Document ID: SEC-2017-0195-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BOX Options Exchange, LLC
Posted Date: 2017-02-08T05:00Z

[Federal Register Volume 82, Number 25 (Wednesday, February 8, 2017)]
[Notices]
[Pages 9886-9891]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-02541]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79936; File No. SR-BOX-2016-50]

Self-Regulatory Organizations; BOX Options Exchange LLC; Order 
Granting Approval of a Proposed Rule Change To Amend Rule 5050 Series 
of Options Contracts Open for Trading To Provide for the Listing and 
Trading on the Exchange of RealDay\TM\ Options Pursuant to a Pilot 
Program

February 2, 2017.

I. Introduction

    On October 26, 2016, BOX Options Exchange LLC (the ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
provide for the listing and trading on the Exchange of RealDay\TM\ 
Options (``RealDay Options'') on a pilot basis. The proposed rule 
change was published for comment in the Federal Register on November 
15, 2016.\3\ The Commission received one comment letter on the proposed 
rule change.\4\ On December 20, 2016, pursuant to Section 19(b)(2) of 
the Act,\5\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to approve or disapprove 
the proposed rule change.\6\ This order approves the proposed rule 
change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79258 (November 8, 
2016), 81 FR 80125 (``Notice'').
    \4\ See Letter from Edward T. Tilly, Chief Executive Officer, 
Chicago Board Options Exchange (``CBOE''), Incorporated, to Brent J. 
Fields, Secretary, Commission, dated December 6, 2016 (``CBOE 
Letter'').
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 79613, 81 FR 95206 
(December 27, 2016). The Commission designated February 13, 2017 as 
the date by which the Commission would either approve or disapprove, 
or institute proceedings to determine whether to approve of 
disapprove, the proposed rule change.

---------------------------------------------------------------------------

[[Page 9887]]

II. Description of the Proposed Rule Change

General Description \7\
---------------------------------------------------------------------------

    \7\ For additional details, including examples provided by the 
Exchange with respect to the proposed operation of RealDay Options, 
see Notice, supra note 3.
---------------------------------------------------------------------------

    Pursuant to a twelve-month pilot program, the Exchange proposes to 
amend its rules to list and trade on the Exchange RealDay Options on 
the SPDR[supreg] S&P 500[supreg] Exchange Traded Fund (``SPY''). The 
Exchange states that RealDay Options are designed and exclusively 
licensed by the RealDay Options Corporation, and would be exclusively 
listed on BOX. RealDay Options would share many characteristics of 
existing standardized options with some distinct variations. Most 
notably, at the commencement of trading of a particular RealDay Option 
and until the close of trading on the last trading day before its 
expiration, the numerical value of the strike price would not be known. 
However, the formula used to calculate the strike price would be fixed 
and known from the time of listing.\8\
---------------------------------------------------------------------------

    \8\ The Exchange describes RealDay Options as true, or real, 
one-day options because they are forward start (or delayed start) 
options with strike increments and a strike price setting formula 
that are fixed from the time of listing, but with numerical strike 
prices determined based on the formula using the closing price of 
SPY from the last trading day before expiration.
---------------------------------------------------------------------------

    The trading of RealDay Options would in essence be divided into two 
periods: The anticipatory period and the active period. The 
anticipatory period would be the period of time from the day the option 
is listed up until the close of trading on the last trading day before 
expiration. The active period would be the expiration day of the 
option. During the anticipatory period, the strike intervals and strike 
price setting formula would be known, but not the numerical value of 
the strike prices, because they would depend on the closing price of 
SPY from the last trading day before expiration. RealDay Options could 
still be traded in the anticipatory period in the same manner as 
standard options on SPY. During the active period, the numerical value 
of the strike prices would be known. Although the active period is only 
one trading day, RealDay Options could be listed for up to nine months 
in advance of the expiration date, but at least two weeks prior to 
their expiration.\9\
---------------------------------------------------------------------------

    \9\ See Proposed Rule 5050(f).
---------------------------------------------------------------------------

