[Federal Register Volume 86, Number 27 (Thursday, February 11, 2021)]
[Notices]
[Pages 9108-9110]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-02780]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91067; File No. SR-CBOE-2020-116]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 1, To 
Add Options on the Mini-Russell 2000 Index to Its P.M. Pilot Program

February 5, 2021.

I. Introduction

    On December 18, 2020, Cboe Exchange, Inc. (``Cboe'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to add Mini-Russell 2000 Index (``Mini-RUT'' or 
``MRUT'') options to the Exchange's pilot program for P.M. settled 
options with third-Friday-of-the-month expiration dates (``Expiration 
Friday''). The proposed rule change was published for comment in the 
Federal Register on December 29, 2020.\3\ On January 28, 2021, the 
Exchange filed Amendment No. 1 to the proposed rule change.\4\ The 
Commission received no comment letters on the proposed rule change. The 
Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 90749 (December 21, 
2020), 85 FR 85752 (``Notice'').
    \4\ In Amendment No. 1, the Exchange (i) represented that its 
existing surveillance and reporting safeguards in place are adequate 
to deter and detect possible manipulative behavior which might arise 
from listing and trading P.M.-settled MRUT options and (ii) stated 
that the trading of P.M.-settled MRUT options will be subject to 
Exchange Rules governing customer accounts, position and exercise 
limits, margin requirements and trading halt procedures. Because 
Amendment No. 1 to the proposed rule change does not materially 
alter the substance of the proposed rule change and makes conforming 
and technical changes, Amendment No. 1 is not subject to notice and 
comment. Amendment No. 1 is available at: https://www.sec.gov/comments/sr-cboe-2020-116/srcboe2020116-8302266-228358.pdf.
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II. Description of the Proposal, as Modified by Amendment No. 1

    The Exchange is proposing to amend its rules to permit it to list 
and trade, on a pilot basis, cash-settled MRUT options with Expiration 
Friday expiration dates, for which the exercise settlement value will 
be based on the index value derived from the closing prices of the 
component securities (``P.M.-settled''). MRUT options are options on 
the Mini-RUT Index, the value of which is 1/10th the value of the 
Russell 2000 (``RUT'') Index.
    The Exchange proposes to add P.M.-settled MRUT options to the 
Exchange's pilot program under Interpretation and Policy .13 to Rule 
4.13 that allows the listing of P.M. settled options that expire on 
Expiration Friday (``P.M. Pilot Program''). The Exchange notes that the 
existing P.M. Pilot Program, which is set to end on May 3, 2021, 
includes options on the Mini-SPX Index (``XSP''), the value of which is 
1/10th the value of the S&P 500 Index.\5\ Cboe has proposed to add 
P.M.-settled MRUT options to that pilot so that the end of the pilot 
period for P.M.-settled MRUT options would also be May 3, 2021.
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    \5\ See Securities Exchange Act Release No. 90263 (October 23, 
2020), 85 FR 68611 (October 29, 2020) (CBOE-2020-100). See also 
Securities Exchange Act Release No. 70087 (July 31, 2013), 78 FR 
47809 (August 6, 2013) (SR-CBOE-2013-055) (``P.M.-settled XSP 
Approval Order'').
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    The Exchange notes that trading in P.M.-settled MRUT options would 
operate in the same manner as provided in the proposal to list and 
trade Mini-RUT options on the Exchange. That is, P.M.-settled MRUT 
options would have the same European-style exercise, same number of 
permissible expirations, same exercise interval prices and limitations, 
same position and exercise limits, and will trade in the same minimum 
price increment.\6\
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    \6\ See Notice, supra note 3, fn. 3 at 85753. The Exchange 
represents that its existing surveillance and reporting safeguards 
in place are adequate to deter and detect possible manipulative 
behavior which might arise from listing and trading P.M.-settled 
MRUT options. See Amendment No. 1, supra note 4.
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    The Exchange proposes to abide by the same reporting requirements 
for the trading of P.M.-settled MRUT options that it does for the 
trading of P.M.-settled XSP options.\7\ The Exchange proposes to 
include data regarding P.M.-settled MRUT options as it does for P.M.-
settled XSP options in the pilot program report that it submits to the 
Commission at least two months prior to the expiration date of the P.M. 
Pilot Program (the ``annual report'').\8\ Specifically, the Exchange 
submits annual reports to the Commission that contain an analysis of 
volume, open interest, and trading patterns in connection with products 
in the P.M. Pilot Program. The analysis examines trading in products in 
the P.M. Pilot Program, as well as trading in the securities that 
comprise the underlying index. Additionally, for series that exceed 
certain minimum open interest parameters, the annual reports provide 
analysis of index price volatility and share trading activity.
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    \7\ See P.M.-settled XSP Approval Order supra note 4.
    \8\ See P.M.-settled XSP Approval Order, supra note 4.
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    Going forward, the Exchange would include the same analysis of 
P.M.-settled MRUT options, as well as trading in securities that 
comprise the RUT Index (as MRUT options are based on 1/10th the value 
of the RUT Index), in the annual reports. Also, like it currently does 
for P.M.-settled XSP options, the Exchange would submit periodic 
interim reports for P.M.-settled MRUT options that contain some, but 
not all, of the information contained in the annual reports.
    The pilot reports will both contain the following volume and open 
interest data:

