(f)(6) thereunder.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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 extend the pilot period related to the market-wide circuit breaker 
in Rule 5.22. 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
    Exchange Rule 5.22 describes the methodology for determining when 
to halt trading in all stock options due to extraordinary market 
volatility, i.e., market-wide circuit breakers (``MWCB''). The MWCB 
mechanism was approved by the Securities and Exchange Commission (the 
``Commission'') to operate on a pilot basis, the term of which was to 
coincide with the pilot period for the Plan to Address Extraordinary 
Market Volatility Pursuant to Rule 608 of Regulation NMS (the ``LULD 
Plan''),\5\ including any extensions to the pilot period for the LULD 
Plan. Though the LULD Plan was primarily designed for equity markets, 
the Exchange believed it would, indirectly, potentially impact the 
options markets as well. Thus, the Exchange has previously adopted and 
amended Rule 5.22 \6\ (as well as other options pilot rules) to ensure 
the option markets were not harmed as a result of the Plan's 
implementation and implemented such rule on a pilot basis that has 
coincided with the pilot period for the Plan.\7\ The Commission 
recently approved an amendment to the LULD Plan for it to operate on a 
permanent, rather than pilot, basis.\8\ In light of the proposal to 
make the LULD Plan permanent, the Exchange amended Rule 5.22 to untie 
the pilot's effectiveness from that of the LULD Plan and to extend the 
pilot's effectiveness to the close of business on October 18, 2019.\9\ 
The Exchange subsequently amended Rule 5.22 to extend the pilot to the 
close of business on October 18, 2020.\10\ The Exchange now proposes to 
amend Rule 5.22 to extend the pilot to the close of business on October 
18, 2021. This filing does not propose any substantive or additional 
changes to Rule 5.22.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012). The LULD Plan provides a 
mechanism to address extraordinary market volatility in individual 
securities.
    \6\ In October 2019, the Exchange restructured its Rulebook and 
relocated previous Rule 6.3B, governing the MWCB mechanism, to 
current Rule 5.22. No substantive changes were made to the rule. See 
Securities Exchange Act Release No. 87224 (October 4, 2019), 84 FR 
54652 (October 10, 2019) (SR-CBOE-2019-081).
    \7\ See Securities Exchange Act Release Nos. 65438 (September 
28, 2011), 76 FR 61447 (October 4, 2011) (SR-CBOE-2011-087) 
(amending Rule 5.22, prior Rule 6.3B, for determining when to halt 
trading in all stocks and stock options due to extraordinary market 
volatility); 68770 (January 30, 2013), 78 FR 8211 (February 5, 2013) 
(SR-CBOE-2013-011) (amending Rule 5.22, prior Rule 6.3B, to delay 
the operative date of the pilot to coincide with the initial date of 
operations of the Plan); and 85616 (April 11, 2019), 84 FR 16093 
(April 17, 2019) (SR-CBOE-2019-020) (proposal to extend the pilot 
for certain options pilots, including Rule 5.22, prior Rule 6.3B).
    \8\ See Securities Exchange Act Release No. 85623 (April 11, 
2019), 84 FR 16086 (April 17, 2019) (Order Approving Amendment No. 
18).
    \9\ See Securities Exchange Act Release No. 85616 (April 11, 
2019), 84 FR 16093 (April 17, 2019) (SR-CBOE-2019-020) (proposal to 
extend the pilot for certain options pilots, including Rule 5.22, 
prior Rule 6.3B).
    \10\ See Securities Exchange Act Release No. 87341 (October 18, 
2019), 84 FR 57081 (October 24, 2019) (SR-CBOE-2020-100).
---------------------------------------------------------------------------

    The market-wide circuit breaker under Rule 5.22 provides an 
important, automatic mechanism that is invoked to promote stability and 
investor confidence during a period of significant stress when 
securities markets experience extreme broad-based declines. As stated 
above, because all U.S. equity exchanges and FINRA adopted uniform 
rules on a pilot basis relating to market-wide circuit breakers in 2012 
(``MWCB Rules''), which are designed to slow the effects of extreme 
price movement through coordinated

