Document ID: SEC-2019-1996-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2019-12-31T05:00Z

[Federal Register Volume 84, Number 250 (Tuesday, December 31, 2019)]
[Notices]
[Pages 72409-72414]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-28215]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87852; File No. SR-CBOE-2019-122]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Order Granting Accelerated Approval of a Proposed Rule 
Change To Allow the Exchange To Continue To List Classes of Options on 
the MSCI Emerging Markets Index After January 1, 2020

December 23, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on December 12, 2019, Cboe Exchange, Inc. (``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 and, for the reasons 
discussed below, is issuing this order approving the proposed rule 
change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. seeks approval from the Securities and Exchange 
Commission to continue listing classes of options on the MSCI EM Index.
    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 seek approval pursuant to Rule 4.10(i) for 
the continued listing of options on the EM Index (``EM Options''). Rule 
4.10(i) establishes maintenance listing standards that apply to options 
on the EM Index \3\ and also provides that in the event a class of 
index options listed on the Exchange fails to satisfy the maintenance 
listing standards, the Exchange shall not open for trading any 
additional series of options of that class unless the continued listing 
of that class of index options has been approved by the Commission 
under Section 19(b)(2) of the Exchange Act. Specifically, Rule 
4.10(i)(2), requires that the total number of component securities in 
the EM Index

[[Page 72410]]