[[Page 9109]]

    (1) Monthly volume aggregated for all trades;
    (2) monthly volume aggregated by expiration date;
    (3) monthly volume for each individual series;
    (4) month-end open interest aggregated for all series;
    (5) month-end open interest for all series aggregated by expiration 
date; and
    (6) month-end open interest for each individual series.
    The annual reports will also contain the information noted in Items 
(1) through (6) above for Expiration Friday, A.M.-settled, RUT index 
options traded on Cboe, as well as the following analysis of trading 
patterns in P.M.-settled MRUT options series in the Pilot Program:
    (1) A time series analysis of open interest; and
    (2) an analysis of the distribution of trade sizes.
    Finally, for series that exceed certain minimum parameters, the 
annual reports will contain the following analysis related to index 
price changes and underlying share trading volume at the close on 
Expiration Fridays:
    (1) A comparison of index price changes at the close of trading on 
a given Expiration Friday with comparable price changes from a control 
sample. The data includes a calculation of percentage price changes for 
various time intervals and compare that information to the respective 
control sample. Raw percentage price change data as well as percentage 
price change data normalized for prevailing market volatility, as 
measured by the Cboe Volatility Index (VIX), is provided; and
    (2) a calculation of share volume for a sample set of the component 
securities representing an upper limit on share trading that could be 
attributable to expiring in-the-money series. The data includes a 
comparison of the calculated share volume for securities in the sample 
set to the average daily trading volumes of those securities over a 
sample period.
    The minimum open interest parameters, control sample, time 
intervals, method for randomly selecting the component securities, and 
sample periods are determined by the Exchange and the Commission. 
Additionally, the Exchange would provide the Commission with any 
additional data or analyses the Commission requests because it deems 
such data or analyses necessary to determine whether the P.M. Pilot 
Program, including P.M.-settled MRUT options as proposed, is consistent 
with the Exchange Act. As it does for current P.M. Pilot products, the 
Exchange would make public any data and analyses in connection with 
P.M.-settled MRUT options it submits to the Commission under the Pilot 
Program.\9\
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    \9\ P.M. Pilot products data and analyses are made available at 
https://www.cboe.com/aboutcboe/legal-regulatory/national-market-system-plans/pm-settlement-spxpm-data.
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    Further, the Exchange proposes to amend Rule 5.1, which governs 
trading days and hours, in conjunction with the proposed addition of 
MRUT options to the P.M. Pilot Program. Cboe Rule 5.1(b)(2)(C) 
currently provides that on their last trading day, Regular Trading 
Hours for P.M.-settled XSP options are between 9:30 a.m. and 4:00 p.m. 
Eastern Time (as opposed to the 9:30 a.m. to 4:15 p.m. Regular Trading 
Hours for options with those expirations that are non-expiring). The 
proposed rule change amends Rule 5.1(b)(2)(C) to apply these time 
frames to the trading of P.M.-settled MRUT options on their last 
trading day.
    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 any potential additional traffic associated with trading of 
P.M.-settled MRUT options.\10\ The Exchange believes that its Trading 
Permit Holders will not experience a capacity issue as a result of this 
proposal. Cboe represents that it will monitor the trading volume 
associated with any possible additional options series listed as a 
result of this proposal and the effect (if any) of these additional 
series on market fragmentation and on the capacity of the Exchange's 
automated systems.\11\
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    \10\ See Notice supra, note 3 at 85754.
    \11\ See Notice supra, note 3 at 85754.
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III. Discussion and Commission Findings

