Document ID: SEC-2021-1090-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2021-08-12T04:00Z

[Federal Register Volume 86, Number 153 (Thursday, August 12, 2021)]
[Notices]
[Pages 44411-44421]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-17175]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92599; File No. SR-CBOE-2021-041]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend Certain Rules To Accommodate 
the Listing and Trading of Micro FLEX Index Options and To Make Other 
Clarifying and Nonsubstantive Changes

August 6, 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 July 23, 2021, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange.\3\ 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\ On August 4, 2021, the Exchange filed Partial Amendment No. 
1 to the proposed rule change. The Exchange withdrew Partial 
Amendment No. 1 on August 6, 2021.
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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 certain Rules to accommodate the listing and trading of Micro 
FLEX Index Options and to make other clarifying and nonsubstantive 
changes. 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.

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 certain rules 
to accommodate the listing and trading of certain FLexible EXchange 
(``FLEX'') index options with an index multiplier of one (``Micro FLEX 
Index Options''). The Exchange has the authority to list options on 
broad-based indexes for which the value of the underlying is at least 
100 with an index multiplier of one \4\ and proposes to expand that 
authority to list FLEX Index Options on the same indexes with an index 
multiplier of one. The Exchange believes Micro FLEX Index Options will 
expand investors' choices and flexibility by listing and trading FLEX 
Options on larger-valued broad-based indexes, which provide investors 
with the ability to gain exposure to the market, with a notional value 
of 1/100th of the value of currently available FLEX Index Options.
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    \4\ See Rule 4.11 (definition of micro-option). Currently, the 
Exchange has the authority to list options on 13 indexes that 
satisfy this criteria: S&P 500 Index, Mini-S&P 500 Index (XSP), 
Russell 2000 Index (RUT), Mini-Russell 2000 Index (MRUT), Dow Jones 
Industrial Average (DJX), S&P 100 Index (OEX and XEO), S&P 500 ESG 
Index (SPESG), MSCI EAFE Index (MXEA), MSCI Emerging Markets Index 
(MXEF), Russell 1000 Growth Index (RLG), Russell 1000 Value Index 
(RLV), Russell 1000 Index (RUI), and FTSE 100 Mini-Index (UKXM). The 
proposed rule change would authorize the Exchange to list Micro FLEX 
Index Options on the same 13 indexes.
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    The Exchange believes the additional granularity provided by Micro 
FLEX Index Options with respect to the prices at which investors may 
execute and exercise index options on the Exchange will appeal to 
institutional investors by providing them with an additional exchange-
traded tool to manage the positions and associated risk in their 
portfolios more precisely based on notional value, which currently may 
equal a fraction of a standard contract. For example, suppose an 
investor holds a security portfolio of $10,000,000 and desires to hedge 
its portfolio with SPX options. In order to hedge the entire portfolio 
with SPX options, the investor would need to trade 23.11 contracts 
($10,000,000/$432,770).\5\ The nearest whole number of contracts would 
be 23 contracts, which would have a total notional value of $9,953,710. 
As a result, the investor could only hedge within $46,290 of its 
portfolio value with SPX options with an index multiplier of 100 and 
would be underhedged. However, with SPX micro-options, the investor 
would need to trade 2,310.70 contracts ($10,000,000/$4,327.70). The 
nearest whole number of contracts would be 2,311 SPX micro-options,\6\ 
which would have a total notional value of $10,001,314.70. This will 
allow the investor to hedge within $1,315 of its portfolio value. 
Therefore, the proposed rule change would permit this investor to hedge 
its portfolio more effectively with far greater precision.
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    \5\ This assumes an S&P 500 Index value of 4,327.70.
    \6\ An investor could also trade 23 SPX options and 11 micro-
options. We do not, however, expect investors to make two separate 
trades in this manner due to the additional price and execution risk 
that accompanies two separate trades compared to a single trade.
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    The Exchange notes investors may currently execute and exercise 
options with this smaller contract multiplier in the unregulated over-
the-counter (``OTC'') options market. The Exchange understands that 
investors may prefer to trade such options in a listed environment to 
receive the benefits of trading listing options, including (1) enhanced 
efficiency in initiating and

[[Page 44412]]

closing out position; (2) increased market transparency; and (3) 
heightened contra-party creditworthiness due to the role of OCC as 
issuer and guarantor of all listed options. The Exchange believes the 
proposed rule change may shift liquidity from the OTC market onto the 
Exchange, which the Exchange believes would increase market 
transparency as well as enhance the process of price discovery 
conducted on the Exchange through increased order flow.
    Currently, Rule 4.21(b)(1) states the index multiplier for FLEX 
Index Options is 100. The proposed rule change adds that the index 
multiplier for FLEX Index Options on broad-based indexes for which the 
value of the underlying is at least 100 \7\ may also be one (a ``Micro 
FLEX Index Option'') (in addition to the current index multiplier of 
100), and that a FLEX Trader must specify when submitting a FLEX Order.
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    \7\ These are the same indexes on which the Exchange may list 
micro-options (non-FLEX options with an index multiplier of one).
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    To the extent the Exchange lists a Micro FLEX Index Option on an 
index on which it also lists a standard FLEX Index option, it will be 
listed with a different trading symbol than the standard index option 
with the same underlying index to reduce any potential confusion.\8\ 
The Exchange believes that the clarity of this approach is appropriate 
and transparent. The Exchange recognizes the need to differentiate 
Micro FLEX Index Options from standard FLEX Index Options and believes 
the proposed rule change will provide the necessary differentiation.
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    \8\ For example, a standard FLEX Index Option for index ABC with 
an index multiplier of 100 may have symbol 4ABC, while a Micro FLEX 
Index Option for index ABC with a multiplier of one may have symbol 
4ABC9. Similarly, in the non-FLEX market, a non-FLEX option on index 
ABC with an index multiplier of 100 may have symbol ABC, while a 
non-FLEX micro-option would have a different symbol (such as ABC9).
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    When submitting a FLEX Order, the submitting FLEX Trader \9\ must 
include all required terms of a FLEX Option series.\10\ Pursuant to 
current Rule 4.21(b)(1), the submitting FLEX Trader must include the 
underlying equity security or index (i.e., the FLEX Option class) on 
the FLEX Order. The proposed rule change amends Rule 4.21(b)(1) to 
state that if a FLEX Trader specifies an index on a FLEX Order, the 
FLEX Trader must also include whether the index option has an index 
multiplier of 100 or 1 when identifying the class of FLEX Order. The 
Exchange is specifying it may list FLEX Index Option classes with an 
index multiplier of either 1 or 100. Therefore, each FLEX Index Option 
series in a Micro FLEX Index Option class will include the same 
flexible terms as any other FLEX Option series, including strike price, 
settlement, expiration date, and exercise style as required by Rule 
4.21(b).\11\
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    \9\ A ``FLEX Trader'' is a Trading Permit Holder the Exchange 
has approved to trade FLEX Options on the Exchange.
    \10\ These terms include, in addition to the underlying equity 
security or index, the type of options (put or call), exercise 
style, expiration date, settlement type, and exercise price. See 
Rule 4.21(b). A ``FLEX Order'' is an order submitted in FLEX 
Options. The submission of a FLEX Order makes the FLEX Option series 
in that order eligible for trading. See Rule 5.72(b).
    \11\ As discussed below, these are the terms designated by the 
Commission as those that constitute standardized options, and 
therefore, the Exchange believes the proposed rule change is 
consistent with Section 9(b) of the Act. See Securities Exchange Act 
Release No. 31910 (February 23, 1993), 58 FR 12056 (March 2, 1993) 
(``1993 FLEX Approval Order'').
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    FLEX Micro Options will be traded in the same manner as all other 
FLEX Options pursuant to Chapter 5, Section F of the Rules. There are 
two important distinctions between FLEX Index Options with a multiplier 
of 100 and FLEX Micro Options due to the difference in multipliers.

