Document ID: SEC-2021-1446-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2021-10-20T04:00Z

[Federal Register Volume 86, Number 200 (Wednesday, October 20, 2021)]
[Notices]
[Pages 58118-58121]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-22811]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93326; File No. SR-CBOE-2021-059]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
To Amend Rule 5.54 and Rule 5.55 in Connection With a Designated 
Primary Market-Maker's and a Lead Market-Maker's Obligation To Submit 
Opening Quotes for the Regular Trading Hours Session in Index Options

October 14, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 8, 2021, Cboe Exchange, Inc. (the ``Exchange'' or 
``Cboe Options'') filed with the Securities and Exchange Commission 
(the ``Commission'') the

[[Page 58119]]

proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Exchange filed the 
proposal as a ``non-controversial'' proposed rule change pursuant to 
Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) 
thereunder.\4\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend Rule 5.54 and Rule 5.55 in connection with a Designated 
Primary Market-Maker's (``DPM'') and a Lead Market-Maker's (``LMM'') 
obligation to submit opening quotes for the Regular Trading Hours 
session in index options, and to make a clarifying, nonsubstantive 
change. 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 Exchange proposes to amend Rule 5.54 and Rule 5.55 in 
connection with a DPM's and an LMM's obligation, respectively, to 
submit opening quotes for the Regular Trading Hours trading session in 
index options.
    Current Rule 5.54(a)(6) requires each DPM to enter opening quotes 
for the Regular Trading Hours trading \5\ session within one minute of 
the initiation of an opening rotation in any series that is not open 
due to the lack of a quote pursuant to Rule 5.31. Likewise, current 
Rule 5.55(a)(2) requires each LMM to enter opening quotes for the 
Regular Trading Hours trading session within one minute of the 
initiation of an opening rotation in any series that is not open due to 
the lack of a quote pursuant to Rule 5.31. Pursuant to Rule 5.31(e)(1), 
the System initiates an opening rotation for an option series following 
the occurrence of an opening rotation trigger pursuant to Rule 5.31(d). 
Specifically, Rule 5.31(d)(1)(B) governs the opening rotation trigger 
for index options and provides that the System initiates the opening 
rotation for index options after a time period (which the Exchange 
determines for all classes) following the System's observation after 
9:30 a.m.\6\ of the first disseminated index value for the index 
underlying an index option.\7\ The Exchange has observed that index 
reporting authorities generally disseminate the first index value 
beginning at 9:30 a.m., regardless of whether all of the underlying 
index components have opened. The System then initiates the opening 
rotation in an index option one second \8\ after the first index value 
publication and then determines if a series is eligible to open 
pursuant to Rule 5.31(e)(1). If there is no Composite Market (which is 
comprised of the better of Market-Maker bulk messages on the Exchange 
or any away market quotes),\9\ a series is ineligible to open until 
certain conditions are met.\10\ Because the System is unable to open a 
series due to a lack of a quote, the DPM or LMM in that index class is 
then obligated to enter opening quotes within the same minute of the 
initiation of the opening rotation pursuant to Rule 5.54(a)(6) or Rule 
5.55(a)(2), respectively.
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    \5\ The proposed rule change makes a nonsubstantive change by 
updating ``Regular Trading session'' to ``Regular Trading Hours 
