Document ID: SEC-2023-0029-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2023-01-17T05:00Z

[Federal Register Volume 88, Number 10 (Tuesday, January 17, 2023)]
[Notices]
[Pages 2647-2651]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-00655]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96623; File No. SR-CBOE-2022-062]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
To Amend Rule 5.24

January 10, 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 December 27, 2022, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 5.24(e).
(additions are italicized; deletions are [bracketed])
* * * * *

Rules of Cboe Exchange, Inc.

* * * * *

Rule 5.24. Disaster Recovery

    (a)-(d) No change.
    (e) Loss of Trading Floor or Trading Pit. If the Exchange trading 
floor or a trading pit(s) becomes inoperable and the Exchange does not 
make a virtual trading floor available in [a]the impacted class(es) 
pursuant to subparagraph (3) below, the Exchange will continue to 
operate with respect to the impacted class(es) in a screen-based only 
environment using a floorless configuration of the System that is 
operational while the trading floor or trading pit(s) facility is 
inoperable. The Exchange will operate using this configuration only 
until the Exchange's trading floor or trading pit(s) facility is 
operational. Open outcry trading in the impacted classes will not be 
available in the event the trading floor or trading pit(s) becomes 
inoperable, except as otherwise set forth in this paragraph (e) below 
and pursuant to Rule 5.26, as applicable.
    (1) Applicable Rules. In the event that the trading floor or a 
trading pit(s) becomes inoperable, trading in the impacted class(es) 
will be conducted pursuant to all applicable System Rules, except that 
open outcry Rules will not be in force for the impacted class(es), 
including but not limited to the Rules (or applicable portions of the 
Rules) in Chapter 5, Section G, and as follows [(subparagraphs (A) 
through (C) will be effective until June 20, 2021)]:
    (A) notwithstanding the introductory paragraphs of Rules 5.37 and 
5.73, an order for the account of a Market-Maker with an appointment in 
the applicable class on the Exchange may be solicited for the 
Initiating Order submitted for execution against an Agency Order in any 
exclusively listed index option class into a simple AIM Auction 
pursuant to Rule 5.37 or a simple FLEX AIM Auction pursuant to Rule 
5.73; and
    [(B) with respect to complex orders in any exclusively listed index 
option class:
    (1) notwithstanding Rule 5.4(b), the minimum increment for bids and 
offers on complex orders with any ratio equal to or greater than one-
to-twenty-five (0.04) and equal to or less than twenty-five-to-one 
(25.00) is $0.01 or greater, which may be determined by the Exchange on 
a class-by-class basis, and the legs may be executed in $0.01 
increments; and
    (2) notwithstanding the definition of ``complex order'' in Rule 
1.1, for purposes of Rule 5.33, the term ``complex order'' means a 
complex order with any ratio equal to or greater than one-to-twenty-
five (0.04) and equal to or less than twenty-five-to-one (25.00); and]
    ([C]B) the contract volume a Market-Maker trades electronically in 
an impacted class(es) during a time period in which the Exchange 
operates with respect to that class(es) in a screen-based only 
environment will be excluded from determination of whether a Market-
Maker executes more than 20% of its contract volume electronically in 
an appointed class during any calendar quarter, and thus is subject to 
the continuous electronic quoting obligation, as set forth in Rule 
5.52(d).

[[Page 2648]]