    The Exchange has only proposed to list RealDay Options on SPY, but 
the Exchange states that it may seek to list RealDay Options on 
additional securities in the future.\10\ According to the Exchange, it 
has proposed to list RealDay Options initially on SPY due to the vast 
liquidity in the security, which the Exchange states to be the largest 
and most actively traded Exchange Traded Fund (``ETF'') in the United 
States.\11\
---------------------------------------------------------------------------

    \10\ See Notice, supra note 3, at 80126 (representing that, if 
it were to seek to list RealDay Options on additional securities, 
the Exchange would use the approval process under Form 19b-4).
    \11\ See Notice, supra note 3, at 80126.
---------------------------------------------------------------------------

Strike Price, Strike Intervals, Settlement and Exercise Price

    While the numerical value of the strike prices for RealDay Options 
would not be known until the close of trading on the last trading day 
before expiration, the strike intervals and strike price setting 
formula would be fixed from inception.\12\ The formula would involve 
multiplying the closing price of SPY from the last trading day before 
expiration (``Strike Setting Price'') by the Strike Multiplier.\13\ In 
effect, the strike price would stay at the same percentage relationship 
to the price of SPY from the time of listing. The Exchange proposes to 
only list up to a maximum of seven strike prices for each expiration 
date, consisting of up to three strike prices with a price greater than 
the Strike Setting Price, three strike prices with a price less than 
the Strike Setting Price, and one strike price equal to the Strike 
Setting Price.\14\ The Exchange proposes to have discretion in 
determining the number of strike prices that would be listed per 
expiration, provided that the strike prices satisfy these restrictions. 
Additionally, the Exchange would be required to always list the strike 
price that is equal to the Strike Setting Price for each RealDay 
Options expiration. The Exchange proposes to have the discretion to 
determine not to list in-the-money (``ITM'') put or call options for 
any of the seven strike prices,\15\ as the Exchange believes the value 
of RealDay Options is in the instruments that are at-the-money and out-
of-the-money. Similar to other options products listed by the Exchange, 
the Exchange proposes to allow for the addition of strike prices after 
the initial listing of a RealDay Option, provided that the Exchange 
does not list more than the seven strike prices permitted by the 
guidelines described above.\16\
---------------------------------------------------------------------------

    \12\ See proposed Rule 5050(f)(8).
    \13\ The ``Strike Multiplier'' is the decimal equivalent of the 
percentage strike of the specific option. The Strike Multiplier 
would be expressed with three decimal places. For example, an option 
that is equal to the Strike Setting price would be 100%, making the 
Strike Multiplier 1.000.
    \14\ See proposed Rule 5050(f)(2).
    \15\ See proposed Rule 5050(f)(2)(ii). The ITM puts that the 
Exchange may decide to not list are those corresponding to the three 
strike prices that are greater than the Strike Setting Price and the 
ITM call options are those corresponding to the three strike prices 
that are less than the Strike Setting Price.
    \16\ See Notice, supra note 3, at 80127.
---------------------------------------------------------------------------

    The Exchange also proposes additional procedures in determining the 
exact number of strike prices that may be listed for a RealDay 
Option.\17\ Specifically, if the underlying security is priced at or 
above $25.00 per share, the Exchange would be permitted to list up to 
all seven permitted strike prices. If the underlying security is priced 
at or below $10.00 per share, the Exchange would not list any RealDay 
Options on the underlying security. If the underlying security is 
priced between $10.00 and $25.00 per share, the Exchange would only 
list one strike price, which would be equal to the Strike Setting 
Price.
---------------------------------------------------------------------------

    \17\ See proposed Rule 5050(f)(2).
---------------------------------------------------------------------------

    The strike price formula would be used after the close of trading 
on the last trading day before expiration in order to calculate the 
numerical values of the strike prices. Specifically, the strike prices 
would be determined by multiplying the Strike Setting Price by the 
Strike Multiplier. Rather than applying the Exchange's general strike 
price interval rules, the strike prices for RealDay Options would have 
fixed strike intervals of 0.50%.\18\ The strike prices would be rounded 
to the nearest minimum trading increment, if necessary. If SPY does not 
open for trading on the trading day before the expiration date, the 
Exchange proposes to use the last available closing price for SPY as 
the Strike Setting Price.
---------------------------------------------------------------------------