------------------------------------------------------------------------
                                                   Index        Index
                     Term                       (multiplier  (multiplier
                                                   of 100)       of 1)
------------------------------------------------------------------------
Strike Price..................................         4330         4330
Bid or offer..................................        32.05        32.05
Total Value of Deliverable....................     $433,000       $4,330
Total Value of Contract.......................       $3,205       $32.05
------------------------------------------------------------------------

The proposed rule change amends certain Rules describing the exercise 
prices and bids and offers of FLEX Options to reflect these 
distinctions (as further described below).
    The Rules permit trading in a put or call FLEX Option series only 
if it does not have the same exercise style, same expiration date, and 
same exercise price as a non-FLEX Option series on the same underlying 
security or index that is already available for trading.\12\ In other 
words, a FLEX Option series may not have identical terms as a non-FLEX 
Option series listed for trading. The proposed rule change adds to the 
introductory paragraph of Rule 4.21(b) that a FLEX Index Option with an 
index multiplier of one may not be the same type (put or call) and may 
not have the same exercise style, expiration date, settlement type, and 
exercise price as a non-FLEX Index Option overlying the same index 
listed for trading (regardless of the index multiplier of the non-FLEX 
Index Option) (i.e., a Micro FLEX Index Option may not have the same 
terms as a non-FLEX Index Option or non-FLEX micro-option). This will 
prevent a Micro FLEX Index Option from being listed with terms 
identical to those of a non-FLEX Index Option (with an index multiplier 
of 1 or 100) on the same index.
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    \12\ See Rule 4.21(a)(1).
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    Pursuant to Rule 4.22(a), a FLEX Option position becomes fungible 
with a non-FLEX option that becomes listed with identical terms. As 
discussed above, options with different multipliers are different 
classes, and an option series in one class cannot be fungible with an 
option series in another classes, even if they are economically 
equivalent. Fungibility is only possible for series with identical 
terms. This is similar to how a FLEX XSP Index Option series is not 
fungible with an economically equivalent non-FLEX SPX Option series. 
Therefore, a FLEX Micro Option would become fungible with a non-FLEX 
micro-option with the same terms pursuant to Rule 4.22(a), but would 
not be fungible with a non-FLEX option overlying the same index with a 
multiplier of 100 with the same expiration date, settlement, and 
exercise price. Because the proposed rule change will not permit a 
Micro FLEX Index Option to be listed with the same terms as a non-FLEX 
Index Option regardless of the index multiplier, proposed Rule 
4.22(b)(2) states if a non-FLEX Index Option series with an index 
multiplier of 100 and the same terms as a FLEX Index Option overlying 
the same index with a multiplier of one is listed for trading, a 
position established under the FLEX trading procedures may be closed 
using the FLEX trading procedures in Chapter 5, Section F against 
another closing only FLEX position during the time period that non-FLEX 
Index Option series is listed for trading. No FLEX Orders may be 
submitted into an electronic auction or represented for open outcry 
trading pursuant to Rule 5.72 for a FLEX Index Option series with a 
multiplier of one with the same terms as the non-FLEX Index Option 
series overlying the same index with an index multiplier of 100, unless 
the FLEX Order is a closing order, during the time that non-FLEX Index 
Option series is listed for trading.\13\ This proposed ``closing only'' 
process is similar to the current ``closing only'' process for non-FLEX 
Option American-style series added intraday, as set forth in current 
Rule 4.22(b) (which the Exchange proposes to number as Rule 4.22(b)(1), 
accompanied by nonsubstantive punctuation mark changes to reflect 
proposed Rule

[[Page 44413]]

4.22(b)(2)). This provision will prevent new Micro FLEX Index Option 
positions from being opened when a non-FLEX Index Option with a 
multiplier of 100 with the same terms is listed for trading.\14\
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    \13\ To the extent the non-FLEX Index Option is later delisted, 
then opening trades of the Micro FLEX Index Option may resume after 
that occurs.
    \14\ If the Exchange lists a non-FLEX Index Option with a 
multiplier of one with identical terms as a Micro FLEX Index Option, 
then current Rule 4.22(a) applies to the fungibility of those 
options (or proposed Rule 4.22(b)(1) if it is an American-style) 
series added intraday).
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Trading Hours
    Pursuant to Rule 5.1(b)(3)(A) and (c)(1), Micro FLEX Index Options 
will be available for trading during the same hours as non-FLEX Index 
Options pursuant to Rule 5.1(b)(2). Therefore, Regular Trading Hours 
for Micro FLEX Index Options will generally be 9:30 a.m. to 4:15 p.m. 
Eastern time.\15\ To the extent an index option is authorized for 
trading during Global Trading Hours, the Exchange may also list Micro 
FLEX Index Options during that trading session as well, the hours for 
which trading session are 3:00 a.m. to 9:15 a.m. Eastern time.
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    \15\ Certain indexes close trading at 4:00 p.m. Eastern time. 
See Rule 5.1.
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Expiration, Settlement, and Exercise Style
    In accordance with Rule 4.21(b), FLEX Traders may designate the 
type (put or call), exercise style, expiration date, and settlement 
type of Micro FLEX Index Options.
Exercise Prices
    The proposed rule change amends Rule 4.21(b)(6) to describe the 
difference between the meaning of the exercise price of a FLEX Index 
Option with a multiplier of 100 and a Micro FLEX Index Option. 
Specifically, the proposed rule change states that the exercise price 
for a FLEX Index Option series in a class with a multiplier of one is 
set at the same level as the exercise price for a FLEX Index Option 
series in a class with a multiplier of 100.
    The proposed rule change also adds the following examples to Rule 
4.21(b)(6) regarding how the deliverable for a Micro FLEX Index Option 
will be calculated (as well as for a FLEX Index Option with a 
multiplier of 100 and a FLEX Equity Option, for additional clarity and 
transparency): If the exercise price of a FLEX Option series is a fixed 
price of 50, it will deliver: (A) 100 shares of the underlying security 
at $50 (with a total deliverable of $5,000) if a FLEX Equity Option; 
(B) cash equal to 100 (i.e. the index multiplier) times 50 (with a 
total deliverable value of $5,000) if a FLEX Index Option with a 
multiplier of 100; and (C) cash equal to 1 (i.e. the index multiplier) 
times 50 (with a total deliverable value of $50) if a Micro FLEX Index 
Option. If the exercise price of a FLEX Option series is 50% of the 
closing value of the underlying security or index, as applicable, on 
the trade date, it will deliver: (A) 100 shares of the underlying 
security at a price equal to 50% of the closing value of the underlying 
security on the trade date (with a total deliverable of 100 times that 
percentage amount) if a FLEX Equity Option; (B) cash equal to 100 
(i.e., the index multiplier) times a value equal to 50% of the closing 
value of the underlying index on the trade date (with a total 
deliverable of 100 times that percentage amount) if a FLEX Index Option 
with a multiplier of 100; and (C) cash equal to 1 (i.e., the index 
multiplier) times a value equal to 50% of the closing value of the 
underlying index on the trade date (with a total deliverable of one 
times that percentage amount) if a Micro FLEX Index Option.
    The descriptions of exercise prices for FLEX Equity Options and 
FLEX Index Options with a multiplier of 100 are true today. The 
proposed rule change merely adds for purposes of clarity examples to 
the rule regarding the exercise price of a FLEX Equity Option or a FLEX 
Index Option with a multiplier of 100 (the deliverables for which are 
equal to the exercise price times the 100 contract multiplier to 
determine the deliverable dollar value). Because a Micro FLEX Index 
Option has a multiplier of 1/100 of the multiplier of a FLEX Index 
Option with a multiplier of 100, the value of the deliverable of a FLEX 
Micro Option as a result is 1/100 of the value of the deliverable of a 
FLEX Index Option with a deliverable of 100.
Bids and Offers
    Pursuant to Rule 5.4(c), the Exchange will determine the minimum 
increment for bids and offers on Micro FLEX Index Options (as it does 
for all other FLEX Options) on a class-by-class basis, which may not be 
smaller than (1) $0.01, if the exercise price for the FLEX Option 
series is a fixed price, or (2) 0.01%, if the exercise price for the 
FLEX Option series is a percentage of the closing value of the 
underlying equity security or index on the trade date.\16\ The proposed 
rule change amends Rule 5.3(e)(3) to describe the difference between 
the expression of bids and offers for FLEX Equity Options, FLEX Index 
Options with a multiplier of 100, and Micro FLEX Index Options. 
Currently, that rule states that bids and offers for FLEX Options must 
be expressed in (a) U.S. dollars and decimals if the exercise price for 
the FLEX Option series is a fixed price, or (b) a percentage, if the 
exercise price for the FLEX Option series is a percentage of the 
closing value of the underlying equity security or index on the trade 
date, per unit.\17\ As noted above, a FLEX Option contract unit 
consists of 100 shares of the underlying security or 100 times the 
value of the underlying index, as they currently have a 100 contract 
multiplier.\18\ The proposed rule change clarifies that bids and offers 
are expressed per unit, if a FLEX Equity Option or a FLEX Index Option 
with a multiplier of 100, and adds an example (as set forth below). 
This is true today, and merely adds clarity to the Rules.
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    \16\ The System rounds bids and offers to the nearest minimum 
increment.
    \17\ The proposed rule change reorganizes the language in this 
provision to make clear that the phrase ``if the exercise price for 
the FLEX Option series is a percentage of the closing value of the 
underlying equity security or index on the trade date'' applies to 
the entire clause (B) of 5.3(e)(3). The proposed rule change also 
adds a cross-reference to Rule 5.4 to provide that bids and offers 
in U.S. dollars and decimals and percentages of the closing values 
of the underlying equity security or index on the trade date must be 
in the applicable minimum increment as set forth in Rule 5.4.
    \18\ See current Rule 4.21(b)(1).
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    The proposed rule change adds to Rule 5.3(e)(3) a description of 
the expression of bids and offers for Micro FLEX Index Options. 
Specifically, bids and offers for Micro FLEX Index Options must be 
expressed in (a) U.S. dollars and decimals if the exercise price for 
the FLEX Option series is a fixed price, or (b) a percentage per 1/
100th unit of the underlying security or index, as applicable, if the 
exercise price for the FLEX Option series is a percentage of the 
closing value of the underlying equity security or index on the trade 
date. Additionally, the proposed rule change adds examples describing 
the expression of bids and offers of FLEX Options: If the exercise 
price of a FLEX Option series is a fixed price, a bid of ``0.50'' 
represents a bid of (A) $50 (0.50 times 100 shares) for a FLEX Equity 
Option; (B) $50 (0.50 times an index multiplier of 100) for a FLEX 
Index Option with a multiplier of 100; and (C) $0.50 (0.50 times an 
index multiplier of one) for a Micro FLEX Index Option. If the exercise 
price of a FLEX Option series is a percentage of the closing value of 
the underlying equity security, a bid of ``0.50'' represents a bid of 
(A) 50% (0.50 times 100 shares) of the closing value of the underlying 
equity security on the trade date if a FLEX Equity Option; (B) 50% 
(0.50 times an index multiplier of 100) of the closing value of the 
underlying