    All non-trading rules of the Exchange will continue to apply.
* * * * *
    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 5.24(e). Rule 5.24 describes 
which Trading Permit Holders (``TPHs'') are required to connect to the 
Exchange's backup systems as well as certain actions the Exchange may 
take as part of its business continuity plans so that it may maintain 
fair and orderly markets if unusual circumstances occurred that could 
impact the Exchange's ability to conduct business. This includes what 
actions the Exchange would take if its trading floor became inoperable. 
Specifically, Rule 5.24(e) states if the Exchange trading floor becomes 
inoperable, the Exchange will continue to operate in a screen-based 
only environment using a floorless configuration of the System that is 
operational while the trading floor facility is inoperable. The 
Exchange would operate using that configuration only until the 
Exchange's trading floor facility became operational. Open outcry 
trading would not be available in the event the trading floor becomes 
inoperable.\3\ Rule 5.24(e)(1) also currently states in the event that 
the trading floor becomes inoperable, trading will be conducted 
pursuant to all applicable System Rules, except that open outcry Rules 
would not be in force, including but not limited to the Rules (or 
applicable portions) in Chapter 5, Section G,\4\ and that all non-
trading rules of the Exchange would continue to apply, except as set 
forth in Rule 5.24(e)(1)(A) through (C).
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    \3\ Pursuant to Rule 5.26, the Exchange may enter into a back-up 
trading arrangement with another exchange, which could allow the 
Exchange to use the facilities of a back-up exchange to conduct 
trading of certain of its products. The Exchange currently has no 
back-up trading arrangement in place with another exchange.
    \4\ Chapter 5, Section G of the Exchange's rulebook sets forth 
the rules and procedures for manual order handling and open outcry 
trading on the Exchange.
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    The Exchange proposes several changes to Rule 5.24(e). First, the 
Exchange amends paragraph (e) in various places to that it will apply 
if the trading floor or a specific trading pit(s) becomes inoperable. 
It is possible that only one or more trading pits may be inoperable 
while other trading pits are unimpacted (and thus operable). Permitting 
the Exchange to operate in a screen-based only environment with a 
floorless configuration with respect to only classes impacted by an 
event that causes only part of the trading floor to become inoperable 
will minimize the impact to the Exchange's market and trading 
participants. Amending Rule 5.24(e) apply on a class basis is 
consistent with the current Rule--for example, Rule 5.24(e) would apply 
if the Exchange does not make a virtual trading floor available in a 
class pursuant to Rule 5.24(e)(3).
    Second, the proposed rule change deletes Rule 5.24(e)(1)(B). 
Subparagraph (1)(B) permitted, when the trading floor was inoperable, 
in exclusively listed index classes, complex orders with any ratio 
equal to or greater than one-to-twenty-five and equal to or less than 
twenty-five-to-one to be submitted for electronic execution and 
permitted the minimum increment for bids and offers on those complex 
orders to be $0.01 and the legs of those complex orders to be executed 
in $0.01 increments.\5\ Currently, however, the Exchange permits 
electronic execution of complex orders of any ratio and their legs in 
penny increments. Therefore, the temporary rule for when the trading 
floor is inoperable in current subparagraph (1)(B) is moot and no 
longer necessary.\6\
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    \5\ See Rules 1.1(definition of complex order), 5.4(b), and 
5.33(f)(1). The Exchange notes complex orders with ratios greater 
than three-to-one or less than one-to-three, whether submitted for 
execution electronically or in open outcry, are subject to separate 
priority requirements. These priority requirements would continue to 
apply in any class that operates in a screen-based only environment 
if its applicable trading pit is inoperable. See Rule 5.33(f)(2).
    \6\ The proposed rule change also amends current Rule 
5.24(e)(1)(C) to become subparagraph (B) in light of the deletion of 
current subparagraph (B).
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    Third, the proposed rule change deletes the parenthetical in Rule 
5.24(e)(1). Pursuant to that parenthetical, the rule exceptions set 
forth in the subparagraphs of that Rule that would apply when the 
trading floor was inoperable would be effective only until June 20, 
2021. This timeframe was tied to the Exchange's closing of its trading 
floor in 2020 in response to the COVID-19 pandemic.\7\ However, the 
Exchange believes it is appropriate to permit these temporary rules to 
apply at any time the trading floor (or a trading pit) is inoperable to 
allow it to maintain fair and orderly markets and facilitate trading in 
as continuous manner as possible in the event extraordinary 
circumstances cause the trading floor to become inoperable. These two 
rule exceptions would apply only during times when the Exchange's 
trading floor, or a trading pit(s) as proposed, is inoperable and apply 
only to impacted classes (and subparagraph (e)(1)(A) would continue 
apply only to exclusively listed classes). The current Rules would 
continue to apply when normal conditions exist, and the Exchange offers 
both electronic and open outcry trading. All non-trading rules of the 
Exchange, including business conduct rules, would continue to apply.
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    \7\ See Securities Exchange Act Release No. 88386 (March 13, 
2020), 85 FR 15823 (March 19, 2020).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the and the rules and regulations thereunder applicable to the Exchange 
and, in particular, the requirements of Section 6(b) of the Act.\8\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \9\ 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) \10\ requirement that the rules of 
an exchange not be designed

