Document ID: SEC-2023-0085-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2023-01-24T05:00Z

[Federal Register Volume 88, Number 15 (Tuesday, January 24, 2023)]
[Notices]
[Pages 4265-4271]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-01260]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96703; File No. SR-CBOE-2023-005]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change to Make Permanent the Operation of Its 
Program That Allows the Exchange To List P.M.-Settled Third Friday-of-
the-Month S&P 500 Stock Index (``S&P 500'') Options (``SPX'') Series

January 18, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 6, 2023, Cboe Exchange, Inc. (``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III 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 240.19b-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 make permanent the operation of its program that allows the Exchange 
to list P.M.-settled third Friday-of-the-month S&P 500 Stock Index 
(``S&P 500'') options (``SPX'') series. The text of the proposed rule 
change is provided below.

(additions are italicized; deletions are [bracketed])
* * * * *

Rules of Cboe Exchange, Inc.

* * * * *

Rule 4.13. Series of Index Options

* * * * *

Interpretations and Policies

    .01-.12 No change.
    .13 In addition to A.M.-settled S&P 500 Stock Index (``SPX'') 
options approved for trading on the Exchange pursuant to Rule 4.13, 
the Exchange may also list options on SPX whose exercise settlement 
value is derived from closing prices on the last trading day prior 
to expiration (P.M.-settled third Friday-of-the-month SPX options 
series).
    .14 The Exchange may [also] list options on the Mini-SPX Index 
(``XSP'') and Mini-RUT Index (``MRUT'') whose exercise settlement 
value is derived from closing prices on the last trading day prior 
to expiration (``P.M.-settled''). [P.M.-settled third Friday-of-the-
month SPX options series and] P.M.-settled XSP and MRUT options will 
be listed for trading for a pilot period ending May 8, 2023.
* * * * *
    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 make permanent its Pilot Program that 
permits the Exchange to list SPX options whose exercise settlement 
value is derived from closing prices on the last trading day prior to 
expiration (``SPXPM''). The Securities and Exchange Commission (the 
``Commission'') approved a rule change that established the SPXPM Pilot 
Program on February 8, 2013.\3\ The Exchange has since continuously 
extended the pilot period, which, pursuant to current Rule 4.13.13,\4\ 
is currently set to expire on the earlier of May 8, 2023 or the date on 
which the SPXPM Pilot Program is approved on a permanent basis.\5\ The 
Exchange hereby requests that the Commission approve the SPXPM Pilot 
Program on a permanent basis.\6\
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    \3\ See Securities Exchange Act Release No. 68888 (February 8, 
2013), 78 FR 10668 (February 14, 2013) (SR-CBOE-2012-120) (the 
``SPXPM Approval Order''). Pursuant to Securities Exchange Act 
Release No. 80060 (February 17, 2017), 82 FR 11673 (February 24, 
2017) (SR-CBOE-2016-091), the Exchange moved third-Friday P.M.-
settled options into the S&P 500 Index options class, and as a 
result, the trading symbol for P.M.-settled S&P 500 Index options 
that have standard third Friday-of-the-month expirations changed 
from ``SPXPM'' to ``SPXW.'' This change went into effect on May 1, 
2017, pursuant to Cboe Options Regulatory Circular RG17-054.
    \4\ In 2019, the Exchange relocated prior Rule 24.9, containing 
the provision which governs the Pilot Program, to current Rule 4.13. 
See SR-CBOE-2019-092 (October 4, 2019), which did not make any 
substantive changes to prior Rule 24.9 and merely relocated it to 
Rule 4.13.
    \5\ See Securities Exchange Act Release Nos. 71424 (January 28, 
2014), 79 FR 6249 (February 3, 2014) (SR-CBOE-2014-004); 73338 
(October 10, 2014), 79 FR 62502 (October 17, 2014) (SR-CBOE-2014-
076); 77573 (April 8, 2016), 81 FR 22148 (April 14, 2016) (SR-CBOE-
2016-036); 80386 (April 6, 2017), 82 FR 17704 (April 12, 2017) (SR-
CBOE-2017-025); 83166 (May 3, 2018), 83 FR 21324 (May 9, 2018) (SR-
CBOE-2018-036); 84535 (November 5, 2018), 83 FR 56129 (November 9, 
2018) (SR-CBOE-2018-069); 85688 (April 18, 2019), 84 FR 17214 (April 
24, 2019) (SR-CBOE-2019-023); 87464 (November 5, 2019), 84 FR 61099 
(November 12, 2019) (SR-CBOE-2019-107); 88674 (April 16, 2020), 85 
FR 22479 (April 22, 2020) (SR-CBOE-2020-036); 90263 (October 23, 
2020), 85 FR 68611 (October 29, 2020) (SR-CBOE-2020-100); 91698 
(April 28, 2021) 86 FR 23761 (May 4, 2021) (SR-CBOE-2021-027); 93455 
(October 28, 2021), 86 FR 60660 (November 3, 2021) (SR-CBOE-2021-
062); 94799 (April 27, 2022), 87 FR 26244 (May 3, 2022) (SR-CBOE-
2022-019); and 96222 (November 3, 2022), 87 FR 67736 (November 9, 
2022) (SR-CBOE-2022-054).
    \6\ The Exchange notes that it also proposes to adopt Rule 
4.13.14 to continue to govern the Pilot Programs also currently in 
place in Rule 4.13.13 which permit the Exchange to list P.M.-settled 
options on the Mini-SPX Index (``XSP'') and Mini-RUT Index 
(``MRUT''). The Exchange plans to submit a separate proposal to make 
the operation of these P.M. Pilot Programs permanent following 
Commission approval of this proposal.

