Document ID: SEC-2021-0519-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2021-04-15T04:00Z

[Federal Register Volume 86, Number 71 (Thursday, April 15, 2021)]
[Notices]
[Pages 19933-19938]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-07674]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91528; File No. SR-CBOE-2020-117]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1, To Amend Certain 
Rules To Accommodate the Listing and Trading of Index Options With an 
Index Multiplier of One

April 9, 2021.

I. Introduction

    On December 23, 2020, 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 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to allow the 
Exchange to list and trade certain index options with an index 
multiplier of one (``micro-options''). The proposed rule change was 
published for comment in the Federal Register on January 11, 2021.\3\ 
On February 24, 2021, the Commission designated a longer period within 
which to approve the proposed rule change, disapprove the proposed rule 
change, or institute proceedings to determine whether to disapprove the 
proposed rule change.\4\ On March 30, 2021, the Exchange filed 
Amendment No. 1 to the proposed rule change, which replaced and 
superseded the proposed rule change in its entirety.\5\ The Commission 
is publishing this notice to solicit comments on the Exchange's 
proposal, as modified by Amendment No. 1, from interested persons and 
is approving the Exchange's proposal, as modified by Amendment No. 1, 
on an accelerated basis.
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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 90853 (January 5, 
2021), 86 FR 2006. Comments on the proposed rule change can be found 
on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-117/srcboe2020117.htm.
    \4\ See Securities Exchange Act Release No. 91194, 86 FR 12244 
(March 2, 2021). The Commission designated April 11, 2021, as the 
date by which it should approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.
    \5\ In Amendment No. 1, the Exchange: (i) Narrowed the scope of 
the proposed rule change to permit the listing and trading of micro-
options only on broad-based index options that have index values of 
at least 100, rather than all indexes; (ii) narrowed the scope of 
the proposal to remove all aspects of the proposal that would have 
permitted the trading of flexible index options (``FLEX Index 
Options'') with an index multiplier of one (``FLEX micro-index 
options''); and (iii) provided additional rationale and support for 
the proposed rule change. Amendment No. 1 is available on the 
Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-117/srcboe2020117-8566514-230802.pdf.
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II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1

    The Exchange proposes to amend its rules to allow the listing and 
trading of micro-options on broad-based indexes that have an index 
value of at least 100.\6\ Currently, the Exchange may list options on 
broad-based indexes that satisfy the initial and maintenance criteria 
in Rule 4.10, and, according to the Exchange, it presently lists 
options on 12 broad-based indexes with an underlying index value of at 
least 100. These 12 broad-based indexes are listed below, along with 
their closing values as of March 30, 2021, as provided by the 
Exchange.\7\
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    \6\ The Exchange states that it intends to file a Form 19b-4(e) 
with the Commission for any index option it lists for trading with 
an index multiplier of one pursuant to Rule 19b-4(e) of the Act.
    \7\ The Exchange states that it intends to initially list micro-
options on only a single index and may expand the listing of micro-
options in the future in response to customer demand for such 
additional products.

------------------------------------------------------------------------
                  Index (option symbol)                    Current value
------------------------------------------------------------------------
S&P 500 Index (SPX).....................................        3,958.55
Mini-S&P 500 Index (XSP)................................          395.86
Russell 2000 Index (RUT)................................        2,195.80
Mini-Russell 200 Index (MRUT)...........................          219.58
Dow Jones Industrial Average (DJX)......................      \8\ 330.67
S&P 100 Index (OEX and XEO).............................        1,792.63
S&P 500 ESG Index (SPESG)...............................          336.30
MSCI EAFE Index (MXEA)..................................        2,216.07
MSCI Emerging Markets Index (MXEF)......................        1,319.50
Russell 1000 Growth Index (RLG).........................        2,412.94
Russell 1000 Value Index (RLV)..........................        1,500.12
Russell 1000 Index (RUI)................................        2,228.28
------------------------------------------------------------------------
\8\ Options are based on 1/100th of the full value of the Dow Jones
  Industrial Average (``DJIA'').