may not increase or decrease by more than 10% over the last six-month 
period (the ``component securities threshold''). Due to global market 
trends and the overall objectives of the EM Index, as described below, 
the Exchange has become aware that the EM Index will not meet this 
requirement for the next bi-annual index surveillance review of the EM 
Index components as-of January 1, 2020. Thus, the Exchange now seeks 
the Commission's approval for the continued listing of options on the 
EM Index, specifically, in connection with the component securities 
threshold, beginning January 1, 2020, as provided in Rule 4.10(i). The 
Commission's approval would allow the Exchange to continue to open for 
trading additional series of options on such index without interruption 
to the market and investor participation.
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    \3\ As well as the MSCI EAFE, FTSE Emerging and FTSE Developed 
Europe indexes.
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    The EM Index is designed to capture large and mid-cap 
representation across emerging market countries. In particular, it is 
built to ``be flexible enough to adjust quickly to a constantly 
changing opportunity set'', that is, emerging markets.\4\ It seeks ``to 
capitalize on the unique attributes of these vibrant economies'', which 
includes ``superior growth potential''.\5\ Indeed, EM has experienced a 
continuous rise in the number of its component securities. When 
initially listed on the Exchange in 2015, the EM Index consisted of the 
following 23 emerging market country indexes: Brazil, Chile, China, 
Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, 
Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, 
South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. At 
that time, the EM Index had 834 constituents which covered 
approximately 85% of the free float-adjusted market capitalization in 
each country. Since its initial listing, Argentina,\6\ Pakistan,\7\ and 
Saudi Arabia \8\ have joined the list of countries represented in the 
EM Index. Over recent years, the component securities of the EM Index 
have grown to a market capitalization of 5,582,502 (USD Millions) (up 
from 3,219,779 in 2016) and average market capitalization per 
constituent of 4,644 (USD Millions) (up from 3,847 in 2016). In 
addition to this, the components securities have an average daily 
volume of over 42 billion, and an average daily volume per constituent 
of over 35 million. Additionally, the largest constituent in the EM 
Index currently only accounts for 4.5% of the weight of the EM 
Index.\9\
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    \4\ See MSCI Emerging Markets Index brochure (dated May 2019) 
located at: https://www.msci.com/documents/1296102/15035999/USLetter-MIS-EM-May2019-cbr-en.pdf/fb580e1e-d54c-4c68-1314-977bbff69bd7?t=1559125400402.
    \5\ Id.
    \6\ Added in June 2018.
    \7\ Added in June 2017.
    \8\ Added in June 2018.
    \9\ See MSCI Emerging Markets Index fact sheet (dated October 
31, 2019) located at: https://www.msci.com/documents/10199/c0db0a48-01f2-4ba9-ad01-226fd5678111.
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    Indeed, as a result of the growth of the emerging markets 
represented, the index has experienced continued expansion. As of July 
1, 2019, the number of constituents in the EM Index had grown to a 
total of 1,194, and, as of October 31, 2019, a total of 1,202 
constituents. In particular, the most notable expansion has been the 
recent (2018) introduction of Saudi Arabian securities (as indicated 
above) and mainland China component securities \10\ into the EM Index. 
In early 2019, MSCI implemented a two-step inclusion plan for Saudi 
Arabian component securities and a three-step inclusion plan for 
mainland China component securities.\11\ The plan ``phased-in'' 
increases in the weight and number of Saudi Arabian component 
securities, which was completed in August 2019,\12\ and the weight and 
number of mainland China component securities, which was completed in 
November 2019.\13\ The Exchange notes that the cumulative average 
growth rate of the EM Index component securities since 2015 has 
averaged 4.5% every six months. In the six-month window from January 
2019 through July 2019 the EM Index experienced approximately a 6.2% 
increase in component securities; the majority of this increase was a 
direct result of MSCI's first inclusion phase of Saudi Arabian and 
mainland China component security. Though this was a departure from the 
4.5% average every six months, the January 2019 through July 2019 
increase was contained within the 10% threshold pursuant to Rule 
4.10(i)(2). However, as a result of the second inclusion phase for 
Saudi Arabian and mainland China shares in August 2019, coupled with 
the third, and last, inclusion phase for mainland China shares in 
November 2019, the EM Index has surpassed a 10% increase from July 
2019, and therefore, will be non-compliant with the component 
securities threshold for the Exchange's next bi-annual review of the 
component securities as-of January 1, 2020. Specifically, as a result 
of the August 2019 and November 2019 inclusions, the EM Index has 
experienced approximately a 17% increase from July 2019 (1,202 
component securities at this time) to November 2019 (a total of 1,410 
component securities after the November 2019 inclusion). The Exchange 
notes that this significant increase since July 2019 is an isolated 
departure from the 4.5% average six-month increases the EM Index has 
typically and steadily experienced since 2015. The Exchange further 
notes that the component securities threshold was the only threshold 
implicated as a result of MSCI's inclusion plan, and that the other 
threshold tests applicable to the EM Index under Rule 4.10(h) will be 
met as-of January 1, 2019 [sic]. As such, the Exchange respectfully 
requests that the Commission approve the continued listing of options 
on the EM Index in connection with the component securities threshold 
beginning January 1, 2020, as provided in Rule 4.10(i).
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    \10\ China ``A-Shares'', which trade on the Shanghai Stock 
Exchange and Shenzhen Stock Exchange.
    \11\ See MSCI Implementation Q&A: Inclusion of the MSCI 
Argentina, the MSCI Saudi Arabia Indexes and China A Shares in the 
MSCI Emerging Markets Indexes, at 17, 24 (May 2019) located at: 
https://www.msci.com/documents/1296102/af029454-117c-f15c-8d5e-52aa627efa14.
    \12\ See MSCI Emerging Markets Press Release, MSCI Equity 
Indexes August 2019 Index Review (August 7, 2019) located at: 
https://www.msci.com/eqb/pressreleases/archive/MSCI_Aug19_QIRPR.pdf; 
and MSCI Emerging Markets Press Release, MSCI Equity Indexes May 
2019 Index Review (May 13, 2019) located at: https://app2.msci.com/eqb/pressreleases/archive/MSCI_May19_QIRPR.pdf.
    \13\ See MSCI Emerging Markets Press Release, MSCI Equity 
Indexes November 2019 Index review (November 7, 2019) located at: 
https://www.msci.com/eqb/pressreleases/archive/MSCI_Nov19_QIRPR.pdf.
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    The Exchange believes that MSCI's recent inclusion plans are an 
exception to the normal course of the MSCI index reviews. The timing of 
the inclusion plans for the two, rapidly expanding markets arose around 
the same time, due to similar market overhauls separately undertaken by 
Saudi Arabia and China. In the recent years, Saudi Arabian markets have 
increased privatization and implemented several enhancements that 
further opened their markets to international institutional investors, 
while the Chinese government has eased previously strict access 
controls on the their markets.\14\ As a result of these developments, 
MSCI conducted ``extensive global consultation with a large number of 
international institutional investors, including asset owners, asset 
managers, broker/dealers and other market

[[Page 72411]]