[[Page 66392]]

trading halts across securities markets when severe price declines 
reach levels that may exhaust market liquidity, the Exchange, too, 
adopted a MWCB mechanism on a pilot basis pursuant to Rule 5.22. 
Market-wide circuit breakers provide for trading halts in all equities 
and options markets during a severe market decline as measured by a 
single-day decline in the S&P 500 Index.
    Pursuant to Rule 5.22, a market-wide trading halt will be triggered 
if the S&P 500 Index declines in price by specified percentages from 
the prior day's closing price of that index. Currently, the triggers 
are set at three circuit breaker thresholds: 7% (Level 1), 13% (Level 
2), and 20% (Level 3). A market decline that triggers a Level 1 or 
Level 2 halt after 9:30 a.m. ET and before 3:25 p.m. ET would halt 
market-wide trading for 15 minutes, while a similar market decline at 
or after 3:25 p.m. ET would not halt market-wide trading. A market 
decline that triggers a Level 3 halt, at any time during the trading 
day, would halt market-wide trading for the remainder of the trading 
day.
    Since the MWCB pilot was last extended in October 2019, the MWCB 
mechanism has proven itself to be an effective tool for protecting 
markets through turbulent times. In the Spring of 2020, at the outset 
of the worldwide COVID-19 pandemic, U.S. equities markets experienced 
four MWCB Level 1 halts, on March 9, 12, 16, and 18, 2020. In each 
instance, the markets halted as intended upon a 7% drop in the S&P 500 
Index and resumed as intended 15 minutes later.
    In response to these events, the previously-convened MWCB Taskforce 
(``Taskforce'') reviewed the March 2020 halts and considered whether 
any immediate changes to the MWCB mechanism should be made. The 
Taskforce, consisting of representatives from equities exchanges, 
futures exchanges, FINRA, broker-dealers, and other market 
participants, had been assembled in early 2020 to consider more 
generally potential changes to the MWCB mechanism. The Taskforce held 
ten meetings in the Spring and Summer of 2020 that were attended by 
Commission staff to consider, among other things: (1) Whether to retain 
the S&P 500 Index as the standard for measuring market declines; (2) 
whether halts that occur shortly after the 9:30 a.m. market open cause 
more harm than good; and (3) what additional testing of the MWCB 
mechanism should be done.
    After considering data and anecdotal reports of market 
participants' experiences during the March 2020 MWCB events, the 
Taskforce did not recommend immediate changes be made to the use of the 
S&P 500 Index as the reference price against which market declines are 
measured, or to the current MWCB mechanism which permits halts even 
shortly after the 9:30 a.m. market open. The Taskforce recommended 
creating a process for a backup reference price in the event that the 
S&P 500 Index becomes unavailable and enhancing functional MWCB 
testing. The Taskforce also asked CME to consider modifying its rules 
to enter into a limit-down state in the futures pre-market after a 7% 
decline instead of 5%.
    On September 17, 2020, the Director of the Division of Trading and 
Markets requested that the equities exchanges and FINRA prepare a more 
complete study of the design and operation of the MWCB mechanism and 
the LULD Plan during the period of volatility in the Spring of 2020. 
Based on the results of that study, the Exchange expects to work with 
the Commission, FINRA, the other exchanges, and market participants to 
determine if any additional changes to the MWCB mechanism should be 
made, including consideration of rules and procedures for the periodic 
testing of the MWCB mechanism with industry participants.
    In addition to the work of the Taskforce, the equities exchanges 
also moved forward in 2019 and 2020 with a plan to normalize their Day 
2 opening procedures after a Level 3 MWCB halt, such that all exchanges 
would reopen on Day 2 with a standard opening process. The Exchange 
notes that its affiliated equities exchanges \11\ filed rule changes to 
that effect in March 2020,\12\ and successfully tested the 
implementation of those changes on September 12, 2020.
---------------------------------------------------------------------------

