Document ID: SEC-2021-1321-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2021-09-30T04:00Z

[Federal Register Volume 86, Number 187 (Thursday, September 30, 2021)]
[Notices]
[Pages 54269-54275]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-21211]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93122; File No. SR-CBOE-2021-041]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change, as Modified by Amendment 
No. 2, To Amend Certain Rules To Accommodate the Listing and Trading of 
Micro FLEX Index Options and To Make Other Clarifying and Non-
Substantive Changes

September 24, 2021.
    On July 23, 2021, Cboe Exchange, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (the 
``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
accommodate the listing and trading of flexible exchange (``FLEX'') 
index options with an index multiplier of one (``Micro FLEX Index 
Options'') and to make other clarifying and non-substantive changes.\3\ 
The proposed rule change was published in the Federal Register on 
August 12, 2021.\4\ On September 22, 2021, the Exchange submitted 
partial Amendment No. 2 to the proposed rule change.\5\ The Commission 
received no comments on the proposed rule change. The Commission is 
approving the proposed rule change, as modified by Amendment No. 2.
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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.
    \4\ Securities Exchange Release No. 92599 (August 6, 2021), 86 
FR 44411 (August 12, 2021) (``Notice'').
    \5\ In Amendment No. 2, the Exchange stated that, currently, the 
Exchange lists non-FLEX options on 12 (not 13, as stated in the 
Exchange's original filing) broad-based indexes with a value of at 
least 100, and the proposed rule change would authorize the Exchange 
to list Micro FLEX Options on the same 12 indexes, which are all 
broad-based and all have a value of at least 100. The Exchange 
stated that it delisted options on FTSE 100 Mini-Index (UKXM). The 
Exchange also made a conforming change to its representation under 
the heading ``Capacity.'' Because Amendment No. 2 does not 
materially alter the substance of the proposed rule change, 
Amendment No. 2 is not subject to notice and comment. Amendment No. 
2 is available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2021-041/srcboe2021041.htm.

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[[Page 54270]]