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[[Page 4266]]

    By way of background, when cash-settled \7\ index options were 
first introduced in the 1980s, settlement was based on the closing 
value of the underlying index on the option's expiration date. The 
Commission later became concerned about the impact of P.M.-settled, 
cash-settled index options on the markets for the underlying stocks at 
the close on expiration Fridays. Specifically, certain episodes of 
price reversals around the close on quarterly expiration dates 
attracted the attention of regulators to the possibility that the 
simultaneous expiration of index futures, futures options, and options 
might be inducing abnormal volatility in the index value around the 
close.\8\ Academic research at the time provided at least some evidence 
suggesting that futures and options expirations contributed to excess 
volatility and reversals around the close on those days.\9\ In light of 
the concerns with P.M. settlement and to help ameliorate the price 
effects associated with expirations of P.M.-settled, cash-settled index 
products, in 1987, the Commodity Futures Trading Commission (``CFTC'') 
approved a rule change by the Chicago Mercantile Exchange (``CME'') to 
provide for A.M. settlement \10\ for index futures, including futures 
on the S&P 500.\11\ The Commission subsequently approved a rule change 
by Cboe Options to list and trade A.M.-settled SPX options.\12\ In 
1992, the Commission approved Cboe Options' proposal to transition all 
of its European-style cash-settled options on the S&P 500 Index to A.M. 
settlement; \13\ however, in 1993, the Commission approved a rule 
allowing Cboe Options to list P.M.-settled options on certain broad-
based indices, including the S&P 500, expiring at the end of each 
calendar quarter (``Quarterly Index Expirations'') (since adopted as 
permanent).\14\ Starting in 2006, the Commission approved numerous rule 
changes, on a pilot basis, permitting the Cboe Options to introduce 
other index options, including SPX options, with P.M.-settlement. These 
include P.M.-settled index options expiring weekly (other than the 
third Friday) and at the end of each month (``EOM''),\15\ SPXPM, as 
well as P.M.-settled Mini-SPX Index (``XSP'') options and Mini-Russell 
2000 Index (``MRUT'') options expiring on the third Friday.\16\
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    \7\ The seller of a ``cash-settled'' index option pays out the 
cash value of the applicable index on expiration or exercise. A 
``physically settled'' option, like equity and ETF options, involves 
the transfer of the underlying asset rather than cash. See 
Characteristics and Risks of Standardized Options, available at: 
https://www.theocc.com/Company-Information/Documents-and-Archives/Options-Disclosure-Document.
    \8\ The close of trading on the quarterly expiration Friday 
(i.e., the third Friday of March, June, September and December), 
when options, index futures, and options on index futures all expire 
simultaneously, became known as the ``triple witching hour.''
    \9\ See Securities and Exchange Commission, Division of Economic 
Risk and Analysis, Memorandum, Cornerstone Analysis of PM Cash-
Settled Index Option Pilots (February 2, 2021) (``DERA Staff PM 
Pilot Memo'') at 5, available at: https://www.sec.gov/files/Analysis_of_PM_Cash_Settled_Index_Option_Pilots.pdf.
    \10\ The exercise settlement value for an A.M.-settled index 
option is determined by reference to the reported level of the index 
as derived from the opening prices of the component securities on 
the business day before expiration.
    \11\ See Securities Exchange Act Release No. 24367 (April 17, 
1987), 52 FR 13890 (April 27, 1987) (SR-CBOE-87-11) (noting that CME 
moved S&P 500 futures contract's settlement value to opening prices 
on the delivery date).
    \12\ See id.
    \13\ See Securities Exchange Act Release No. 30944 (July 21, 
1992), 57 FR 33376 (July 28, 1992) (SR-CBOE-92-09). Thereafter, the 
Commission approved proposals by the options markets to transfer 
most of their cash-settled index products to A.M. settlement.
    \14\ See Securities Exchange Act Release No. 31800 (February 1, 
1993), 58 FR 7274 (February 5, 1993) (SR-CBOE-92-13); and see Rule 
4.13(a)(2)(B); see also Securities Exchange Act Release Nos. 54123 
