Document ID: SEC-2018-1003-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2018-06-29T04:00Z

[Federal Register Volume 83, Number 126 (Friday, June 29, 2018)]
[Notices]
[Pages 30795-30801]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-13977]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83504; File No. SR-CBOE-2018-045]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
to Exchange Rule 6.2., Hybrid Opening (and Sometimes Closing) System 
(``HOSS'')

June 25, 2018.
    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 June 15, 2018, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The Exchange 
filed the proposal 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

    The Exchange proposes to amend Rule 6.2., Hybrid Opening (and 
Sometimes Closing) System (``HOSS'').
(additions are italicized; deletions are [bracketed])
* * * * *

Cboe Exchange, Inc. Rules

* * * * *
Rule 6.2. Hybrid Opening (and Sometimes Closing) System (``HOSS'')
    (a)-(h) (No change).
    . . . Interpretations and Policies:
    .01 Modified Opening Procedure for Series Used to Calculate the 
Exercise/Final Settlement Values of Volatility Indexes. All provisions 
set forth in Rule 6.2 remain in effect unless superseded or modified by 
this Interpretation and Policy .01. On the dates on which the exercise 
and final settlement values are calculated for options (as determined 
under Rule 24.9(a)(5) or (6)) or (security) futures contracts on a 
volatility index (i.e., expiration and final settlement dates), the 
Exchange utilizes the modified opening procedure described below for 
all series used to calculate the exercise/final settlement value of the 
volatility index for expiring options and (security) futures contracts 
(these option series referred to as ``constituent options'').
    (a) Strategy Orders. All orders for participation in the modified 
opening procedure that are related to positions in, or a trading 
strategy involving, expiring volatility index options or (security) 
futures (``strategy orders''), and any change to or cancellation of any 
such order:
    (i)-(ii) (No change).
    Whether orders are strategy orders for purposes of this Rule 6.2.01 
depends

[[Page 30796]]