I. Description of the Proposed Rule Change, as Modified by Amendment 
No. 2

    The Exchange proposes to amend its rules to permit the trading of 
FLEX index options with an index multiplier of one on broad-based 
indexes for which the value of the underlying is at least 100. The 
Commission recently approved a rule change that provided the Exchange 
with the authority to list options with an index multiplier of one on 
broad-based indexes for which the value of the underlying is at least 
100 on the Exchange's standardized, non-FLEX market.\6\
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    \6\ See CBOE Rule 4.11 (providing for the listing of non-FLEX 
options with a multiplier of one (``micro-options''). See Securities 
Exchange Release No. 91528 (April 9, 2021), 86 FR 19933 (April 15, 
2021). According to the Exchange, currently, the Exchange lists non-
FLEX options on 12 broad-based indexes with a value of at least 100: 
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), and Russell 1000 
Index (RUI). The Exchange states that the proposed rule change will 
authorize the Exchange to list Micro FLEX Index Options on the same 
12 indexes, which are all broad-based and all have a value of at 
least 100. In Amendment No. 2, the Exchange stated that it may 
authorize for trading a FLEX option class on any index if it may 
authorize for trading a non-FLEX option class on that index, even if 
the Exchange does not list that non-FLEX option class for trading. 
Currently, the Exchange is authorized to (but does not) list for 
trading options on six additional broad-based indexes with values of 
at least 100. The Exchange stated that the Exchange's system 
currently prevents FLEX trading on these indexes (and other 
underlying securities and indexes on which the Exchange does not 
list non-FLEX options even though authorized to under its rules). If 
the Exchange updates its system in the future to permit FLEX trading 
on underlying securities or indexes on which the Exchange does not 
list non-FLEX options, Micro FLEX Index Options on these six indexes 
(assuming they still satisfied the Exchange's maintenance listing 
criteria in Rule 4.10 and had values of at least 100) would be 
permitted to be listed and traded. See infra note 27.
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    Currently, CBOE Rule 4.21(b)(1) states the index multiplier for 
FLEX index options is 100. The Exchange proposes to add to the rule 
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 in addition to the current index multiplier of 100. The proposed 
rule change amends CBOE Rule 4.21(b)(1) to state that if a FLEX Trader 
\8\ specifies an index on a FLEX Order,\9\ 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.\10\ The Exchange states that, 
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.\11\
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    \7\ These are the same indexes on which the Exchange may list 
micro-options.
    \8\ A ``FLEX Trader'' is a Trading Permit Holder the Exchange 
has approved to trade FLEX options on the Exchange.
    \9\ 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 CBOE Rule 5.72(b).
    \10\ When submitting a FLEX Order, the submitting FLEX Trader 
must include all required terms of a FLEX option series. 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 CBOE Rule 4.21(b). Pursuant 
to CBOE Rule 4.21(b)(1), the submitting FLEX Trader must include the 
underlying equity security or index on the FLEX Order. The Exchange 
states that, 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 CBOE Rule 
4.21(b).
    \11\ The Exchange states that, 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 and 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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    In its proposal, the Exchange stated that its 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\ The Exchange proposes to add to the 
introductory paragraph of CBOE 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 whether the index 
multiplier of the non-FLEX index option is one or 100). As a result, a 
Micro FLEX Index Option may not have the same terms as a non-FLEX index 
option or non-FLEX micro-option. The Exchange states that this will 
prevent a Micro FLEX Index Option from being listed with terms 
identical to those of a non-FLEX index option with a multiplier of 100 
or a non-FLEX micro-option with a multiplier of one on the same index.
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    \12\ See CBOE Rule 4.21(a)(1).
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    The Exchange states that a Micro FLEX Index Option would become 
fungible \13\ with a non-FLEX micro-option with the same terms pursuant 
to CBOE 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. The Exchange states 
that because the proposed rule change would 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 CBOE Rule 
4.22(b)(2) will provide that if a non-FLEX index option series with an 
index multiplier of 100 and the same terms as a Micro FLEX Index Option 
overlying the same index 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. During the time that non-FLEX index option series 
is listed for trading, pursuant to CBOE Rule 5.72, no FLEX Orders may 
be submitted into an electronic auction or represented for open outcry 
trading 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.\14\ 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 CBOE Rule 4.22(b).\15\ 
The Exchange states that this proposed change would 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.\16\ In addition, as proposed, CBOE Rule 4.22(b) would require 
that the Exchange notifies FLEX

[[Page 54271]]

Traders when a FLEX option series is restricted to closing only 
transactions.\17\
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    \13\ Under CBOE Rule 4.22(a), if the Exchange lists for trading 
a non-FLEX option series with identical terms as a FLEX option 
series, all existing open positions established under the FLEX 
trading procedures are fully fungible with the non-FLEX option 
series, and any further trading in the series would be as non-FLEX 
options subject to non-FLEX trading procedures and rules.
    \14\ The Exchange states that, 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.
    \15\ The Exchange plans to renumber current CBOE Rule 4.22(b) as 
CBOE Rule 4.22(b)(1), accompanied by non-substantive punctuation 
mark changes to reflect proposed CBOE Rule 4.22(b)(2).
    \16\ As proposed, 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 CBOE Rule 4.22(a) applies to the fungibility of 
those options (or proposed CBOE Rule 4.22(b)(1) if it is an 
American-style series added intraday) and the FLEX Micro Index 
Option would no longer be a FLEX option, but instead be traded as a 
standard micro-option.
    \17\ The Exchange proposes to move this provision to make it 
clear it will apply to the entire paragraph (b) as proposed to be 
amended, and to make changes that it states would modernize this 
provision. Currently, CBOE Rule 4.22(b) states that a FLEX Official 
announces to FLEX Traders when such a FLEX option series is 
restricted to closing only transactions. The Exchange states that 
this was true when FLEX options were traded only in open outcry and 
a verbal announcement was made to the trading floor. The Exchange 
states that 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. Accordingly, the Exchange proposes to revise Rule 
4.22(b) to state that the Exchange notifies FLEX Traders when a FLEX 
Option series is restricted to closing only transactions. The 
Exchange also states that, in accordance with CBOE Rule 1.5, the 
Exchange currently notifies FLEX Traders of restricted FLEX option 
series by electronic message.
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Trading Hours

