Document ID: SEC-2020-2100-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2020-12-29T05:00Z

[Federal Register Volume 85, Number 249 (Tuesday, December 29, 2020)]
[Notices]
[Pages 85752-85756]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28655]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90749; File No. SR-CBOE-2020-116]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Add Options on the Mini-Russell 
2000 Index (``Mini-RUT'' or ``MRUT'') to Its P.M. Pilot Program

December 21, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on December 18, 2020, Cboe Exchange, Inc. (``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III 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 add options on the Mini-Russell 2000 Index (``Mini-RUT'' or 
``MRUT'') to its P.M. Pilot Program. 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 (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

[[Page 85753]]

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 purpose of this proposed rule change is to amend the Exchange's 
pilot program for P.M.-settled options on standard third-Friday-of-the-
month (``Expiration Friday'') in connection with the Exchange's plans 
to list and trade MRUT options.\3\ MRUT options are options on the 
Mini-RUT Index, the value of which is 1/10th the value of the Russell 
2000 (``RUT'') Index. Currently, the Exchange has in place a pilot 
program under Interpretation and Policy .13 to Rule 4.13 that allows 
the Exchange to list Mini-SPX (``XSP'') options \4\ that expire on 
Expiration Friday, for which the exercise settlement value is based on 
the index value derived from the closing prices of the component (i.e., 
P.M.-settled) (the ``P.M. Pilot Program'').\5\ The Exchange proposes to 
add Mini-RUT options to the existing P.M. Pilot Program and to permit 
it to list P.M.-settled Mini-RUT options, for which the exercise 
settlement value will be based on the index value derived from the 
closing prices of the on the last trading day prior to expiration, on a 
pilot basis (currently set to expire on May 3, 2021).\6\ The Exchange 
notes that, like proposed MRUT options, XSP options are reduced-value 
options (1/10th) compared to SPX options that offer individual 
investors lower cost options to obtain the potential benefits of 
options on a broad-based index (the S&P 500 Index), and are likewise 
designed to provide options overlying the higher-valued SPX Index more 
readily available as an investing tool and at more affordable prices 
for the average retail investor. Therefore, the Exchange believes that 
because both mini-index options are intended for the same investor-
base, providing the same P.M.-settlement opportunities for both XSP and 
MRUT options is appropriate. The Exchange believes permitting the 
trading of MRUT options on a P.M.-settled basis will encourage greater 
trading in MRUT options once listed and traded on the Exchange.\7\
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    \3\ The Exchange plans to, simultaneously with this proposal, 
submit a proposal to list and trade Mini-RUT options on the 
Exchange. The Exchange plans to list Mini-RUT options as part of the 
Nonstandard Expiration Pilot Program and as a Quarterly Index 
Expiration (``QIX'') option. The Exchange intends to list and trade 
Mini-RUT options at the end of January 2021. The Exchange notes that 
trading in P.M.-settled MRUT options will 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 will 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.
    \4\ As well as SPX options (``SPXPM'').
    \5\ See Interpretation and Policy .13 to Rule 4.13.
    \6\ The proposed rule change also makes a nonsubstantive update 
to Interpretation and Policy .13 to Rule 4.13 by adding a reference 
to the defined term ``SPX'' after S&P 500 Stock Index and using that 
defined term within the provision in order to provide greater 
clarity and consistency with the language throughout Interpretation 
and Policy .13 to Rule 4.13.
    \7\ See supra note 3.
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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.\8\ 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'').\9\ 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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    \8\ See Securities Exchange Act Release No. 70087 (July 31, 
2013), 78 FR 47809 (August 6, 2013) (SR-CBOE-2013-055) (the ``P.M.-
settled XSP Approval Order''). The reporting requirements are also 
the same for SPXPM. See Securities and Exchange Act Release No. 
68888 (February 8, 2013), 78 FR 10668 (February 14, 2013) (SR-CBOE-
2012-120) (the ``SPXPM Approval Order'').
    \9\ See P.M.-settled XSP Approval Order.
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    Going forward, the Exchange will 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 will 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:
    (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 Options, 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