upon specific facts and circumstances. The Exchange may also deem order 
types other than those provided above as strategy orders if the 
Exchange determines that to be the case based upon the applicable facts 
and circumstances.
    (b) Non-Strategy Orders. All other orders for participation in the 
modified opening procedure[s] (``non-strategy orders''), and any change 
to or cancellation of any such order, must be received prior to the 
applicable cut-off time (as determined by the Exchange on a class-by-
class basis) in order to participate at the opening price for the 
applicable series, which may be no earlier than 8:25 a.m. and no later 
than the opening of trading in the option series. The Exchange will 
announce all determinations regarding changes to the applicable non-
strategy order cut-off time at least one day prior to implementation.
    (c) Market-Makers. A Market-Maker with an appointment in a class 
with constituent option series may submit bids and offers in those 
series for bona fide market-making purposes in accordance with Rule 8.7 
and the Exchange Act for its market-maker account prior to the open of 
trading for participation in the modified opening procedure. The 
Exchange will deem these bids and offers to be non-strategy orders, and 
will not deem them to be changes to or cancellations of previously 
submitted strategy orders, if:
    (i) The Trading Permit Holder with which the Market-Maker is 
affiliated has established, maintains, and enforces reasonably designed 
written policies and procedures (including information barriers, as 
applicable), taking into consideration the nature of the Trading Permit 
Holder's business and other facts and circumstances, to prevent the 
misuse of material nonpublic information (including the submission of 
strategy orders); and
    (ii) when submitting these bids and offers, the Market-Maker has no 
actual knowledge of any previously submitted strategy orders.
* * * * *
    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
    Cboe Options and Cboe Futures Exchange, LLC (``CFE'') list options 
and futures, respectively, on different volatility indexes that are 
calculated using prices of options traded on Cboe Options.\5\ The final 
settlement value for these derivatives is determined on the morning of 
their expiration date through a special opening quotation (``SOQ'') of 
the volatility index using the opening prices of a portfolio of options 
(for example, the settlement value of VIX options and futures uses the 
opening prices of a portfolio of S&P 500 Index options (``SPX 
options'') that expire approximately 30 days later). On the days when 
the settlement values for these contracts are determined, Cboe Options 
opens the constituent options \6\ for these volatility indexes using 
the modified Hybrid Opening System (``HOSS'') procedure.\7\ The main 
feature of the modified HOSS procedure used to calculate the exercise/
final settlement value of volatility indexes for expiring options and 
(security) futures that distinguishes it from the normal opening 
procedure used on all other days is a cutoff time for the entry of 
strategy orders.\8\ By providing market participants with a mechanism 
to buy and sell constituent options at prices used to calculate the 
final settlement value of the volatility index derivatives, the 
volatility index settlement process is ``tradable.''
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    \5\ These volatility indexes include the Cboe Volatility Index 
(``VIX'') and the Russell 2000 Volatility Index (``RVX''). Options 
expire on an expiration date and settle to an exercise settlement 
value, and futures settle on a final settlement date to a final 
settlement value. For ease of reference, the Exchange will use the 
options terminology throughout this filing when referring to the 
``expiration/final settlement date'' and ``expiration/final 
settlement value'' for volatility index derivatives.
    \6\ ``Constituent options'' are the series used to calculate the 
exercise/final settlement value of the volatility index for expiring 
options and (security) futures contracts.
    \7\ See Rule 6.2, Interpretation and Policy .01.
    \8\ Strategy orders are all orders (defined in Rule 1.1(ooo) as 
a firm commitment to buy or sell option contracts) for participation 
in the modified opening procedure that are related to positions in, 
or a trading strategy involving, volatility index options or 
(security) futures (as discussed below, the proposed rule change is 
adding ``expiring'' to this definition). In general, the Exchange 
considers orders to be strategy orders if they are for (a) option 
series with the expiration that will be used to calculate the 
exercise or final settlement value of the applicable volatility 
index option or futures contract; (b) option series spanning the 
full range of strike prices for the appropriate expiration for 
option series that will be used to calculate the exercise or final 
settlement value of the applicable volatility index option or 
futures contract (not necessarily every available strike price); and 
(c) put options with strike prices at or less than the ``at-the-
money'' strike price and for call options with strike prices greater 
than or at the ``at-the-money'' strike price. Whether orders are 
strategy orders depends upon specific facts and circumstances. The 
Exchange may also deem order types other than those provided above 
as strategy orders if the Exchange determines that to be the case 
based upon the applicable facts and circumstances. The strategy 
order cut-off time may be no earlier than 8:00 a.m. and no later 
than the opening of trading in the series, and is currently 8:20 
a.m. Chicago time. See Rule 6.2, Interpretation and Policy .01.
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    The volatility index settlement process is patterned after the 
process used to settle SPX options. On the days SPX options expire, S&P 
calculates an SOQ of the S&P 500 Index using the opening prices of the 
component stocks in their primary markets. Market participants can 
replicate the exposure of their expiring SPX options by entering orders 
to buy and sell the component stocks of the S&P 500 Index at their 
opening prices. If they are successful, market participants can 
effectively construct a portfolio that matches the value of the SOQ. At 
this point, the derivatives and cash markets converge.
    In a very similar way, the exercise settlement value for volatility 
index derivatives is an SOQ of the volatility index using opening 
prices of the constituent options used to determine the value of the 
index. With respect to VIX, the VIX exercise settlement value is 
calculated using the opening prices of SPX options that expire 
approximately 30 days later. Analogous to the settlement process for 
SPX options, market participants can replicate the exposure of their 
expiring VIX derivatives by entering buy and sell orders in constituent 
SPX options. If they are successful, market participants can 
effectively construct a portfolio of SPX options whose value matches 
the value of the VIX SOQ. By doing so, market participants may make or 
take delivery of the SPX options that will be used to settle VIX 
derivatives.
    A tradable settlement creates the opportunity to convert the 
exposure of an expiring VIX derivative into the portfolio of SPX 
options that will be used to settle the expiring contract. 
Specifically, some market participants