[[Page 44414]]

index on the trade date if a FLEX Index Option with a multiplier of 
100; and (C) 0.50% (0.50 times an index multiplier of one) of the 
closing value of the underlying index on the trade date if a Micro FLEX 
Index Option. The Exchange believes this approach identifies a clear, 
transparent description of the differences between FLEX Index Options 
with a multiplier of 100 and Micro FLEX Index Options. The proposed 
rule change also provides additional clarity regarding how bids and 
offers of FLEX Equity Options and FLEX Index Options with a multiplier 
of 100 are expressed.
Contract Size Limits
    The proposed rule change updates various other provisions in the 
following Rules to reflect that one-hundred micro-contracts overlying 
an index will be economically equivalent to one contract for a standard 
index option overlying the same index:
     Rule 5.74: Rule 5.74 describes the Exchange's FLEX 
Solicitation Auction Mechanism (``FLEX SAM''). An order, or the 
smallest leg of a complex order, must be for at least the minimum size 
designated by the Exchange (which may not be less than 500 standard 
option contracts or 5,000 mini-option contracts). The proposed rule 
change adds that 50,000 Micro FLEX Index Options is the corresponding 
minimum size for orders submitted into FLEX SAM Auctions.
     Rule 5.87: Rule 5.87(f) describes when a Floor Broker is 
entitled to cross a certain percentage of an order, subject to the 
requirements in that paragraph. Under that Rule, the Exchange may 
determine on a class-by-class basis the eligible size for an order that 
may be transacted pursuant to this paragraph; however, the eligible 
order size may not be less than 50 standard option contracts (or 500 
mini-option contracts or 5,000 for micro-options). The proposed rule 
change adds that 5,000 FLEX Index Option contracts with an index 
multiplier of one is the corresponding minimum size for orders that may 
be crossed in accordance with this provision. Additionally, Rule 5.87, 
Interpretation and Policy .07(a) provides that Rule 5.86(e) \19\ does 
not prohibit a Trading Permit Holder (``TPH'') from buying or selling a 
stock, security futures or futures position following receipt of an 
order, including an option order, but prior to announcing such order to 
the trading crowd, provided that the option order is in a class 
designated as eligible for ``tied hedge'' transactions and within the 
eligibility size parameters, which are determined by the Exchange and 
may not be smaller than 500 standard option contracts (or 5,000 mini-
option contracts or 50,000 micro-options). The proposed rule change 
adds that 50,000 FLEX Index Option contracts with a multiplier of one 
is the corresponding minimum size for orders that may qualify as tied 
hedge transactions and not be deemed a violation of Rule 5.86(e).
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    \19\ Rule 5.86(e) provides that it will be considered conduct 
inconsistent with just and equitable principles of trade for any TPH 
or person associated with a TPH, who has knowledge of all material 
terms and conditions of an original order and a solicited order, 
including a facilitation order, that matches the original order's 
limit, the execution of which are imminent, to enter, based on such 
knowledge, an order to buy or sell an option of the same class as an 
option that is the subject of the original order, or an order to buy 
or sell the security underlying such class, or an order to buy or 
sell any related instrument until either (1) all the terms and 
conditions of the original order and any changes in the terms and 
conditions of the original order of which that Trading Permit Holder 
or associated person has knowledge are disclosed to the trading 
crowd or (2) the solicited trade can no longer reasonably be 
considered imminent in view of the passage of time since the 
solicitation. An order to buy or sell a ``related instrument,'' 
means, in reference to an index option, an order to buy or sell 
securities comprising ten percent or more of the component 
securities in the index or an order to buy or sell a futures 
contract on any economically equivalent index.
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Position and Exercise Limits \20\
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    \20\ This discussion focuses on position and exercise limits 
with respect to indexes on which the Exchange currently lists 
standard options and may also list Micro FLEX Index Options. To the 
extent the Exchange lists Micro FLEX Index Options on other indexes 
in the future, they would be subject to the same position and 
exercise limits set forth in the applicable Rules, and similarly 
aggregated with standard options on the same indexes, as proposed.
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    The proposed rule change amends Rule 8.35(a) regarding position 
limits for FLEX Options to describe how Micro FLEX Index Options will 
be counted for purposes of determining compliance with position 
limits.\21\ Because 100 Micro FLEX Index Options are equivalent to one 
FLEX Index Option with a multiplier of 100 overlying the same index due 
to the difference in contract multipliers, proposed Rule 8.35(a)(7) 
states that for purposes of determining compliance with the position 
limits under Rule 8.35, 100 Micro FLEX Index Option contracts equal one 
FLEX Index Option contract with a multiplier of 100 with the same 
underlying index. The proposed rule change makes a corresponding change 
to Rule 8.35(b) to clarify that, like reduced-value FLEX contracts, 
Micro FLEX Index Option contracts will be aggregated with full-value 
contracts and counted by the amount by which they equal a full-value 
contract for purposes of the reporting obligation in that provision 
(i.e., 100 Micro FLEX Index Options will equal one FLEX Index Option 
contract with a multiplier of 100 overlying the same index).\22\ The 
proposed rule change also adds that Micro FLEX Index Options on certain 
broad-based indexes for which FLEX Index Options with a multiplier of 
100 have no position limits will also have no position limits. The 
proposed rule change amends Rule 8.42(g) to make corresponding changes 
regarding the application of exercise limits to Micro FLEX Index 
Options. This is consistent with the current treatment of other 
reduced-value FLEX Index Options with respect to position and exercise 
limits. The margin requirements set forth in Chapter 10 of the Rules 
will apply to FLEX Micro Options (as they currently do to all FLEX 
Options).\23\
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    \21\ The proposed rule change also corrects an administrative 
error in Rule 8.35(a). Currently, there are two subparagraphs 
numbered as (a)(5). The proposed rule change amends paragraph (a) to 
renumber the second subparagraph (a)(5) to be subparagraph (a)(6).
    \22\ As it does today with respect to reduced-value indexes, the 
Exchange will count Micro FLEX Index Options as a percentage of a 
FLEX Index Option with a multiplier of 100 when calculating 
positions to determine compliance with position limits. For example, 
currently, since 10 XSP contracts equals 1 SPX contract, 5 XSP 
contracts equals 0.5 SPX contracts for position limit purposes. With 
respect to Micro FLEX Index Options, since 100 Micro FLEX SPX 
Options equals 1 FLEX SPX Option, 4 Micro FLEX SPX Options will 
equal 0.47 FLEX SPX Options for purposes of position limits.
    \23\ Pursuant to Rule 8.43(j), FLEX Index Options with a 
multiplier of one will be aggregated with non-FLEX Index Options on 
the same underlying index in the same manner as all other FLEX Index 
Options.
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Capacity
    The Exchange has analyzed its capacity and represents that it 
believes the Exchange and Options Price Reporting Authority (``OPRA'') 
have the necessary systems capacity to handle the additional traffic 
associated with the listing of new series that may result from the 
introduction of the Micro FLEX Index Options. Because the proposed rule 
change is limited to broad-based index options, which currently 
represent only 13 of the indexes on which the Exchange listed on the 
Exchange, the Exchange believes any additional traffic that may be 
generated from the introduction of Micro FLEX Index Options will be 
manageable. The Exchange also understands that the OCC will be able to 
accommodate the listing and trading of Micro FLEX Index Options.
Nonsubstantive and Clarifying Changes
    The proposed rule change specifies the actual permissible minimum 
amounts for exercise prices for FLEX Equity Options or FLEX Index 
Options