(July 11, 2006), 71 FR 40558 (July 17, 2006) (SR-CBOE-2006-65); and 
60164 (June 23, 2009), 74 FR 31333 (June 30, 2009) (SR-CBOE-2009-
029).
    \15\ See Securities Exchange Act Release Nos. 62911 (September 
14, 2010), 75 FR 57539 (September 21, 2010) (SR-CBOE-2009-075); 
76529 (November 30, 2015), 80 FR 75695 (December 3, 2015) (SR-CBOE-
2015-106); 78132 (June 22, 2016), 81 FR 42018 (June 28, 2016) (SR-
CBOE-2016-046); and 78531 (August 10, 2016), 81 FR 54643 (August 16, 
2016) (SR-CBOE-2016-046).
    \16\ See Securities Exchange Act Release Nos. 70087 (July 31, 
2013), 78 FR 47809 (August 6, 2013) (SR-CBOE-2013-055); and 91067 
(February 5, 2021) 86 FR 9108 (February 11, 2021) (SR-CBOE-2020-
116).
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    As stated above, since its inception in 2013, the Exchange has 
continuously extended the SPXPM Pilot Program period and, during the 
course of the SPXPM Pilot Program and in support of the extensions of 
the SPXPM Pilot Program, the Exchange has submitted reports to the 
Commission regarding the Pilot Program that detail the Exchange's 
experience with the Pilot Program, pursuant to the SPXPM Approval 
Order.\17\ Specifically, the Exchange has submitted annual Pilot 
Program reports to the Commission that contain an analysis of volume, 
open interest, and trading patterns. The analysis examines trading in 
SPX options, as well as trading in the securities that comprise the S&P 
500 Index. Additionally, for series that exceed certain minimum open 
interest parameters, the annual reports provide analysis of index price 
volatility and share trading activity. The Exchange has also submitted 
periodic interim reports that contain some, but not all, of the 
information contained in the annual reports (together with the periodic 
interim reports, the ``pilot reports'').\18\
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    \17\ See supra note 3.
    \18\ In providing the pilot reports to the Commission, the 
Exchange previously requested confidential treatment of the pilot 
reports under the Freedom of Information Act (``FOIA''). See 5 
U.S.C. 552.
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    The pilot reports contained the following volume and open interest 
data:
    (1) monthly volume aggregated for all trades;
    (2) monthly volume aggregated by expiration date;
    (3) monthly volume for each individual series;
    (4) month-end open interest aggregated for all series;
    (5) month-end open interest for all series aggregated by expiration 
date; and
    (6) month-end open interest for each individual series.
    The annual reports also contained the information noted in Items 
(1) through (6) above for Expiration Friday, A.M.-settled SPX options 
traded on Cboe Options, as well as the following analysis of trading 
patterns in SPX options series in the Pilot Program:
    (1) a time series analysis of open interest; and
    (2) an analysis of the distribution of trade sizes.
    Finally, for series that exceed certain minimum parameters,\19\ the 
annual reports contained the following analysis related to index price 
changes and underlying share trading volume at the close on Expiration 
Fridays:
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    \19\ The Exchange and the Commission determined the minimum open 
interest parameters, control sample, time intervals, method for 
randomly selecting the component securities, and sample periods.
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    (1) a comparison of index price changes at the close of trading on 
a given Expiration Friday with comparable price changes from a control 
sample. The data includes a calculation of percentage price changes for 
various time intervals and compare that information to the respective 
control sample. Raw percentage price change data as well as percentage 
price change data normalized for prevailing market volatility, as 
measured by the Cboe Volatility Index (VIX), is provided; and
    (2) a calculation of share volume for a sample set of the component 
securities representing an upper limit on share trading that could be 
attributable to expiring in-the-money series. The data includes a 
comparison of the calculated share volume for securities in the sample 
set to the average daily trading