[[Page 2649]]

to permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ Id.
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    In particular, the Exchange believes the proposed rule change to 
permit the Exchange to operate in a screen-based only environment in a 
floorless configuration with respect to impacted classes if only part 
of the Exchange's trading floor is inoperable will 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. Specifically, if only part of the Exchange's trading floor is 
inoperable due to extraordinary circumstances, the Exchange believes it 
will allow continued execution opportunities for impacted classes while 
permitted unimpacted classes to trade in an uninterrupted manner.
    The Exchange believes the removal of the temporary rule related to 
complex orders will protect the investors and the public interest, as 
the need for this temporary is moot and no longer necessary in the 
rules, as the Exchange currently permits complex orders with any ratio 
to be submitted for electronic execution in penny increments. 
Therefore, deletion of this provision from the Rules will reduce 
potential confusion for investors.
    Finally, the Exchange believes the proposed rule change to permit 
the temporary rules set forth in proposed Rule 5.24(e)(1)(A) and (B) to 
be effective any time the Exchange's trading floor or a trading pit(s) 
(as proposed) is inoperable 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, because these 
Rules minimize any impact on liquidity that may otherwise occur when 
the trading floor (or a trading pit) is in operable. As set forth when 
adopted,\11\ with respect to the provision to permit appointed Market-
Makers to be solicited to trade against an Agency Order submitted into 
a simple AIM Auction (both for FLEX and non-FLEX Options in exclusively 
listed index option classes), the majority of liquidity provided to 
orders executed as part of an open outcry cross is provided by 
appointed Market-Makers. If this liquidity was not available to TPHs in 
an all-electronic environment, there would be significant risk that 
these orders may not receive full execution in a timely manner (or at 
all) and may trade at worse prices than would have otherwise been 
available on the trading floor. The Exchange believes this provision 
minimizes this risk and provide electronic execution and price 
improvement opportunities for these orders, similar to the 
opportunities that are generally available to them on the trading 
floor, which protects customers seeking execution of these orders. As 
set forth in the Rules, all TPHs may submit responses to AIM Auctions, 
all Agency Orders will continue to have an opportunity for price 
improvement, and priority customer orders will continue to have 
priority at each price level.
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    \11\ See Securities Exchange Act Release No. 88386 (March 13, 
2020), 85 FR 15823 (March 19, 2020).
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    Additionally, the Exchange believes the provision to exclude volume 
executed during a time when the trading floor is inoperable from the 
determination of whether a Market-Maker is subject to continuous 
electronic quoting obligations promotes just and equitable principles 
of trade. If this volume were included in this determination, a Market-
Maker not otherwise subject to these obligations may become subject to 
them for reasons outside of the Market-Maker's control. As a result, a 
Market-Maker may become subject to additional obligations that would 
not apply during normal circumstances. This provision has no impact on 
Market-Makers currently subject to continuous electronic quoting 
obligations, as once a Market-Maker becomes subject to that obligation, 
it remains subject to that obligation, even if it executes less than 
20% of its contract volume electronically in a subsequent calendar 
quarter. This provision is solely intended to impact those Market-
Makers who currently are not subject to continuous electronic quoting 
obligations. Without this provision, depending on the length of time 
the trading floor is inoperable, a Market-Maker that has not previously 
exceeded the 20% contract volume threshold and thus is not currently 
subject to continuous electronic quoting obligation could exceed that 
threshold for a calendar quarter, which would then subject it to a new 
obligation that was not in place when the trading floor was operable. 
The Exchange believes it would be unduly burdensome to impose 
obligations on a Market-Maker that are inconsistent with the Market-
Maker's standard business practices as a result of extraordinary 
circumstances outside of the Market-Maker's control, particularly when 
the Exchange expects those circumstances to be temporary. The Exchange 
notes all Market-Makers must comply with the other obligations set 
forth in Rules 5.51 and 5.52, including the obligations related to 
size, two-sided quotes, and competitive quotes.
    The Exchange believes the presence of these temporary rules were 
beneficial to liquidity and thus to investors during the three-month 
closure of the Exchange's trading floor in 2020 and observed no harm to 
investors as a result of these temporary rules. The Exchange believes 
it is appropriate for these two temporary rules to apply any time the 
trading floor or a trading pit is inoperable so that it may maintain 
fair and orderly markets with sufficient liquidity for investors in the 
event any extraordinary circumstances cause the Exchange to close its 
trading floor (or any part thereof).
    The Exchange's Regulatory Division will continue its standard 
routine surveillance reviews for electronic trading as it does today 
and has put together a regulatory plan to surveil the additional 
changes being proposed when any class is operating in a screen-based 
only environment.