    Currently, the Exchange has designated an index multiplier of 100 
for indexes it lists for trading. Pursuant to Rule 4.11, the Exchange 
may determine the index multiplier of an option, which is the amount 
specified in the contract by which the current index value is 
multiplied to arrive at the value required to be delivered upon valid 
exercise of the contract.\9\ The Exchange generally specifies the index 
multiplier in the specifications for an index option.\10\ Similarly, 
Article I, Section 1, I(3) of the Options Clearing Corporation 
(``OCC'') By-Laws defines ``index multiplier'' as the dollar amount (as 
specified by the Exchange on which such contract is traded) by which 
the current index value is to be multiplied to obtain the aggregate 
current index value. The Exchange states that, while the OCC's By-Laws 
define a unit of trading for equity options as 100 shares if not 
otherwise specified, the definition of index multiplier does not 
include a default unit.\11\ The Exchange therefore believes the current 
index multiplier definition in the OCC By-Laws permits any index 
multiplier specified by the listing exchange.
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    \9\ However, certain other Exchange Rules reflect an index 
multiplier of 100, and the Exchange proposes to update those rules 
to reflect the potential for an index multiplier of one.
    \10\ Option specifications are available at: cboe.com/tradable_products/.
    \11\ See OCC By-Laws Article I, Section 1, U(5).
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    Additionally, the Exchange believes micro-options are covered by 
the disclosures in the Options Disclosure Document (``ODD''). The 
Exchange states that the ODD reflects the possibility of differing 
values of index multipliers when describing features of

[[Page 19934]]

index options.\12\ Specifically, the ODD states the total exercise 
price for an index option is the exercise price multiplied by the 
multiplier, and the aggregate premium is the premium multiplied by the 
multiplier.\13\ As a result, the Exchange believes that the risk 
disclosures regarding index options in the ODD currently cover any 
risks associated with option index options with multipliers of one (and 
other amounts).
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    \12\ The ODD is available at https://www.theocc.com/about/publications/character-risks.jsp. The ODD states that the exercise 
price of a stock option is multiplied by the number of shares 
underlying the option to determine the aggregate exercise price and 
aggregate premium of that option. See ODD at 18. Similarly, the ODD 
states that the total exercise price for an index option is the 
exercise price multiplied by the multiplier, and the aggregate 
premium is the premium multiplied by the multiplier. See ODD at 8, 
9, and 125.
    \13\ See ODD at 8, 9, and 125.
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    The proposed rule change amends various rules regarding index 
options to permit the Exchange to designate an index multiplier of one 
for broad-based indexes that have an index value of at least 100 on 
which it may list options.\14\ As proposed, micro-options would trade 
in the same manner as other index options.\15\ The table below 
demonstrates the differences between a micro-option and a standard 
index option on the SPX Index:
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    \14\ The proposed rule change, as amended by Amendment No. 1, 
will not permit the trading of FLEX micro-index options.
    \15\ The proposed rule change defines ``micro-options'' in Rule 
4.11 as a broad-based index option for which the value of the 
underlying index is at least 100 with an index multiplier of one. 
The proposed rule change adds that references to ``index option'' in 
the Rules include ``micro-option'' unless the context otherwise 
requires.

------------------------------------------------------------------------
                                     Standard (index
               Term                   multiplier of       Micro (index
                                           100)         multiplier of 1)
------------------------------------------------------------------------
Strike Price......................               3930               3930
Bid or offer......................              32.05              32.05
Total Value of Deliverable........           $393,000             $3,930
Total Value of Contract...........             $3,205             $32.05
------------------------------------------------------------------------

    To differentiate a micro-option on an index from a standard index 
option, the Exchange would list micro-options with a different trading 
symbol than the standard index option with the same underlying index to 
reduce any potential confusion.\16\
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    \16\ For example, a standard index option for index ABC with an 
index multiplier of 100 may have symbol ABC, while a micro-option 
for index ABC with a multiplier of one may have symbol ABC9.
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Trading Hours