[[Page 4267]]

volumes of those securities over a sample period.
    Also, during the course of the SPXPM Pilot Program, the Exchange 
provided the Commission with any additional data or analyses the 
Commission requested if it deemed such data or analyses necessary to 
determine whether the Pilot Program was consistent with the Exchange 
Act. The Exchange has made public on its website all data and analyses 
previously submitted to the Commission under the Pilot Program,\20\ and 
will continue to make public any data and analyses it submits to the 
Commission while the SPXPM Pilot Program is still in effect.
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    \20\ Available at https://www.cboe.com/aboutcboe/legal-regulatory/national-market-system-plans/pm-settlement-spxpm-data.
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    The Exchange has concluded that the SPXPM Pilot Program does not 
negatively impact market quality or raise any unique or prohibitive 
regulatory concerns. The Exchange has not identified any evidence from 
the pilot data indicating that the trading of P.M.-settled SPX options 
has any adverse impact on fair and orderly markets on Expiration 
Fridays for the S&P 500 Index or the underlying securities comprising 
the S&P 500, nor have there been any observations of abnormal market 
movements attributable to P.M.-settled SPX options from any market 
participants that have come to the attention of the Exchange. Based on 
a study conducted by the Commission's Division of Economic and Risk 
Analysis (``DERA'') staff on the pilot data from 2006 through 2018,\21\ 
and the Exchange's review of the pilot data from 2019 through 2021, the 
size of the market for P.M.-settled SPX options (including quarterly, 
weekly, EOM and third Friday expirations) since 2007 has grown from a 
trivial portion of the overall market to a substantial share (from 
around 0.1% of open interest in 2007 to 30% in 2021).\22\ Notional 
value of open interest in P.M.-settled SPX options increased from 
approximately a median of $1.5 billion in 2007 to $1.9 trillion in 
2021, approximately 1260 times its value in 2007. Notional open 
interest in A.M.-settled SPX options was already hovering around a 
median of $1.4 trillion in 2007, and it has since increased to 
approximately $4.4 trillion in 2021. It is also important to note that 
open interest on expiring P.M.-settled SPX options, as compared to 
A.M.-settled options, is spread out across a greater number of 
expiration dates, which results in a smaller percentage of open 
interest expiring on any one date, thus mitigating concerns that SPXPM 
option expiration may have a disruptive effect on the market.\23\ Daily 
trading volume in P.M.-settled SPX options has increased from a median 
of about 700 contracts in 2007 to nearly 1.9 million contracts in 
2021,\24\ and now exceeds trading volume in A.M.-settled SPX options.
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    \21\ See DERA Staff PM Pilot Memo, at 13 (``Option settlement 
quantity data for A.M.- and P.M.-settled options were obtained from 
the Cboe, including the number of contracts that settled in-the-
money for each exchange-traded option series on the S&P 500 index . 
. . on expiration days from January 20, 2006 through December 31, 
2018. Daily open interest and volume data for [SPX] option series 
were also obtained from Cboe, including open interest data from 
January 3, 2006 through December 31, 2018 and trading volume data 
from January 3, 2006 through December 31, 2018.'')
    \22\ The DERA staff study reviewed and provided statistics for 
market share, median notional value of open interest and median 
volume in 2007 and in 2018. The Exchange provides updated statistics 
for market share, median notional value of open interest and median 
volume in 2021, replacing the 2018 statistics provided in the 
Commission staff study.
    \23\ See DERA Staff PM Pilot Memo, at 2.
    \24\ The Exchange notes that the DERA staff study used two-sided 
volume data for the median volume in 2007 and in 2018; therefore, 
the Exchange provides two-sided volume data for the median volume in 
2021.
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    Moreover, the DERA staff study of the P.M.-settled SPX options 
pilot data (2006 through 2018) did not identify any significant 
economic impact on S&P 500 futures,\25\ the S&P 500, or the underlying 
component securities of the S&P 500 surrounding the close. For purposes 
of the study, volatility was by and large measured by using the 
standard deviation \26\ of one-minute returns of S&P 500 futures values 
and the index value during regular hours on each day reviewed 
(excluding the first and last 15 minutes of trading) and then compared 
with the standard deviation of one-minute returns (for S&P 500 futures, 
the S&P 500, and the underlying component securities of the S&P 500) 
over the last 15 minutes of a trading day.\27\ Using this as a general 
measure,\28\ the DERA staff study then reviewed whether, and to what 
extent, the settlement quantity of SPXPM options and the levels of open 
interest in SPXPM options on expiration days (as compared to non-
expiration days) may be associated with general price volatility and 
price reversals for S&P 500 futures, the S&P 500, and the underlying 
component securities of the S&P 500 near the close. From its review of 
the study, the Exchange agrees that, although volatility before the 
market close is generally higher than during the rest of the trading 
day, there is no evidence of any significant adverse economic impact to 
the futures, index, or underlying index component securities markets as 
a result of the quantity of P.M.-settled SPX options that settle at the 
close or the amount of expiring open interest in P.M.-settled SPX 
options. For example, the largest settlement event that occurred during 
the time period of the study (a settlement of $100.4 billion of 
notional on December 29, 2017) had an estimated impact on the futures 
price of only approximately 0.02% (a predicted impact of $0.54 relative 
to a closing futures price of $2,677).
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    \25\ Futures on the S&P 500 experience high volume and liquidity 
both before and after the close of the underlying market. Therefore, 
futures are a useful measure of abnormal volatility surrounding the 
close and the open. See DERA Staff PM Pilot Memo, at 14. The 
Exchange agrees with this approach.
    \26\ Standard deviation applied to a rate of return (in this 
case, one-minute) of an instrument can indicate that instrument's 
historical volatility. The greater the standard deviation, the 
greater the variance between price and the mean, which indicates a 
larger price range, i.e., higher volatility.
    \27\ For example, if on a particular day the standard deviation 
of one-minute returns between 3:45 p.m. ET and 4:00 p.m. ET is 0.004 
and the standard deviation of returns from 9:45 a.m. ET to 3:45 p.m. 
ET is 0.002, this metric would take on a value of 2 for that day, 
indicating that volatility during the last 15 minutes of the trading 
day was twice as high as it was during the rest of the trading day. 
See DERA Staff PM Pilot Memo, at 15; see also DERA Staff PM Pilot 
Memo, at Section V, which discusses in detail the metrics used to 
measure, for the purposes of the study, the extent to which the 
market may experience abnormal volatility surrounding SPXPM option 
settlement.
    \28\ See DERA Staff PM Pilot Memo, at Section V, which discusses 
in detail the metrics used to measure, for the purposes of the 
study, the extent to which the market may experience abnormal 
volatility surrounding SPXPM option settlement.
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    In particular, the DERA staff study found that an additional P.M.-
settled SPX options settlement quantity equal to $10 billion in 
notional value is associated with a marginal impact on futures prices 
during the last 15 minutes of the trading day of only about $0.06 
(where the hypothetical index level is 2,500), additional expiring open 
interest in P.M.-settled SPX options equal to $10 billion in notional 
value is associated with a marginal impact on futures prices during the 
last 15 minutes of the trading day of only about $0.05 (assumed index 
level is 2,500). Also, an additional increase in settlement quantity or 
in expiring open interest, each equal to $20 million in notional value, 
did not result in any meaningful futures price reversals near the close 
(neither was