[[Page 85754]]

periods are determined by the Exchange and the Commission. In proposing 
to add MRUT options to the P.M. Pilot Program, the Exchange will abide 
by the reporting requirements described herein, the same reporting 
requirements described in the P.M.-settled XSP Approval Order.\10\ 
Additionally, the Exchange will 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 will make public any data and analyses in connection with 
P.M.-settled MRUT options it submits to the Commission under the Pilot 
Program.\11\
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    \10\ See also SPXPM Approval Order.
    \11\ 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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    Overall, the Exchange believes that permitting the trading of MRUT 
options on a P.M.-settled basis will encourage greater trading in MRUT 
options. The Exchange anticipates high customer demand for P.M.-settled 
MRUT options as they will provide market participants, particularly 
smaller-sized investors and retail customers, an opportunity to benefit 
from exposure to the broad-based RUT Index market with a manageably 
sized contract that has the flexibility of a P.M.-settlement.
    Additionally, 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.-settled Pilot Program. Rule 
5.1(b)(2)(C) currently provides that on their last trading day, Regular 
Trading Hours for P.M.-settled XSP options \12\ may be effected on the 
Exchange between 9:30 a.m. and 4:00 p.m. Eastern Time \13\ (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 include P.M.-settled MRUT options. The 
Exchange expects that MRUT options, like SPX, XSP and RUT options (with 
Nonstandard Expirations, i.e., P.M.-settled Weekly and End of Month 
(``EOM'') RUT options),\14\ will typically be priced in the market 
based on corresponding futures values. The primary listing markets for 
the component securities that comprise the RUT Index (and thus, Mini-
RUT Index) close trading in those securities at 4:00 p.m., just as the 
primary listing markets for the component securities that comprise the 
SPX Index (on which SPX and XSP options are based) close trading at 
4:00 p.m. The primary listing exchanges for the component securities 
disseminate closing prices for the component securities, which are used 
to calculate the exercise settlement value of the RUT Index. The 
Exchange believes that, under normal trading circumstances, the primary 
listing markets have sufficient bandwidth to prevent any data queuing 
that may cause any trades that are executed prior to the closing time 
from being reported after 4:00 p.m. If trading in expiring P.M.-settled 
MRUT options continued an additional fifteen minutes until 4:15 p.m. on 
their last trading day, expiring MRUT options could not be priced on 
corresponding futures values, but rather would have to be priced on the 
known cash value. At the same time, the prices of non-expiring P.M.-
settled MRUT options series would continue to move and likely be priced 
in response to changes in corresponding futures prices. As a result, a 
potential pricing divergence could occur between 4:00 p.m. and 4:15 
p.m. on the final trading day in expiring P.M.-settled MRUT options 
(e.g., a switch from pricing off of futures to cash). The Exchange 
understands that the switch from pricing off of futures to cash can be 
a difficult and risky crossover for liquidity providers. As a result, 
if expiring P.M.-settled contracts closed at 4:15 p.m., Market-Makers 
may react by widening spreads in order to compensate for the additional 
risk. Therefore, in order to mitigate potential investor confusion and 
the potential for increased costs to investors, the Exchange believes 
that it is appropriate to cease trading in the expiring P.M.-settled 
MRUT options at 4:00 p.m., as it already does for expiring P.M.-settled 
XSP options and RUT options with Nonstandard Expirations for the same 
aforementioned reasons.\15\ The Exchange does not believe that the 
proposed rule change will impact volatility on the underlying cash 
market comprising the RUT Index at the close on Expiration Fridays, as 
it already closes trading on the last trading day for expiring P.M.-
settled options at 4:00 p.m. (such as P.M.-settled XSP options and 
P.M.-settled Weekly and EOM RUT options), which the Exchange does not 
believe has had an adverse impact on fair and orderly markets on 
Expiration Fridays for the underlying stocks comprising the 
corresponding indexes.\16\
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    \12\ This same rule will apply to MRUT options with Nonstandard 
Expirations and QIXs, as proposed in the rule filing to list and 
trade MRUT options.
    \13\ See Rule 1.6, which states that unless otherwise specified, 
all times in the Rules are Eastern Time.
    \14\ See Rule 4.13(e).
    \15\ See Securities Exchange Act Release No. 69638 (May 24, 
2013), 78 FR 32524 (May 30, 2013) (SR-CBOE-2013-055); and P.M.-
settled XSP Approval Order.
    \16\ See Securities Exchange Act Release No. 90263 (October 23, 
2020), 85 FR 68611 (October 29, 2020) (SR-CBOE-2020-100).
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    With regard to the impact of this proposal on system capacity, the 
Exchange has analyzed its capacity and represents that it believes that 
the Exchange and OPRA have the necessary systems capacity to handle any 
potential additional traffic associated with trading of P.M.-settled 
MRUT options. The Exchange does not believe that its Trading Permit 
Holders (``TPHs'') will experience any capacity issues as a result of 
this proposal and 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.
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.\17\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \18\ 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) \19\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ Id.
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    In particular, the Exchange does not believe that the addition of 
MRUT options to the P.M. Pilot Program will raise any prohibitive 
regulatory concerns, nor adversely impact fair and orderly markets on 
Expiration Fridays for the underlying stocks comprising the