[[Page 44415]]

that are not Cliquet-settled rather than identifying them by reference 
to Rule 5.4, which defines permissible minimum increments for bids and 
offers. Current Rule 4.21(b)(6) states the exercise price (which the 
System rounds to the nearest minimum increment as set forth in Rule 
5.4), which may be for a FLEX Equity Option or FLEX Index Option that 
is not Cliquet-settled, a fixed price expressed in terms of dollars and 
decimals or a specific index value, as applicable, or a percentage of 
the closing value of the underlying equity security or index, as 
applicable, on the trade date. The Exchange has historically 
interpreted this rule to mean that the smallest permissible increments 
for exercise prices of FLEX Options are the same as the minimum 
increments for bids and offers of FLEX Options, which smallest 
increments the Exchange may determine on a class-by-class basis (as the 
Exchange may do for minimum increments for bids and offers).
    Rather than identify the minimum increments for exercise prices by 
reference to the rule describing the minimum increments for bids and 
offers, the proposed rule change adds the language specifying the 
actual minimum increments for exercise prices for FLEX Equity Options 
and FLEX Index Options that are not Cliquet-settled, which minimum 
increments are the same as minimum increments for bids and offers. 
Specifically, the proposed rule change states that the exercise price 
may be in increments no smaller than (which language is taken from Rule 
5.4(c)(4)) (1) for a FLEX Equity Option or FLEX Index Option that is 
not Cliquet-settled, (a) $0.01, if the exercise price for the FLEX 
Option series is expressed as a fixed price in terms of dollars and 
decimals or a specific index value, as applicable, or (b) 0.01%, if the 
exercise price for the FLEX Option series is expressed as a percentage 
of the closing value of the underlying equity security or index on the 
trade date, as applicable.\24\ The minimum permissible amounts of $0.01 
and 0.01% for FLEX Options with fixed exercise prices and percentage 
exercise prices, respectively, submitted into FLEX Auctions added to 
Rule 4.21(b)(6) are the current minimum increments permissible for 
these FLEX Options. Therefore, the proposed rule change makes no 
substantive changes to the minimum increments of exercise prices for 
FLEX Orders submitted into FLEX Auctions. The Exchange believes this 
will make the rule regarding permissible exercise prices for FLEX 
Options more transparent and thus may eliminate potential confusion 
regarding permissible exercise prices.
---------------------------------------------------------------------------

    \24\ The proposed rule change makes nonsubstantive changes to 
the structure of this sentence to accommodate the addition of the 
specific minimum increments for the exercise price.
---------------------------------------------------------------------------

    The proposed rule change adds to Rule 4.21(b)(6) after subparagraph 
(B) that the Exchange may determine the smallest increment for exercise 
prices of FLEX Options on a class-by-class basis. As discussed above, 
this is consistent with the Exchange's longstanding interpretation of 
the current Rule, which refers to the minimum increment for bids and 
offers as set forth in Rule 5.4 when identifying the minimum increments 
for exercise prices of FLEX Options. Rule 5.4(c)(4) states that the 
Exchange may determine the minimum increment for bids and offers on 
FLEX Options on a class-by-class basis, which may be no smaller than 
the amounts specified in that rule. Therefore, the Exchange has 
interpreted Rule 4.21(b)(6) to mean that those same provisions apply to 
the minimum increments for exercise prices for FLEX Options. The 
proposed rule change codifies this longstanding interpretation in the 
Rules, which the Exchange believes will make the rule regarding 
permissible exercise prices for FLEX Options more transparent and thus 
may eliminate potential confusion regarding permissible exercise 
prices.\25\
---------------------------------------------------------------------------

    \25\ The Exchange believes this flexibility is appropriate to 
permit the Exchange to make determinations based on the market 
characteristics of different classes. The Exchange notes the rules 
of another options exchange similarly permit that exchange to 
determine on a class-by-class basis both minimum increments for 
exercise prices and premiums (i.e., bids and offers) stated using a 
percentage-based methodology. See, e.g., NYSE Arca, Inc. (``Arca'') 
Rule 5.32-O(e)(2)(C).
---------------------------------------------------------------------------