[[Page 4268]]

found to cause a price reversal of over one standard deviation \29\).
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    \29\ See supra note 26.
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    Likewise, the study identified that an additional total P.M.-
settled SPX options settlement quantity equal to $10 billion in 
notional value corresponds to price movement in the S&P 500 of only 
about $0.08 (assuming an index level of 2,500) during the last 15 
minutes of the trading day, and that additional expiring open interest 
equal to $10 billion in notional value corresponds to a price movement 
in the S&P 500 of only about $0.06 (assuming an index level of 2,500) 
during the last 15 minutes of the trading day. The study also 
identified that it would take an increase of $34 billion in notional 
value of total settlement quantity and of expiring open interest for 
one additional S&P 500 price reversal of greater than two standard 
deviations to occur in the last 15 minutes before the market close. 
Also, regarding potential impact to S&P 500 component securities, it 
would take an increase in total P.M.-settled SPX options settlement 
quantity equal to $20 billion to effect a price movement of only 
approximately $0.03 for a $200 stock, an increase in expiring open 
interest in P.M.-settled SPX options equal to $10 billion to effect a 
price movement less than half a standard deviation, and an increase in 
total P.M.-settled SPX settlement quantity equal to $7 billion to 
achieve a price reversal greater two standard deviations.
    The study employed the same metrics to determine whether there is 
greater price volatility for S&P 500 futures, the S&P 500, and the 
component securities of the S&P 500 related to SPXPM option settlements 
during an environment of high market volatility (i.e., on days in which 
the VIX Index was in the top 10% of closing index values) and did not 
identify indicators of any significant economic impact on these markets 
near the close as a result of the P.M.-settled SPX options 
settlement.\30\ In addition to this, the DERA staff study, applying the 
same metrics and analysis as for P.M.-settled SPX options to A.M.-
settled SPX options, did not identify any evidence of a statistically 
significant relationship between settlement quantity or expiring open 
interest of A.M.-settled options and volatility near the open.
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    \30\ The Exchange also notes that the study did not identify any 
evidence that less liquid S&P 500 constituent securities experienced 
any greater impact from the settlement of P.M.-settled SPX options.
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    Upon review of the results of the DERA staff study, the Exchange 
agrees that each of the above-described marginal price movements in S&P 
500 futures, the S&P 500, and the S&P 500 component securities affected 
by increases in P.M.-settled SPX options settlement quantity and 
expiring open interest appear to be de minimis pricing changes from 
those that occur over regular trading hours (outside of the last 15 
minutes of the trading day). Further, the Exchange has not observed any 
significant economic impact or other adverse effects on the market from 
similar reviews of its pilot reports and data submitted after 2018.\31\ 
In its review of a sample of the pilot data from 2019 through 2021, the 
Exchange similarly measured volatility over the final fifteen minutes 
of each trading day by taking the standard deviation of rolling one-
minute returns of the S&P 500 level (excluding the first and last 
fifteen minutes of trading) and comparing such with the standard 
deviation of one-minute returns \32\ of the S&P 500 level, over the 
last 15 minutes of a trading day. The Exchange identified an average 
standard deviation ratio of 1.42 for the S&P 500 on non-expiration days 
and an average standard deviation ratio of 1.54 for the S&P 500 on 
expiration days (a ratio between expiration days and non-expiration 
days of 1.09). The Exchange also notes that, using the same 
methodology, it observed that, from 2015 through 2019,\33\ the average 
standard deviation ratio for the S&P 500 on non-expiration days was 
1.11 and the average standard deviation ratio for the S&P 500 on 
expiration days was 1.22 (a ratio between expiration days and non-
expiration days of 1.10). While the average standard deviation ratio on 
both expiration and non-expiration days was higher in 2019 through 2021 
due to overall market volatility, the ratios between the standard 
deviation ratios on expiration days and non-expirations days remained 
nearly identical between the 2015 through 2019 timeframe and the 2019 
through 2021. This shows that, in cases where overall market volatility 
may increase, the normalized impact on expiration days to non-
expiration days generally remains consistent.
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    \31\ Total SPX open interest volumes were examined for 
expiration dates over a roughly two-year period between October 2019 
and November 2021.
    \32\ Calculated at every tick for the prior minute.
    \33\ November 2015 through November 2021.
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    In addition to this, the Exchange notes that the S&P 500 is 
rebalanced quarterly. The changes resulting from each rebalancing 
coincide with the third-Friday of the quarterly rebalancing month 
(i.e., March, June, September, October and December) \34\ and generally 
drive an increase in trading activity from investors that seek to track 
the S&P 500. As such, The Exchange measured volatility on quarterly 
rebalancing dates and found that the average standard deviation ratio 
was 1.62, which suggests more closing volatility on quarterly rebalance 
dates compared to non-quarterly expiration dates (for which the average 
standard deviation ratio was 1.22), thus indicating that the impact 
rebalancing may have on the S&P 500 is greater than any impact that 
P.M.-settled SPX options may have on the S&P 500.
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    \34\ See S&P Dow Jones Indices, Equity Indices Policies & 
Practices, Methodology (August 2021), at 15, available at https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-equity-indices-policies-practices.pdf.
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    The Exchange additionally focused its study of the post-2018 sample 
pilot data on reviewing for potential correlation between excess market 
volatility and price reversals and the hedging activity of liquidity 
providers. As explained in the DERA staff study, potential impact of 
P.M.-settled SPX options on the correlated equity markets is thought to 
stem from the hedging activity of liquidity providers in such 
options.\35\ To determine any such potential correlation, the Exchange 
studied the expected action of liquidity providers that are the primary 
source of the hedging on settlement days. These liquidity providers 
generally delta-hedge their S&P 500 index exposure via S&P 500 futures 
and on settlement day unwind their futures positions that correspond 
with the delta of their in-the-money (ITM) expiring P.M.-settled SPX 
options. Assuming such behavior, the Exchange estimated the Market-On-
Close (``MOC'') \36\ volume for the shares of the S&P 500 component 
securities (i.e., ``MOC share volume'') that could ultimately result 
from the unwinding of the liquidity providers' futures positions by 
equating the notional value of the futures positions that correspond to 
expiring ITM open interest to the number S&P 500 component security 
contracts (based on the weight of each S&P 500 component security). 
That is, the Exchange calculated (an estimate) of the amount of MOC 
volume in the S&P 500 component markets attributable hedging activity 
as a result of expiring ITM P.M.-settled SPX options (i.e., ``hedging 
MOC''). The Exchange then: (1) compared the hedging MOC share volume to 
all MOC share volume on expiration days and non-expiration trading 
days; and (2) compared the notional value of the hedging futures 
positions (i.e., that correspond to expiring ITM P.M.-settled SPX 
options