participants worldwide,'' \15\ in order to ultimately implement the 
inclusion plans. The Exchange also notes that, although MSCI announced 
the inclusion phase-in plan prior to its implementation, the number of 
component securities actually added (or removed as part of MSCI's 
regular quarterly reviews) in each phase was unknown until the August 
2019 and November 2019 review releases.
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    \14\ See MSCI Press Release, MSCI Will Increase the Weight of 
China A Shares in MSCI Indexes (February 28, 2019) located at: 
https://www.msci.com/documents/10199/238444/China_A_Further_Weight_Increase_PR_Eng.pdf/43f3ee8b-5182-68d4-a758-2968b4206e54; see also MSCI Press Release, Results of the MSCI 2018 
Market Classification Review (June 20, 2018) located at: https://www.msci.com/documents/10199/95fa3628-ff2e-e9cd-53b9-8912329ec40c 
(discussing the decision to include Saudi Arabia).
    \15\ See id.
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    The Exchange notes that the 10% threshold is designed to prevent 
significant adjustments to the number of EM Index constituents, 
particularly decreases that could: (i) Reduce component securities in 
the EM Index to a point that would raise manipulation concerns; or (ii) 
change the general character of the EM Index over which index options 
are issued. The 10% threshold is designed to allow for the more rapid, 
shorter-term changes (e.g., an average 4.5% increase in constituents 
every six-months, and occasional increases from this, like the 6.2% 
increase from January 2019 through July 2019 as a result of the one 
inclusion phase) experienced by emerging markets that the EM Index is 
designed to capture. The current threshold is aligned with the way the 
EM Index has grown over the past four years and is expected to continue 
growing.\16\
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    \16\ The Exchange also notes that the generic listing standards 
applicable to ETPs listed on other national securities exchanges 
(e.g., Cboe BZX Exchange Rule 14.11(c)(3)(A)(ii)) do not include any 
requirements based on the increase or decrease in component 
securities, and instead only require that an ETP based on an index 
that includes non-U.S. component stocks includes at least 20 
component securities, among other diversification, liquidity, and 
market cap requirements. As such, an ETP based on the EM Index would 
not be delisted based on a percentage increase or decrease in 
component securities as long as it continued to have at least 20 
component securities. Therefore, the Exchange believes that the 
proposed threshold is more restrictive than the current standard for 
listing products on the EM Index.
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    As noted above, the 10% threshold is designed to prevent material 
increases that could change the character of the index over which 
broad-based index options are issued. The Exchange does not believe 
that the increase described herein changes the character of the EM 
Index. Unlike an index that is meant to represent a relatively fixed 
constituent count reflection of large-cap stocks, such as the S&P 500 
Index, the EM Index contains mid-cap components and is designed to be 
flexible to change over time as the represented markets change. Given 
the increasingly high number of constituents and capitalization of the 
EM Index, the deep and liquid markets for the securities underlying the 
index, and the low percentage each constituent comprises of the total 
EM Index weight, and normally steady recent growth patterns, the 
concerns that a further increase, even such a significant 17% increase, 
in component securities would change the character of the index or 
allow for potential market manipulation and/or disruption in the 
underlying markets are greatly reduced. As stated above, the 17% 
increase is an outlying departure from the incremental increases the EM 
Index typically experiences.
    The Exchange notes that significant decreases, as opposed to 
increases like those described herein, are more likely to raise 
concerns related to manipulation and/or disruption in the underlying 
markets, although the Exchange does not believe that a decrease in the 
number of constituents in any index, even by an amount greater than 
10%, necessarily gives rise to manipulation concerns. Further, the 
Exchange currently maintains ``watch lists'' made up of countries and 
indexes with large constituent count changes which it reviews at least 
quarterly. The Exchange also conducts intermediate reviews on at least 
a quarterly basis to identify potential compliance concerns in 
connection with the continued listing standards in advance of its 
formal semi-annual index maintenance reviews. If the Exchange 
determines from its reviews that a change in the EM Index's composition 
would affect the protection of investors, it may cease listing series 
on the EM Index pursuant to Rule 4.4, notwithstanding Commission 
approval to continue listing options or if an index is still compliant 
with the component security threshold. The Exchange believes the 
frequency of these reviews will continue to successfully identify and 
address continued listing compliance concerns that the component 
securities threshold is also designed to address for the EM Index.
    The Exchange further notes that EM Options are currently listed for 
trading on the Exchange and that the Exchange generally adds new series 
after an expiration, which allows trading to commence in the new series 
on the first trading day after the expiration date. The Exchange 
currently lists EM options that expire monthly, as well as Friday-
expiring weekly options. In addition to this, the Exchange offers FLEX 
options on this index, which may only be listed if the standard options 
on an index are authorized to be listed. Specifically, without the 
Commission's approval, additional series of weekly EM options may no 
longer be scheduled to be added, nor will additional monthly series 
after expiration on January 17, 2020, which would allow trading to 
commence in the additional series on the next trading day of January 
20, 2020.
    In light of MSCI's November 2019 inclusion, market participants 
have already begun to express concern to the Exchange regarding 
interruption in their trading of series on the EM Index come January 
2020 as a result of non-compliance with the Exchange's component 
securities threshold. Indeed, market participants that intend to write 
optionality with weekly expiration dates in the first weeks of January 
2020 will, instead, have to take their volume OTC. This poses counter 
party risks to which a market participant would not otherwise have 
exposure if series were available on the EM Index. The inability to add 
the EM options would be a detriment to market participants seeking to 
hedge portfolios indexed to the EM Index, positions in ETPs based on 
the EM Index (e.g., EEM), options on EEM and futures on the EM Index, 
and European-traded derivatives on the EM Index. Further, there are 
ETPs that use options on the EM Index as part of their investment 
strategy. Without the ability to add the EM options, these ETPs could 
be unable to achieve their investment objective, to the detriment of 
investors. Additionally, to the extent market participants want to roll 
a position in EM options that expire in January to series at a later 
expiration date and at a favorable or comparable price, they will be 
prevented from doing so without the Commission's approval for continued 
listing. Furthermore, in the time in which the Exchange may not list 
additional series on the EM Index, FLEX trades which may result in the 
creation of new FLEX series will be nullified, which may cause 
confusion and prove burdensome to market participants.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\17\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \18\ 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