    Pursuant to CBOE 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 CBOE Rule 5.1(b)(2). Accordingly, Regular 
Trading Hours for Micro FLEX Index Options will generally be 9:30 a.m. 
to 4:15 p.m. Eastern time.\18\ To the extent an index option is 
authorized for trading during Global Trading Hours, the Exchange states 
it 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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    \18\ Certain indexes close trading at 4:00 p.m. Eastern time. 
See CBOE Rule 5.1.
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Expiration, Settlement, and Exercise Style

    In accordance with CBOE 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 Exchange proposes to amend CBOE Rule 4.21(b)(6) to state 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. To 
illustrate the deliverable exercise price for index options with 
different multipliers as well as physically settled equity options, the 
proposed rule change adds the following examples to CBOE 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 
Exchange states that the descriptions of exercise prices for FLEX 
equity options and FLEX index options with a multiplier of 100 are true 
today, and that the examples merely add clarity to the rules.

Bids and Offers

    Pursuant to CBOE Rule 5.4(c), the Exchange states that it 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.\19\ The proposed rule change amends CBOE 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.\20\ 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.\21\
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    \19\ The System (as defined in CBOE Rule 1.5(aa)) rounds bids 
and offers to the nearest minimum increment.
    \20\ The Exchange states that 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 
CBOE 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 CBOE Rule 5.4.
    \21\ See current CBOE Rule 4.21(b)(1).
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    The proposed rule change states that 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 unit (if a FLEX equity option or a FLEX index option 
with a multiplier of 100) or per 1/100th unit (if a FLEX index option 
with a multiplier of one) 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 how FLEX options bids and offers must be expressed. 
The proposed rule will state that, 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 
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 states that it believes the proposed rule 
language identifies a clear, transparent

[[Page 54272]]

description of the differences between FLEX index options with a 
multiplier of 100 and Micro FLEX Index Options and provides clarity 
regarding how bids and offers of FLEX equity options and FLEX index 
options with a multiplier of 100 will be required to be expressed.

Contract Size Limits

    The Exchange states that the proposed rule change updates various 
other provisions in the following rules to reflect that 100 Micro FLEX 
Index Options overlying an index will be economically equivalent to one 
contract for a standard index option overlying the same index:
     Rule 5.74: CBOE 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: CBOE 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 that 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, CBOE Rule 
5.87, Interpretation and Policy .07(a) provides that CBOE Rule 5.86(e) 
\22\ 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 CBOE Rule 
5.86(e).
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    \22\ The Exchange states that CBOE 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 TPH 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 \23\
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    \23\ The Exchange states that, 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 CBOE 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.\24\ 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 
CBOE Rule 8.35(a)(7) states that for purposes of determining compliance 
with the position limits under CBOE 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 CBOE 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).\25\ 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 CBOE 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 Exchange's Rules will apply to Micro FLEX Index 
Options (as they currently do to all FLEX options).\26\
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    \24\ The proposed rule change also corrects an administrative 
error in CBOE 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).
    \25\ The Exchange states that, 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.
    \26\ According to the Exchange, pursuant to CBOE 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 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 12 of the indexes 
on which the Exchange listed on the Exchange, the Exchange states that 
believes any additional traffic that may be generated from the 
introduction of Micro FLEX Index Options will be manageable.\27\ The 
Exchange states that it also understands that the OCC will be able to 
accommodate the listing and trading of Micro FLEX Index Options.
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    \27\ The Exchange states that if it updates its system to permit 
FLEX trading on underlying securities and indexes on which it does 
not list non-FLEX options, including Micro FLEX Index Options 
trading on broad-based indexes with a value of at least 100, the 
Exchange would do so only if it had sufficient capacity to permit 
such additional trading. See supra note 6.
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Other Changes

    The Exchange proposes to amend CBOE Rule 4.21(b)(6) to state that 
the exercise price may be in increments no smaller than: \28\ (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

[[Page 54273]]