[[Page 4269]]

open interest) to the notional value of expiring ITM P.M.-settled SPX 
options open interest, the notional value of all expiring P.M.-settled 
SPX options open interest and the notional value of all P.M.-settled 
SPX options open interest.
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    \35\ See DERA Staff PM Pilot Memo, at 10-12.
    \36\ MOC orders allow a market participant to trade at the 
closing price. Market participants generally utilize MOC orders to 
ensure they exit positions at the end of the trading day.
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    The Exchange observed that, on average, there were approximately 
25% more MOC shares executed on expiration days (332 expiration days) 
than non-expiration days (209 non-expiration days). While, at first 
glance, the volume of MOC shares executed on expiration days seems much 
greater than the volume executed on non-expiration days, the Exchange 
notes that much of this difference is attributable to just eight 
expiration days--the quarterly index rebalancing dates captured within 
the scope of the post-2018 sample pilot data. The average MOC share 
volume on the eight quarterly rebalancing dates was approximately 4.8 
times the average MOC share volume on the non-quarterly rebalancing 
expiration dates; again, indicating that the impact rebalancing may 
have on the S&P 500 Index is greater than any impact that P.M.-settled 
SPX options may have on the S&P 500 Index. That is, the Exchange 
observed that the majority of closing volume on quarterly rebalance 
dates is driven by rebalancing of shares in in the S&P 500, and not by 
P.M.-settled SPX options expiration-related hedging activity. 
Notwithstanding the MOC share volume on quarterly rebalancing dates, 
the volume of MOC shares executed on expiration days (324 expiration 
days) was only approximately 13% more than that on non-expiration days, 
substantially less than the increase in volume over non-expiration days 
wherein the eight index rebalancing dates are included in expiration 
day volume. In addition to this, the Exchange observed that the hedging 
MOC share volume (i.e., the expected MOC share volume resulting from 
hedging activity in connection with expiring ITM P.M.-settled SPX 
options) was, on average, less than the MOC share volume on non-
expiration days, and was only approximately 20% of the total MOC share 
volume on expiration days, indicating that other sources of MOC share 
volume generally exceed the volume resulting from hedging activity of 
expiring ITM P.M.-settled SPX options and would more likely be a source 
of any potential market volatility.
    The Exchange also observed that, across all third-Friday 
expirations, the notional value of the hedging futures positions was 
approximately 25% of the notional value of expiring ITM P.M.-settled 
SPX options, approximately 3.8% of the notional value of all expiring 
P.M.-settled SPX options, and approximately only 0.5% of the notional 
value of all P.M.-settled SPX options. As such, the estimated hedging 
activity from liquidity providers on expiration days is a fraction of 
the expiring open interest in P.M.-settled SPX options, which, the 
Exchange notes, is only 14% of the total open interest in P.M.-settled 
SPX options; thus, indicating negligible capacity for hedging activity 
to increase volatility in the underlying markets.
    While unrelated to the initial concerns of P.M.-settlement as 
described above, at the request of the Commission, the Exchange 
recently completed an analysis intended to evaluate whether the SPXPM 
Program impacted the quality of the SPX option market. Specifically, 
the Exchange compared values of key market quality indicators 
(specifically, the bid-ask spread \37\ and effective spread \38\) in 
SPXW options both before and after the introduction of Tuesday 
expirations and Thursday expirations for SPXW options on April 18 and 
May 11, 2022, respectively.\39\ Options on the Standard & Poor's 
Depositary Receipts S&P 500 ETF (``SPY'') were used as a control group 
to account for any market factors that might influence key market 
quality indicators. The Exchange used data from January 3, 2022 through 
March 4, 2022 (the two-month period prior to the introduction of SPXW 
options with Tuesday expirations) and data from May 11, 2022 to July 
10, 2022 (the two-month period following the introduction of SPXW 
options with Thursday expirations).\40\ Given the time that as passed 
since the introduction of P.M.-settled SPX options, the Exchange is 
unable to analyze whether the introduction of PM-settled options SPX 
options significantly impacted the market quality of A.M.-settled SPX 
options. The Exchange believes analyzing whether the introduction of 
new SPXW P.M.-settled expirations (i.e., SPXW options with Tuesday and 
Thursday expirations) impacted the market quality of then-existing SPXW 
P.M.-settled expirations (i.e., SPXW options with Monday, Wednesday, 
and Friday expirations) provides a reasonable substitute to evaluate 
whether the introduction of P.M.-settled index options impacted the 
market quality of the SPX market when the pilot began.
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    \37\ The Exchange calculated for each of SPXW options (with 
Monday, Wednesday, and Friday expirations) and SPY Weekly options 
(with Monday, Wednesday, and Friday expirations) the daily time-
weighted bid-ask spread on the Exchange during its regular trading 
hours session, adjusted for the difference in size between SPXW 
options and SPY options (SPXW options are approximately ten times 
