Document ID: SEC-2020-1441-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2020-09-09T04:00Z

[Federal Register Volume 85, Number 175 (Wednesday, September 9, 2020)]
[Notices]
[Pages 55723-55726]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19846]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89749; File No. SR-CBOE-2020-080]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To List 
and Trade Options That Overlie the S&P 500 ESG Index

September 2, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on August 27, 2020, Cboe Exchange, Inc. (``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to list and trade options that overlie the S&P 500 ESG Index. 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 
in connection with the Exchange's plans to list and trade S&P 500 ESG 
Index options.\3\ The S&P 500 ESG Index is a broad-based, market-
capitalization-weighted index that is designed to measure the 
performance of securities meeting sustainability criteria, while 
maintaining similar overall industry group weights as the S&P 500. Each 
constituent of a S&P 500 ESG Index is a constituent of the S&P 500 
Index. S&P Dow Jones Indices' (``S&P DJI'') assigns constituents to a 
S&P 500 ESG Index based on S&P DJI ESG Scores and other environmental, 
social and governance (``ESG'') data to select companies, targeting 75% 
of the market capitalization of each global industry classification 
standard (``GICS'') industry group within the S&P 500. In addition to 
the exclusion of companies with S&P DJI ESG Scores in the bottom 25% of 
companies globally within their GICS industry groups, the S&P 500 ESG 
Index excludes tobacco, controversial weapons and other companies not 
in compliance with the UN Global Compact.
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    \3\ The Exchange intends to file a Form 19b-4(e) with the 
Commission for S&P 500 ESG Index options pursuant to Rule 19b-4(e) 
of the Act.
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Initial and Maintenance Listing Criteria
    The S&P 500 ESG Index meets the definition of a broad-based index 
as set forth in Rule 4.11 (i.e., an index designed to be representative 
of a stock market as a whole or of a range of companies in unrelated 
industries). Additionally, the S&P 500 ESG Index satisfies the initial 
listing criteria of a broad-based index, as set forth in Rule 4.10(f):

    (1) The index is broad-based, as defined in Rule 4.11;
    (2) options will be A.M.-settled;
    (3) the index is capitalization-weighted, modified 
capitalization-weighted, price-weighted, or equal dollar-weighted 
(the S&P 500 ESG Index is capitalization-weighted);
    (4) the index consists of 50 or more component securities;
    (5) each component security that accounts for at least 95% of 
the weight of the index has a market capitalization of at least $75 
million, except that for each component security that accounts for 
at least 65% of the

[[Page 55724]]

weight of the index has a market capitalization of at least $100 
million;
    (6) Component securities that account for at least 80% of the 
weight of the index satisfy the requirements of Rule 4.3 applicable 
to individual underlying securities;
    (7) Each component security that accounts for at least 1% of the 
weight of the index has an average daily trading volume of at least 
90,000 shares during the last six-month period;
    (8) No single component security accounts for more than 10% of 
the weight of the index, and the five highest weighted component 
securities in the index do not, in the aggregate, account for more 
than 33% of the weight of the index;
    (9) Each component security is an NMS stock;
    (10) Non-U.S. component securities (stocks or ADRs) that are not 
subject to comprehensive surveillance agreements do not, in the 
aggregate, represent more than 20% of the weight of the index (S&P 
500 ESG Index is comprised of only U.S. component securities);
    (11) the current index value is widely disseminated at least 
once every 15 seconds by the Options Price Reporting Authority, CTA/
CQ, NIDS or one or more major market data vendors during the time 
options on the index are traded on the Exchange;
    (12) The Exchange reasonably believes it has adequate system 
capacity to support the trading of options on the index, based on a 
calculation of the Exchange's current Independent System Capacity 
Advisor allocation and the number of new messages per second 
expected to be generated by options on such index;
    (13) An equal dollar-weighted index is rebalanced at least once 
every calendar quarter (not applicable as S&P 500 ESG Index is a 
capitalization-weighted index);
    (14) If an index is maintained by a broker-dealer, the index is 
calculated by a third-party who is not a broker-dealer, and the 
broker-dealer has erected an informational barrier around its 
personnel who have access to information concerning changes in, and 
adjustments to, the index (not applicable as S&P is not a broker-
dealer);
    (15) The Exchange has written surveillance procedures in place 
with respect to surveillance of trading of options on the index.