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. The proposed rule change also 
adds to CBOE 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. The Exchange states that these 
changes codify long-standing interpretations of the current rule, which 
references the minimum increment for bids and offers as set forth in 
CBOE Rule 5.4.\29\ The Exchange states that it 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.\30\
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    \28\ The Exchange states that this language is taken from CBOE 
Rule 5.4(c)(4).
    \29\ The Exchange states that the proposed rule change makes 
non-substantive changes to the structure of this sentence to 
accommodate the addition of the specific minimum increments for the 
exercise price.
    \30\ The Exchange also states that it believes flexibility for 
the Exchange to determine the smallest increment for exercise prices 
of FLEX options on a class-by-class basis 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. Rule 5.32-
O(e)(2)(C).
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    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 CBOE Rule 5.4) from the 
introductory clause in CBOE Rule 4.21(b)(6) to the end of subclause 
(A)(ii) so that it applies only to that subclause, as rounding would 
only apply to exercise prices expressed as a percentage. The proposed 
rule change also adds to the parenthetical in CBOE 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.
    In addition, the proposed rule change clarifies in CBOE Rule 
5.3(e)(3) and 5.4(c)(4) that, following application of the designated 
percentage to the closing value of the underlying security or index, 
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 CBOE Rule 5.4(c)(4)(A). The Exchange 
states that this is consistent with current functionality and is merely 
a clarification in the CBOE Rules to more accurately reflect how the 
System currently works.
    In addition, the Exchange proposes to add a parenthetical in the 
first paragraph of CBOE Rule 5.3(e)(3)(B) to state that bids and offers 
would be in the applicable minimum increment as set forth in CBOE Rule 
5.4. The Exchange states that this is true today and merely 
incorporates a cross-reference to CBOE Rule 5.4, which describes 
permissible minimum increments for bids and offers. The Exchange states 
that it believes the addition of this cross-reference will provide 
additional transparency and clarity to this rule.
    The proposed rule change also codifies in CBOE 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 \31\ and Solicited Orders \32\ 
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). The Exchange states 
that FLEX Orders will always first be allocated to responses at the 
best price, as applicable.\33\ The proposed rule change clarifies that 
the term ``price'' refers to (1) the dollar and decimal amount of the 
order or response bid or offer or (2) the percentage value of the order 
or response bid or offer, as applicable. The Exchange states that these 
are non-substantive changes, as they reflect how ranking following FLEX 
Auctions occurs today, and the Exchange believes these changes will 
provide additional transparency in the CBOE Rules.
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    \31\ ``Initiating Order'' is defined in CBOE Rule 5.37.
    \32\ ``Solicited Order'' is defined in CBOE Rule 5.39.
    \33\ The proposed rule change also clarifies this in CBOE Rule 
5.72(d)(2) by adding a cross-reference to CBOE 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 non-substantive change that is 
currently true for open outcry FLEX Auctions, and the proposed rule 
change merely makes this explicit in CBOE Rule 5.72(d)(2), which 
cross-reference was previously inadvertently omitted from the CBOE 
Rules.
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    Finally, in CBOE Rule 4.22(b), the proposed rule change modernizes 
the provision regarding how FLEX Traders are notified when a FLEX 
option series becomes restricted. The Exchange also proposes to move 
this provision to make it clear it will apply to the entire paragraph 
(b) as proposed to be amended. Currently, CBOE Rule 4.22(b) states a 
FLEX Official \34\ announces to FLEX Traders when such a FLEX option 
series is restricted to closing only transactions. The Exchange states 
that this was true when FLEX options were traded only in open outcry 
and a verbal announcement was made to the trading floor. The Exchange 
states that 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 CBOE Rule 1.5, the Exchange currently notifies FLEX 
Traders of restricted FLEX option series by electronic message.
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    \34\ ``FLEX Official'' is defined in CBOE Rule 5.75.
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II. Discussion and Commission Findings

    After careful review of the proposal and the comments received, the 
Commission finds that the proposed rule change, as modified by 
Amendment No. 2, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\35\ In particular, the Commission finds that the proposed 
rule change, as modified by Amendment No. 2, is consistent with Section 
6(b)(5) of the Act,\36\ which requires, among other things, that the 
rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, 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.
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    \35\ In approving this proposed rule change, as modified by 
Amendment No. 2, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
    \36\ 15 U.S.C. 78f(b)(5).
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    The FLEX options market was designed to accommodate flexibility in 
setting the specific terms of an options contract for the purpose of 
satisfying particular investment objectives that could not be met by 
the Exchange's standardized non-FLEX options market.\37\ By permitting 
traders to adjust