the value of SPY options).
    \38\ The Exchange calculated the volume-weighted average daily 
effective spread for simple trades for each of SPXW options (with 
Monday, Wednesday, and Friday expirations) and SPY Weekly options 
(with Monday, Wednesday, and Friday expirations) as twice the amount 
of the absolute value of the difference between an order execution 
price and the midpoint of the national best bid and offer at the 
time of execution, adjusted for the difference in size between SPXW 
options and SPY options.
    \39\ For purposes of comparison, the Exchange paired SPXW 
options and SPY options with the same moneyness and same days to 
expiration.
    \40\ The Exchange observed comparable market volatility levels 
during the pre-intervention and post-intervention time ranges.
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    As a result of this analysis, the Exchange believes the 
introduction of SPX options with Tuesday and Thursday options had no 
significant impact on the market quality of SPXW options with Monday, 
Wednesday, and Friday expirations. With respect to the majority of 
series analyzed, the Exchange observed no statistically significant 
difference in the bid-ask spread or the effective spread of the series 
in the period prior to introduction of the Tuesday and Thursday 
expirations and the period following the introduction of the Tuesday 
and Thursday expirations. While statistically insignificant, the 
Exchange notes that in many series, particularly as they were closer to 
expiration, the Exchange observed that the values of these spreads 
decreased during the period following the introduction of the Tuesday 
and Thursday expirations.\41\
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    \41\ In any series in which the Exchange observed an increase in 
the market quality indicators, the Exchange notes any such increase 
was also statistically insignificant.
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    To further note, given the significant changes in the closing 
procedures of the primary markets in recent decades, including 
considerable advances in trading systems and technology, the Exchange 
believes that the risks of any potential impact of P.M.-, cash-settled 
SPX options on the underlying cash markets are also de minimis.
    The Exchange proposes to make the SPXPM Program permanent as P.M.-
settled index products, particularly SPX options, have become an 
integral part of the Exchange's product offerings, providing investors 
with greater trading opportunities and flexibility. As indicated by the 
significant growth in the size of the market for P.M.-settled SPX 
options, such options have been, and continue to be, well-received and 
widely used by market participants. Therefore, the Exchange wishes to 
be able to continue to provide investors with the ability to trade 
SPXPM options on a permanent basis. The Exchange believes that the 
permanent continuation of the SPXPM Program will serve to maintain the 
status quo by

[[Page 4270]]

continuing to offer a product to which investors have become accustomed 
and have incorporated into their business models and day-to-day trading 
methodologies for nearly ten years. As such, the Exchange also believes 
that ceasing to offer SPXPM options may result in significant market 
disruption and investor confusion. The Exchange has not identified any 
significant impact on market quality nor any unique or prohibitive 
regulatory concerns as a result of the SPXPM Pilot Program, and, as 
such, the Exchange believes that the continuation of the SPXPM Program 
as a pilot, including the use of time and resources to compile and 
analyze quarterly and annual pilot reports and pilot data, is no longer 
necessary and that making the SPXPM Program permanent will allow the 
Exchange to otherwise allocate time and resources to other industry 
initiatives.
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.\42\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \43\ 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.
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78f(b).
    \43\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In particular, the Exchange believes that the making the SPXPM 
Program permanent will allow the Exchange to be able to continue to 
offer SPXPM options--a product of which has become an integral part of 
the Exchange's offerings--on a continuous and permanent basis. Since 
their reintroduction beginning in 2006,\44\ P.M.-settled SPX options 
have been, and continue to be, well-received and widely used by market 
participants, providing investors with greater trading opportunities 
and flexibility. The Exchange believes that the permanent continuation 
of the SPXPM Program 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 by continuing to 
offer a product to which investors have become accustomed and have 
incorporated into their business models and day-to-day trading 
strategies for nearly nine years. As indicated by the significant 
growth in the size of the market for P.M.-settled SPX options, such 
options have been, and continue to be, well-received and widely used by 
market participants. Conversely, the Exchange believes ceasing to offer 
the SPXPM Program may result in significant market disruption and 
investor confusion, as P.M.-settled index products, particularly SPX 
options, have become an integral part of the Exchange's product 
offerings, providing investors with greater trading opportunities and 
flexibility.
---------------------------------------------------------------------------