[[Page 30797]]

may desire to maintain the vega, or volatility, risk exposure of 
expiring VIX derivatives. Since VIX derivatives expire 30 days prior to 
the SPX options used to calculate their settlement value, a market 
participant may have a vega risk from its portfolio of index positions 
that the participant wants to continue to hedge after the participant's 
VIX derivatives expire. To continue that vega coverage following 
expiration of a VIX derivative, a market participant may determine to 
trade the portfolio of SPX options used to settle an expiring VIX 
derivative, since those SPX options still have 30 more days to 
expiration. This trade essentially replaces the uncovered vega exposure 
``hole'' created by an expiring VIX derivative.
    Since the VIX settlement value converges with the value of the 
portfolio of SPX options used to calculate the settlement value of VIX 
derivatives, trading this SPX option portfolio mitigates settlement 
risk. This is because, if done properly, the vega exposure obtained in 
the SPX option portfolio will replicate the vega exposure of the 
expiring VIX derivative (i.e., elimination of slippage). Because a 
market participant is converting vega exposure from one instrument 
(expiring VIX derivative) to another (portfolio of SPX options expiring 
in 30 days), the market participant is likely to be indifferent to the 
settlement price received for the expiring VIX derivative. Importantly, 
trading the next VIX derivative expiration (i.e., rolling) will not 
accomplish the conversion of vega exposure since that VIX derivative 
contract would necessarily cover a different period of expected 
volatility and would be based on an entirely different portfolio of SPX 
options.
    To replicate expiring volatility index derivatives on their 
expiration dates with portfolios of constituent options, market 
participants generally submit strategy orders to participate in the 
modified HOSS procedure on volatility index settlement dates. The 
Exchange understands that the entry of strategy orders may lead to 
order imbalances in the option series being used to determine the final 
settlement value. To the extent (1) market participants seeking to 
replicate an expiring VIX derivative position are on one side of the 
market (e.g., strategy order to buy SPX options) and (2) those market 
participants' orders predominate over other orders during the modified 
HOSS procedure, those trades may contribute to an order imbalance prior 
to the open.
    To provide market participants with time to enter additional orders 
and quotes to offset any such imbalances prior to the opening of these 
series, the Exchange established a strategy order cut-off time.\9\ The 
time period after this cut-off time also permits market participants 
to, among other things, update prices of orders and quotes in response 
to changing market conditions until the open of trading.\10\ Generally, 
if a series (1) has a market order imbalance, or (2) is at a price that 
is outside the Exchange prescribed opening width (as described in Rule 
6.2(d)), the series will not open for trading. Prior to the open, the 
Exchange disseminates messages to market participants indicating the 
expected opening price for a series or imbalance information for that 
series (as applicable) to further encourage market participants to 
enter orders and quotes to offset any imbalances, to submit 
competitively priced bids and offers, and to promote a fair and orderly 
opening.
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    \9\ See Securities Exchange Act Release Nos. 52367 (August 31, 
2005), 70 FR 53401 (September 8, 2005) (SR-CBOE-2004-86) 
(established initially for rapid opening system procedure, which is 
no longer used).
    \10\ Pursuant to Rule 6.2, Interpretation and Policy .01(b), the 
Exchange may determine a non-strategy order cut-off time, which may 
be no earlier than 8:25 a.m. and no later than the opening of 
trading. The current non-strategy order cut-off time is the opening 
of trading.
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    In the options market, it is important for Market-Makers to provide 