[[Page 54274]]

the flexible terms (e.g., strike price, expiration date, and exercise 
style), market participants can trade customized options on the 
Exchange that are not available in the non-FLEX options market.\38\ As 
discussed above, the Exchange may list options with an index multiplier 
of one on broad-based indexes for which the value of the underlying 
index is at least 100.\39\ By permitting Micro FLEX Index Options on 
such indexes, the proposal will permit FLEX Traders to customize the 
flexible terms of such options that are authorized for trading on the 
non-FLEX market.
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    \37\ See Securities Exchange Act Release No. 31920 (February 24, 
1993), 58 FR 12280 at 12281 (March 3, 1993) (original order 
approving a CBOE proposal to list and trade FLEX options on the S&P 
100 and 500 Index options).
    \38\ The FLEX options market operates under a separate structure 
than the standardized non-FLEX options market (``non-FLEX options 
market'') and does not offer the same level of transparency as the 
non-FLEX options market. Among the differences between the market 
structure for FLEX options and non-FLEX options is that the FLEX 
options market does not have a public customer order book and there 
is no national best bid or offer (``NBBO'').
    \39\ See supra note 6.
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    In support of its proposal, the Exchange states that the proposed 
rule change will expand investor choice and flexibility.\40\ In 
particular, the Exchange states that listing and trading of Micro FLEX 
Index Options could benefit investors by providing them additional 
granularity with respect to the prices at which they may execute and 
exercise index options on the Exchange.\41\ The Exchange states that, 
in particular, it believes that Micro FLEX Index Options would provide 
institutional investors 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.\42\ The Exchange states that, 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.\43\ The Exchange 
further states that this flexibility is currently available on the OTC 
market, and believes that 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 price discovery 
through increased order flow.\44\
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    \40\ See Notice, supra note 4, 86 FR at 44416.
    \41\ See id. In the Notice, the Exchange provided examples of 
the trading of a Micro FLEX Index Options as compared to a FLEX 
index option with a multiplier of 100 and the potential benefits for 
investors. See id. at 44418-19.
    \42\ See id. at 44416-17.
    \43\ See id. at 44417.
    \44\ See id.
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    The Commission believes this proposal, which permits Micro FLEX 
Index Options only on broad-based indexes where the value of the 
underlying is at least 100, strikes a reasonable balance between the 
Exchange's desire to offer a wider array of investment opportunities 
and the need to avoid unnecessary proliferation of FLEX options series. 
However, the Commission expects the Exchange to monitor the trading of 
Micro FLEX Index Options to evaluate whether any issues develop.
    The Commission believes that the proposed rule change is consistent 
with the Act because it would provide investors with additional 
investment choices in FLEX options, while also implementing certain 
protections designed to avoid concerns related to price protections on 
the non-FLEX market and market fragmentation. In particular, the 
proposed rule requiring that terms of the Micro FLEX Index Option 
differ from those of a non-FLEX index option or non-FLEX micro-option 
can help to address concerns that FLEX options would act as a surrogate 
for the trading of non-FLEX options.\45\ This is important given 
certain investor protections stated above that exist in the non-FLEX 
options market that are not present in the FLEX options market.\46\ The 
proposed rule change states 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).\47\ A Micro FLEX Index Option therefore 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, and is thus designed to avoid price 
protection and market fragmentation concerns that could arise from 
trading options with identical terms on the FLEX and non-FLEX markets.
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    \45\ See supra note 13 and 16.
    \46\ See supra note 38.
    \47\ See proposed CBOE Rule 4.21(b).
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    In addition, the Commission believes that the fungibility 
provisions under CBOE Rule 4.22 will facilitate this change by 
preventing 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 and by only permitting closing transactions in this 
situation.\48\ Further, pursuant to CBOE Rule 4.22(a), a Micro FLEX 
Index Option with the same terms as a subsequently added non-FLEX 
micro-option would become fungible with the non-FLEX micro-option. 
Accordingly, once a non-FLEX micro-option is added with the same terms 
as an outstanding Micro FLEX Index Option, the Micro FLEX Index Option 
would no longer trade in the FLEX options market and instead would 
become a standardized, non-FLEX option and trade under the same rules 
that apply to any other standard non-FLEX micro-option.\49\
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    \48\ See CBOE Rule 4.22. To facilitate this, the Exchange is 
providing that if an identical non-FLEX index option with an index 
multiplier of 100 is added with the same terms as a Micro FLEX Index 
Option overlying the same index with a multiplier of one, a position 
established under the FLEX trading procedures may be closed using 
the trading procedures against another closing only FLEX position 
during the time period that non-FLEX index option series is listed 
for trading. See proposed CBOE Rule 4.22(b)(2); see also supra notes 
14-16 and accompanying text. In addition, as proposed, CBOE Rule 
4.22 would state that the Exchange notifies FLEX Traders when a FLEX 
options series is restricted to closing only transactions. See 
proposed CBOE Rule 4.22(b)(2). The Commission believes that 
permitting such closing only transactions will help investors close 
out an outstanding Micro FLEX Index Option should a non-FLEX index 
option with a multiplier of 100 with the same terms subsequently be 
added.
    \49\ See CBOE Rule 4.22(a).
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    The Commission also believes that the proposal is consistent with 
the Act, in particular the protection of investors and the public 
interest, as it includes several aspects designed to reduce potential 
investor confusion. In particular, the Commission believes that the 
proposed treatment of exercise prices, bids and offers, size 
requirements for FLEX SAM auctions and for crossing orders, and 
position and exercise limits for Micro FLEX Index Options is consistent 
with the Act, as these proposed changes should make clear how Micro 
FLEX Index Options would be quoted and traded \50\ and are consistent 
with the treatment of certain reduced-value index options and micro-
options.\51\ Additionally, the Commission believes that the use of 
different trading symbols for Micro FLEX Index Options should help