    \44\ See supra notes 21-24. As described above, the Exchange's 
conclusion is consistent with the analysis in the DERA Staff PM 
Pilot Memo.
---------------------------------------------------------------------------

    The Exchange further believes that making the SPXPM Program 
permanent will remove impediments to and perfect the mechanism of a 
free and open market and a national market system and protect 
investors, while maintaining a fair and orderly market, as the Exchange 
believes that previous concerns (arising in the 1980s) regarding 
options expirations potentially contributing to excess volatility and 
reversals around the close have been adequately diminished. As 
described in detail above, the Exchange has observed no significant 
adverse market impact or identified any meaningful regulatory concerns 
during the nearly nine-year operation of the SPXPM Program as a pilot 
nor during the 15 years since P.M.-settled SPX options were 
reintroduced to the marketplace.\45\ Notably, the Exchange did not 
identify any significant economic impact (including on pricing or 
volatility or in connection with reversals) on S&P 500 futures, the S&P 
500, or the underlying component securities of the S&P 500 surrounding 
the close as a result of the quantity of P.M.-settled SPX options that 
settle at the close or the amount of expiring open interest in P.M.-
settled SPX options, nor any demonstrated capacity for options hedging 
activity to impact volatility in the underlying markets. The Exchange 
also believes the introduction of P.M.-settled SPX options had no 
significant impact on the market quality of A.M.-settled SPX options or 
other options. The Exchange believes this as a result of its analysis 
conducted after the introduction of SPXW options with Tuesday and 
Thursday expirations, which demonstrated no statistically significant 
impact on the bid-ask or effective spreads of SPXW options with Monday, 
Wednesday, and Friday expirations after trading in the SPXW options 
with Tuesday and Thursday expirations began. While SPXW options are 
P.M.-settled and SPX options are A.M.-settled, they are otherwise 
nearly identical products. Therefore, the Exchange believes analyzing 
the impact of new SPXW options on then-existing SPXW options permit the 
Exchange to extrapolate from this data that it is unlikely the 
introduction of P.M.-settled SPXW options significantly impacted the 
market quality of A.M.-settled SPX options when the pilot began. 
Additionally, the significant changes in the closing procedures of the 
primary markets in recent decades, including considerable advances in 
trading systems and technology, has significantly minimized risks of 
any potential impact of P.M.-, cash-settled SPX options on the 
underlying cash markets. As such, the Exchange believes that a 
permanent SPXPM Program does not raise any unique or prohibitive 
regulatory concerns and that such trading has not, and will not, 
adversely impact fair and orderly markets on Expiration Fridays for the 
S&P 500 and its component securities. Further, as the Exchange has not 
identified any significant impact on market quality or any unique or 
prohibitive regulatory concerns as a result of offering SPXPM options, 
the Exchange believes that the continuation of the SPXPM Program as a 
pilot, including the gathering, submission and review of the pilot 
reports and data, is no longer necessary and that making the SPXPM 
Program permanent will allow the Exchange to otherwise allocate time 
and resources to other industry initiatives.
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    \45\ See supra notes 21-24.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Cboe Options 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 making the SPXPM Program permanent will impose any 
unnecessary or inappropriate burden on intramarket competition because 
SPXPM options will continue to be available to all market participants 
who wish to participate in the SPXPM options market. The Exchange 
believes that the significant and sustained growth the P.M.-settled SPX 
options market has experienced since their reintroduction through pilot 
programs indicates strong, continued investor interest and demand,

[[Page 4271]]

warranting a permanent SPXPM Program. The Exchange believes that, for 
the period that P.M.-settled SPX options have been in operation as 
pilot programs, they have provided investors with a desirable product 
with which to trade and wishes to permanently offer this product to 
investors. Furthermore, during the pilot period, the Exchange has not 
observed any significant adverse market effects nor identified any 
regulatory concerns as a result of the SPXPM Program, and, as such, the 
continuation of the SPXPM Program as a pilot, including the gathering, 
submission and review of the pilot reports and data, is no longer 
necessary--a permanent SPXPM Program will allow the Exchange to 
otherwise allocate time and resources to other industry initiatives.
    The Exchange further does not believe that making the SPXPM Program 
permanent will impose any burden on intermarket competition that is not 
necessary or appropriate in furtherance of the purposes of the Act 
because it applies to a class of options listed only for trading on 
Cboe Options. The Exchange notes that other exchanges are free to and 
do offer competing products. To the extent that the permanent offering 
and continued trading of SPXPM options may make Cboe Options a more 
attractive marketplace to market participants at other exchanges, such 
market participants may elect to become Cboe Options market 
participants.

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

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

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. by order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2023-005 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-2023-005. 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-2023-005, and should be submitted 
on or before February 14, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
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    \46\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-01260 Filed 1-23-23; 8:45 am]
BILLING CODE 8011-01-P