    The proposed rule change moves the parenthetical regarding the 
System rounding the exercise price to the nearest minimum increment for 
bids and offers in the class (as set forth in Rule 5.4) from the 
introductory clause in Rule 4.21(b)(6) to the end of subclause (A)(ii) 
so that it applies only to that subclause. While not specified in the 
Rules, such rounding would only occur for exercise prices expressed as 
a percentage, so the proposed rule clarifies that it applies only for 
exercise prices expressed as a percentage and specifies that the System 
rounds the actual exercise prices to the nearest fixed price minimum 
increment for bids and offers in the class. The proposed rule change 
also adds to the parenthetical in Rule 4.21(b)(6)(A)(ii) that the 
System rounds the ``actual'' exercise price to the nearest fixed price 
minimum increment to provide additional clarity to the provision, as 
the dollar value of an exercise price expressed as a percentage 
determined after the closing value is available would be rounded to the 
nearest minimum dollar value increment, which dollar value would 
represent the ultimate, ``actual'' exercise price.
    Similarly, the proposed rule change clarifies in Rule 5.3(e)(3) and 
5.4(c)(4) that the System rounds the final transaction prices (rather 
than bids and offers) of FLEX Options to the nearest fixed price 
minimum increment for the class as set forth in Rule 5.4(c)(4)(A) 
following application of the designated percentage to the closing value 
of the underlying security or index. This is consistent with current 
functionality and is merely a clarification in the Rules to more 
accurately reflect how the System currently works. For example, suppose 
a FLEX Trader enters a percentage bid of 0.27 for a FLEX Equity Option, 
which is the price at which the order for that option ultimately 
trades, and the underlying security has a closing value of 24.52 on the 
trade date. Following the close on the trade date, the System 
calculates the transaction price to be 6.6204 (0.27 x 24.52). Assuming 
the minimum increment for bids and offers in a FLEX Option class is 
$0.01, the System rounds 6.6204 to the nearest penny, which would be a 
transaction price of $6.62. The dollar value of the transaction price 
of a FLEX Option for which the bids and offers were expressed as a 
percentage (the ``final'') determined after the closing value is 
available would be rounded to the nearest fixed price minimum increment 
for the class (e.g., the nearest $0.01, if that is the minimum 
determined for the class). This is the same rounding process that 
applies today for these options.
    Currently, as clarified by these proposed rule changes (and the 
additional description regarding rankings of bids and offers in FLEX 
Auction, as discussed below), bids and offers expressed as a percentage 
of the closing value of the underlying on the trade date are ranked by 
the percentage amount for FLEX Option series for which the exercise 
price is expressed as such a percentage. As a result, the transaction 
``price(s)'' at the conclusion of a FLEX Auction will be a percentage 
amount(s), rather than bids and offers. Once the closing value of the 
underlying on the trade date is available, the System determines the 
exercise price and transaction price in a dollar amount using that 
closing value and rounds each to the minimum dollar amount increment at 
that time. The proposed rule change replaces the phrase ``bids and 
offers'' with ``final transaction

[[Page 44416]]

prices'' in Rules 5.3(e)(3) and 5.4(c)(4). This is consistent with 
current functionality and is merely a clarification in the Rules to 
more accurately reflect how the System currently works. For example, 
suppose a FLEX Trader submits an order to buy 100 contracts of FLEX 
Option series ABC Mar 50.24% into a FLEX Auction. There are two 
responses, each to sell 100, with response 1 offering to sell at 7.01% 
and response 2 to sell at 7.03%. Response 1 is a better price for the 
buy order (i.e. is ranked higher than response 2), so response 1 
executes against the buy order at the conclusion of the auction for a 
transaction price of 7.01% of the closing value of the underlying on 
that date. Following the close of trading, the closing price of ABC on 
the day of that trade is $47.63. At that time, the System determines 
the actual exercise price in dollars to be $23.93 (rounded from 
23.929).\26\ At that time, the System also determines the final 
transaction price in dollars to be $3.34 (rounded from 3.338).\27\
---------------------------------------------------------------------------

    \26\ As set forth in Rule 4.21(b)(6), a FLEX Option series with 
a percentage exercise price reflects a percentage of the closing 
value of the underlying equity security or index, as applicable, on 
the trade date. Therefore, in this example, the actual exercise 
price is the percentage (50.24%) of the closing value of underlying 
ABC on the trade date ($47.63), which is 23.929, which the System 
rounds to $23.93. Contract multipliers are applied after any 
rounding occurs.
    \27\ As set forth in Rule 5.4(c)(4), a FLEX Option series with a 
percentage bid or offer reflects a percentage of the closing value 
of the underlying equity security or index, as applicable, on the 
trade date. Therefore, in this example, the actual transaction price 
is the percentage (7.01%) of the closing value of underlying ABC on 
the trade date ($47.63), which is 3.338, which the System rounds to 
$3.34.
---------------------------------------------------------------------------

    In addition, the proposed rule change makes a clarifying, 
nonsubstantive change to Rule 5.3(e)(3). Rule 5.3(e)(3) currently 
states that bids and offers for FLEX Options must be expressed in (a) 
U.S. dollars and decimals, if the exercise price for the FLEX Option 
series is a fixed price, or (b) a percentage, if the exercise price for 
the FLEX Option series is a percentage of the closing value of the 
underlying equity security or index on the trade date, per unit of the 
underlying security or index, as applicable. The System rounds bids and 
offers to the nearest minimum increment. The proposed rule change 
clarifies in the proposed parenthetical in the first paragraph of Rule 
5.3(e)(3)(B) (as described above) that bids and offers would be in the 
applicable minimum increment as set forth in Rule 5.4. This is true 
today and merely incorporates a cross-reference to Rule 5.4, which 
describes permissible minimum increments for bids and offers. The 
Exchange believes the addition of this cross-reference will provide 
additional transparency and clarity to this Rule.
    The proposed rule change also codifies in Rules 5.72(c)(3)(A) and 
(d)(2), 5.73(e), and 5.74(e) how FLEX Auction response bids and offers 
(as well as Initiating Orders and Solicitation Orders with respect to 
FLEX AIM Auctions and FLEX SAM Auctions, respectively) are ranked 
during the allocation process following each type of FLEX Auction 
(i.e., electronic FLEX Auction, open outcry FLEX Auction, FLEX AIM 
Auction, and FLEX SAM Auction, respectively). FLEX Orders will always 
first be allocated to responses at the best price, as applicable.\28\ 
With respect to responses to all types of FLEX Auctions for a FLEX 
Option series with an exercise price expressed as a dollar and decimal, 
the ``prices'' at which FLEX Traders submitting responses are competing 
are the dollar and decimal amounts of the response bids and offers 
entered as fixed amounts (as is the case with all non-FLEX Options), 
and the proposed rule change codifies this in the Rules. With respect 
to responses to all types of FLEX Auctions for a FLEX Option series 
with an exercise price expressed as a percentage, the ``prices'' at 
which FLEX Traders submitting responses are competing are the 
percentage values of the response bids and offers entered as 
percentages (which ultimately become a dollar value after the closing 
value for the underlying security or index, as applicable, is 
available), and the proposed rule change codifies this in the Rules. 
These are nonsubstantive changes, as they reflect how ranking following 
FLEX Auctions occurs today, and the Exchange believes these changes 
will provide additional transparency in the Rules.
---------------------------------------------------------------------------

    \28\ The proposed rule change also clarifies this in Rule 
5.72(d)(2) by adding a cross-reference to Rule 5.85(a)(1), which 
states that, with respect to open outcry trading on the Exchange's 
trading floor, bids and offers with the highest bid and lowest offer 
have priority. This is a nonsubstantive change that is currently 
true for open outcry FLEX Auctions, and the proposed rule change 
merely makes this explicit in Rule 5.72(d)(2), which cross-reference 
was previously inadvertently omitted from the Rules.
---------------------------------------------------------------------------

    Finally, in Rule 4.22(b), the proposed rule change modernizes (and 
moves to make clear it will apply to the entire paragraph (b) (as 
proposed to be amended) the provision regarding how FLEX Traders are 
notified when a FLEX Option series becomes restricted. Currently, Rule 
4.22(b) states a FLEX Official announces to FLEX Traders when such a 
FLEX Option series is restricted to closing only transactions. This was 
true when FLEX Options were traded only in open outcry and a verbal 
announcement was made to the trading floor. Currently, because FLEX 
Options are available for electronic and open outcry trading, the 
Exchange notifies FLEX Traders when a FLEX Option series is restricted 
to closing only transactions. In accordance with Rule 1.5, the Exchange 
currently notifies FLEX Traders of restricted FLEX Option series by 
electronic message.
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.\29\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \30\ 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) \31\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78f(b).
    \30\ 15 U.S.C. 78f(b)(5).
    \31\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes the proposed rule change will 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, protect investors 
and the public interest. The Exchange believes the proposed rule change 
will expand investor choice and flexibility by providing investors with 
the ability to gain exposure to the market using FLEX Index options 
with a notional value of 1/100th of the value of current FLEX Index 
options. The Exchange believes there is unmet market demand from market 
participants for Micro FLEX Index Options. Micro FLEX Index Options 
will provide additional granularity with respect to the prices at which 
investors may execute and exercise index options on the Exchange. Micro 
FLEX Index Options will provide