liquidity to execute against orders submitted by other market 
participants. Pursuant to Rule 8.7, a Market-Maker has general 
obligations to, among other things, engage (to a reasonable degree 
under existing circumstances) in dealings for the Market-Maker's own 
account when there exists, or it is reasonably anticipated that there 
will exist, a lack of price continuity, a temporary disparity between 
the supply of and demand for an option (i.e., an imbalance), to compete 
with other Market-Makers to improve markets in its appointed classes, 
and to update market quotations in response to changed market 
conditions in its appointed classes. Certain types of Market-Makers 
have obligations to facilitate resolution of imbalances and make 
competitive markets, and the proposed rule change is consistent with 
those obligations.\11\ As described above, the entry of strategy orders 
may lead to order imbalances in the option series used to determine the 
final settlement value for expiring volatility index derivatives. In 
order for the Exchange's system to open these series for trading (i.e., 
to resolve order imbalances) and achieve the most competitive pricing 
in these series, Market-Maker participation in the modified HOSS 
procedure is important for adding liquidity and promoting a fair and 
orderly opening and settlement process.
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    \11\ See, e.g., Rules 8.15 and 8.85 (describing obligations of 
Lead-Market-Makers and Designated Primary Market-Makers, 
respectively).
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    The Exchange understands that some Market-Makers may hesitate to 
provide liquidity that could resolve order imbalances, out of a concern 
that adding such liquidity after the strategy order cut-off time could 
be deemed either a new strategy order or a modification to or 
cancellation of an existing strategy order. As a result, this perceived 
risk may lead to reduced liquidity and may exacerbate the time it takes 
to open a series at a competitive price.\12\ The proposed rule change 
encourages Market-Makers to provide liquidity on volatility index 
derivative settlement days by explicitly stating in Rule 6.2, 
Interpretation and Policy .01 that bona fide Market-Maker activity does 
not constitute either a strategy order or a modification to or 
cancellation of a previously submitted strategy order during the 
modified HOSS procedure. The Exchange believes Market-Maker liquidity 
is important to the resolution of order imbalances on volatility index 
settlement days and to the orderly opening of series on such days, due 
to the fact that a series cannot open if there is a market order 
imbalance. Also, Market-Maker liquidity is desirable to advance the 
opening of series at competitive prices on volatility index settlement 
days. The Exchange's system also relies on Market-Maker liquidity to 
open series for trading. Pursuant to Rule 6.2(d), the Exchange's system 
will not open a series for trading if there are no Market-Maker quotes 
present. Additionally, the width of the best Market-Maker quotes on the 
Exchange must be within a certain price range for the System to open a 
series for trading. The Exchange believes the proposed rule change will 
incentivize Market-Maker liquidity on volatility settlement days by 
explicitly stating in the Rules that providing such liquidity will not 
be deemed to constitute either submission of a strategy order or 
modification to or cancellation of a previously submitted strategy 
order.
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    \12\ See Rule 6.2(d).
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    Specifically, proposed Rule 6.2, Interpretation and Policy .01(c) 
states a Market-Maker with an appointment in a class with constituent 
option series may submit bids and offers in those series for bona fide 
market-making purposes in accordance with Rule 8.7 and the Securities 
Exchange Act of 1934 (the ``Act''), for its market-maker account prior 
to the open of trading for participation in the modified opening

