[Federal Register Volume 85, Number 204 (Wednesday, October 21, 2020)]
[Notices]
[Pages 67041-67043]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23255]



[[Page 67041]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90195; File No. SR-CBOE-2020-090]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
To Amend the Definition of ``Current Market Value'' With Respect to 
Certain Index Options for Purposes of Calculating Margin Requirements

October 15, 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 September 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 
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.
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    \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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend the definition of ``current market value'' with respect to 
certain index options for purposes of calculating margin requirements. 
The text of the proposed rule change is provided below.
(additions are italicized; deletions are [bracketed])
* * * * *

Rules of Cboe Exchange, Inc.

* * * * *

Rule 10.3. Margin Requirements

    (a) Definitions. For purposes of this Rule, the following terms 
shall have the meanings specified below.
    (1) No change.
    (2) The term ``current market value'' is as defined in Section 
220.3 of Regulation T of the Board of Governors of the Federal 
Reserve System. At any other time, in the case of options, stock 
index warrants, currency index warrants and currency warrants, it 
shall mean the closing price of that series of options or warrants 
on the Exchange on any day with respect to which a determination of 
current market value is made, except in the case of certain index 
options determined by the Exchange, it shall be based on quotes for 
that series of options on the Exchange 15 minutes prior to the close 
of trading on any day with respect to which a determination of 
current market value is made. In the case of other securities, it 
shall mean the preceding business day's closing price as shown by 
any regularly published reporting or quotation service. If there is 
no closing price or quotes, as applicable, on the option or on 
another security, a TPH organization may use a reasonable estimate 
of the current market value of the security as of the close of 
business or as of 15 minutes prior to the closing of trading, 
respectively, on the preceding business day.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend the definition of ``current market 
value'' with respect to certain index options for purposes of 
calculating margin requirements. Rule 10.3(a)(2) currently defines the 
term ``current market value'' as follows:

    The term ``current market value'' is as defined in Section 220.3 
of Regulation T of the Board of Governors of the Federal Reserve 
System. At any other time, in the case of options, stock index 
warrants, currency index warrants and currency warrants, it shall 
mean the closing price of that series of options or warrants on the 
Exchange on any day with respect to which a determination of current 
market value is made. In the case of other securities, it shall mean 
the preceding business day's closing price as shown by any regularly 
published reporting or quotation service. If there is no closing 
price on the option or on another security, a TPH organization may 
use a reasonable estimate of the current market value of the 
security as of the close of business on the preceding business 
day.\5\
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    \5\ Section 220.3 [sic] of Regulation T of the Board of 
Governors of the Federal Reserve System defines ``current market 
value'' of a security as (1) throughout the day of the purchase or 
sale of a security, the security's total cost of purchase or the net 
proceeds of its sale including any commissions charged; or (2) at 
any other time, the closing sale price of the security on the 
preceding business day, as shown by any regularly published 
reporting or quotation service. If there is no closing sale price, 
the creditor may use any reasonable estimate of the market value of 
the security as of the close of business on the preceding business 
day.'' See 12 CFR 220.2. The term ``marking'' value is often used to 
refer to the current market value for capital and margin purposes.

Rule 10.3 and other Rules in Chapter 10 of the Exchange's Rulebook 
describe how margin requirements are calculated for market 
participants' positions in options (and certain other securities), 
including strategy-based margin and customer portfolio margin 
requirements, which requirements are generally based on the current 
market value of the option series. For example, the minimum margin 
required in customer margin accounts for broad-based index options is 
100% of the current market value of the option plus 10% of the current 
underlying index value (for calls) or the aggregate exercise price (for 
puts).\6\ These requirements are determined on a daily basis for market 
participants' securities accounts that hold options positions.\7\ Most 
index options that are listed for trading on the Exchange close for 
trading at 4:15 p.m. Eastern time.\8\ Therefore, daily margin 
requirements for those index options are currently based on the closing 
trade prices of those options series at that time.\9\
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    \6\ See Rule 10.3(c)(5).
    \7\ The Exchange notes the Options Clearing Corporation 
(``OCC'') calculates the daily margin requirements for Clearing 
Members' options positions at OCC. The Exchange understands OCC 
intends to incorporate a corresponding change regarding the time at 
which the value of a series is determined into its procedures for 
calculating margin requirements.
    \8\ See Rule 5.1(b)(2).
    \9\ The Exchange notes the daily margin requirements for index 
options that close at 4:00 p.m. Eastern time are based on the 
closing trade at that time.
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    Index options and futures are complementary investment tools 
available to market participants. The Exchange understands that market 
participants often incorporate prices of related futures products when 
pricing options. Additionally, market participants' investment and 
hedging strategies often involve index options