    As proposed, micro-options will be available for trading during the 
same hours as standard index options pursuant to Rule 5.1(b)(2), which 
will generally be 9:30 a.m. to 4:15 p.m. ET.\17\ To the extent an index 
option is authorized for trading during Global Trading Hours,\18\ the 
Exchange may also list micro-options during that trading session as 
well, the hours for which trading session are 3:00 a.m. to 9:15 a.m. 
ET.
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    \17\ Certain indexes close trading at 4:00 p.m. ET. See Rule 
5.1.
    \18\ See id.
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Expiration, Settlement, and Exercise Style

    As proposed, the Exchange may list a micro-option on an index with 
the same expirations, settlements, and exercise styles as the standard 
index option overlying the same index. Consistent with existing rules 
for index options, the Exchange will generally allow up to six standard 
monthly expirations for micro-options \19\ as well as up to 10 
expiration months for Long-Term Equity Option Series (``LEAPS'').\20\ 
For certain specified index options (including MXEA, MXEF, and SPESG 
options) and any class that the Exchange (as the Reporting Authority) 
uses to calculate a volatility index (currently, only SPX options are 
used by the Exchange to calculate a volatility index), the Exchange may 
list up to 12 standard monthly expirations for micro-options on those 
indexes.\21\ The Exchange may also list up to the same maximum number 
of expirations permitted in Rule 4.13(a)(2) for micro-options on broad-
based index options with nonstandard expirations in accordance with the 
Nonstandard Expirations Pilot Program.\22\ Micro-options will be cash-
settled contracts with European-style exercise in accordance with the 
listing criteria for those options.\23\ Micro-options, like standard 
index options, with third-Friday expiration will also be A.M.-settled 
or P.M.-settled, as applicable, in accordance with the applicable 
listing criteria.\24\
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    \19\ See Rule 4.13(a)(2).
    \20\ See Rule 4.13(b). Index LEAPS may expire 12 to 180 months 
from the date of issuance.
    \21\ See Rule 4.13(a).
    \22\ See Rule 4.13(e).
    \23\ See Rule 4.10(f) (broad-based initial listing criteria) and 
(h) (MXEA and MXEF); see also Rule 4.13(a)(3).
    \24\ See id.
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    As proposed, the Exchange may list micro-options over the same 
indexes with P.M.-settlement in certain instances (in addition to A.M.-
settlement in accordance with the generic listing terms). Specifically, 
pursuant to Rule 4.13(c), the Exchange may open for trading Quarterly 
Index Expirations (``QIXs'') on certain specified index options. QIXs 
are index option contracts that expire on the last business day of a 
calendar quarter, and the Exchange may list up to eight near-term 
quarterly expirations for trading.\25\ Currently, the index multiplier 
for QIXs may be 100 or 500. The proposed rule change amends Rule 
4.13(c) to permit the index multiplier to also be one to accommodate 
the listing of QIX micro-options on the specified indexes.
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    \25\ See Rule 4.13(c).
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    In addition, the Exchange's Nonstandard Expirations Pilot Program 
currently allows it to list Weekly and End of Month (``EOM'') 
Expirations on any broad-based index.\26\ Like standard index options 
with Weekly and EOM Expirations, micro-options on broad-based indexes 
with Weekly and EOM Expirations will be P.M.-settled and otherwise 
treated the same as options on the same underlying index that expire on 
the third Friday of the month. The maximum number of expirations that 
may be listed for each of the Weeklys and EOMs in a micro-option is the 
same as the maximum number of expirations permitted in Rule 4.13(a)(2) 
for micro-options on the same broad-based index.\27\ The Exchange may 
currently list Weekly and EOM Expirations on broad-based indexes as a 
pilot, which pilot period currently expires on May 3, 2021.\28\ The 
Exchange currently submits regular reports and data to the Commission 
regarding the Nonstandard Expirations Pilot Program. To the extent the 
Exchange lists any micro-options with Weekly or EOM Expirations 
pursuant to this pilot program, the Exchange states that it will 
include the same information with respect to micro-options that it does 
for standard options

