Notice2023-19355
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 4.3 (Criteria for Underlying Securities) To Accelerate the Listing of Options on Certain IPOs
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Published
September 8, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 173 (Friday, September 8, 2023)</title>
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[Federal Register Volume 88, Number 173 (Friday, September 8, 2023)]
[Notices]
[Pages 62126-62129]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-19355]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98277; File No. SR-CBOE-2023-043]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Rule 4.3 (Criteria for Underlying Securities) To Accelerate the Listing
of Options on Certain IPOs
September 1, 2023.
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 August 24, 2023, 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
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.
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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 4.3. The text of the proposed rule change is provided
below.
(additions are italicized; deletions are [bracketed])
* * * * *
Rules of Cboe Exchange, Inc.
* * * * *
Rule 4.3. Criteria for Underlying Securities
(a)-(b) No change.
Interpretations and Policies
.01 The [Board of Directors]Exchange has established guidelines to
be considered [by the Exchange in]when evaluating potential underlying
securities for Exchange option transactions. Absent exceptional
circumstances with respect to subparagraphs (a)(1), (a)(2), (b)(1), or
(b)(2) listed below, at the time the Exchange selects an underlying
security for Exchange option transactions, the following guidelines
with respect to the issuer shall be met.
(a) No change.
(b) Guidelines applicable to the market for the security are:
(1) No change.
(2) (A) If the underlying security is a ``covered security'' as
defined under Section 18(b)(1)(A) of the Securities Act of 1933[,]: (i)
the market price per share of the underlying security has been at least
$3.00 for the previous three consecutive business days preceding the
date on which the Exchange submits a certificate to the OCC for listing
and trading. For purposes of this Interpretation .01(b)(2)(A), the
market price of such underlying security is measured by the closing
price reported in the primary market in which the underlying security
is traded; however, (ii) the requirements set forth in clause (i) will
be waived during the three days following an underlying security's
initial public offering day if the underlying security has a market
capitalization of at least $3 billion based on upon the offering price
of its initial public offering, in which case options on the underlying
security may be listed and traded starting on or after the second
business day following the initial public offering day.
* * * * *
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.
[[Page 62127]]
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 4.3. The Exchange proposes a
listing rule change that is substantially similar in all material
respects to the proposal approved for NYSE American LLC (``NYSE
American'').\3\ NYSE American filed a proposed rule change,\4\ which
the Securities and Exchange Commission (the ``Commission'') recently
approved, to modify the standard for the listing and trading of options
on ``covered securities'' to reduce the time to market in NYSE American
Rule 915 (Criteria for Underlying Securities). At this time, the
Exchange proposes to adopt a substantively identical rule.
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\3\ See Securities Exchange Act Release No. 98013 (July 27,
2023) 88 FR 50927 (August 2, 2023) (SR-NYSEAMER-2023-27) (Order
Granting Approval of a Proposed Rule Change to Amend Rule 915
(Criteria for Underlying Securities) to Accelerate the Listing of
Options on Certain IPO).
\4\ Id.
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Proposal
Exchange Rule 4.3, Interpretation and Policy .01 sets forth the
guidelines to be considered by the Exchange in evaluating potential
underlying securities that are ``covered securities,'' as defined in
Section 18(b)(1)(A) of the Securities Act of 1933 (hereinafter
``covered security'' or ``covered securities''), for Exchange option
transactions.\5\ Currently, the Exchange permits the listing of an
option on an underlying covered security that, amongst other things,
has a market price of at least $3.00 per share for the previous three
consecutive business days preceding the date on which the Exchange
submits a certificate to The Options Clearing Corporation (``OCC'') to
list and trade options on the underlying security (the ``three-day
lookback period'').\6\ Under the current rule, if an initial public
offering (``IPO'') occurs on a Monday, the earliest date the Exchange
could submit its listing certificate to OCC would be on Thursday, with
the market price determined by the closing price over the three-day
lookback period from Monday through Wednesday. The option on the IPO'd
security would then be eligible for trading on the Exchange on Friday
(i.e., within four business days of the IPO inclusive of the day the
listing certificate is submitted to OCC).