    \18\ See Proposed Rule 5050(f)(3). There would be one strike 
price equal to 100% of the Strike Setting Price (with a Strike 
Multiplier of 1.000), three strike prices greater than then Strike 
Setting Price determined by adding 0.5%, 1.0%, and 1.5%, 
respectively, to the Strike Setting Price (with Strike Multipliers 
of 1.005, 1.010, and 1.015, respectively), and three strike prices 
lower than the Strike Setting Price determined by subtracting 0.5%, 
1.0%, and 1.5%, respectively, from the Strike Setting Price (with 
Strike Multipliers of 0.995, 0.990, and 0.985, respectively).
---------------------------------------------------------------------------

    The Exchange proposes to calculate the exercise and settlement 
price of RealDay Options based on the closing price of SPY on the 
trading day of expiration. The exercise-settlement amount would be 
equal to the difference between the settlement price and the exercise 
price of the option multiplied by 100. Exercise would result in the 
delivery of cash on the business day following expiration. If SPY does 
not open for trading on the trading day of expiration, at the close of 
trading on expiration, RealDay Options would have an exercise price 
that is equal to the

[[Page 9888]]

closing price from the last trading day before expiration.

Other Characteristics

    The Exchange proposes that RealDay Options be P.M. cash-settled and 
have European-style exercise provisions.\19\ These options may expire 
every trading day, including days on which monthly options series, 
Short Term Options Series, and Quarterly Options Series on SPY expire.
---------------------------------------------------------------------------

    \19\ See Proposed Rule 5050(f)(4). See also Notice, supra note 
3, at 80126-27 and 80129-30 (discussing the Exchange's 
representations with respect to the appropriateness of its proposed 
settlement and exercise methodologies for RealDay Options).
---------------------------------------------------------------------------

    The Exchange proposes to list RealDay Options on SPY with the 
symbol ``SPYZ.'' During the anticipatory period, the Exchange proposes 
to list the strike prices as the Strike Multiplier because the 
numerical value of the strike price would not yet be known. The 
Exchange proposes to use three decimal places to indicate the strike 
prices as the Strike Multiplier during the anticipatory period.\20\ 
According to the Exchange, using three decimal places is unique and not 
a practice currently used for options, which the Exchange believes 
would put investors on notice and aware that the Strike Multiplier does 
not represent a strike price of a typical standard option.\21\ The 
Exchange represents that it has explained what the three decimal places 
would represent to data vendors, the Options Clearing Corporation, and 
various market participants, and the Exchange represents that they have 
confirmed that they would be able to handle the three decimal places 
when RealDay Options are launched.\22\ The Exchange also represents 
that it will provide information and education to market participants 
via circular prior to the launch of RealDay Options to further minimize 
any potential investor confusion.\23\
---------------------------------------------------------------------------

    \20\ See Notice, supra note 3, at 80128 (providing an example of 
strike prices for RealDay Options during the anticipatory period).
    \21\ See id. at 80128.
    \22\ See id. at 80128 n.24.
    \23\ See id. at 80128.
---------------------------------------------------------------------------

    After the close of trading on the last trading day before 
expiration, the decimal would be converted into the numerical strike 
price by multiplying the Strike Setting Price by the Strike 
Multiplier.\24\
---------------------------------------------------------------------------

    \24\ See id. at 80129 (providing an example of the conversion 
into the numerical strike prices). The Exchange notes that an 
adjustment to the Strike Setting Price may be needed in order to 
remove the effects of corporate actions, such as cash dividends. If 
a dividend is declared, the Exchange would adjust the Strike Setting 
Price by subtracting the declared dividend before multiplying it by 
the Strike Multiplier. See id. at 80128 n.25.
---------------------------------------------------------------------------