[[Page 19935]]

in the reports it submits to the Commission in accordance with the 
pilot program.
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    \26\ See Rule 4.13(e).
    \27\ See id.
    \28\ See Securities Exchange Act Release No. 90262 (October 23, 
2020), 85 FR 68616 (October 29, 2020).
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    Similarly, the Exchange also currently has a pilot program under 
Rule 4.13, Interpretation and Policy .13, that allows the Exchange to 
list options on specified indexes (SPX, XSP, and MRUT) that expire on 
the third Friday of the month that are P.M.-settled. Under the 
Exchange's proposal, the Exchange may list micro-options on those same 
indexes pursuant to this pilot program, which pilot period currently 
expires on May 3, 2021.\29\ As it will for the Nonstandard Expirations 
Pilot Program, to the extent the Exchange lists micro-options on the 
specified indexes pursuant to this P.M.-settlement pilot program, the 
Exchange states that it will include the same information with respect 
to micro-options that it does for standard options in the reports it 
submits to the Commission in accordance with the pilot program.
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    \29\ See Securities Exchange Act Release Nos. 90263 (October 23, 
2020), 85 FR 68611 (October 29, 202), and 91067 (February 5, 2021), 
86 FR 9108 (February 11, 2021).
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Exercise Prices

    The Exchange proposes to adopt Rule 4.13, Interpretation and Policy 
.01(l) to provide that the interval between strike prices of series of 
micro-options will be $0.50 or greater.\30\ The Exchange states that 
there are two important distinctions between micro-options and standard 
options due to the difference in multipliers, one of which is how the 
total deliverable value is calculated (the other is the meaning of bids 
and offers, as further discussed below). Specifically, proposed Rule 
4.13, Interpretation and Policy .01(l) states that strike prices for 
micro-options are set at the same level as index options with an index 
multiplier of 100. For example, a micro-option call series with a 
strike price of 3,250 has a total deliverable value of $3,250 (3,250 x 
$1), while a standard option call series with a strike price of 3,250 
has a total deliverable value of $325,000 (3,250 x $100).\31\
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    \30\ Pursuant to Rule 4.13, Interpretation and Policy .01, the 
interval between strike prices of standard index options is 
generally $5.00 except for lower-priced strikes, for which the 
smallest interval is $2.50, subject to certain exceptions (including 
reduced-value index options, which may have strike intervals of no 
less than $0.50 or $1). The Exchange states that this is consistent 
with lower permissible strike intervals for certain reduced-value 
index options, which have the same practical effect as index options 
with a smaller multiplier.
    \31\ The Exchange states that this corresponds to the 
calculation of exercise prices for other types of options with a 
reduced multiplier. For example, Rule 4.5, Interpretation and Policy 
.18(b) provides that strike prices for mini-options (which have 
multipliers of 10 rather than 100, as set forth in Rule 4.5, 
Interpretation and Policy .18(a)) are set at the same level as for 
standard options. For example, a call series strike price to deliver 
10 shares of stock at $125 per share has a total deliverable value 
of $1,250 (10 x 125) if the strike is 125, while a call series 
strike price to deliver 100 shares of stock at $125 per share has a 
total deliverable value of $12,500 (100 x 125).
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Minimum Increments

    The Exchange proposes to amend Rule 5.4 to provide that a micro-
option will have the same minimum increment for bids and offers as the 
minimum increment for a standard index option on the same index.\32\ 
Specifically, proposed Rule 5.3(c)(2) provides that notwithstanding 
Rule 5.3(a),\33\ bids and offers for a micro-option must be expressed 
in terms of dollars per 1/100th part of the total value of the 
contract. For example, an offer of ``0.50'' represents an offer of 
$0.50 for a micro-option.\34\
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    \32\ See Rule 5.4(a). The Exchange states that this corresponds 
to the provision regarding the minimum increment for mini-options.
    \33\ Rule 5.3(a) states that except as otherwise provided in 
Rule 5.3, bids and offers must be expressed in terms of dollar and 
decimals per unit of the underlying security or index. The Exchange 
believes that the proposed rule change is consistent with this 
provision, as a bid of 7 will represent a bid of 7 for an option 
contract having an index multiplier (i.e., unit of trading) of one. 
However, the Exchange proposes to add a specific provision regarding 
the meaning of bids and offers for micro-options to provide clarity 
in its rules, and to maintain consistency in its rules, which 
currently contain a separate provision for mini-options, which as 
discussed above, have a reduced multiplier compared to standard 
options as micro-options do.
    \34\ An offer of ``0.50'' represents an offer of $50 for a 
standard index option with an index multiplier of 100.
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Appointment Weights