trading session'', which is more in line with the defined term and 
the corresponding language that governs the opening quote 
requirement for LMMs. See Rule 1.1, definition of Regular Trading 
Hours and RTH; and Rule 5.55(a)(3).
    \6\ Unless otherwise specified, all times in the Rules are 
Eastern Time. See Rule 1.6.
    \7\ For VIX Index options, the System initiates the opening 
rotation at 9:30 a.m. See Rule 5.31(d)(1)(C).
    \8\ The current delay period following the first disseminated 
index value, as determined by the Exchange, is one second.
    \9\ See Rule 5.31(a), which provides that the term ``Composite 
Market'' means the market for a series comprised of (1) the higher 
of the then current best appointed Market-Maker bulk message bid on 
the Exchange and the away best bid (``ABB'') (if there is an ABB) 
and (2) the lower of the then-current best appointed Market-Maker 
bulk message offer on the Exchange and the away best offer (``ABO'') 
(if there is an ABO).
    \10\ Specifically, until one of the conditions in Rule 
5.31(e)(1)(A) or (B) for the series is satisfied, until the series 
opens pursuant to a forced opening as set forth in Rule 5.31(e)(4), 
or the Exchange opens the series pursuant to Rule 5.31(h).
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    As stated, index reporting authorities generally disseminate the 
first index value at 9:30 a.m., which is usually before all of the 
underlying index components are opened. While underlying index 
components usually begin opening at 9:30 a.m., for some indexes, a 
substantial portion of the underlying components may not regularly open 
within the 9:30 a.m. minute--that is, within one minute of the first 
disseminated index value (i.e., the initiation of an opening rotation), 
in which a DPM or LMM must provide opening quotes for a series not open 
due to the lack of quote. The Exchange understands that DPMs and LMMs 
often use the pricing of the related index futures products, which are 
already trading at 9:30 a.m., rather than the index spot value to price 
the index options. However, some indexes do not have a related futures 
product, and DPMs in these index options must rely on the index spot 
value to price the options. DPMs and LMMs in such index options have 
expressed to the Exchange that, for purposes of their quoting risk 
profiles, they do not wish to begin quoting before a substantial number 
of the underlying index components have opened (which may not 
necessarily be within the 9:30 a.m. minute).\11\ Without the opening 
prices for a substantial number of the underlying index components 
available, DPMs and LMMs that may use the index spot value to the 
options (particularly those without a related index futures) may not be 
able to provide quotes that reflect then-current market conditions for 
the series in those options in the same manner as they would be able to 
for an index series in which all or a substantial number of the 
underlying index components have opened. Therefore, the Exchange 
proposes to amend the DPM and LMM opening quote requirement to provide 
the Exchange with the flexibility to specify the period of time from 
the initiation of the opening rotation in certain index options before 
a DPM or LMM is required to provide opening quotes.
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    \11\ The Exchange notes it is possible that some DPMs and LMMs 
may also rely on spot values as input in their option pricing models 
for index options for which a related index futures product is 
available. However, the Exchange understands from DPMs and LMMs that 
the spot values are generally not the primary source of information 
used for pricing for such index options.