[[Page 67042]]

and related futures products. For example, market participants often 
engage in hedging strategies that involve options on the S&P 500 Index 
(``SPX options''), which trade exclusively on the Exchange, and e-mini 
S&P 500 Index futures (``S&P futures''), which trade on the Chicago 
Mercantile Exchange (``CME'').\10\ Additionally, market participants 
regularly price SPX options based on then-current prices of the S&P 
futures. Several futures products--S&P futures, Russell futures, and 
Dow futures--related to certain index options that are listed for 
trading on the Exchange (SPX options, XSP options, OEX options, XEO 
options, RUT options, DJX options, and VIX options) are listed on CME.
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    \10\ Similar pricing and strategy relationships exist between 
Mini-S&P 500 Index options (``XSP options'') and American- and 
European-style S&P 100 Index options (``OEX options'' and ``XEO 
options'', respectively) and S&P futures; Russell 2000 Index options 
(``RUT options'') and e-mini Russell 2000 Index futures (``Russell 
futures''); and Dow Jones Industrial Average Index options (``DJX 
options'') and e-mini Dow Index futures (``Dow futures''). In 
addition, given the relationship between options on the Cboe 
Volatility Index (``VIX options'') and the S&P 500 Index, investment 
and hedging strategies that involve both VIX options and VIX futures 
(which trade on the Cboe Futures Exchange, which is making a 
corresponding rule change). It is common for market participants to 
hedge VIX futures with SPX options and to hedge VIX options with VIX 
futures.
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    Currently, CME determines the daily settlement price for those 
futures at 4:15 p.m. Eastern time,\11\ which is the same time at which 
the current market value for margin requirements purposes is determined 
for the above-referenced index options. The Exchange understands that 
CME intends to change this time to 4:00 p.m. Eastern time on October 
26, 2020.\12\ Therefore, to maintain alignment between the times at 
which the current market value of index options is determined and the 
daily settlement price of related futures is determined for purposes of 
calculating daily margin requirements, the Exchange proposes to amend 
the definition of current market value with respect to certain 
Exchange-designated index options \13\ to be based on quotes of that 
series of options on the Exchange 15 minutes prior to the close of 
trading on any day with respect to which a determination of current 
market value is made (and to make conforming changes throughout the 
definition).\14\ The Exchange intends to apply an indicator to the 
quotes disseminated to OPRA that will be the daily mark for a series on 
the applicable trading day. The Exchange anticipates initially applying 
this proposed definition to the following options: SPX, XSP, OEX, XEO, 
VIX, RUT, and DJX. The proposed flexibility will permit the Exchange to 
respond in a timely manner to any changes going forward to daily 
settlement times of futures by other trading venues related to options 
that trade on the Exchange and maintain alignment between those times 
as appropriate.
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    \11\ Similar to the index options that trade on the Exchange, 
these future products close for trading at 4:15 p.m. Eastern time.
    \12\ See CME Notice SER-8591, issued September 22, 2020, 
available at https://www.cmegroup.com/notices/ser/2020/09/SER-8591.html.
    \13\ Pursuant to Rule 1.5, the Exchange announces to Trading 
Permit Holders all determinations it makes pursuant to the Rules 
(which would include the determination of indexes subject to the 
proposed rule change) via specifications, notices, or regulatory 
circulars with appropriate advanced notice, which are posted on the 
Exchange's website, or as otherwise provided in the Rules (among 
other methods).
    \14\ See Cboe Exchange Notice C2020092202, issued September 22, 
2020, available at https://cdn.cboe.com/resources/release_notes/2020/Adjustment-of-Daily-Settlement-Time-for-Proprietary-Index-Products-Notice.pdf. Fifteen minutes prior to the close of trading 
will generally equate to 4:00 p.m. Eastern time. The Exchange notes 
the proposed rule change does not change the time at which trading 
in the applicable index options will close. In other words, on a 
regular trading day, while the current market value for these index 
options will be determined at 4:00 p.m. Eastern time, those index 
options will continue to trade until 4:15 p.m. Eastern time (any 
options trades that occur between 4:00 and 4:15 on that trading day 
would use the 4:00 current market value for margin calculation 
purposes).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\15\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \16\ 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) \17\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. The Exchange also believes the proposed rule 
change furthers the objectives of Section 6(c)(3) of the Act,\18\ which 
authorizes the Exchange to, among other things, prescribe standards of 
financial responsibility or operational capability and standards of 
training, experience and competence for its Trading Permit Holders and 
person associated with Trading Permit Holders.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
    \17\ Id.
    \18\ 15 U.S.C. 78f(c)(3).
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    In particular, the Exchange believes maintaining alignment between 
the times at which related options and futures prices are used to 
calculate daily margin requirements will protect investors. Among other 
things, the Exchange believes retaining this alignment will prevent 
increased risk to market participants that hold positions across 
related options and futures products due to potential disparities that 
could occur in relation to factors such as margin requirements, pay-
collect obligations, the synchronization of existing hedges, and the 
level of end-of-day risk. If the daily valuation times for these 
products were different, offset relationships between options and 
futures positions may be lost, which may distort the true status of 
risk within a market participant's portfolio. Use of the same 
determination time for margin calculations reduces risk of a disconnect 
between the values used in a market participant's securities account 
and the market participant's futures account. For example, if the 
Exchange continued to use the closing prices of index options as the 
current market value of those options while the daily settlement of 
related futures used prices 15 minutes prior to the close, there could 
be a significant misalignment between these values, particularly if 
there were to be a large price move in the equity markets during that 
15-minute time period.
    The Exchange believes the proposed rule change will also promote 
just and equitable principles of trade and remove impediments to and 
perfect the mechanism of a free and open market by permitting continued 
alignment of daily marks for related products that market participants 
often use in a complementary manner as part of their investment and 
hedging strategies. The Act authorizes the Exchange to prescribe 
standards of financial responsibility for Trading Permit Holders, and 
the proposed rule change regarding the daily value to be used for 
calculation of daily margin requirements for options positions is 
consistent with that authority.