    The Exchange proposes to add micro-options each as a Tier AA class 
with a Market-Maker appointment weight of .001.\35\ The Exchange states 
that this is the same appointment weight as a majority of the other 
Tier AA options classes. 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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    \35\ See Rule 5.50(g). While the appointment weights of Tier AA 
classes are not subject to quarterly rebalancing under Rule 
5.50(g)(1), the Exchange represents that it regularly reviews the 
appointment weights of Tier AA classes to ensure that they continue 
to be appropriate.
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Contract Size Limits

    The proposed rule change will update 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:
     Rules 1.1 (definition of ``complex order'') and 5.65(d) 
(definition of ``complex trade''): The proposed rule change adds to the 
definitions in each of Rules 1.1 (definition of ``complex order'') and 
5.65(d) (definition of ``complex trade'') that for the purposes of 
applying the ratios set forth in the definitions to complex orders 
comprised of legs for both micro-options and standard options, 100 
micro-option contracts represent one standard option contract.\36\
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    \36\ The Exchange states that this corresponds to the provision 
in those definitions regarding mini-options, which states that for 
the purpose of applying these ratios to complex orders comprised of 
legs for both mini-options and standard options, ten mini-option 
contracts represent one standard option contract. The proposed rule 
change also conforms the definition of ``complex order'' in Rule 1.1 
to the definition of ``complex trade'' in Rule 5.65 to say that it 
may be comprised of different series in the same ``underlying 
security'' rather than the same ``class.'' As discussed above, 
micro-options will be a different class than standard index options 
overlying the same index. This accommodates, for example, the fact 
that a complex order could be comprised of mini-options and standard 
options overlying the same stock (as contemplated by the current 
definition) despite being in different classes. The proposed rule 
change also expands the definitions of complex order in Rule 1.1 and 
complex trade in Rule 5.65 to provide that it may similarly be 
comprised of different series in the same ``underlying index.'' The 
Exchange states that full-value indexes and reduced-value indexes 
are separate indexes under the Exchange Rules, so to the extent a 
multi-legged order whose legs overly different indexes (such as one 
leg with a full-value index and one leg with a reduced-value index) 
would not qualify for the definition of ``complex trade.''
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     Rules 5.37 and 5.38: Rules 5.37 and 5.38 describe the 
Exchange's Automated Improvement Mechanism for simple (``AIM'') and 
complex orders (``C-AIM''), respectively. There is no minimum size for 
an order submitted into an AIM or C-AIM Auction.\37\ However, in an AIM 
Auction for orders less than 50 standard option contracts (or 500 mini-
option contracts), the stop price must be at least one minimum 
increment better than the then-current national best-bid or offer or 
the order's limit price (if the order is a limit order), whichever is 
better. For orders of 50 standard option contracts (or 500 mini-option 
contracts) or more, the stop price must be at or better than the then-
current national best-bid or offer or the order's limit price (if the 
order is a limit order), whichever is better.\38\ The proposed rule 
change will add to Rule 5.37(b) that 5,000 micro-option

[[Page 19936]]