[[Page 44417]]

investors with an exchange-traded tool to manage more precisely based 
on notional value the positions and associated risk in their 
portfolios, which currently may equal a fraction of a standard 
contract. Because Micro FLEX Index Options and standard FLEX Index 
Options (as well as non-FLEX index options) will overlie the same 
indexes, market participants may use them as hedging vehicles to meet 
their investment needs in connection with index-related products and 
cash positions in a similar manner as they currently do with standard 
FLEX Index Options, but as a more manageably sized contract. The 
smaller-sized contract will provide all market participants with more 
precision with respect to hedging their portfolios more effectively 
with far greater precision. Given the various trading and hedging 
strategies employed by investors, this additional granularity may 
provide investors with more control over the trading of their 
investment strategies and management of their positions and risk 
associated with option positions in their portfolios.
    Additionally, Micro FLEX Index Options will provide investors with 
the ability to execute and exercise options with a smaller index 
multiplier in a listed market environment as opposed to in the 
unregulated OTC options market. The proposed rule change may shift 
liquidity from the OTC market onto the Exchange, which the Exchange 
believes would increase market transparency as well as enhance the 
process of price discovery conducted on the Exchange through increased 
order flow to the benefit of all investors. By permitting index options 
to trade with the same multiplier currently available to customized 
options in the OTC market, the Exchange believes the proposed rule 
change will also promote competition and remove impediments to and 
perfects the mechanism of a free and open market and a national market 
system by further improving a comparable alternative to the OTC market 
in customized options. By enhancing our Exchange products to provide 
additional terms available in the OTC market but not currently 
available in the listed options market, the Exchange believes it may be 
a more attractive alternative to the OTC market. The Exchange believes 
market participants benefit from being able to trade customized options 
in an exchange environment in several ways, including but not limited 
to the following: (1) Enhanced efficiency in initiating and closing out 
positions; (2) increased market transparency; and (3) heightened 
contra-party creditworthiness due to the role of the OCC as issuer and 
guarantor of all listed options.
    The listing of Micro FLEX Index Options has the same practical 
effect as the listing of FLEX Index Options on reduced-value indexes, 
which the Exchange (and other options exchanges) currently has the 
authority to do with respect to several indexes (in accordance with 
previously Commission-approved rules). For example, the Exchange may 
list FLEX Options on both the S&P 500 Index (SPX options) and the Mini-
S&P 500 Index (XSP options), which is 1/10th the value of the S&P 500 
Index.\32\ This is economically equivalent to if the Exchange listed an 
S&P 500 Index option with an index multiplier of 100 and with an index 
multiplier of 10, respectively. The Commission approved the Exchange's 
authority to list non-FLEX Options on broad-based indexes with a value 
of at least 100 with an index multiplier of 1, and the proposed rule 
change extends that authority to list FLEX Options on the same 
indexes.\33\
---------------------------------------------------------------------------

    \32\ The Exchange notes if it desired to list a reduced-value 
index option on other indexes, or list an option on a micro-level 
index (i.e., an index with 1/100th the value of the full-sized 
index), it could do so without Commission approval if the underlying 
index satisfied the generic listing criteria in Rule 4.12.
    \33\ See Securities and Exchange Act Release No. 91528 (April 9, 
2021), 86 FR 19933 (April 15, 2021) (SR-CBOE-2020-117) (Commission 
approval of micro-options).
---------------------------------------------------------------------------

    As described above, the proposal contains a number of features 
designed to protect investors by reducing investor confusion. For 
example, Micro FLEX Index Options will be designated by different 
trading symbols from standard FLEX Index Options. Additionally, the 
proposed rule change describes in the Rules the differences regarding 
the meanings of bids and offers, exercise prices (and thus 
deliverables), and minimum sizes of index options contracts with a 
multiplier of one and a multiplier of 100, all of which are adjusted 
proportionately to reflect the difference in multiplier, and thus the 
difference in the deliverable value of the underlying.\34\ The Exchange 
believes the transparency and clarity the proposed rule change adds to 
the Rules regarding the distinctions between index options due to the 
different multipliers will benefit investors. These proposed changes 
are not novel, as they correspond to similar rule provisions regarding 
other reduced-value options.\35\
---------------------------------------------------------------------------

    \34\ These proposed changes correspond to similar provisions for 
mini-options and micro-options, which also have a smaller multiplier 
than standard-sized options.
    \35\ See, e.g., Rules 4.5, Interpretation and Policy .18 
(description of strike prices for mini-options, which have a 
multiplier of 10), 5.3(c) (description of bids and offers for mini-
options and micro-options), and 5.74(a)(4) (description of minimum 
size of FLEX Agency Order for mini-options and micro-options). Just 
as terms for micro-options, which have a multiplier of 1/100th the 
size of standard options, equal 1/100th of the same terms for 
standard options, the proposed terms for Micro FLEX Index Options, 
which have a multiplier 1/100th the size of FLEX Index Options with 
a multiplier of 100, equal 1/100th of the same terms as FLEX Index 
Options with a multiplier of 100.
---------------------------------------------------------------------------

    Other than these differences, Micro FLEX Index Options will trade 
in the same manner as all other FLEX Index Options. Because Micro FLEX 
Index Options and standard FLEX Index Options (and non-FLEX options) 
overlie the same indexes, market participants may use Micro FLEX Index 
Options as hedging vehicles to meet their investment needs in 
connection with index-related products and cash positions in a similar 
manner as they do with standard index options, but as a more manageably 
sized contract. The smaller-sized contract may provide market 
participants with more precision with respect to hedging their 
portfolios. Therefore, the Exchange believes it is reasonable and 
appropriate to permit FLEX Traders to trade Micro FLEX Index Options in 
the same manner as all other FLEX Options.
    The Exchange believes the proposed rule change regarding the 
treatment of Micro FLEX Index Options with respect to determining 
compliance with position and exercise limits is designed to prevent 
fraudulent and manipulative acts and practices and promote just and 
equitable principles of trade. Micro FLEX Index Options will be counted 
for purposes of those limits in a proportional manner to FLEX Index 
Options (including reduced-value indexes) with a multiplier of 100 and 
aggregated with FLEX Index Options overlying the same index (including 
reduced-value indexes) and non-FLEX Options in the same manner as index 
options currently are. This is equivalent to current limits imposed on 
reduced-value options and micro-options. As noted above, while the 
multipliers of reduced-value indexes are $100, a reduced-value index 
option has an economically equivalent effect to an index option with a 
smaller multiplier. An index option with a multiplier of one 
corresponds to an option overlying a reduced-valued index that is 1/
100th the value of the full-value index. It just uses a different 
multiplier rather than a different value of the underlying

[[Page 44418]]

index.\36\ The Exchange believes its surveillances continue to be 
designed to deter and detect violations of Exchange Rules, including 
position and exercise limits and possible manipulative behavior, and 
those surveillance will apply to index options with a multiplier of one 
that the Exchange determines to list for trading. Ultimately, the 
Exchange does not believe that this proposed rule change raises any 
unique regulatory concerns because existing safeguards--such as 
position and exercise limits (and the aggregation of options overlying 
the same index (including reduced-value indexes)) and reporting 
requirements--would continue to apply.
---------------------------------------------------------------------------

    \36\ This is also similar to position limits for other options 
with multipliers less than 100. See, e.g., Rule 8.30, Interpretation 
and Policy .08 (describing position limits for mini-options).
---------------------------------------------------------------------------

