[Federal Register Volume 86, Number 19 (Monday, February 1, 2021)]
[Notices]
[Pages 7760-7763]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-02005]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90990; File No. SR-CBOE-2021-006]


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'' for Purposes of 
Calculating Margin Requirements for Certain Options

January 26, 2021.
    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 January 14, 2021, 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.
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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'' for purposes of 
calculating margin requirements for certain options. 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]2 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 
and ETF 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 ETF 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, 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.\5\
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    \5\ Section 220.2 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. The proposed 
rule change corrects the reference to Section 220.3 in the 
definition of current market value in Rule 10.3(a)(2) to be Section 
220.2.

    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. These requirements are determined on 
a daily basis for market participants' securities accounts that hold 
options positions.\6\ Currently, 43 ETF options that are listed for 
trading on the Exchange close for trading at 4:15 p.m. Eastern time.\7\ 
Therefore, daily margin requirements for those options are currently 
based on the closing trade prices of those options series at that 
time.\8\
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    \6\ 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.
    \7\ See Rule 5.1(b)(2); see also closing times for ETF options, 
available at https://www.cboe.com/us/options/market_statistics/symbol_reference/?mkt=cone&underlying=1.
    \8\ The Exchange notes the daily margin requirements for all 
other ETF options that close at 4:00 p.m. Eastern time are based on 
the closing trade at that time.

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[[Page 7761]]

    A number of options overlie exchange-traded funds (``ETFs'') that 
track the same indexes on which the Exchange lists index options.\9\ 
These options are complementary investment tools available to market 
participants. The Exchange understands that market participants 
generally use the same information when pricing an index option and an 
ETF option with an underlying ETF that tracks the same index. 
Additionally, market participants' investment and hedging strategies 
often involve index options and related products, including ETF 
options. 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 SPY options, which may 
trade on any options exchange.
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    \9\ For example, the SPDR S&P 500 ETF Trust (``SPY'') tracks the 
S&P 500 Index. The Exchange (as well as other options exchanges) 
list SPY options for trading, and the Exchange lists options on the 
S&P 500 Index as well (``SPX''). Additional examples of ETF options 
(which may trade on any options exchange) with an underlying ETF 
that tracks an index on which the Exchange lists an option include 
the iShares Russell 2000 ETF (``IWM'') (which tracks the Russell 
2000 Index, as do RUT options) and the SPDR Dow Jones Industrial 
Average ETF Trust (``DIA'') (which tracks the Dow Jones Industrial 
Average, as do DJX options).
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    The Exchange recently amended the definition of ``current market 
value'' to provide that, for certain index options determined by the 
Exchange, it would be based on quotes for a series of options on the 
Exchange 15 minutes prior to the close of trading rather than the 
closing price.\10\ The purpose of that change was to maintain alignment 
between the times at which the current market value of index options 
and the daily settlement price of related futures (i.e., futures that 
overlie the same indexes as the index options) is determined for 
purposes of calculating daily margin requirements.\11\ Currently, the 
Exchange has determined to determine the current market value for 
margin requirements 15 minutes prior to the closing time for the 
following index options: DJX options, MXEA options, MXEF options, OEX 
options, RUT options, SPESG options, SPX options, VIX options, XEO 
options, and XSP options.\12\
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    \10\ See Securities Exchange Act Release No. 90195 (October 15, 
2020), 85 FR 67041 (October 21, 2020) (SR-CBOE-2020-090).
    \11\ See id. As described in that proposed rule change, the 
Chicago Mercantile Exchange (``CME''), on which index futures 
products trade, intended to change the daily settlement price for 
index futures from 4:15 p.m. Eastern time to 4:00 p.m. Eastern time.
    \12\ See Exchange Notice C2020113000, Schedule Update--Cboe 
Proprietary Index Products MXEA and MXEF to be Added to 3:00 p.m. 
Marking Price Files. These index options close for trading at 4:15 
p.m. Eastern time.
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    Currently, the Exchange determines the daily settlement price for 
all ETF options at the time at which they close for trading, which as 
noted above, is at 4:15 p.m. for a number of ETF options. Several of 
these ETF options overlie an ETF that tracks an index on which the 
Exchange lists index options, including index options for which the 
Exchange determines the current market value for margin requirements 15 
minutes prior to the closing time. The Exchange has received numerous 
requests from market participants to determine the current market value 
for such ETF options at the same time at which it determines the 
current market value for corresponding index options. Therefore, to 
permit the Exchange to align the times at which the current market 
value of index options and options overlying ETFs that track the same 
indexes 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 ETF 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.\14\ The Exchange 
intends to apply an indicator to the quotes disseminated to the Options 
Price Reporting Authority (``OPRA'') that will be the daily mark for a 
series on the applicable trading day. The Exchange anticipates 
initially applying this proposed definition to SPY options. The 
proposed flexibility will permit the Exchange to respond in a timely 
manner to any requests from industry participants and maintain 
alignment between those times as appropriate.
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    \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 ETF options 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\ 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 ETF options will close. In other words, on a regular 
trading day, while the current market value for these ETF options 
will be determined at 4:00 p.m. Eastern time, those ETF 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 alignment between the times at 
which related options prices are used to calculate daily margin 
requirements will protect investors. In fact, the Exchange has received 
numerous requests from market participants to make this change. Among 
other things, the Exchange believes this alignment will prevent 
increased risk to market participants that hold positions across 
related options 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. Differing daily valuation times for these products may 
cause offset relationships between options positions to 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