contracts is the corresponding size for these stop price restrictions. 
Additionally, Rule 5.37(c) and 5.38(c) provide that no concurrent AIM 
or C-AIM Auctions, respectively, are permitted for orders less than 50 
standard option contracts (or 500 mini-option contracts) (for C-AIM 
Auctions, the size is determined by the smallest leg of the complex 
order), but are permitted for orders of 50 standard option contracts 
(or 500 mini-option contracts) or greater (for C-AIM Auctions, the size 
is determined by the smallest leg of the complex order). The proposed 
rule change will add that 5,000 micro-option contracts is the 
corresponding size for determining whether concurrent auctions are 
permissible.
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    \37\ The Exchange states that in SPX during Regular Trading 
Hours, there is a maximum size of 10 contracts for orders submitted 
into AIM and C-AIM Auctions (in C-AIM, the maximum size is based on 
the smallest leg of the complex order). See Rules 5.37(a)(3) and 
5.38(a)(3). The Exchange is not proposing any changes to Rules 
5.37(a)(3) and 5.38(a)(3).
    \38\ See Rule 5.37(b).
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     Rules 5.39 and 5.40: Rules 5.39 and 5.40 describe the 
Exchange's Solicitation Auction Mechanism for simple (``SAM'') and 
complex (``C-SAM''), orders, respectively. 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 will add that 50,000 micro-option contracts is the corresponding 
minimum size for orders submitted into SAM or C-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). The proposed rule change will add that 5,000 
micro-option contracts 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) 
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). The proposed rule change adds that 50,000 
micro-option contracts 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).

Position and Exercise Limits 39
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    \39\ 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-options. To the extent the 
Exchange lists micro-options on other indexes in the future, the 
Exchange states that 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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    Rule 8.31 governs position limits for broad-based index options, 
and currently provides that there are no position limits for broad-
based index option contracts (including reduced-value option contracts) 
on DJX, OEX, XEO, RUT, and SPX classes (among others). The position 
limits on other broad-based index options that the Exchange currently 
lists for trading are below:

------------------------------------------------------------------------
                                           Standard limit (on the same
           Broad-Based index                   side of the market)
------------------------------------------------------------------------
Russell 1000, Russell 1000 Growth,       50,000 contracts (no more than
 Russell 1000 Value.                      30,000 near-term).
MSCI Emerging Markets Index, MSCI EAFE   50,000 contracts.
 Index.
Other..................................  25,000 contracts (no more than
                                          15,000 near-term).
------------------------------------------------------------------------

    The proposed rule change adds Rule 8.31(f) to provide that 
positions in micro-options (with an index multiplier of one) will be 
aggregated with positions in standard options (including reduced-value 
option contracts) (with an index multiplier of 100) on the same broad-
based index and, for purposes of determining compliance with the 
position limits under Rule 8.31, 100 micro-option contracts with an 
index multiplier of one equal one standard option contract with an 
index multiplier of 100. The Exchange states that this is consistent 
with Rule 8.31(d), which similarly provides that positions in reduced-
value index options are aggregated with positions in full-value index 
options based on economic equivalent values of those options.
    Rule 8.42(b) governs exercise limits for index options and provides 
that exercise limits for index option contracts will be equivalent to 
the position limits prescribed for option contracts with the nearest 
expiration date in Rule 8.31, 8.32, or 8.34. As is the case for certain 
broad-based index options as noted above, there are no exercise limits 
for certain broad-based index options (including reduced-value option 
contracts). The proposed rule change adds to Rule 8.42(b) that there 
will similarly be no exercise limits on micro-option contracts on those 
same broad-based indexes.

Capacity and Regulation

    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-
options. The Exchange states that it also understands that the OCC will 
be able to accommodate the listing and trading of micro-options. 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-options. The 
Exchange further states that current Exchange Rules that apply to the 
trading of other index options traded on the Exchange will also apply 
to the trading of micro-options, such as Exchange Rules governing 
customer accounts, margin requirements and trading halt procedures. The 
Exchange also states that TPHs that enter micro-option orders on behalf 
of customers, including retail customers, will continue to be subject 
to all Exchange Rules regarding doing business with the public.

III. 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. 1, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\40\ In particular, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5)

[[Page 19937]]