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\5\ Current Exchange Rule 4.3(a) requires that, for underlying
securities to be eligible for listing and trading on the Exchange,
securities must be duly registered and be an NMS stock (as defined
in Rule 600 of Regulation NMS under the Act) and be characterized by
a substantial number of outstanding shares that are widely held and
actively traded. The Exchange also proposes to replace the term
``Board of Directors'' with Exchange and make conforming
nonsubstantive changes to the introductory paragraph of Rule 4.3,
Interpretation and Policy .01, as it is outdated. The Board of
Directors delegated authority to determine listing criteria to
Exchange management. Exchange management currently determines
guidelines for evaluating potential underlying securities for
Exchange option transactions, as set forth in Rule 4.3(b).
\6\ See Exchange Rule 4.3, Interpretation and Policy
.01(b)(2)(A). The Exchange is not proposing to make any changes to
the guidelines for listing securities that are not a ``covered
security.'' See Exchange Rule 4.3, Interpretation and Policy
.01(b)(2)(B).
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The Exchange notes that the three-day look back period helps ensure
that options on underlying securities may be listed and traded in a
timely manner while also allowing time for OCC to accommodate the
certification request. However, there are certain large IPOs that issue
high-priced securities--well above the $3.00 per share threshold--that
would obviate the need for the three-day lookback period. The Exchange
understands from market participants that the proposed changes would
help options on covered securities with a market capitalization of at
least $3 billion based upon the offering prices of their IPOs come to
market earlier. The proposed change, which the Exchange expects will be
harmonized across options exchanges, is designed to provide investors
the opportunity to hedge their interests in IPO investments in a
shorter amount of time than what is currently permitted.\7\ The
Exchange believes that options serve as a valuable tool to the trading
community and help markets function efficiently by mitigating risk. To
that end, the Exchange believes that the absence of options in the
early days after an IPO may heighten volatility in the trading of IPO'd
securities.\8\
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\7\ While the Exchange acknowledges that market participants may
utilize options for speculative purposes (in addition to as a
hedging tool), the Exchange believes (as set forth below) that its
existing surveillance technologies and procedures adequately address
potential violations of exchange rules and federal securities laws
applicable to trading on the Exchange.
\8\ See proposed Rule 4.3, Interpretation and Policy
.01(b)(2)(A)(ii).
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Accordingly, the Exchange proposes to modify Rule 4.3,
Interpretation and Policy .01(b)(2) to waive the three-day lookback
period for covered securities that have a market capitalization of at
least $3 billion based upon the offering price of the IPO of such
securities and to allow options on such securities to be listed and
traded starting on or after the second business day following the
initial public offering day (i.e., not inclusive of the day of the
IPO).\9\ NYSE American noted in its rule change that it reviewed
trading data for IPO'd securities dating back to 2017 and is unaware of
any such security that achieved a market capitalization of $3 billion
based upon the offering price of its IPO that would not have also
qualified for listing options based on the three-day lookback
requirement.\10\ Specifically, NYSE American stated in its rule change
that it determined that 202 of the 1,179 IPOs that took place between
January 1, 2017, and October 21, 2022 met the $3 billion market
capitalization/IPO offering price threshold.\11\ Further, NYSE American
stated that options on all 202 of those IPO shares subsequently
satisfied the three-day lookback requirement for listing and trading,
i.e., none of these large IPOs closed below the $3.00/share threshold
during its first three days of its trading.\12\ As such, the Exchange
believes the proposed capitalization threshold of $3 billion based upon
the offering price of its IPO is appropriate.