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 proposed rule change is 
not intended as a competitive filing, but rather is proposed as part of 
its business continuity plans intended to allow it to maintain fair and 
orderly markets if unusual circumstances cause the Exchange's trading 
floor or a trading pit(s) to become inoperable. The Exchange believes 
the proposed rule change will not burden intramarket competition, as 
any closure of the trading floor (or trading pit) and resulting 
operation in a screen-based only environment in a floorless 
configuration for any class will apply in the same manner to all market 
participants, as all market participants would be able to submit orders 
for electronic execution only in impacted classes. Additionally, the 
Exchange believe the proposed rule change will not burden intermarket 
competition, as it applies solely to the operation of the Exchange's 
trading floor. Other than the two temporary rules (one of which applies 
only to exclusively listed classes), any trading in any class in a 
screen-based only environment would occur in the same manner as it does 
today. Permitting the Exchange to operate in a floorless configuration 
with respect to only impacted classes rather than the entire floor (and 
all classes) if some classes may continue to operate in hybrid 
environment will permit the Exchange to operate its market with as 
minimal interruption as possible in the event extraordinary 
circumstances cause only part of its trading floor to be inoperable.

[[Page 2650]]

    The Exchange does not believe the proposed rule change to permit 
the temporary provision related to AIM contra-parties to apply any time 
the Exchange's trading floor (or trading pit) is inoperable will impose 
any burden on intramarket competition, as it will permit all market 
participants to be solicited to participate in AIM transactions in 
exclusively listed index options. Additionally, the Exchange does not 
believe this proposed rule change will impose any burden on intermarket 
competition, as this provision would apply only to an exclusively 
listed index option(s) impacted by the trading floor or trading pit 
closure, which are available for trading solely on the Exchange. By 
limiting this provision to exclusively listed index options, the 
Exchange believes this will permit competition with other options 
exchange with respect to multi-listed options to continue in the same 
manner as it occurs during normal trading circumstances. The Exchange 
believes the proposed rule change is necessary and appropriate to allow 
it to provide trading in these products (which are only able to trade 
on the Exchange) in an uninterrupted manner to the extent practicable 
under any extraordinary circumstances (not just the ongoing pandemic).
    The Exchange does not believe the proposed rule change to permit 
the temporary provision to exclude contract volume executed during a 
time when the trading floor is inoperable from the determination of 
whether a Market-Maker is subject to continuous quoting obligations at 
any time will not burden intramarket competition, as it will apply in 
the same manner to all Market-Makers. As noted above, this provision 
will have no impact on Market-Makers currently subject to continuous 
electronic quoting obligations, as those will continue to apply. This 
provision will prevent Market-Makers not currently subject to 
continuous electronic quoting obligations who could exceed the 20% 
threshold triggering those obligations solely because the trading floor 
was inoperable. The Exchange believes it would be unduly burdensome to 
subject a Market-Maker to additional obligations because of the 
unavailability of the Exchange facility where that Market-Maker 
conducts the vast majority of its business under normal trading 
circumstances. The Exchange believes this proposed rule change will not 
burden intermarket competition, as it applies solely to continuous 
electronic quoting obligations applicable to Market-Makers of the 
Exchange.

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

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

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

    Because the foregoing proposed rule change does not: (i) 
significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \12\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Commission has waived the five-day prefiling requirement in this 
case.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \14\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \15\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposal may become operative immediately upon filing. The Exchange 
represents that one of its trading pits on the Exchange's trading floor 
recently experienced weather-related water damage, causing the Exchange 
to operate in a screen-based only environment with a floorless 
configuration in one class. The Commission believes that waiving the 
30-day operative delay is consistent with the protection of investors 
and the public interest. The Exchange represents that waiver of the 
operative delay would permit the Exchange to operate in an 
uninterrupted manner as much as practicable if any extraordinary 
circumstance causes a part of the trading floor to become inoperable. 
The Commission notes that the Exchange represents that the Exchange 
operated all classes in a floorless configuration for approximately 
three months in 2020, with temporary rules applying to all classes as 
applicable and observed no negative impact on the market or market 
participants. Accordingly, the Commission hereby waives the operative 
delay and designates the proposal operative upon filing.\16\
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    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ 17 CFR 240.19b-4(f)(6)(iii).
    \16\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2022-062 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-2022-062. 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

[[Page 2651]]

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-2022-062 and should be submitted on or before February 7, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-00655 Filed 1-13-23; 8:45 am]
BILLING CODE 8011-01-P