[[Page 54275]]

investors and other market participants to distinguish those options 
from the related non-FLEX options with a multiplier of 100 and micro-
options as well as FLEX index options with a multiplier of 100, 
reducing potential investor confusion.\52\
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    \50\ The Commission also believes that the examples that the 
Exchange proposes to add to the rules provide clarity to the 
operation of the proposed rules. See CBOE Rule 4.21(b)(6) (exercise 
prices), CBOE Rule 5.3(e)(3) (bids and offers).
    \51\ The Exchange has made changes to provisions in its rules to 
reflect that 100 Micro FLEX Index Options will be economically 
equivalent to one contract for non-FLEX index option with a 
multiplier of 100 overlying the same index. See CBOE Rule 5.74 
(order size for FLEX SAM), CBOE Rule 5.87 (crossing orders), CBOE 
Rule 8.35(a)(7) (position limits), CBOE Rule 8.42(g) (exercise 
limits).
    \52\ See supra note 11.
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    The Commission believes it is appropriate for Micro FLEX Index 
Options to trade pursuant to existing FLEX rules governing the listing 
and trading of FLEX index options. In addition, the Exchange states 
that it and 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 Micro FLEX Index Options.\53\ The 
Exchange also states that the OCC will be able to accommodate the 
listing and trading of Micro FLEX Index Options.
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    \53\ See supra note 27.
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    As a national securities exchange, the Exchange is required, under 
Section 6(b)(1) of the Act,\54\ to enforce compliance by its members 
and persons associated with its members with the provisions of the Act, 
Commission rules and regulations thereunder, and its own rules. The 
Exchange states that its existing surveillance and reporting safeguards 
are designed to deter and detect possible manipulative behavior that 
might arise from listing and trading Micro FLEX Options. In addition, 
Micro FLEX Index Options will be traded under the Exchange's existing 
regulatory regime for FLEX index options, which includes, among other 
things, the Exchange's existing rules regarding customer protection, 
safeguards related to position and exercise limits, as applicable,\55\ 
and reporting requirements. In particular, Micro FLEX Index Option 
orders entered by TPHs on behalf of customers, including institutional 
and retail customers, will be subject to all Exchange rules regarding 
doing business with the public, including those within Chapter 9 of the 
Exchange's Rules.\56\ The Commission believes that it is consistent 
with the Act to apply Exchange rules governing, among other things, 
customer accounts, margin requirements, and trading halt procedures to 
the proposed Micro FLEX Index Options that are otherwise applicable to 
other FLEX index options. Further, the Commission believes that trading 
the Micro FLEX Index Options pursuant to the Exchange's current rules 
governing the trading of FLEX index options is consistent with the 
protection of investors and should provide market participants with the 
same flexibility to customize certain terms of the options while 
allowing investors to trade a smaller sized options contract that may, 
according to the Exchange, better meet their hedging needs.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78f(b)(1).
    \55\ There are, however, no position limits or exercise limits 
for certain broad-based FLEX index options. See CBOE Rule 8.35(b) 
and CBOE Rule 8.42(g).
    \56\ The Commission notes that these rules require, among other 
things, that: (i) A TPH may not accept an option order, including a 
Micro FLEX Index Option order, from a customer unless that 
customer's account has been approved for options transactions in 