of the Act,\41\ 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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    \40\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \41\ 15 U.S.C. 78f(b)(5).
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    In support of its proposal, the Exchange states that the listing 
and trading of micro-options could benefit investors, particularly 
retail investors, by expanding investor choice and flexibility by 
providing them with the ability to trade certain index options and 
hedge their portfolios with a smaller outlay of capital. Similarly, one 
commenter expressed support for the proposal,\42\ asserting that the 
listing and trading of micro-options could benefit investors by 
providing a more precise hedging tool. The Exchange explains that 
micro-options may appeal to investors who currently may not participate 
in the trading of certain index options because index options are 
generally higher-priced securities due to the high levels of the 
indexes. The Exchange believes micro-options could provide these 
investors with a point of entry into the index options market, which 
will make options overlying larger-valued broad-based indexes \43\ more 
readily available as investing and hedging tools. The Exchange believes 
this may facilitate overall investor participation in the markets for 
index options, which may increase the depth and liquidity to the 
benefit of all investors. The Exchange states that it does not believe 
the proposed rule change will result in fragmentation of liquidity. In 
particular, the Exchange states that it has observed no fragmentation 
of liquidity in the markets for economically equivalent products that 
are listed today. The Exchange further states that it expects micro-
options to generate new order flow to the Exchange, rather than 
diverting current order flow from standard options to micro-options.
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    \42\ See Letter to Vanessa Countryman, Secretary, Commission, 
from Milliman Financial Risk Management LLC, dated April 5, 2021. A 
second commenter expressed support for listing and trading FLEX 
micro-index options for similar reasons; however, the Exchange 
removed aspects of the proposal that would permit the Exchange to 
list FLEX micro-index options in Amendment No. 1. See Letter to 
Vanessa Countryman, Secretary, Commission, from Biju Kulathakal, 
Chief Executive Officer, Halo Investing, Inc., dated March 31, 2021.
    \43\ The Exchange also believes it is reasonable to limit micro-
options to broad-based indexes with values of at least 100, as 
indexes with smaller values would have smaller notional values.
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    The Commission believes that the listing and trading of micro-
options on broad-based indexes that have a value of at least 100 could 
benefit investors by providing them with additional investment 
alternatives.\44\ The Commission believes that, as stated by the 
Exchange, the listing and trading of micro-options could make options 
overlying higher-valued broad-based indexes more readily available to 
investors, thereby providing investors with an additional trading and 
hedging mechanism.\45\ The Commission believes this proposal, as 
amended to include only higher-value broad-based indexes, 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 options series. However, the Commission expects the 
Exchange to monitor the trading of micro-options to evaluate whether 
any issues develop.
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    \44\ The Commission has previously approved the listing and 
trading of options based on a reduced value of broad-based indexes, 
including 1/100th the value of the FTSE 100 Index and FTSE 250 
Index,44 and 1/10th the value of the Nasdaq 100 Index. 
See Securities Exchange Act Release Nos. 57654 (April 11, 2008), 73 
FR 21003 (April 17, 2008). See also Securities Exchange Act Release 
No. 51121 (February 1, 2005), 70 FR 6476 (February 7, 2005).
    \45\ In Amendment No. 1, the Exchange provided examples of the 
trading of a micro-option as compared to a standard option on a 
broad-based index and the potential benefits for investors. See 
Amendment No. 1 at 7-11.
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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 
aspects of the proposal related to the quoting and trading of micro-
options provide clarity about the application of certain of the 
Exchange's rules to micro-options. The Commission believes that the 
proposed treatment of strike prices, minimum size of index options 
contracts, bids and offers, and position and exercise limits for micro-
options is consistent with the Act, as these proposed changes should 
make clear how micro-options would be quoted and traded and are 
consistent with the treatment of certain reduced-value index 
options.\46\ The Commission also believes that the use of different 
trading symbols for micro-options should help investors and other 
market participants to distinguish those options from the related 
standard options, reducing potential investor confusion. Lastly, the 
Exchange has stated that it plans to provide investor education on the 
uses and risks of micro-options through its current and expanded 
education platforms.
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    \46\ In addition, the Exchange has made changes to various 
provisions in its rules to reflect that one hundred micro-option 
contracts overlying an index will be economically equivalent to one 
contract for a standard index option. See Rule 1.1 (definition of 
``complex order''), Rules 5.37-5.40 (governing various auction 
mechanisms), Rule 5.65(d) (definition of ``complex trade''), and 
Rule 5.87 (crossing orders).
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    Additionally, the Commission believes that the proposed appointment 
weight for micro-options is consistent with the Act, as the initial 
appointment weight is designed to incentivize more Market-Makers to 
obtain an appointment in each micro-option that the Exchange will list, 
which may result in more liquidity and competitive pricing.
    The Commission believes it is appropriate and consistent with the 
Act for the Exchange to list the same expirations, settlements, and 
exercise styles for micro-options as it may for standard index 
options.\47\ 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 
the micro-options. The Exchange also states that the OCC will be able 
to accommodate the listing and trading of micro-options.
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    \47\ As described above, to the extent the Exchange lists micro-
options pursuant to the Nonstandard Expirations Pilot Program or its 
pilot regarding certain P.M.-settled index options, the Exchange 
states that it will include the same information with respect to 
micro-options that it does for standard options in the reports and 
data it provides to the Commission.
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    As a national securities exchange, the Exchange is required, under 
Section 6(b)(1) of the Act,\48\ 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-options. In addition, micro-
options will be traded under the Exchange's existing regulatory regime 
for index options, which includes, among other things, the Exchange's 
existing rules regarding customer protection. In particular, the 
Exchange states that TPHs that enter micro-option orders on behalf of 
customers, including retail customers, will continue to be subject to 
all Exchange rules regarding doing business with the public,