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[[Page 58120]]

    Specifically, the proposed rule change updates Rule 5.54(a)(6) and 
Rule 5.55(a)(2) to require each DPM and LMM, respectively, to enter 
opening quotes for the Regular Trading Hours trading session in any 
series that is not open due to the lack of a quote pursuant to Rule 
5.31 within (i) a specified time period (determined by the Exchange on 
a class-by-class basis) for index options, and (ii) one minute for 
equity options, of the initiation of an opening rotation. The proposed 
rule change is designed to allow the Exchange to specify a period of 
time following the initiation of the opening rotation in index options 
long enough to allow a substantial portion of the underlying index 
components to open before a DPM or LMM is required to submit opening 
quotes in series that are ineligible to open given a lack of quote. The 
Exchange this will enable DPMs and LMMs to price those index options in 
a manner that may more closely reflect then-current market conditions 
at the open and provide a tighter market upon which a series may open.
    As indicated above, different option classes may have different 
characteristics and trading models, and the proposed flexibility will 
permit the Exchange to apply different timing parameters in connection 
with a DPM's or LMM's opening quote obligation to address those 
differences, in much the same way the Exchange Rules already permit the 
Exchange to apply different parameters in many places. The Exchange 
notes that the Exchange Rules provide the Exchange with similar 
flexibility regarding timing in connection with the opening of trading 
on the Exchange,\12\ as well as similar flexibility to apply different 
settings or designations on a class-by-class basis, including in 
connection with Market-Maker obligations.\13\
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    \12\ See Rule 5.31(d)(1)(B), which provides that, for index 
options, the System initiates the opening rotation after a time 
period (which the Exchange determines for all classes) following the 
System's observation after 9:30 a.m. of the first disseminated index 
value for the index underlying an index option (except for VIX Index 
options).
    \13\ See Rule 5.52(b), which allows the Exchange to determine 
the minimum size required for a Market-Maker's quotes on a class-by-
class basis; and Rule 3.53, which permits the Exchange to authorize 
a DPM to function remotely away from the Exchange's trading floor on 
a class-by-class basis.
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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.\14\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \15\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \16\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ Id.
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    In particular, the Exchange believes the proposed rule change will 
remove impediments to and perfect the mechanism of a free and open 
market and protect investors, because it is designed to allow the 
Exchange to specify a period of time following the initiation of the 
opening rotation in index options long enough to allow a substantial 
portion of the underlying index components to open before a DPM or LMM 
is required to submit opening quotes in series that are ineligible to 
open given a lack of quote. The Exchange believes it will protect 
investors to not require DPMs and LMMs to submit quotes when index spot 
values may not be fully representative of the market due to the lack of 
a substantial portion of the components being open. As noted above, 
while DPMs and LMMs generally rely on futures pricing if there is a 
related index future trading, DPMs and LMMs will generally rely on 
index spot values when there is not such futures product. The Exchange 
believes it is reasonable and appropriate to not require DPMs and LMMs 
to quote in such an index option prior to the time when a substantial 
portion of the underlying index components have opened, particularly 
when DPMs' and LMMs' quoting risk profiles rely on index spot values, 
which may not regularly occur for some indexes within the 9:30 a.m. 
minute after the first index value is disseminated. By allowing the 
Exchange to specify a period of time following the initiation of an 
opening rotation in index options long enough to allow a substantial 
portion of the underlying index components to open before a DPM's or an 
LMM's opening quote obligation is triggered, the proposed rule change 
will enable DPMs and LMMs to provide pricing in those index options 
that may better reflect then-current market conditions at the open and 
a tighter market upon which the series may open, to the benefit of all 
investors. In addition to this, and as described above, the Exchange 
notes that, because different option classes may have different 
characteristics and trading models, the Exchange Rules currently permit 
the Exchange to apply different parameters in many places to address 
such differences; including in connection with the opening of trading 
on the Exchange \17\ and in connection with Market-Maker obligations.
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    \17\ See supra note 8.
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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 Exchange does not 
believe that the proposed rule change will impose any burden on 
intramarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act because allowing different time 
periods during which DPMs and LMMs may have an opening quote obligation 
will reflect differing characteristics of index options listed on the 
Exchange. For some indexes, a substantial portion of the underlying 
components may not regularly open within a minute (i.e., 9:30 a.m.) of 
the first disseminated index value. As noted above, while some DPMs and 
LMMs quote options based on pricing of related index futures, DPMs and 
LMMs in options that do not have related index futures quote primarily 
based on these index values. If a DPM or LMM is required to submit 
opening quotes in such an index option prior to a substantial portion 
of the underlying components being open, the DPM's or LMM's quotes may 
not reflect then-current market conditions. The proposed rule change 
will allow for enough time to pass in order for a substantial portion 
of the underlying index components for certain indexes to open, 
particularly those in which the Exchange understands DPMs and LMMs may 
rely on the index spot values (e.g., because the index does not have a 
related futures product). Therefore, the Exchange believes the proposed 
rule change will impose the opening quoting requirement on DPMs and 
LMMs at a time when they can quote using

[[Page 58121]]

information that more fully incorporates then-current market 
conditions, enabling DPMs and LMMs to more accurately price such 
options and provide for a tighter spread upon the opening of the 
series. An Exchange-determined period of time before a DPM's and LMM's 
opening quote obligations are triggered in an index option class will 
apply uniformly to any DPM and/or LMM that may be appointed in that 
class.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, because it 
relates solely to a quoting obligation applicable to DPMs and LMMs on 
the Exchange. The Exchange notes that other options exchanges that may 
have similar opening quote requirements for their market makers may, in 
their discretion, adopt similar flexibility regarding the timing of the 
opening quote requirements in connection with index options.

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

    The Exchange has designated this rule filing as non-controversial 
under Section 19(b)(3)(A) \18\ of the Act and Rule 19b-4(f)(6) \19\ 
thereunder. Because the 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 which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6) thereunder.
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6).
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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 under 
Section 19(b)(2)(B) \20\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \20\ 15 U.S.C. 78s(b)(2)(B).
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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 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 [email protected]. Please include 
File Number SR-CBOE-2021-059 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2021-059. 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-2021-059 and should be submitted on 
or before November 10, 2021.
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    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-22811 Filed 10-19-21; 8:45 am]
BILLING CODE 8011-01-P