[[Page 67043]]

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 primary purpose of the 
proposed rule change is to maintain alignment of margin calculations 
for related products in the securities and futures industries. 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 the proposed change 
related to margin requirements for the designated options will apply in 
the same manner to all market participants that hold positions in those 
options. 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 it 
relates solely to margin requirements for options that trade 
exclusively on the Exchange. Additionally, as noted above, the proposed 
rule change is intended to maintain alignment of the daily valuation 
time of index options with the daily valuation time of related future 
products that trade on another exchange.

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

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. 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 \19\ and 
Rule 19b-4(f)(6) \20\ thereunder.
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(6). In addition, as required under Rule 
19b-4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of the filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    The Exchange has asked the Commission to waive the 30-day operative 
delay so that the proposal may become operative immediately upon 
filing. The Exchange states that waiver of the 30-day operative delay 
will permit the Exchange to maintain continuous alignment of the times 
at which the current market value of index options in securities 
accounts and the daily settlement value of related futures in futures 
accounts are determined. The Commission believes that waiving the 30-
day operative delay is consistent with the protection of investors and 
the public interest, as it will allow the Exchange to maintain the 
continuous alignment of the times at which the current market value of 
index options and related futures are determined, thereby avoiding 
confusion that could result from potential price distortions for 
investors holding positions in both index options and related futures. 
For this reason, the Commission designates the proposed rule change to 
be operative upon filing.\21\
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    \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).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will 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-2020-090 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-2020-090. 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; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.

All submissions should refer to File Number SR-CBOE-2020-090 and should 
be submitted on or before November 12, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23255 Filed 10-20-20; 8:45 am]
BILLING CODE 8011-01-P


