Notice2021-22811
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Amend Rule 5.54 and Rule 5.55 in Connection With a Designated Primary Market-Maker's and a Lead Market-Maker's Obligation To Submit Opening Quotes for the Regular Trading Hours Session in Index Options
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Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 20, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 200 (Wednesday, October 20, 2021)</title>
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[Federal Register Volume 86, Number 200 (Wednesday, October 20, 2021)]
[Notices]
[Pages 58118-58121]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-22811]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93326; File No. SR-CBOE-2021-059]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change Relating
To Amend Rule 5.54 and Rule 5.55 in Connection With a Designated
Primary Market-Maker's and a Lead Market-Maker's Obligation To Submit
Opening Quotes for the Regular Trading Hours Session in Index Options
October 14, 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 October 8, 2021, Cboe Exchange, Inc. (the ``Exchange'' or
``Cboe Options'') filed with the Securities and Exchange Commission
(the ``Commission'') the
[[Page 58119]]
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 Rule 5.54 and Rule 5.55 in connection with a Designated
Primary Market-Maker's (``DPM'') and a Lead Market-Maker's (``LMM'')
obligation to submit opening quotes for the Regular Trading Hours
session in index options, and to make a clarifying, nonsubstantive
change. 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 (<a href="http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx">http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx</a>), 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 Rule 5.54 and Rule 5.55 in
connection with a DPM's and an LMM's obligation, respectively, to
submit opening quotes for the Regular Trading Hours trading session in
index options.
Current Rule 5.54(a)(6) requires each DPM to enter opening quotes
for the Regular Trading Hours trading \5\ session within one minute of
the initiation of an opening rotation in any series that is not open
due to the lack of a quote pursuant to Rule 5.31. Likewise, current
Rule 5.55(a)(2) requires each LMM to enter opening quotes for the
Regular Trading Hours trading session within one minute of the
initiation of an opening rotation in any series that is not open due to
the lack of a quote pursuant to Rule 5.31. Pursuant to Rule 5.31(e)(1),
the System initiates an opening rotation for an option series following
the occurrence of an opening rotation trigger pursuant to Rule 5.31(d).
Specifically, Rule 5.31(d)(1)(B) governs the opening rotation trigger
for index options and provides that the System initiates the opening
rotation for index options after a time period (which the Exchange
determines for all classes) following the System's observation after
9:30 a.m.\6\ of the first disseminated index value for the index
underlying an index option.\7\ The Exchange has observed that index
reporting authorities generally disseminate the first index value
beginning at 9:30 a.m., regardless of whether all of the underlying
index components have opened. The System then initiates the opening
rotation in an index option one second \8\ after the first index value
publication and then determines if a series is eligible to open
pursuant to Rule 5.31(e)(1). If there is no Composite Market (which is
comprised of the better of Market-Maker bulk messages on the Exchange
or any away market quotes),\9\ a series is ineligible to open until
certain conditions are met.\10\ Because the System is unable to open a
series due to a lack of a quote, the DPM or LMM in that index class is
then obligated to enter opening quotes within the same minute of the
initiation of the opening rotation pursuant to Rule 5.54(a)(6) or Rule
5.55(a)(2), respectively.
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\5\ The proposed rule change makes a nonsubstantive change by
updating ``Regular Trading session'' to ``Regular Trading Hours
trading session'', which is more in line with the defined term and
the corresponding language that governs the opening quote
requirement for LMMs. See Rule 1.1, definition of Regular Trading
Hours and RTH; and Rule 5.55(a)(3).
\6\ Unless otherwise specified, all times in the Rules are
Eastern Time. See Rule 1.6.
\7\ For VIX Index options, the System initiates the opening
rotation at 9:30 a.m. See Rule 5.31(d)(1)(C).
\8\ The current delay period following the first disseminated
index value, as determined by the Exchange, is one second.
\9\ See Rule 5.31(a), which provides that the term ``Composite
Market'' means the market for a series comprised of (1) the higher
of the then current best appointed Market-Maker bulk message bid on
the Exchange and the away best bid (``ABB'') (if there is an ABB)
and (2) the lower of the then-current best appointed Market-Maker
bulk message offer on the Exchange and the away best offer (``ABO'')
(if there is an ABO).