    The Exchange proposes for RealDay Options to overlie 100 shares of 
SPY in the same manner as standard options on SPY. The Exchange's 
standard trading hours for SPY options would also apply to trading in 
RealDay Options. The Exchange proposes to apply margin requirements for 
the purchase and sale of RealDay Options that are identical to the 
margin requirements for standard options on SPY.\25\ The Exchange 
proposes to calculate margin requirements for RealDay Options in the 
same manner as margins for standard options on SPY. The Exchange notes 
that margins would be calculated in the same manner during both the 
anticipatory and active periods. The Exchange states that the strike 
price used for calculating the margin would be the numerical value of 
the strike price using the current price of SPY for the strike setting 
formula.\26\ The Exchange proposes to apply the same minimum trading 
increment of $0.01 to RealDay Options as applicable to standard options 
on SPY.\27\ The Exchange further proposes that the position limits for 
RealDay Options would be the same as the position limits for standard 
options, such that there would be no position or exercise limits for 
RealDay Options on SPY, as with standard options on SPY.\28\ In 
addition, positions in RealDay Options would be aggregated with 
positions in all other options on SPY.
---------------------------------------------------------------------------

    \25\ See Proposed Rule 5050(f)(6). The Exchange notes that 
Options Participants and associated persons are bound by the initial 
and maintenance margin requirements of either CBOE or the New York 
Stock Exchange. See Exchange Rule 10120; see also CBOE Rule 12.3.
    \26\ See Notice, supra note 3, at 80129.
    \27\ See Proposed Rule 5050(f)(5).
    \28\ See Proposed Rule 5050(f)(10). See also Securities Exchange 
Act Release No. 67936 (September 27, 2012), 77 FR 60491 (October 3, 
2012) (SR-BOX-2012-013). The Exchange noted that since the removal 
of any position limits on SPY is subject to a pilot program, if such 
pilot is discontinued and SPY becomes subject to position limits, 
then RealDay Options would become subject to the same position 
limits as SPY options. See Notice, supra note 3, at 80130.
---------------------------------------------------------------------------

    The Exchange proposes to apply Section 4000 of its rules, which is 
designed to protect public customer trading, to trading in RealDay 
Options. Specifically, Exchange Rules 4020(a) and (b) prohibit Order 
Flow Providers (``OFPs'') \29\ from accepting a Public Customer order 
to purchase or write an option, including RealDay Options, unless such 
customer's account has been approved in writing by a designated Options 
Principal of the OFP. Additionally, Exchange Rule 4040 regarding 
suitability is designed to ensure that options, including RealDay 
Options, are sold only to customers capable of evaluating and bearing 
the risks associated with trading in the instrument. Further, Exchange 
Rule 4050 permits OFPs to exercise discretionary power with respect to 
trading options, including RealDay Options, in a Public Customer's 
account only if the OFP has received prior written authorization from 
the customer and the account has been accepted in writing by a 
designated Options Principal. Finally, the Exchange states that 
Exchange Rules 4030 (Supervision of Accounts), 4060 (Confirmation to 
Public Customers), and 4100 (Delivery of Current Options Disclosure 
Documents and Prospectus) would also apply to trading in RealDay 
Options.
---------------------------------------------------------------------------

    \29\ See Rule 100(a)(45). The term OFP means those Options 
Participants representing as agent Customer Orders on BOX and those 
non-Market Maker Participants conducting proprietary trading.
---------------------------------------------------------------------------

    The Exchange represents that it has an adequate surveillance 
program in place for RealDay Options and intends to apply the same 
program procedures that it applies to the Exchange's other options 
products, which the Exchange believes would adequately monitor trading 
in RealDay Options.\30\ The Exchange stated that it is also a member of 
the Intermarket Surveillance Group (``ISG''), the members of which work 
together to coordinate surveillance and investigative information 
sharing in the stock and options markets.
---------------------------------------------------------------------------

    \30\ See Notice, supra note 3, at 80130.
---------------------------------------------------------------------------

    The Exchange further represents that it has the necessary system 
capacity to support the additional quotations and messages that would 
result from the listing and trading of RealDay Options.\31\ The 
Exchange intends to minimize the system capacity required to list 
RealDay Options by limiting the listing to seven strike prices per 
expiration. The Exchange also states that having the discretion to not 
list ITM call or put options would further minimize the required system 
capacity to list RealDay Options.
---------------------------------------------------------------------------

    \31\ See id.
---------------------------------------------------------------------------