    The Exchange represents that it has the necessary systems capacity 
to support the new option series given these proposed specifications. 
The Exchange believes that its existing surveillance and reporting 
safeguards are designed to deter and detect possible manipulative 
behavior which might arise from listing and trading Micro FLEX Index 
Options. The Exchange further notes that current Exchange Rules that 
apply to the trading of other FLEX Index Options traded on the Exchange 
will also apply to the trading of Micro FLEX Index Options, such as 
Exchange Rules governing customer accounts, margin requirements and 
trading halt procedures. The Exchange understands that market 
participants may currently, and currently do, execute orders in options 
like the ones being proposed in the unregulated OTC options market, 
where neither the Exchange nor the Commission has oversight over market 
participants that may be purposely trading at prices through the listed 
market. The proposed rule change may encourage these orders to be 
submitted to the Exchange, which could bring these orders into a 
regulated market and be subject to surveillance and oversight to which 
they are currently not subject with respect to execution of these 
option orders.
    The Exchange believes the proposed rule change will protect 
investors by preventing a Micro FLEX Index Option series to be listed 
with the same terms as a non-FLEX Index Option. Therefore, Micro FLEX 
Index Options will be permissible with the same terms as FLEX Index 
Options with a multiplier of 100 are currently available for trading. 
The Exchange believes this restriction eliminates any possible price 
protection concerns that permitting a FLEX Option with the same terms a 
but a different index multiplier than a non-FLEX Option on the same 
underlying index may allow FLEX options with a multiplier of one to 
gain priority over customer orders on the book for similar non-FLEX 
index options overlying the same index and to bypass or trade through 
the NBBO in non-FLEX options, potentially leading to market 
fragmentation.
    The Exchange believes the proposed rule change will move volume 
currently being executed in the OTC market to the Exchange. As 
discussed above, the precision the proposed rule change will add to the 
Exchange is currently available in the OTC market, and the Exchange 
understands this precision is necessary for certain market 
participants' investment strategies. The Exchange has heard from 
numerous institutional investors--insurance companies, in particular--
who use index options to hedge their portfolio risk. These investors 
have indicated they execute a significant portion of their hedging 
transactions in the OTC market because the Exchange does not offer a 
product that provides them with the level of precision they need for 
their hedging activity. However, they have expressed their preference 
to transact on the Exchange to eliminate the counterparty risk they 
must incur by trading in the OTC market. The Exchange understands that 
it is a critical and regular part of an insurance company's business to 
hedge their risk, which many do with index options. When insurance 
companies issue policies to their customers, those companies accumulate 
liabilities for the payouts they may need to make to their customers 
pursuant to those policies. Insurance companies regularly hedge the 
notional amount of these liabilities to protect against downturns in 
the market. Because they are looking to protect against broad market 
downturns, broad-based index options are a tool insurance companies 
often use for this protection. One insurance company informed the 
Exchange that it has hedged approximately 25% of the notional value of 
its $40 billion portfolio with index options executed in the OTC 
market, and the Exchange understands several other companies have 
similarly used index options to hedge significant portions of their 
portfolios. Given the size of insurance companies' portfolios, which 
can be in the tens of billions of dollars, that translates to index 
options with an aggregate notional value of billions of dollars being 
transacted annually in the nontransparent, unregulated, and riskier OTC 
market (where there is counterparty risk and no price protection exists 
for these customers).
    For a customer to achieve a precise hedge for a specific notional 
value amount using currently available products on the Exchange, the 
Exchange understands a customer would need to make at least four 
separate trades (which multiple trades introduce additional costs, 
inefficiencies, and execution risk) to achieve a result close to 
identical to the result it could achieve with a single trade in the OTC 
market. The inability of insurance companies to precisely hedge the 
notional value of their portfolios ultimately harms their customers. If 
an insurance company, for example, ``underhedges'' the notional value 
of its portfolio (which, again, is generally at least tens of billions 
of dollars), even 1% of such ``slippage'' would leave hundreds of 
millions of dollars of that portfolio unhedged,\37\ which creates 
significant risk for that company.\38\ Alternatively, if an insurance 
company ``overhedges'' the notional value of its portfolio, that would 
unnecessarily tie up some of its financial reasons, as the difference 
in value of the options and the value of the portfolio is serving no 
purpose. Either case will likely result in higher premiums or reduced 
benefits for customers. As a result, because these companies are unable 
to achieve a more precise hedge on the Exchange, they turn to the OTC 
market where the precision they need to implement their hedging 
strategies more efficiently is available and not unnecessarily harm 
their customers.
---------------------------------------------------------------------------

    \37\ For example, if an insurance company has a $40,000,000,000 
portfolio, 1% of that portfolio equates to $400,000,000.
    \38\ The Exchange notes the total unhedged risk across the 
insurance industry would be multiplied if each insurance company 
were unable to hedge the full notional value of its portfolio.
---------------------------------------------------------------------------

    For example, if an insurance company sells to a customer a 
$247,589,000 annuity policy, the insurance company may seek to obtain 
positions in broad-based index options with an equivalent notional 
value. On the Exchange, if the company used SPX options, it would need 
651 SPX contracts if the index level of the S&P 500 Index was 3801.19 
(247,589,000/3801.19/100 \39\ = 651.34). However, 651 SPX contracts 
would equate to $247,457,469, leaving that one policy underhedged by 
$131,531. The company could also trade 6514 XSP options, which would 
equate to $247,609,517, which would overhedge the policy by $20,517 and 
unnecessarily use that amount of funds for hedging its portfolio rather 
than, for example, pay

[[Page 44419]]

out insurance benefits to customers.\40\ With a one multiplier, the 
company could instead trade 65135 FLEX SPX Option contracts with a 
multiplier of one (as the company may do today in the OTC market), 
which would equate to $247,590,511, which is far closer to the value of 
the policy and thus is the most efficient use of the insurance 
company's hedging resources.
---------------------------------------------------------------------------

    \39\ The index multiplier is 100.
    \40\ As this relates to only a single policy in the insurance 
company's portfolio, the harm that may be caused by the lack of 
precision only increases for each policy for which the company is 
unable to precisely hedge.
---------------------------------------------------------------------------