[[Page 30798]]

procedure. The Exchange will deem these bids and offers to be non-
strategy orders, and will not deem them to be changes to or 
cancellations of previously submitted strategy orders, if:
    (i) The Trading Permit Holder with which the Market-Maker is 
affiliated has established, maintains, and enforces reasonably designed 
written policies and procedures (including information barriers, if 
applicable), taking into consideration the nature of the business of 
the Trading Permit Holder and other facts and circumstances, to prevent 
the misuse of material nonpublic information (including the submission 
of strategy orders); and
    (ii) when submitting these bids and offers, the Market-Maker has no 
actual knowledge of any previously submitted strategy orders.
    In other words, if a Market-Maker submits bids or offers in 
constituent options on a volatility index derivative settlement day, 
and if such bids and offers are for its market-maker account and 
submitted for purposes of its market-making activities on the Exchange 
(including in accordance with Market-Maker obligations, such as to 
offset imbalances or provide competitive pricing), the Market-Maker may 
submit those bids and offers any time prior to the open of trading, 
including both before and after the strategy order cut-off time. As 
long as the Trading Permit Holder has appropriate procedures in place 
both to prevent the Market-Maker from knowing about the submission of 
strategy orders by other persons within the Trading Permit Holder 
organization with which it is affiliated, and to prevent other persons 
from knowing about the Market-Maker's submission of bids and offers, 
the Exchange will not review such bids and offers for either potential 
impermissible entry of strategy orders, or cancellations of or 
modifications to previously submitted strategy orders.
    Bona fide Market-Maker activity is generally activity consistent 
with Market-Maker requirements under the Act and Cboe Options Rules:
     Pursuant to the Act, a market-maker is a specialist 
permitted to act as a dealer, any dealer acting in the capacity of 
block positioner, and any dealer who, with respect to a security, holds 
himself out (by entering quotations in an inter-dealer communications 
system or otherwise) as being willing to buy and sell such security for 
his own account on a regular or continuous basis.\13\
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    \13\ 15 U.S.C. 78c(a)(38); see also 12 U.S.C. 1851(d)(1)(B) 
(market-making is intended to service ``the reasonably expected 
near-term demand'' of other parties).
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     Pursuant to Rule 8.7, a Market-Maker appointed to a class 
must, among other things, engage to a reasonable degree under existing 
circumstances in dealings for the Market-Maker's own account when there 
exists, or it is reasonably anticipated that there will exist, a lack 
of price continuity, a temporary disparity between the supply of and 
demand for an option (i.e., an imbalance), to compete with other 
Market-Makers to improve markets in its appointed classes, and to 
update market quotations in response to changed market conditions in 
its appointed classes. Additionally, pursuant to Rule 8.7, all quotes a 
Market-Maker submits, including prior to the opening, must comply with 
all requirements, including applicable bid-ask differential and minimum 
size requirements.\14\ Rule 8.7, Interpretation and Policy .01 imposes 
an ongoing price continuity requirement on Market-Makers that applies 
through the opening of trading, as well as during regular trading 
hours.
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    \14\ Rule 6.2, Interpretation and Policy .02 permits the 
Exchange to set different minimum quote size and bid-ask 
differential requirements for opening quotes as those for intraday 
quotes.
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     In addition to these obligations, Market-Makers also 
effect transactions for the purpose of hedging, reducing risk of, 
rebalancing, or liquidating their open positions.\15\
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    \15\ See, e.g., Rule 8.7, Interpretation and Policy .03.
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    As noted above, the Exchange implemented the strategy order cut-off 
time for the operational purpose of providing market participants with 
time to enter additional orders and quotes to offset any such 
imbalances prior to the opening of these series.\16\ The Exchange's 
surveillance procedures to determine market participants' compliance 
with the strategy order cut-off time are separate and distinct from the 
Exchange's surveillance procedures to identify potentially manipulative 
behavior. Therefore, from the Exchange's perspective, whether a Market-
Maker's bids and offers constitute strategy orders is distinct from 
whether the submitting Market-Maker is attempting to engage in 
manipulative behavior. The classification of bona fide Market-Maker 
activity as non-strategy orders will have no impact on the Exchange's 
surveillance procedures to detect activity intended to manipulate the 
settlement value or violate other Rules. Additionally, all Market-Maker 
bids and offers, even though not considered strategy orders pursuant to 
the proposed rule change, will continue to be subject to Exchange 
surveillance procedures that monitor trading in the option series used 
to calculate volatility index settlement values on expiration dates, as 
well as surveillance procedures that monitor Market-Maker activity for 
compliance with Market-Maker obligations in the Rules. This activity 
will merely be excepted from Exchange surveillance procedures 
determining compliance with the operational strategy order cut-off 
time.
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    \16\ See supra note 9.
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    The Exchange believes Market-Makers are more likely to interact 
with and resolve order imbalances on volatility index settlement days 
if they can be confident that their bids and offers submitted for that 
purpose will not be deemed strategy orders or cancellations of or 
modifications to previously submitted strategy orders. As discussed 
above, the purpose of the strategy order cut-off time is to provide 
market participants, including Market-Makers, with sufficient time to 
address imbalances created by strategy orders. Additionally, as 
discussed above, pursuant to Rule 6.2(d), whether a series opens 
depends on the presence of Market-Maker quotes at prices no wider than 
an acceptable price range. Market-Makers are an important source of 
liquidity on the Exchange, and also have various obligations with which 
they must comply. The proposed rule change will provide a Market-Maker 
with an opportunity to provide liquidity on volatility settlement dates 
and to satisfy their Market-Maker obligations, without concern that the 
Exchange may consider such activity to constitute the placing of, or 
cancellations to or modifications of, strategy orders, even if the 
Trading Permit Holder organization with which the Market-Maker is 
affiliated submitted a strategy order.
    The purpose of this proposed change is to accommodate the fact that 
the Trading Permit Holder with which the Market-Maker is affiliated may 
submit a strategy order while the Market-Maker may also be submitting 
bids and offers to accommodate a fair and orderly opening process, by 
among other things, resolving market order imbalances and submitting 
competitively priced bids and offers.
    For example, a Trading Permit Holder organization may have an SPX 
Market-Maker and a separate volatility trading desk. During the 
modified opening procedure on a volatility settlement day, the trading 
strategy of the SPX Market-Maker is to provide markets in SPX options 
(both before and after the strategy order cut-off time), and the 
trading strategy of the volatility trading desk may be to replicate 
Vega exposure by replacing its expiring VIX options positions with 
positions in the SPX