\10\ Specifically, until one of the conditions in Rule
5.31(e)(1)(A) or (B) for the series is satisfied, until the series
opens pursuant to a forced opening as set forth in Rule 5.31(e)(4),
or the Exchange opens the series pursuant to Rule 5.31(h).
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As stated, index reporting authorities generally disseminate the
first index value at 9:30 a.m., which is usually before all of the
underlying index components are opened. While underlying index
components usually begin opening at 9:30 a.m., for some indexes, a
substantial portion of the underlying components may not regularly open
within the 9:30 a.m. minute--that is, within one minute of the first
disseminated index value (i.e., the initiation of an opening rotation),
in which a DPM or LMM must provide opening quotes for a series not open
due to the lack of quote. The Exchange understands that DPMs and LMMs
often use the pricing of the related index futures products, which are
already trading at 9:30 a.m., rather than the index spot value to price
the index options. However, some indexes do not have a related futures
product, and DPMs in these index options must rely on the index spot
value to price the options. DPMs and LMMs in such index options have
expressed to the Exchange that, for purposes of their quoting risk
profiles, they do not wish to begin quoting before a substantial number
of the underlying index components have opened (which may not
necessarily be within the 9:30 a.m. minute).\11\ Without the opening
prices for a substantial number of the underlying index components
available, DPMs and LMMs that may use the index spot value to the
options (particularly those without a related index futures) may not be
able to provide quotes that reflect then-current market conditions for
the series in those options in the same manner as they would be able to
for an index series in which all or a substantial number of the
underlying index components have opened. Therefore, the Exchange
proposes to amend the DPM and LMM opening quote requirement to provide
the Exchange with the flexibility to specify the period of time from
the initiation of the opening rotation in certain index options before
a DPM or LMM is required to provide opening quotes.
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\11\ The Exchange notes it is possible that some DPMs and LMMs
may also rely on spot values as input in their option pricing models
for index options for which a related index futures product is
available. However, the Exchange understands from DPMs and LMMs that
the spot values are generally not the primary source of information
used for pricing for such index options.
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Specifically, the proposed rule change updates Rule 5.54(a)(6) and
Rule 5.55(a)(2) to require each DPM and LMM, respectively, to enter
opening quotes for the Regular Trading Hours trading session in any
series that is not open due to the lack of a quote pursuant to Rule
5.31 within (i) a specified time period (determined by the Exchange on
a class-by-class basis) for index options, and (ii) one minute for
equity options, of the initiation of an opening rotation. The proposed
rule change is designed to allow the Exchange to specify a period of
time following the initiation of the opening rotation in index options
long enough to allow a substantial portion of the underlying index
components to open before a DPM or LMM is required to submit opening
quotes in series that are ineligible to open given a lack of quote. The
Exchange this will enable DPMs and LMMs to price those index options in
a manner that may more closely reflect then-current market conditions
at the open and provide a tighter market upon which a series may open.
As indicated above, different option classes may have different
characteristics and trading models, and the proposed flexibility will
permit the Exchange to apply different timing parameters in connection
with a DPM's or LMM's opening quote obligation to address those
differences, in much the same way the Exchange Rules already permit the
Exchange to apply different parameters in many places. The Exchange
notes that the Exchange Rules provide the Exchange with similar
flexibility regarding timing in connection with the opening of trading
on the Exchange,\12\ as well as similar flexibility to apply different
settings or designations on a class-by-class basis, including in
connection with Market-Maker obligations.\13\
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\12\ See Rule 5.31(d)(1)(B), which provides that, for index
options, the System initiates the opening rotation after a time
period (which the Exchange determines for all classes) following the
System's observation after 9:30 a.m. of the first disseminated index
value for the index underlying an index option (except for VIX Index
options).
\13\ See Rule 5.52(b), which allows the Exchange to determine
the minimum size required for a Market-Maker's quotes on a class-by-
class basis; and Rule 3.53, which permits the Exchange to authorize
a DPM to function remotely away from the Exchange's trading floor on
a class-by-class basis.
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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.\14\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \15\ 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) \16\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
\16\ Id.