Pilot

    The Exchange has filed this proposal on a pilot basis for a period 
of twelve months (the ``Pilot Program'' or ``Pilot Period'').\32\ The 
Exchange further states that, if it were to propose an extension of the 
Pilot Program or propose to make the Pilot Program permanent, the 
Exchange would submit a filing to the Commission proposing such 
amendments.\33\
---------------------------------------------------------------------------

    \32\ See Proposed Rule 5050(f)(9).
    \33\ The Exchange noted that any positions established under the 
pilot would not be impacted by the expiration of the pilot. For 
example, a position in a RealDay Options series that expires beyond 
the conclusion of the pilot period could be established during the 
12-month pilot. If the pilot program were not extended, then the 
position could continue to exist. However, any further trading in 
the series would be restricted to transactions where at least one 
side of the trade is a closing transaction.

---------------------------------------------------------------------------

[[Page 9889]]

    The Exchange proposes to submit a report to the Commission two 
months prior to the expiration date of the Pilot Program (the ``Pilot 
Report'').\34\ The Pilot Report would contain an analysis of volume, 
open interest, and trading patterns examining trading in RealDay 
Options. In addition, for certain series, the Pilot Report would 
provide an analysis of price volatility and trading activity in 
additional option series. In addition to the Pilot Report, the Exchange 
would provide the Commission with periodic interim reports while the 
Pilot Program is in effect that would contain some, but not all, of the 
information contained in the Pilot Report. The Pilot Report would be 
provided to the Commission on a confidential basis.
---------------------------------------------------------------------------

    \34\ See Notice, supra note 3, at 80131.
---------------------------------------------------------------------------

    The Exchange states that the Pilot Report would contain the 
following volume and open interest data for RealDay Options:
    (1) Daily contract trading volume aggregated for all trades, for 
all option series with less than 31 days until expiration;
    (2) daily contract trading volume aggregated by expiration date, 
for all option series with less than 31 days until expiration;
    (3) daily contract trading volume for each individual series;
    (4) daily open interest aggregated for all series, for all option 
series with less than 31 days until expiration;
    (5) daily open interest aggregated for all series by expiration 
date, for all option series with less than 31 days until expiration;
    (6) daily open interest for each individual series;
    (7) statistics on the distribution of trade sizes;
    (8) type of market participant trading (e.g., contract trading 
volume for each market participant type); and
    (9) 5-minute returns, level changes, and trading volume for the S&P 
500 Index, VIX, SPY, IVV, and expiring RealDay options between open and 
close for the first and second Wednesday of the month that is a trading 
day and trading days when standard SPY options expire.
    In addition to the Pilot Report, the Exchange would periodically 
provide the Commission with interim reports of the information listed 
in items (1) through (9) above as required by the Commission while the 
Pilot Program is in effect. These interim reports will also be provided 
on a confidential basis. The initial period of the Exchange's proposed 
Pilot Program is set to expire on February 2, 2018.

III. Summary of Comment Letter

    The Commission received a comment letter from the Chicago Board 
Options Exchange opposing the Exchange's RealDay Options proposal.\35\ 
The commenter argues that the proposal should be disapproved. First, 
the commenter questions whether a RealDay Option can be considered a 
securities option and therefore within the Commission's jurisdiction. 
The commenter asserts that there is no precedent for classifying 
RealDay Options as a securities option \36\ and cites a Seventh Circuit 
decision holding that a contract is an option only if, among other 
things, it ``establish[es] a careful balance among premium, strike 
price, and duration.'' \37\ The commenter notes that, for all but ``a 
tiny portion of its life'' (i.e., one day), a RealDay Option would not 
have a specified strike price and believes that there is a ``serious 
and novel issue about whether [RealDay Options] can be considered a 
securities option--and therefore can fall within the Commission's 
jurisdiction. . . .'' \38\
---------------------------------------------------------------------------

    \35\ See CBOE Letter, supra note 4.
    \36\ See id. at 2.
    \37\ See id. at 2 (citing Chicago Mercantile Exchange v. SEC, 
883 F.2d 537, 546 (7th Cir. 1989)).
    \38\ See id. at 2.
---------------------------------------------------------------------------