accordance with CBOE Rule 9.1; (ii) TPHs that conduct customer 
business, including institutional and retail customer business, must 
ensure they provide for appropriate supervisory control over that 
business and maintain customer records in accordance with CBOE Rule 
9.2; and (iii) TPHs will also need to provide customers that trade 
Micro FLEX Index Option (and any other option) with a copy of the 
ODD and amendments to the ODD in accordance with CBOE Rule 9.9 so 
that customers are informed of any risks associated with trading 
options, including Micro FLEX Index Options.
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    The Commission also believes the proposed changes that the Exchange 
is making regarding codifying how percentage-based FLEX orders and 
auction responses will be ranked are consistent with the Act.\57\ The 
Exchange states that such ranking provides FLEX Traders willing to pay 
more (or receive less) with priority.\58\ The Exchange further states 
that providing priority to FLEX Traders that submit more aggressive 
responses will encourage FLEX Traders to submit competitive responses, 
which the Exchange believes will benefit investors.\59\ In addition, 
the Exchange states that such ranking is consistent with the Exchange's 
current practice, as well as the way the Exchange ranks dollar-priced 
premiums.\60\ For the foregoing reasons, the Commission believes that 
the proposed rule change regarding the ranking of percentage-based FLEX 
orders and options responses is consistent with the Act.
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    \57\ See proposed amendments to CBOE Rule 4.21(b)(6), CBOE Rule 
5.3(e)(3), and CBOE Rule 5.4(c)(4). As discussed above, following 
the application of the designated percentage to the closing value of 
the underlying security or index, the system rounds the final 
transaction prices to the nearest minimum fixed price increment for 
the class as set forth in Rule 5.4. See CBOE Rule 5.3(e)(3) and CBOE 
Rule 5.4(c)(4).
    \58\ See Notice, supra note 4 at 44420.
    \59\ See id.
    \60\ See id. at 44419.
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    Finally, the Commission believes that the other non-substantive and 
clarifying changes will help protect investors and the public interest 
by providing clarity and transparency to the rules by making them 
easier to read and understand.\61\
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    \61\ See, e.g., proposed amendments to CBOE Rule 4.21(b)(6) 
(stating the minimum increments for exercise prices); CBOE Rule 
4.22(b) (changing the terminology related to notification of when a 
FLEX option series is restricted to closing only transactions). See 
also proposed amendments to CBOE Rule 5.72(c)(3)(A); CBOE Rule 
5.73(e); CBOE Rule 5.74(e) (codifying that 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 based on the 
dollar and decimal amount of the order or response bid or offer, or 
the percentage value of the order or response bid or offer, as 
applicable).
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    Accordingly, the Commission finds that the proposed rule change, as 
modified by Amendment No. 2, is consistent with Section 6(b)(5) of the 
Act \62\ and the rules and regulations thereunder applicable to a 
national securities exchange.
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 78f(b)(5).
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III. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\63\ that the proposed rule change (SR-CBOE-2021-041), as modified 
by Amendment No. 2, be, and hereby is, approved.
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    \63\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\64\
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    \64\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-21211 Filed 9-29-21; 8:45 am]
BILLING CODE 8011-01-P