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In particular, the Exchange believes the proposed rule change will
remove impediments to and perfect the mechanism of a free and open
market and protect investors, because it is designed to allow the
Exchange to specify a period of time following the initiation of the
opening rotation in index options long enough to allow a substantial
portion of the underlying index components to open before a DPM or LMM
is required to submit opening quotes in series that are ineligible to
open given a lack of quote. The Exchange believes it will protect
investors to not require DPMs and LMMs to submit quotes when index spot
values may not be fully representative of the market due to the lack of
a substantial portion of the components being open. As noted above,
while DPMs and LMMs generally rely on futures pricing if there is a
related index future trading, DPMs and LMMs will generally rely on
index spot values when there is not such futures product. The Exchange
believes it is reasonable and appropriate to not require DPMs and LMMs
to quote in such an index option prior to the time when a substantial
portion of the underlying index components have opened, particularly
when DPMs' and LMMs' quoting risk profiles rely on index spot values,
which may not regularly occur for some indexes within the 9:30 a.m.
minute after the first index value is disseminated. By allowing the
Exchange to specify a period of time following the initiation of an
opening rotation in index options long enough to allow a substantial
portion of the underlying index components to open before a DPM's or an
LMM's opening quote obligation is triggered, the proposed rule change
will enable DPMs and LMMs to provide pricing in those index options
that may better reflect then-current market conditions at the open and
a tighter market upon which the series may open, to the benefit of all
investors. In addition to this, and as described above, the Exchange
notes that, because different option classes may have different
characteristics and trading models, the Exchange Rules currently permit
the Exchange to apply different parameters in many places to address
such differences; including in connection with the opening of trading
on the Exchange \17\ and in connection with Market-Maker obligations.
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\17\ See supra note 8.
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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
intramarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act because allowing different time
periods during which DPMs and LMMs may have an opening quote obligation
will reflect differing characteristics of index options listed on the
Exchange. For some indexes, a substantial portion of the underlying
components may not regularly open within a minute (i.e., 9:30 a.m.) of
the first disseminated index value. As noted above, while some DPMs and
LMMs quote options based on pricing of related index futures, DPMs and
LMMs in options that do not have related index futures quote primarily
based on these index values. If a DPM or LMM is required to submit
opening quotes in such an index option prior to a substantial portion
of the underlying components being open, the DPM's or LMM's quotes may
not reflect then-current market conditions. The proposed rule change
will allow for enough time to pass in order for a substantial portion
of the underlying index components for certain indexes to open,
particularly those in which the Exchange understands DPMs and LMMs may
rely on the index spot values (e.g., because the index does not have a
related futures product). Therefore, the Exchange believes the proposed
rule change will impose the opening quoting requirement on DPMs and
LMMs at a time when they can quote using
[[Page 58121]]
information that more fully incorporates then-current market
conditions, enabling DPMs and LMMs to more accurately price such
options and provide for a tighter spread upon the opening of the
series. An Exchange-determined period of time before a DPM's and LMM's
opening quote obligations are triggered in an index option class will
apply uniformly to any DPM and/or LMM that may be appointed in that
class.
The Exchange does not believe that 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 a quoting obligation applicable to DPMs and LMMs on
the Exchange. The Exchange notes that other options exchanges that may
have similar opening quote requirements for their market makers may, in
their discretion, adopt similar flexibility regarding the timing of the
opening quote requirements in connection with index options.
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) \18\ of the Act and Rule 19b-4(f)(6) \19\
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.
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\18\ 15 U.S.C. 78s(b)(3)(A).
\19\ 17 CFR 240.19b-4(f)(6).
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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 shall institute proceedings under
Section 19(b)(2)(B) \20\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\20\ 15 U.S.C. 78s(b)(2)(B).
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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
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#9be9eef7feb6f8f4f6f6fef5efe8dbe8fef8b5fcf4ed"><span class="__cf_email__" data-cfemail="afdddac3ca82ccc0c2c2cac1dbdcefdccacc81c8c0d9">[email protected]</span></a>. Please include
File Number SR-CBOE-2021-059 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to the Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number SR-CBOE-2021-059. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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-2021-059 and should be submitted on
or before November 10, 2021.
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\21\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-22811 Filed 10-19-21; 8:45 am]
BILLING CODE 8011-01-P
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