    The S&P 500 ESG Index options will also be subject to the 
maintenance listing standards set forth in Rule 4.10(g):

    (1) the conditions stated in (1), (2), (3), (9), (10), (11), 
(12), (13), (14), and (15) above must continue to be satisfied and 
the conditions stated in (5), (6), (7), (8) above must be satisfied 
only as of the first day of January and July in each year;
    (2) The total number of component securities in the index may 
not increase or decrease by more than 10% from the number of 
component securities in the index at the time of its initial 
listing.\4\
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    \4\ As is the case with other index options authorized for 
listing and trading on Cboe Options, in the event the S&P 500 ESG 
Index fails to satisfy the maintenance listing standards, the 
Exchange will not open for trading any additional series of options 
of that class unless such failure is determined by the Exchange not 
to be significant and the Commission concurs in that determination, 
or unless the continued listing of that class of index options has 
been approved by the Securities and Exchange Commission (the 
``Commission'') under Section 19(b)(2) of the Securities and 
Exchange Act (the ``Act'').
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Expiration Months, Settlement, and Exercise Style
    Consistent with existing rules for certain index options, the 
Exchange will allow up to twelve near-term expiration months for the 
S&P 500 ESG Index options \5\ as well as LEAPS,\6\ as these are the 
same amounts the Rules permit for options on the S&P 500 Index (``SPX 
options''). The S&P 500 ESG Index consists of components that are also 
included in the S&P 500, as discussed above. Because of the relation 
between the S&P 500 ESG Index and the S&P 500, which will likely result 
in market participants' investment and hedging strategies consisting of 
options over both, the Exchange believes it is appropriate to permit 
the same number of monthly expirations for the S&P 500 ESG Index 
options as SPX options.
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    \5\ See Rule 4.13(a).
    \6\ Pursuant to Rule 4.13(b), index LEAPS may expire from 12-180 
months from the date of issuance.
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    The S&P 500 ESG Index options will be A.M., cash-settled contracts 
with European-style exercise.\7\ A.M.-settlement is consistent with the 
generic listing criteria for broad-based indexes,\8\ and thus it is 
common for index options to be A.M.-settled. The Exchange proposes to 
amend Rule 4.13(a)(4) to add the S&P 500 ESG Index options to the list 
of other A.M.-settled options. Standard third-Friday SPX options are 
A.M.-settled. European-style exercise is consistent with many index 
options, as set forth in Rule 4.13(a)(3). Standard third-Friday SPX 
options are A.M.-settled with European-style exercise. The Exchange 
proposes to amend Rule 4.13(a)(3) to add the S&P 500 ESG Index options 
to the list of other European-style index options. Because of the 
relation between the S&P 500 ESG Index and the S&P 500 Index, which 
will likely result in market participants' investment and hedging 
strategies consisting of options over both, the Exchange believes it is 
appropriate to list the S&P 500 ESG Index options with the same 
settlement and exercise style as the other SPX options.
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    \7\ See Rule 4.13(a)(3).
    \8\ See Rule 4.10(f)(2).
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Appointment Weights
    The Exchange proposes a Market-Maker appointment weight of .001 for 
the S&P ESG 500 Index options, and each will have a Market-Maker 
appointment weight of .001.\9\ This is the same appointment weight as 
other options on options on S&P indexes (e.g., S&P Select Sector 
Indexes). The Exchange determines appointment weights of Tier AA 
classes based on several factors, including, but not limited to, 
competitive forces and trading volume. The Exchange believes the 
proposed initial appointment weight for the S&P 500 ESG Index options 
will foster competition by incentivizing Market-Makers to obtain an 
appointment in these newly listed options, which may increase liquidity 
in the new class.
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    \9\ See Rule 5.1(g). S&P 500 ESG Index options will be in Tier 
AA (as are other S&P index options). While the appointment weights 
of Tier AA classes are not subject to quarterly rebalancing under 
Rule 5.1(g)(1), the Exchange regularly reviews the appointment 
weights of Tier AA classes to ensure that they continue to be 
appropriate. The Exchange determines appointment weights of Tier AA 
classes based on several factors, including, but not limited to, 
competitive forces and trading volume.
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Capacity
    The Exchange has analyzed its capacity and represents that it 
believes the Exchange and OPRA have the necessary systems capacity to 
handle the additional traffic associated with the listing of new series 
that would result from the introduction of the S&P 500 ESG Index 
options up to the proposed number of possible expirations. Because the 
proposal is limited to one class, the Exchange believes any additional 
traffic that would be generated from the introduction of the S&P 500 
ESG Index options would be manageable.
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.\10\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \11\ 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

[[Page 55725]]