[[Page 30799]]

constituent series. To replicate its Vega exposure, the volatility 
trading desk may enter strategy orders prior to the strategy order cut-
off time. These are separate and distinct trading strategies. If the 
Trading Permit Holder organization has reasonable policies and 
procedures in place such that the SPX Market-Maker has no knowledge of 
the volatility trading desk's submission of strategy orders, and that 
the volatility trader has no knowledge of the SPX Market-Maker's 
submission of bids and offers, the Exchange believes it is appropriate 
for the SPX Market-Maker's bids and offers to not be deemed strategy 
orders, or the modification to or cancellation of the strategy order 
submitted by its affiliated volatility trading desk.
    The Exchange does not believe it is necessary to restrict the bona 
fide market-making activities of a Market-Maker within its appointed 
classes due to other unrelated trading activities that may involve 
submissions of orders deemed to be strategy orders of which the Market-
Maker has no actual knowledge. The proposed rule change expressly 
provides that activity related to a Market-Maker's market-making 
activity in an appointed class will not constitute the submission of a 
strategy order or the cancellation of or modification to a previously 
submitted strategy order.
    The proposed rule change makes clear that a Market-Maker's 
submission of bids and offers for bona fide market-making purposes in 
constituent series is permitted on volatility settlement days through 
the open of trading in the same manner as it is permitted in all in 
series in its appointed classes at all other times. This will encourage 
Market-Makers to continue to submit bids and offers through the open, 
despite other trading activity within the Trading Permit Holder 
organization. This will also ensure Market-Makers can respond to 
imbalances and update their quotes \17\ in accordance with their 
market-making dealings and obligations. The Exchange believes this will 
contribute to price transparency and liquidity in the option series at 
the open, and thus will promote a fair and orderly opening on 
volatility index settlement days. The Exchange continuously evaluates 
the modified HOSS procedure to identify potential enhancements, and 
intends to modify the procedure as it deems appropriate to contribute 
to a fair and orderly opening process. A fair and orderly opening in 
these series benefits all market participants who trade in the 
volatility index derivatives and the constituent options.
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    \17\ As noted above, the Exchange's system will not open a 
series if there is no quote or if the opening quote or price is 
outside an acceptable price range.
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    The proposed rule change would not eliminate a Market-Maker's 
requirements to abide by Exchange Rules 4.1 (Just and Equitable 
Principles of Trade), 4.7 (Manipulation), and 4.18 (Prevention of the 
Misuse of Material, Nonpublic Information). The requirement in the 
proposed rule change that the Trading Permit Holder with which a 
Market-Maker is affiliated must establish, maintain, and enforce 
policies and procedures reasonably designed to ensure the Market-Maker 
will not have knowledge of the submission of strategy orders is 
consistent with requirements of Rule 4.18. The Exchange will continue 
to conduct surveillance to monitor trading in the option series used to 
calculate volatility index settlement values on expiration dates, 
including but not limited to, monitoring entry of strategy orders, or 
modifications to strategy orders, following the cut-off time, as well 
as compliance with other Rules.
    The proposed rule change also makes nonsubstantive changes to add 
paragraph headings and numbering.
    Additionally, the proposed rule change modifies Interpretation and 
Policy .01(a) to state that ``strategy orders'' means all orders for 
participation in the modified opening procedure that are related to 
positions in, or a trading strategy involving, expiring volatility 
index options or (security) futures. The addition of the word 
``expiring'' is a codification of the Exchange's longstanding 
interpretation of the term strategy order. As discussed above, to 
replicate expiring volatility index derivatives on their expiration 
dates with options portfolios, market participants generally submit 
strategy orders to participate in the modified HOSS opening process on 
volatility index settlement dates. The addition of the word 
``expiring'' is consistent with the introductory paragraph in 
Interpretation and Policy .01, which states the modified HOSS procedure 
applies to series used to calculate the exercise/final settlement value 
of the volatility index for expiring options and (security) futures, 
and demonstrates the rule is meant to refer to orders that relate to 
strategies involving expiring volatility index derivatives. Therefore, 
the proposed codification is consistent with this general practice, as 
well as the current rule.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\18\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \19\ 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) \20\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
    \20\ Id.
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    In particular, the Exchange believes the proposed change will 
increase liquidity on volatility index settlement dates, as it will 
remove an impediment that may discourage Market-Makers from submitting 
bids and offers to offset imbalances and update the prices of their 
quotes in response to changing market conditions prior to the open. The 
Exchange believes this additional liquidity may contribute to a fair 
and orderly opening by increasing execution opportunities, reducing 
imbalances in constituent options, and increasing the presence of 
quotes within the acceptable price range, which would benefit all 
market participants who trade in the volatility index derivatives and 
the constituent options. The Exchange does not believe it is necessary 
to restrict the bona fide market-maker activities of a Market-Maker due 
to other unrelated trading activities by the Trading Permit Holder 
organization with which it is affiliated. The Exchange notes that the 
proposed rule change would not impact a Market-Maker's requirements to 
abide by Exchange Rules 4.1 (Just and Equitable Principles of Trade), 
4.7 (Manipulation), and 4.18 (Prevention of the Misuse of Material, 
Nonpublic Information). The requirement in the proposed rule change 
that the Trading Permit Holder with which a Market-Maker is affiliated 
must establish, maintain, and enforce policies and procedures 
reasonably designed to ensure the Market-Maker will not have knowledge 
of the submission of strategy orders is consistent with requirements