[[Page 7762]]

between the values used in a market participant's securities account 
for related securities. For example, if the Exchange continues to use 
the closing prices of ETF options as the current market value of those 
options while the marking time of related index options uses 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.\19\
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    \19\ The Exchange is unaware of market participants who have 
been significantly negatively impacted by this lack of alignment 
since the marking time for index options changed in October. 
However, the proposed rule change would eliminate the potential risk 
associated with misalignment going forward.
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    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 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.

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 align margin calculations for related 
products in the securities 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 the proposed rule 
change relates to margin requirements the Exchange imposes on its 
Trading Permit Holders. As noted above, the Exchange recently made a 
similar rule change to permit it to align the time at which it 
determines current market value for index options with the time at 
which a futures exchange determined the daily settlement value for 
related futures products for substantially similar purposes. Other 
options exchanges may choose to similarly change the time at which 
current market value will be determined for purposes of their margin 
rules.

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 \20\ and 
Rule 19b-4(f)(6) \21\ thereunder.
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 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 stated that it believes waiver of the operative 
delay will protect investors by permitting the Exchange to align the 
times at which the current market value of ETF options with the times 
at which the current market value of related index options in 
securities accounts are determined as soon as practicable. The Exchange 
also stated that it believes this will benefit market participants by 
preventing potential price distortions between related options and 
reduce pricing risks to market participants that hold positions in ETF 
options and related index options that may occur if the time at which 
the current market value of options was determined differed from the 
time at which the daily settlement value of related futures was 
determined. The Exchange also noted the proposed rule change is not 
novel, because the Exchange recently made a similar rule change to 
permit it to align the time at which it determines current market value 
for index options with the time at which a futures exchange determined 
the daily settlement value for related futures products for 
substantially similar purposes. The Exchange stated it will announce to 
Trading Permit Holders the date on which the change will be implemented 
in accordance with Rule 1.5 (i.e., the date will be announced 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)). The Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest, because waiver of the 
operative delay will permit the Exchange to eliminate the potential 
pricing disparities that may occur as a result of continued 
misalignment as soon as possible. For this reason, the Commission 
designates the proposed rule change to be operative upon filing.\22\
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    \22\ 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-2021-006 on the subject line.

[[Page 7763]]

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-2021-006. 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-2021-006 and should be submitted on 
or before February 22, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-02005 Filed 1-29-21; 8:45 am]
BILLING CODE 8011-01-P