    After careful consideration of the proposal, the Commission finds 
that the proposed rule is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange,\12\ and, in particular, the requirements of 
Section 6 of the Act.\13\ Specifically, the Commission finds that the 
proposed rule change to allow the Exchange to add P.M.-settled MRUT 
options to the P.M. Pilot Program is consistent with Section 6(b)(5) of 
the Act,\14\ which requires that an exchange have rules designed to 
remove impediments to and perfect the mechanism of a free and open 
market and to protect investors and the public interest.
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    \12\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f.
    \14\ 15 U.S.C. 78(f)(b)(5).
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    As the Commission noted in its orders approving the listing and 
trading of P.M.-settled options on the S&P 500 Index (``SPXPM''), the 
Commission has had concerns about the potential adverse effects and 
impact of P.M. settlement upon market volatility and the operation of 
fair and orderly markets on the underlying cash markets at or near the 
close of trading, including for cash-settled derivatives contracts 
based on a broad-based index.\15\ The potential impact today remains 
unclear, given the significant changes in the closing procedures of the 
primary markets in recent decades. The Commission is mindful of the 
historical experience with the impact of P.M. settlement of cash-
settled index derivatives on the underlying cash markets, but 
recognizes that these risks may be mitigated today by the enhanced 
closing procedures that are now in use at the primary equity markets.
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    \15\ See Securities Exchange Act Release No. 68888 (February 8, 
2013), 78 FR 10668, 10669 (February 14, 2013) (order approving the 
listing and trading of SPXPM on CBOE). See also Securities Exchange 
Act Release Nos. 64599 (June 3, 2011), 76 FR 33798, 33801-02 (June 
9, 2011) (order instituting proceedings to determine whether to 
approve or disapprove a proposed rule change to allow the listing 
and trading of SPXPM options); and 65256 (September 2, 2011), 76 FR 
55969, 55970-76 (September 9, 2011) (order approving proposed rule 
change to establish a pilot program to list and trade SPXPM 
options).
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    For the reasons described below, the Commission believes that the 
Exchange's proposal to add P.M.-settled MRUT options to the P.M. Pilot 
Program is designed to mitigate concerns regarding P.M. settlement and 
will provide additional trading opportunities for investors while 
providing the Commission with data to monitor the effects of MRUT 
options and the impact of P.M. settlement on the markets. To assist the 
Commission in assessing any potential impact of a P.M.-settled Mini-RUT 
index option on the options market as well as the underlying cash 
equities markets, Cboe will be required to submit data to the 
Commission in connection with the P.M. Pilot Program. The Commission 
believes that Cboe's P.M. Pilot Program, together with the data and 
analysis that the Exchange will provide to the Commission, will allow 
Cboe and the Commission to monitor for and assess any potential for 
adverse market effects of allowing P.M. settlement for Mini-RUT index 
options, including on the underlying component stocks. In particular, 
the data collected from Cboe's P.M. Pilot Program will help inform the 
Commission's consideration of whether the P.M. Pilot

[[Page 9110]]

Program should be modified, discontinued, extended, or permanently 
approved. Furthermore, the Exchange's ongoing analysis of the P.M. 
Pilot Program should help it monitor any potential risks from large 
P.M.-settled positions and take appropriate action on a timely basis if 
warranted.
    The Exchange represents that it has adequate surveillance 
procedures to monitor trading in these options thereby helping to 
ensure the maintenance of a fair and orderly market \16\ and has 
represented that it has sufficient capacity to handle additional 
traffic associated with this new listing.\17\
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    \16\ See Amendment No. 1, supra note 4.
    \17\ See Notice, supra note 3 at 85754.
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    For the reasons discussed above, the Commission finds that Cboe's 
proposal is consistent with the Act, including Section 6(b)(5) thereof, 
in that it is designed to remove impediments to and perfect the 
mechanism of a free and open market, and, in general, to protect 
investors and the public interest. In light of the enhanced closing 
procedures at the underlying markets and the potential benefits to 
investors discussed by the Exchange in the Notice,\18\ the Commission 
finds that it is appropriate and consistent with the Act to approve 
Cboe's proposal on a pilot basis. The collection of data during the 
P.M. Pilot Program and Cboe's active monitoring of any effects of P.M.-
settled MRUT options on the markets will help Cboe and the Commission 
assess any impact of P.M. settlement in today's market.
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    \18\ See Notice, supra note 3 at 85755.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-CBOE-2020-116), as modified 
by Amendment No. 1, be, and hereby is, approved, subject to a pilot 
period set to expire on May 3, 2021.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-02780 Filed 2-10-21; 8:45 am]
BILLING CODE 8011-01-P