    This example demonstrates the value one insurance company could 
receive from the availability of FLEX Index Options with a multiplier 
of one for a hedge related to a single policy. The aggregate value to 
the insurance industry, and their customers, created by the 
availability of FLEX Index Options with a multiplier of one would be 
extensive if multiple insurance companies used these options to hedge 
their portfolios, as the Exchange expects them to do. As a result, a 
substantial number of index options transactions that currently occur 
with no transparency and counterparty risk would have the opportunity 
to receive the benefits of occurring on a national securities exchange. 
The availability of this product on the Exchange would provide these 
companies with a more transparent, lower risk option that would allow 
them to use their resources more efficiently and pass on those savings 
to their customers.
    The Exchange's surveillance program will incorporate Micro FLEX 
Index Options. Broker-dealers are also subject to due diligence and 
best execution obligations, which obligations may require broker-
dealers to consider the prices of economically equivalent options when 
executing customer orders. Market participants may currently, and the 
Exchange understands they currently do, execute orders like the ones 
being proposed in the unregulated OTC market, where neither the 
Exchange nor the Commission has oversight over market participants that 
may be purposely trading at prices through the listed market.
    The Commission initially approved the listing and trading of FLEX 
Options on only two indexes--the S&P 100 and S&P 500.\41\ As noted 
above, the Commission issued a separate order designating FLEX Options 
as standardized options under Rule 9b-1 of the Exchange Act, which 
order specifically referenced FLEX Options on those two indexes.\42\ 
While the initial scope of FLEX Options was limited, the use of FLEX 
Options has significantly expanded since 1993. The Exchange may now 
list FLEX Options on any equity or index for which it is authorized to 
trade non-FLEX Options.\43\ The expansion of the use of FLEX Options is 
consistent with the initial purpose for which the Exchange initially 
proposed to adopt FLEX Options, which was to permit trading in options 
that were otherwise permissible in the OTC market to provide investors 
with the benefits of trading options on a listed market versus the OTC 
market. Since 1993, the Commission, through designated authority, has 
approved numerous proposed rule changes to expand the applicability of 
FLEX Options and designated those FLEX Options as standardized options 
under Rule 9b-1 of the Exchange Act, including FLEX Options with terms 
different than those initially approved by the Commission in 1993.\44\ 
The proposed rule change similarly seeks to expand the availability of 
FLEX Options in a manner consistent with the initial purpose for which 
the Exchange initially adopted, and has since then expanded the 
applicability of, FLEX Options. Options with an index multiplier of one 
are currently permissible in the OTC market but not in the listed 
market. The proposed rule change seeks to meet the demands of investors 
that currently may only obtain more precise hedging as described above 
through the OTC markets. The Exchange believes it benefits the 
investing public to continue to enhance product offerings to evolve to 
constantly changing needs of investors, even if certain products were 
initially introduced in a more limited manner.
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    \41\ See Securities Exchange Act Release No. 31920 (February 24, 
1993), 58 FR 12280 (March 3, 1993) (SR-CBOE-92-17) (``Initial Cboe 
FLEX Approval'').
    \42\ See 1993 FLEX Approval Order.
    \43\ See Rule 4.20.
    \44\ Similar to previous changes in the past, the Commission has 
the authority to designate FLEX Options with an index multiplier of 
one to be standardized options pursuant to Rule 9b-1 under the 
Exchange Act if it believes such designation is appropriate.
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    A robust and competitive market requires that exchanges respond to 
investors' evolving needs by constantly improving their offerings. When 
Congress charged the Commission with supervising the development of a 
``national market system'' for securities, Congress stated its intent 
that the ``national market system evolve through the interplay of 
competitive forces as unnecessary regulatory restrictions are 
removed.\45\ Consistent with this purpose, Congress and the Commission 
have repeatedly stated their preference for competition, rather than 
regulatory intervention to determine products and services in the 
securities markets.\46\ This consistent and considered judgment of 
Congress and the Commission is correct, particularly in light of 
evidence of robust competition in the options trading industry. The 
fact that an exchange proposed something new is a reason to be 
receptive, not skepticalinnovation is the life-blood of a vibrant 
competitive marketand that is particularly so given the continued 
internalization of the securities markets, as exchanges continue to 
implement new products and services to compete not only in the United 
States but throughout the world. Options exchanges continuously adopt 
new and different products and trading services in response to industry 
demands in order to attract order flow and liquidity to increase their 
trading volume. This competition has led to a growth in investment 
choices, which ultimately benefits the marketplace and the public. The 
Exchange believes that the proposed rule change will help further 
competition by providing market participants with yet another 
investment option for the listed options market.
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    \45\ See H.R. Rep. No. 94-229, at 92 (1975) (Conf. Rep.).
    \46\ See S. Rep. No. 94-75, 94th Cong., 1st Sess. 8 (1975) 
(``The objective [in enacting the 1975 amendments to the Exchange 
Act] would be to enhance competition and to allow economic forces, 
interacting within a fair regulatory field, to arrive at appropriate 
variations in practices and services.''); Order Approving Proposed 
Rule Change Relating to NYSE Arca Data, Securities Exchange Act 
Release No. 59039 (December 2, 2008), 73 FR 74770 (December 9, 2008) 
(``The Exchange Act and its legislative history strongly support the 
Commission's reliance on competition, whenever possible, in meeting 
its regulatory responsibilities for overseeing the [self-regulatory 
organizations] and the national market system. Indeed, competition 
among multiple markets and market participants trading the same 
products is the hallmark of the national market system.''); and 
Regulation NMS, 70 FR at 37499 (observing that NMS regulation ``has 
been remarkably successful in promoting market competition in [the] 
forms that are most important to investors and listed companies'').
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    The Exchange believes the proposed nonsubstantive, codifying, and 
clarifying changes described above increase the transparency of the 
Rules and ultimately benefit investors. With respect to the 
codification of how FLEX orders and auction responses will be ranked, 
the Exchange believes ranking percentage-priced premiums at the time of 
the auction rather than after the close of trading (when the dollar 
amount of the price is determined) will promote just and equitable 
principles of trade because it is consistent with the ranking of 
dollar-priced premiums. This also

[[Page 44420]]

provides FLEX Traders with real-time executions as opposed to waiting 
until the close of trading to know if it received an execution and, if 
so, for how many contracts. FLEX Traders are competing in auctions 
based on the percentage amount of their bids and offers (in the same 
manner they do with dollar bids and offers) and thus should be ranked 
based on that amount, as they do not know at the time of submitting 
those bids and offers to what final price they will be rounded. Like 
bids and offers in dollar amounts, the Exchange believes a FLEX Trader 
willing to pay more (or receive less) at the time of a FLEX Auction 
should receive priority. As long as it is possible that different 
percentage bids and offers could differ after the close of trading, the 
Exchange believes a more aggressive auction response bares the risk 
that the adjusted price may also be more aggressive, and the responder 
should be rewarded for taking on that risk by receiving a higher 
ranking. The Exchange believes consistency in ranking of bids and 
offers submitted in all FLEX Auctions (and non-FLEX Auctions) will 
benefit investors, and providing FLEX Traders that submit more 
aggressive responses with priority will encourage FLEX Traders to 
submit competitive responses, which ultimately benefits investors as 
well.

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 as any Micro FLEX Index Options 
the Exchange lists for trading will be available for all market 
participants in the same manner who wish to trade such options. The 
Exchange may list Micro FLEX Index Options for trading on all broad-
based indexes with a value of at least 100 currently authorized to be 
listed on the Exchange, subject to the same listing criteria (the 
Exchange is currently authorized to list micro-options on the same 
indexes). These options will trade in the same manner as FLEX Index 
Options with a multiplier of 100, with certain terms proportionately 
adjusted to reflect the different contract multipliers.
    The Exchange does not believe the proposed rule change will impose 
any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act because Micro 
FLEX Index Options may only be listed for trading on the Exchange. To 
the extent that the availability of these products makes the Exchange a 
more attractive marketplace to market participants at other exchanges, 
market participants are free to elect to become market participants on 
the Exchange. As noted above, other derivative products related to 
these indexes are listed for trading on other exchanges. Additionally, 
the Exchange notes that listing and trading Micro FLEX Index 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 OTC market.
    The Exchange believes that the proposed rule change may relieve any 
burden on, or otherwise promote, competition. The proposal is designed 
to increase competition for order flow on the Exchange in a manner that 
is beneficial to investors by providing them with a lower-cost option 
to hedge their investment portfolios. The Exchange notes that it 
operates in a highly competitive market in which market participants 
can readily direct order flow to competing venues who offer similar 
products. The Exchange believes this is an enhancement to a comparable 
alternative to the OTC market in customized options. By enhancing our 
FLEX trading platform to provide additional contract granularity that 
available in the OTC market but not currently available in the listed 
options market, the Exchange believes it may be a more attractive 
alternative to the OTC market. The Exchange believes market 
participants will benefit from being able to trade customized options 
in an exchange environment in several ways, including but not limited 
to the following: (1) Enhanced efficiency in initiating and closing out 
position; (2) increased market transparency; and (3) heightened contra-
party creditworthiness due to the role of OCC as issuer and guarantor 
of all listed options.
    The proposed nonsubstantive, clarifying, and codifying changes will 
have no impact on competition, as they merely clarify or codify 
information in the Rules and make no changes to how FLEX Options trade. 
With respect to the codification of how FLEX orders and auction 
responses will be ranked, the Exchange believes the proposed rule 
change will not impose any burden on competition that is not necessary 
or appropriate in furtherance of the purposes of the Act, because it 
will rank FLEX orders and auction responses in the same manner 
regardless of the form of the exercise price of a series.

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-2021-041 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-2021-041. 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

[[Page 44421]]

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-2021-041, and should be 
submitted on or before September 2, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\47\
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    \47\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-17175 Filed 8-11-21; 8:45 am]
BILLING CODE 8011-01-P