    In its filing, the Exchange cited to CBOE's Delayed Start Options 
(``DSOs'') as precedent for the approval of RealDay Options.\39\ The 
commenter argues that RealDay Options are ``fundamentally different'' 
from DSOs. The commenter notes that, in its own filing seeking approval 
for DSOs, it represented that the time interval between setting the 
strike price and expiration initially would be three months, as 
compared to one day for RealDay Options. At the same time, the 
commenter acknowledges that it also stated that it would be able to 
increase or decrease that interval, but maintains that it ``never 
considered reducing that interval so drastically that the DSO would 
live as a fully specified option for but a single day in a much longer 
lifespan.'' \40\
---------------------------------------------------------------------------

    \39\ See Notice, supra note 3, at 80126 n.3; see also id. at 
80127 n.16.
    \40\ See CBOE Letter, supra note 4, at 2.
---------------------------------------------------------------------------

    In addition, the commenter states that it would be unprecedented to 
have a cash-settled option on an ETF.\41\ In its filing, the Exchange 
cites to other cash-settled options, including CBOE's SPX options, as 
support for the notion that cash settlement of options is not 
novel.\42\ The commenter notes that SPX options are index options, 
whereas the proposed RealDay Option would be an ETF option, which the 
commenter notes ``have always been physically settled.'' \43\ The 
commenter also argues that it would be without precedent for RealDay 
Options to have European-style exercise when they would be trading 
alongside physically settled options with American-style exercise on 
the same ETF that might have the exact same strikes and would permitted 
to expire on the same day.\44\
---------------------------------------------------------------------------

    \41\ See id. at 2-3.
    \42\ See Notice, supra note 3, at 80126 n.11.
    \43\ See CBOE Letter, supra note 4, at 2-3.
    \44\ See id. at 3.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\45\ In 
particular, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\46\ which requires, among other things, 
that the rules of a national securities exchange be designed to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \45\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \46\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Comment Letter

    The Commission disagrees with the commenter's assertion that, with 
respect to the timing of strike price setting, there is no precedent 
for RealDay Options or their classification as securities options. As 
noted by both the Exchange and the commenter, the Commission previously 
approved an options product with a strike price not specified at the 
time of issuance (i.e., DSOs).\47\ In its order approving the DSO 
product, the Commission examined the question of whether DSOs should be 
designated as standardized options for purposes of Rule 9b-1 under the 
Act and concluded that DSOs should be so designated.\48\ In concluding 
that the ``lack [of] a specified exercise price at the commencement of 
trading does not detract from [the DSOs'] character as

[[Page 9890]]

options,'' the Commission noted that each DSO series would trade with a 
fixed formula for determining the numerical strike price,\49\ which is 
similar to the operation of RealDay Options. Moreover, although CBOE 
states that, for DSOs, it never considered an active period as short as 
a single day, it acknowledges that its own rule filing seeking approval 
for DSOs stated that it would be able to increase or decrease the 
three-month time interval between setting the strike price and 
expiration. The Commission does not believe that the strike price 
setting feature of RealDay Options is a novel issue, and believes the 
same analysis it applied to DSOs applies to RealDay Options.\50\
---------------------------------------------------------------------------

    \47\ See Securities Exchange Act Release No. 56855 (November 28, 
2007), 72 FR 68610 (December 5, 2007) (SR-CBOE-2006-90).
    \48\ See id. at 68612-13 (discussing the Commission's 
designation of DSOs as standardized options).
    \49\ See id. at 68613.
    \50\ See id.
---------------------------------------------------------------------------