[[Page 85755]]

RUT Index. The Exchange has not experienced any meaningful regulatory 
concerns, nor adverse impact on fair and orderly markets, in connection 
with the P.M. Pilot Program that has permitted trading of P.M.-settled 
XSP since 2013, which have a similar purpose and likely similar 
investor base as MRUT options.\20\ Additionally, the proposed rule 
change will provide investors with an opportunity to trade MRUT options 
with a P.M.-settlement feature on the Exchange subject to transparent 
exchange-based rules as well as price discovery and liquidity, as 
opposed to alternatively trading these products in the over-the-counter 
market. Investors will benefit from the opportunity to trade in 
association with this product on Expiration Fridays. Indeed, market 
participants, particularly smaller-sized investors and retail 
customers, will benefit from exposure to the broad-based RUT Index 
market with a manageably sized contract that has the flexibility of a 
P.M.-settlement, thereby removing impediments to a free and open market 
consistent with the Act.
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    \20\ Trading in SPXPM has been permitted since 2013, as well. 
The Exchange notes too that for roughly five years (1987 to 1992) it 
listed and traded an A.M.-settled S&P 500 index option (called NSX) 
at the same time it listed and traded a P.M.-settled S&P 500 index 
option (called SPX) and did not observe any market disruptions as a 
result of offering both products.
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    In addition, the Exchange believes that the proposal to end trading 
at 4:00 p.m. on the last trading day for transactions in expiring P.M.-
settled MRUT options will prevent continued trading on a product after 
the exercise settlement value has been fixed, thereby mitigating 
potential investor confusion and the potential for increased costs to 
investors as a result of potential pricing divergence at the end of the 
trading day. Given the significant changes in the closing procedures of 
the primary markets in recent decades, the Exchange does not believe 
that the proposed P.M.-settled MRUT options and 4:00 p.m. closing time 
on Expiration Fridays will adversely impact the maintenance of a fair 
and orderly market or the protection of investors because the risks of 
potential impact of P.M.-, cash-settled index derivatives on the 
underlying cash markets are greatly reduced today by the enhanced 
closing procedures currently in place at the primary equity markets. 
The Exchange notes also that it will include analysis in connection 
with P.M.-settled MRUT options, in the same manner that it currently 
does for other P.M.-settled options, in the pilot reports it submits to 
the Commission, and will provide the Commission with any additional 
data or analyses the it may request because it deems such data or 
analyses necessary to determine whether the Pilot Program, including 
P.M.-settled MRUT options as proposed, is consistent with the Exchange 
Act. The Exchange represents that it believes that it has the necessary 
systems capacity to support any additional traffic associated with 
trading of P.M.-settled MRUT and does not believe that its TPHs will 
experience any capacity issues as a result of this proposal. The 
Exchange will monitor the trading volume associated with any possible 
additional options series listed and the effect (if any) of these 
additional series on market fragmentation and on the capacity of the 
Exchange's automated systems.

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 P.M.-settled MRUT 
options will be available to all market participants and the proposed 
4:00 p.m. closing time on Expiration Fridays will apply equally to all 
market participants trading in MRUT options.
    The Exchange does not believe that the proposal to list and trade 
options on the Mini-RUT Index, and the proposed rules governing the 
trading of MRUT options on the Exchange, will impose any burden on 
intermarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act because options on the RUT 
Index, including reduced-value options as proposed, are proprietary 
Exchange products. To the extent that the advent of P.M.-settled MRUT 
options trading on the Exchange may make the Exchange a more attractive 
marketplace to market participants at other exchanges, such market 
participants are free to elect to become market participants on the 
Exchange. As stated above, the listing and trading of P.M.-settled MRUT 
options on the Exchange will subject such options to transparent 
exchange-based rules as well as price discovery and liquidity, as 
opposed to alternatively trading these products in the over-the-counter 
market.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2020-116 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2020-116. 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

[[Page 85756]]

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-2020-116, and should be 
submitted on or before January 19, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-28655 Filed 12-28-20; 8:45 am]
BILLING CODE 8011-01-P