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\9\ The Exchange acknowledges that the Options Listing
Procedures Plan (or ``OLPP'') requires that the listing certificate
be provided to OCC no earlier than 12:01 a.m. and no later than
11:00 a.m. (Chicago time) on the trading day prior to the day on
which trading is to begin. See OLPP, at p. 3., available here:
<a href="https://www.theocc.com/getmedia/198bfc93-5d51-443c-9e5b-fd575a0a7d0f/options_listing_procedures_plan.pdf">https://www.theocc.com/getmedia/198bfc93-5d51-443c-9e5b-fd575a0a7d0f/options_listing_procedures_plan.pdf</a>. The OLPP is a
national market system plan that, among other things, sets forth
procedures governing the listing of new options series.
\10\ See supra note 5.
\11\ Id.
\12\ Id.
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Under the proposed rule, if an IPO for a company with a market
capitalization of $3 billion based upon the offering price of its IPO
occurs on a Monday, the Exchange could submit its listing certificate
to OCC (to list and trade options on the IPO'd security) as soon as all
the other requirements for listing are satisfied. If, on Tuesday, all
requirements are deemed satisfied, options on the IPO'd security could
then be eligible for trading on the Exchange on Wednesday (i.e.,
starting on or after the second business day following the IPO day).
Thus, the proposal could potentially accelerate the listing of options
on IPO'd securities by two days.
The Exchange believes the proposed change would allow options on
IPO'd securities to come to market sooner without sacrificing investor
protection. The Exchange represents that trading in options on IPO'd
securities--like all other options traded on the Exchange--is subject
to surveillances administered by the Exchange and/or FINRA on
[[Page 62128]]
behalf of the Exchange.\13\ Those surveillances are designed to detect
violations of Exchange rules and applicable federal securities laws.
The Exchange represents that those surveillances are adequate to
reasonably monitor Exchange trading of options on IPO'd securities in
all trading sessions and to reasonably deter and detect violations of
Exchange rules and federal securities laws applicable to trading on the
Exchange.\14\ As such, the Exchange believes that its existing
surveillance technologies and procedures, coupled with NYSE American's
findings related to the IPOs reviewed as described herein, adequately
address potential concerns regarding possible manipulation or price
stability.
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\13\ FINRA currently conducts certain surveillances on behalf of
the Exchange pursuant to a regulatory services agreement. To the
extent that FINRA may conduct any surveillances on behalf of the
Exchange pursuant to the regulatory services agreement (which
surveillances may vary over time), the Exchange is responsible for
FINRA's performance under the regulatory services agreement. The
Exchange is also a party to a bilateral Rule 17d-2 Agreement with
FINRA and various multi-party Rule 17d-2 Agreements with FINRA and
other national securities exchanges that trade options (e.g., Rule
17d-2 Agreements governing options sales practice and options
position limits) and to national market systems plans with the other
national securities exchanges that trade options (e.g., the national
market system plan that governs options insider trading for which
FINRA is the current plan processor).
\14\ See supra note 9.
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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.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
\17\ Id.
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In particular, the Exchange believes the proposed change would
facilitate options transactions and would remove impediments to and
perfect the mechanism of a free and open market and a national market
system, which would, in turn, protect investors and the public interest
by providing an avenue for options on IPO'd securities to come to
market earlier. The Exchange notes that the three-day look back period
helps ensure that options on underlying securities may be listed and
traded in a timely manner while also allowing time for OCC to
accommodate the certification request. However, there are certain large
IPOs that issue high-priced securities--well above the $3.00 per share
threshold--that would obviate the need for the three-day lookback
period. As noted above, NYSE American noted that it reviewed trading
data for IPO'd securities dating back to 2017 and was unaware of an
IPO'd security with a market capitalization of $3 billion or more
(based upon the offering price of its IPO) that subsequently would have
failed to qualify for listing and trading as options under the three-
day lookback requirement.\18\ The Exchange believes that the proposed
amendment, which the Exchange expects to be harmonized across options
exchanges, would remove impediments to and perfect the mechanism of a
free and open market and a national market system by providing an
avenue for investors to hedge their interest in IPO investments in a
shorter amount of time than what is currently permitted. The Exchange
believes that options serve as a valuable tool to the trading community
and help markets function efficiently by mitigating risk. To that end,
the Exchange believes that the absence of options in the early days
after an IPO may heighten volatility to IPO'd securities.\19\
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\18\ See supra note 5.