    As noted above, CBOE also asserts that the Exchange's RealDay 
Options proposal is unprecedented because of its proposed settlement 
and exercise methodologies. Among other things, the commenter 
criticizes the Exchange for misleadingly making assertions regarding 
cash settlement and options, noting that while it is not unusual for 
index and currency options to be cash settled, that is not the case 
with ETF options (such as the proposed RealDay Options product). In the 
Notice, the Exchange argues that its proposed settlement and exercise 
methodologies are appropriate for the proposed RealDay Options 
product.\51\ Among other things, the Exchange asserts that there is a 
low potential for manipulation of the settlement value of RealDay 
Options on SPY due to the high cost and regulatory scrutiny that would 
result from any attempted manipulation and the vast liquidity and high 
level of participation among market participants in the market for SPY, 
making manipulation very difficult.\52\ In addition, while the Exchange 
notes that manipulation of the settlement value is unlikely, it 
represents that its current surveillance procedures for its other 
options products will be sufficient to monitor RealDay Options.\53\ The 
Exchange further asserts that this low potential for manipulation and 
its continued monitoring will alleviate any concerns regarding the 
P.M., cash-settled nature of RealDay Options.\54\ According to the 
Exchange, cash settlement helps to mitigate the risk that the price of 
the security could change overnight before the investor would be able 
to liquidate their position, which would undermine the intent of the 
product having an active period designed to cover only a single trading 
day.\55\ The Exchange further notes that P.M. settlement is necessary 
for RealDay Options to prevent events occurring after the close from 
having an effect on the settlement price, which the Exchange believes 
would similarly undermine the intent of RealDay Options to cover only 
one trading day.\56\
---------------------------------------------------------------------------

    \51\ See Notice, supra note 3, at 80126-27.
    \52\ See id. at 80129-30.
    \53\ See id. at 80130.
    \54\ See id. at 80126 and 80129-30.
    \55\ See id. at 80126.
    \56\ See id. at 80127.
---------------------------------------------------------------------------

    The Commission is cognizant that the proposed settlement and 
exercise features of RealDay Options--while they exist in options more 
broadly--would, taken together, be unique. However, given the 
significant liquidity of the underlying ETF for the proposed 
product,\57\ the Commission initially believes that the proposed 
settlement and exercise features can be appropriate for RealDay Options 
on SPY. As discussed above, though the Commission believes that the 
liquidity of SPY and the proposed surveillance of RealDay Options can 
serve to mitigate manipulation concerns, because of the proposed 
features of RealDay Options, including those with respect to settlement 
and exercise, the Commission believes it is appropriate for the product 
to be approved on a pilot basis such that the Commission may further 
review trading in the product to determine whether its proposed 
features including, among other things, cash settlement, continue to be 
appropriate. Importantly, the Commission notes that, if the Exchange 
were to propose listing RealDay Options on any additional underlying 
product (i.e., other than SPY), the Exchange has stated that it would 
seek approval for such product through a proposed rule change and the 
Commission would have to evaluate such different underlying product in 
the context of RealDay Options, and whether or not the proposed 
settlement and exercise features, among other things, for such RealDay 
Options are appropriate.
---------------------------------------------------------------------------

    \57\ See id. at 80126 and 80129-30.
---------------------------------------------------------------------------

Other Issues

    The Commission believes that the Exchange's proposal to impose no 
position limits on RealDay Options is appropriate and consistent with 
the Act. As noted above, the Exchange proposed to initially list 
RealDay Options only on SPY. The Commission notes that SPY options are 
the most actively-traded options in terms of average daily volume. The 
Commission believes that because these options are extremely liquid, 
the potential manipulation and potential market disruption concerns 
that position limits are designed to address are mitigated in the case 
of this product. Moreover, the Commission believes that having no 
position limits for these options may benefit investors by bringing 
additional depth and liquidity to these options without raising 
significant concerns about potential manipulation or potential market 
disruption. Further, the Commission notes that standard options on SPY 
are currently not subject to any position limits under a pilot program, 
and the Exchange has proposed to apply any position limits for standard 
options on SPY if that pilot program were discontinued.\58\
---------------------------------------------------------------------------

    \58\ See id. at 80130.
---------------------------------------------------------------------------

    The Commission also believes that it is consistent with the Act to 
apply margin requirements to the proposed RealDay Options that are 
otherwise applicable to standard options on SPY. The Commission further 
believes that the Exchange's proposed minimum trading increments, 
strike price setting process,\59\ and other aspects of the proposed 
rule change are appropriate and consistent with the Act.
---------------------------------------------------------------------------

    \59\ The Commission notes that, as described above, the Exchange 
has represented that it has informed various market participants 
about the nature of the proposed use of three decimal places to 
represent the Strike Multiplier, that it has ensured that these 
market participants will understand the meaning of and be able to 
handle the three decimal places, and that it will continue to 
further educate market participants on this process to minimize any 
potential investor confusion. See Notice, supra note 3, at 80128 
n.24.
---------------------------------------------------------------------------