[[Page 30800]]

of Rule 4.18. As a result, the Exchange does not believe that proposed 
rule change will be burdensome on Market-Makers.
    The Exchange believes the proposed rule change will contribute to 
price transparency and liquidity in the option series at the open, and 
thus a fair and orderly opening on volatility index settlement days. A 
fair and orderly opening in these series benefits all market 
participants who trade in the volatility index derivatives and the 
constituent options.
    The proposed rule change to add the term ``expiring'' to the 
definition of strategy orders is merely a codification of a current 
Exchange interpretation and is consistent with the definition of 
constituent options in the current rule.

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. Because of the importance of 
Market-Maker liquidity in the options market and the Exchange's need 
for competitive quotes to open a series, the Exchange believes it is 
appropriate for Market-Makers' bids and offers prior to the opening of 
trading, including after the strategy order cut-off time, not be 
considered strategy orders, or cancellations to or modifications of 
previously submitted strategy orders. As discussed above, Market-Makers 
are subject to various obligations under the Rules, and the proposed 
rule change provides them with the ability to satisfy these obligations 
without the risk of their market-making activity being deemed to 
constitute strategy orders or modifications to or cancellations of 
strategy orders. The requirement in the proposed rule change that the 
Trading Permit Holder with which a Market-Maker is affiliated must 
establish, maintain, and enforce policies and procedures reasonably 
designed to ensure the Market-Maker will not have knowledge of the 
submission of strategy orders is consistent with requirements of Rule 
4.18. As a result, the Exchange does not believe the proposed rule 
change will be burdensome on Market-Makers. The Exchange does not 
believe it is necessary to restrict the bona fide market-maker 
activities of a Trading Permit Holder organization due to its other 
unrelated trading activities. The proposed rule change has no impact on 
intermarket competition, as it applies to orders and quotes submitted 
to an SOQ process the Exchange conducts prior to the open of trading in 
certain classes.
    Cboe Options believes that the proposed rule change will relieve 
any burden on, or otherwise promote, competition. The Exchange believes 
the proposed rule change will contribute to price transparency and 
liquidity in constituent options at the open on volatility index 
settlement days, and thus to a fair and orderly opening on those days. 
A fair and orderly opening, and increased liquidity, in these series 
benefits all market participants who trade in the volatility index 
derivatives and the constituent options.
    The proposed rule change to add the term ``expiring'' to the 
definition of strategy orders has no impact on competition, as it is 
merely a codification of a current Exchange interpretation and is 
consistent with the definition of constituent options in the current 
rule.

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 \21\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\22\
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    \21\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \22\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    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-2018-045 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-2018-045. 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-2018-045 and should be submitted on 
or before July 20, 2018.

[[Page 30801]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-13977 Filed 6-28-18; 8:45 am]
 BILLING CODE 8011-01-P