    \11\ The Exchange's affiliated equities exchanges include Cboe 
BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, 
Inc., and Cboe EDGX Exchange, Inc.
    \12\ See Securities Exchange Act Release Nos. 88417 (March 18, 
2020), 85 FR 16702 (March 24, 2020) (SR-CboeBZX-2020-025); 88416 
(March 18, 2020), 85 FR 16699 (March 24, 2020) (SR-CboeBYX-2020-
009); 88420 (March 18, 2020), 85 FR 16696 (March 24, 2020) (SR-
CboeEDGX-2020-012); 88419 (March 18, 2020), 85 FR 16716 (March 24, 
2020) (SR-CboeEDGA-2020-008).
---------------------------------------------------------------------------

2. Statutory Basis

    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\13\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \14\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \15\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ Id.
---------------------------------------------------------------------------

    The MWCB mechanism under Rule 5.22 is an important, automatic 
mechanism that is invoked to promote stability and investor confidence 
during a period of significant stress when securities markets 
experience extreme broad-based declines. Extending the MWCB pilot for 
an additional year would ensure the continued, uninterrupted operation 
of a consistent mechanism to halt trading across the U.S. markets while 
the Exchange, with the other SROs, study the design and operation of 
the MWCB mechanism and the LULD Plan during the period of volatility in 
the Spring of 2020. Based on the results of that study, the Exchange 
expects to work with the Commission, FINRA, the other exchanges, and 
market participants to determine if any additional changes to the MWCB 
mechanism should be made, including consideration of rules and 
procedures for the periodic testing of the MWCB mechanism with industry 
participants.
    The Exchange also believes that the proposed rule change promotes 
just and equitable principles of trade in that it promotes transparency 
and uniformity across markets concerning when and how to halt trading 
in all stocks as a result of extraordinary market volatility. Based on 
the foregoing, the Exchange believes the benefits to market 
participants from the MWCB under Rule 5.22 should continue on a pilot 
basis because the MWCB will promote fair and orderly markets and 
protect investors and the public interest.

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 not

[[Page 66393]]

necessary or appropriate in furtherance of the purposes of the Act 
because the proposal would ensure the continued, uninterrupted 
operation of a consistent mechanism to halt trading across the U.S. 
markets while the Exchange, in conjunction with the other SROs, study 
the design and operation of the MWCB mechanism and the LULD Plan during 
the period of volatility in the Spring of 2020. Further, the Exchange 
understands that FINRA and other national securities exchanges will 
file proposals to extend their rules regarding the market-wide circuit 
breaker pilot. Thus, the proposed rule change will help to ensure 
consistency across market centers without implicating any competitive 
issues.

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

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

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

    The Exchange has designated this rule filing as non-controversial 
under Section 19(b)(3)(A) \16\ of the Act and Rule 19b-4(f)(6) \17\ 
thereunder. Because the proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6) thereunder.\18\
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ In addition, Rule 19b-4(f)(6)(iii) requires the Exchange to 
give the Commission written notice of its intent to file the 
proposed rule change, along with a brief description and text of the 
proposed rule change, at least five business days prior to the 
filing of the proposed rule change, or such shorter time as 
designated by the Commission. The Commission has waived this 
requirement.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) \19\ normally 
does not become operative for 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\20\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative upon filing. Extending the pilot for an additional 
year will allow the uninterrupted operation of the existing pilot while 
the Exchange, FINRA, and the other exchanges conduct a study of the 
MWCB mechanism in consultation with market participants and determine 
if any additional changes to the MWCB mechanism should be made, 
including consideration of rules and procedures for the periodic 
testing of the MWCB mechanism with industry participants. Therefore, 
the Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
The Commission hereby designates the proposed rule change to be 
operative upon filing.\21\
---------------------------------------------------------------------------

    \19\ Id.
    \20\ 17 CFR 240.19b-4(f)(6)(iii).
    \21\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2020-098 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-2020-098. 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 and on its internet 
website. 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-2020-098 and 
should be submitted on or before November 9, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23016 Filed 10-16-20; 8:45 am]
BILLING CODE 8011-01-P