    As a national securities exchange, the Exchange is required, under 
Section 6(b)(1) of the Act,\60\ to enforce compliance by its members 
and persons associated with its members with the provisions of the Act, 
Commission rules and regulations thereunder, and its own rules. In this 
regard, other than for certain exercise and settlement features as 
described above,\61\ the Commission notes that trading of RealDay 
Options will be subject to many of the same rules that currently govern 
the trading of other options on the Exchange.\62\ In addition, as noted 
above, the Exchange has asserted that manipulation of the settlement 
value of RealDay Options on SPY will be difficult based on the size and 
liquidity of the market for SPY.\63\ Moreover, the Exchange has 
represented that it has an adequate surveillance program in place for 
RealDay Options on SPY, and will monitor for any potential manipulation 
of the settlement value according to its current

[[Page 9891]]

surveillance procedures.\64\ In approving the proposed listing and 
trading of the proposed RealDay Options, the Commission has also relied 
on the Exchange's representation that it has the necessary systems 
capacity to support the new options series that will result from this 
proposal.\65\
---------------------------------------------------------------------------

    \60\ 15 U.S.C. 78f(b)(1).
    \61\ See supra notes 12-19 and accompanying text.
    \62\ See Exchange Rule 5050.
    \63\ See supra note 52 and accompanying text.
    \64\ See supra note 30 and accompanying text.
    \65\ See supra note 31 and accompanying text.
---------------------------------------------------------------------------

Pilot

    Given the size and liquidity of the market for SPY, the Commission 
believes that the risks of manipulation and potential market disruption 
are significantly mitigated as discussed above. Notwithstanding this 
and the Exchange's representations in this regard, the Commission 
believes that a prudent approach is warranted with respect to the 
Exchange's proposal to list RealDay Options on SPY. To the extent the 
potential for adverse effects with regard to the markets for the SPY 
ETF, the S&P 500 component securities underlying the SPY ETF, or 
RealDay Options on SPY continues to exist, the Exchange's proposal to 
implement this change on a pilot basis should help to address this 
concern. Accordingly, the Commission is approving the proposal on a 
twelve-month pilot basis. Within two months of the end of the Pilot 
Program the Exchange will be required to submit to the Commission the 
Pilot Report. As described in more detail above,\66\ the Pilot Report 
will contain an analysis of volume, open interest, and trading patterns 
examining trading in RealDay Options. In addition, for certain series, 
the Pilot Report will provide an analysis of price volatility and 
trading activity in additional option series. In addition to the Pilot 
Report, the Exchange will provide the Commission with periodic interim 
reports while the Pilot Program is in effect that would contain some, 
but not all, of the information contained in the Pilot Report. The 
Pilot Report will be provided to the Commission on a confidential 
basis. Furthermore, if the pilot is not extended or permanently 
approved by the end of the Pilot Program, any position in RealDay 
Options established during the Pilot Program would remain in effect, 
but any further trading in those RealDay Options would be restricted to 
transactions where at least one side of the trade is a closing 
transaction.
---------------------------------------------------------------------------

    \66\ See supra note 34 and accompanying text.
---------------------------------------------------------------------------

    The Commission expects that, throughout the Pilot Program, the 
Exchange will monitor for any problems and collect and analyze on an 
ongoing basis the data and information that the Exchange ultimately 
intends to include in the Pilot Report. The Commission also expects 
that the Exchange will take prompt action, including timely 
communication with the Commission and with other marketplace self-
regulatory organizations responsible for oversight of trading in 
component stocks, should any unanticipated adverse market effects 
develop.
    Based on the Exchange's representations with respect to the 
proposed RealDay Options on SPY and for the foregoing reasons, the 
Commission finds that the proposed rule change is consistent with the 
Act.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\67\ that the proposed rule change (SR-BOX-2016-50) be, and hereby 
is, approved on a twelve-month pilot basis set to expire on February 2, 
2018.
---------------------------------------------------------------------------

    \67\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\68\
---------------------------------------------------------------------------

    \68\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-02541 Filed 2-7-17; 8:45 am]
 BILLING CODE 8011-01-P