\19\ See supra note 9.
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Further, as noted herein, the Exchange believes the proposed change
would allow options on IPO'd securities to come to market sooner
without sacrificing investor protection. The Exchange represents that
trading in options on IPO'd securities--like all other options traded
on the Exchange--is subject to surveillances administered by the
Exchange and/or FINRA on behalf of the Exchange.\20\ Those
surveillances are designed to detect violations of Exchange rules and
applicable federal securities laws. The Exchange represents that those
surveillances are adequate to reasonably monitor Exchange trading of
options on IPO'd securities in all trading sessions and to reasonably
deter and detect violations of Exchange rules and federal securities
laws applicable to trading on the Exchange.\21\ As such, the Exchange
believes that its existing surveillance technologies and procedures,
coupled with NYSE American's findings related to the IPOs reviewed as
described herein, adequately address potential concerns regarding
possible manipulation or price stability.
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\20\ FINRA currently conducts certain surveillances on behalf of
the Exchange pursuant to a regulatory services agreement. To the
extent that FINRA may conduct any surveillances on behalf of the
Exchange pursuant to the regulatory services agreement (which
surveillances may vary over time), the Exchange is responsible for
FINRA's performance under the regulatory services agreement. The
Exchange is also a party to a bilateral Rule 17d-2 Agreement with
FINRA and various multi-party Rule 17d-2 Agreements with FINRA and
other national securities exchanges that trade options (e.g., Rule
17d-2 Agreements governing options sales practice and options
position limits) and to national market systems plans with the other
national securities exchanges that trade options (e.g., the national
market system plan that governs options insider trading for which
FINRA is the current plan processor).
\21\ See supra note 9.
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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 expects other
options exchanges will adopt substantively similar proposals, such that
there would be no burden on intermarket competition from the Exchange's
proposal. Accordingly, the proposed change is not meant to affect
competition among the options exchanges. For these reasons, the
Exchange believes that the proposed rule change reflects this
competitive environment and does not impose any undue burden on
intermarket competition.
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: (i)
significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become
[[Page 62129]]
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 \22\ and Rule 19b-4(f)(6)
\23\ thereunder.
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\22\ 15 U.S.C. 78s(b)(3)(A).
\23\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization 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 date of 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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A proposed rule change filed under Rule 19b-4(f)(6) \24\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\25\ 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 proposed
rule change may become operative upon filing. The Exchange requested
the waiver, stating its desire to harmonize its rules to those of NYSE
American to ensure fair competition among the options exchanges.
Further, the proposed change would allow options on IPO'd securities to
come to market sooner (i.e., at least two business days post-IPO not
inclusive of the day of the IPO) without sacrificing investor
protection. For these reasons, and because the proposed rule change
does not raise any novel legal or regulatory issues, the Commission
believes that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest. Therefore, the
Commission hereby waives the 30-day operative delay and designates the
proposal operative upon filing.\26\
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\24\ 17 CFR 240.19b-4(f)(6).
\25\ 17 CFR 240.19b-4(f)(6)(iii).
\26\ 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 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
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#3341465f561e505c5e5e565d4740734056501d545c45"><span class="__cf_email__" data-cfemail="443631282169272b2929212a3037043721276a232b32">[email protected]</span></a>. Please include
file number SR-CBOE-2023-043 on the subject line.
Paper Comments
<bullet> 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-2023-043. 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="https://www.sec.gov/rules/sro.shtml">https://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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-CBOE-2023-043 and should be
submitted on or before September 29, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-19355 Filed 9-7-23; 8:45 am]
BILLING CODE 8011-01-P
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