investors and the public interest. Additionally, the Exchange believes 
the proposed rule change is consistent with the Section 6(b)(5) \12\ 
requirement that the rules of an exchange not be designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ Id.
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    In particular, the Exchange believes that the proposal to list and 
trade options on the S&P 500 ESG Index 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, 
because the Exchange believes that the proposed rule change will 
further the Exchange's goal of introducing new and innovative products 
to the marketplace. Additionally, the Exchange believes that the 
proposed rule change will protect investors, as the Exchange believes 
there is unmet market demand for exchange-listed security options 
listed on this new ESG index. ESG SPDRs and E-mini S&P ESG future 
products are listed and traded on other exchanges. As a result, the 
Exchange believes that the S&P 500 ESG Index options are designed to 
provide different and additional opportunities for investors to hedge 
or speculate on the market risk associated with this index by listing 
an option directly on this index. Because of the relation between the 
S&P 500 ESG Indexes, and the S&P 500 Index, the Exchange believes the 
proposed rule change will benefit investors, as it will provide market 
participants with additional investment and hedging strategies 
consisting of options over each of these indexes.
    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, because the proposed rule change is 
consistent with current Rules, which were previously filed with 
approved as consistent with the Exchange Act by the Commission. 
Particularly, the S&P 500 ESG Index options satisfy the initial listing 
standards for broad-based indexes in the Exchange's current Rules, 
which the Commission previously deemed consistent with Act.\13\ The 
proposed rule change merely adds the S&P 500 ESG Index to the table 
regarding reporting authorities for indexes, to the rule regarding 
number of permissible expirations, to the list of European-style 
exercise index options, and to the list of A.M.-settled index options, 
similar to SPX options. These changes are consistent with existing 
Rules and index options currently authorized and listed for trading on 
the Exchange. The Exchange notes, with respect to these changes, 
standard third-Friday SPX options (which overlie the S&P 500 Index, 
which consist of the same components as the S&P 500 ESG Index) 
currently has the same reporting authority, the same number of 
permissible expirations, the same settlement, and the same exercise 
style.\14\ The Exchange has observed no trading or capacity issues in 
SPX trading given the number of permissible expirations, A.M. 
settlement, and European-style exercise. Because of the relation 
between the S&P 500 ESG Index and the S&P 500 Index, which will likely 
result in market participants' investment and hedging strategies 
consisting of options over each of these indexes, the Exchange believes 
it is appropriate to have the same number of expirations, settlement, 
and exercise style for options on each of these indexes.
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    \13\ See Securities Exchange Act Release No. 34-53266 (February 
9, 2006), 71 FR 8321 (February 16, 2006) (SR-CBOE-2005-59) (order 
approving generic listing standards for options on broad-based 
indexes).
    \14\ See Rules 4.12(c), 4.13(a)(2) through (4).
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    The Exchange also 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 
options on the S&P 500 ESG Index. The Exchange further notes that 
current Exchange Rules that apply to the trading of other index options 
traded on the Exchange, such as options on the S&P 500 Index, would 
also apply to the trading of options on the S&P 500 ESG Index, such as, 
for example, Exchange Rules governing customer accounts, margin 
requirements and trading halt procedures.
    The Exchange lastly believes the proposed initial low appointment 
weight for the S&P 500 ESG Index options promotes competition and 
efficiency by incentivizing more Market-Makers to obtain an appointment 
in the newly listed class. The Exchange believes this may result in 
liquidity and competitive pricing in this class, which ultimately 
benefits investors. The proposed rule change does not result in unfair 
discrimination, as the appointment weight will apply to all Market-
Makers in this class. Additionally, the proposed appointment weight is 
the same as the appointment weight for other S&P Index options (e.g., 
S&P Select Sector Indexes).\15\
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    \15\ See Rule 5.50(g).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The S&P 500 ESG Index 
satisfies initial listing standards set forth in the Rules, and the 
proposed number of expirations, settlement, and exercise style are 
consistent with current rules applicable to index options, including 
standard third-Friday SPX options. Because of the relation between the 
S&P 500 ESG Index and the S&P 500 Index, which will likely result in 
market participants' investment and hedging strategies consisting of 
options over each of these indexes, the Exchange believes it is 
appropriate to have the same number of expirations, settlement, and 
exercise style for options on each index. The S&P 500 ESG Index options 
will provide investors with different and additional opportunities to 
hedge or speculate on the market associated with this index.
    The Exchange believes the proposed initial low appointment cost for 
the S&P 500 ESG Index options promotes competition and efficiency by 
incentivizing more Market-Makers to obtain an appointment in the newly 
listed class. The Exchange believes this may result in liquidity and 
competitive pricing in this class, which ultimately benefits investors. 
The proposed rule change does not result in unfair discrimination, as 
the appointment weight will apply to all Market-Makers in this class. 
Additionally, the proposed appointment weight for the S&P 500 ESG Index 
options is the same as the appointment weight for the other S&P Index 
related options (e.g., S&P Select Sector Indexes).

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on

[[Page 55726]]

which it was filed, or such shorter time as the Commission may 
designate, it has become effective pursuant to Section 19(b)(3)(A)(iii) 
of the Act \16\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \17\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days from the date of filing. However, Rule 
19b-4(f)(6)(iii) \18\ permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest. The Exchange has asked the Commission to waive the 
30-day operative delay. The Commission notes that the Exchange intends 
to launch the S&P 500 ESG Index options on September 21, 2020. The 
Commission notes that waiver of the operative delay will permit the 
Exchange to list these products on the Exchange on such date and thus 
provide market participants with the ability to trade these products on 
the Exchange. The Commission believes that waiver of the 30-day 
operative delay is consistent with the protection of investors and the 
public interest because the proposed rule change does not raise any new 
or novel issues, as the S&P 500 ESG Index satisfies the initial listing 
criteria for broad-based indexes as set forth in Rule 4.10(f). 
Accordingly, the Commission waives the 30-day operative delay and 
designates the proposed rule change operative upon filing.\19\
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    \18\ 17 CFR 240.19b-4(f)(6)(iii).
    \19\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2020-080 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2020-080. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2020-080 and should be submitted on 
or before September 30, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-19846 Filed 9-8-20; 8:45 am]
BILLING CODE 8011-01-P