[[Page 19938]]

including those within Chapter 9 of the Exchange Rulebook.\49\ 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-options 
that are otherwise applicable to other index options. The Commission 
believes that the Exchange's rules governing the trading of the index 
options on the Exchange help to ensure the maintenance of fair and 
orderly markets for micro-options, which is consistent with the 
protection of investors and the public interest.
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    \48\ 15 U.S.C. 78f(b)(1).
    \49\ The Exchange states these rules require, among other 
things, that: (i) A TPH may not accept an option order, including a 
micro-option order, from a customer unless that customer's account 
has been approved for options transactions in accordance with Rule 
9.1; (ii) TPHs that conduct customer business, including retail 
customer business, must ensure they provide for appropriate 
supervisory control over that business and maintain customer records 
in accordance with Rule 9.2; and (iii) TPHs will also need to 
provide customers that trade micro-options (and any other option) 
with a copy of the ODD and amendments to the ODD in accordance with 
Rule 9.9 so that customers are informed of any risks associated with 
trading options, including micro-options.
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    Accordingly, the Commission finds that the proposed rule change, as 
modified by Amendment No. 1, is consistent with Section 6(b)(5) of the 
Act \50\ and the rules and regulations thereunder applicable to a 
national securities exchange.
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    \50\ 15 U.S.C. 78f(b)(5).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 1, 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-2020-117 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-2020-117. 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-2020-117, and should be submitted 
on or before May 6, 2021.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the 30th day after the 
date of publication of notice of the filing of Amendment No. 1 in the 
Federal Register. Amendment No. 1 narrowed the scope of the proposed 
rule change, as well as provided additional rationale and support for 
the proposed rule change. Specifically, the Exchange (i) narrowed the 
scope of the proposed rule change to permit the listing and trading of 
micro-options only on broad-based index options that have index values 
of at least 100, rather than all indexes; (ii) narrowed the scope of 
the proposal to remove all aspects of the proposal that would have 
permitted the trading of FLEX micro-index options; and (iii) provided 
additional rationale and support for the proposed rule change. In 
support of the proposed rule change, the Exchange: Provided additional 
examples of how retail investors may use micro-options; emphasized that 
TPHs, in entering micro-option orders on behalf of customers, will 
continue to be subject to all Exchange Rules regarding doing business 
with the public; and represented that it will expand education 
offerings to inform investors of the benefits and risks of trading 
micro-options. The changes to the proposal and additional information 
in Amendment No. 1 do not raise any novel regulatory issues and assist 
the Commission in evaluating the Exchange's proposal and in determining 
that it is consistent with the Act. Accordingly, the Commission finds 
good cause, pursuant to Section 19(b)(2) of the Act,\51\ to approve the 
proposed rule change, as modified by Amendment No. 1, on an accelerated 
basis.
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    \51\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\52\ that the proposed rule change (SR-CBOE-2020-117), as modified 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
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    \52\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\53\
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    \53\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-07674 Filed 4-14-21; 8:45 am]
BILLING CODE 8011-01-P