[[Page 72412]]

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) \19\ requirement that the rules 
of an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ Id.
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    The Exchange believes that the Commission's approval to continue 
listing options on the EM Index will remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, protect investors and the public interest, because it 
will allow the Exchange to continue to list EM Options in light of the 
recent inclusion plan exceptions to MSCI's normal course of reviews. As 
stated above, the 10% threshold is intended to prevent significant 
changes over shorter periods of time in the EM Index that might 
potentially change the character of the index or make it more 
susceptible to manipulation. Given that the EM Index itself is designed 
to capture and allow for continuous emerging market growth and trends 
and that the 17% constituent increase appears to be only a temporary 
departure from the normal incremental growth experienced by the EM 
Index, the Exchange does not believe that the recent increase changes 
the character of the EM Index or otherwise raises concerns of market 
manipulation and/or disruption in the underlying markets. As a general 
principle, increases in the elements that make up an index, such as 
market capitalization and the weight and number component securities, 
do not in and of themselves do not lead to manipulation and/or 
disruption. This general principle applies to the recent inclusions, 
therefore, the Exchange does not believe the index has become 
susceptible to manipulation and/or disruption as a result. Although 
significant decreases, not increases, would be more likely to raise 
concerns related to manipulation and/or disruption in the underlying 
markets, the Exchange notes that it does not believe that a decrease in 
the number of constituents in any index, even by an amount greater than 
10%, necessarily creates manipulation concerns. The Exchange also does 
not believe that the EM Index is otherwise easily susceptible to 
manipulation, as it is a broad-based index, its component securities 
have a high market capitalization, it has an average daily volume of 
over 42 billion, and no single component comprises more than 4.5% of 
the index. The Exchange also notes that a total component securities 
standard, as provided in Rule 4.10(i)(2), is not essential to the 
continued listing standards for EM Index-based products, and, instead, 
is an additional protection against potential manipulation and/or 
disruption in the underlying securities. Because the EM Index has 
continued to experience incremental increases in component securities 
(notwithstanding the exceptional increase as a result of the 2019 
inclusion plan), capitalization, and market liquidity in line with 
continuous emerging market growth trends and the EM's overall 
investment objectives, the Exchange does not believe that the continued 
listing of the EM Index following the inclusion plan would circumvent 
the additional protections of the component securities threshold nor 
would it affect the protection of investors and the maintenance of a 
fair and orderly market. In addition to this, the Exchange continues to 
maintain and review country and index watch lists, as well as conduct 
intermediate reviews on at least a quarterly basis. Thus, it continues 
to be able to identify potential compliance concerns in connection with 
the continued listing standards and may cease listing series on the EM 
Index at any time if it determines that a change in the index's 
composition would affect the protection of investors.
    As stated above, without the Commission's approval, the Exchange 
would not be able to list new series of weekly or monthly options on 
the EM Index after the January 2020 review. The Exchange believes that 
the Commission's approval to continue listing options on the EM Index 
is necessary for the protection of investors and the public interest, 
as without such, the Exchange will be prevented from adding the weekly 
and monthly EM options. Indeed, market participants that intend to 
write optionality with weekly expiration dates in the first weeks of 
January 2020 will, instead, have to take their volume OTC. OTC poses 
counter party risks for investors that they would not normally 
otherwise choose to be subject to if series on the EM Index were 
available for trading. The inability to add the EM options would be a 
detriment to market participants seeking to hedge positions in ETPs 
based on the EM Index (e.g., EEM), options on EEM and EM futures, and 
European-traded derivatives on the EM Index. Further, there are ETPs 
that use options on the EM Index as part of their investment strategy. 
Without the ability to add the EM options, these ETPs could be unable 
to achieve their investment objective, to the detriment of investors. 
Additionally, market participants that wish to roll a position in EM 
options that expire in January to a position in a series with a later 
expiration month at a favorable or comparable price, will be prevented 
from doing so without this amendment. Furthermore, in the time in which 
the Exchange may not list additional series on EM, FLEX trades which 
may result in the creation of new FLEX series will be nullified, which 
may cause confusion and prove burdensome to market participants. The 
Exchange also notes that since the last inclusion phase was implemented 
in MSCI's November 2019 review, multiple market participants have 
expressed their concern to the Exchange regarding interruption of their 
activity in EM Index series as a result of anticipated non-compliance 
with the component securities threshold.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the continued listing of options 
on the EM Index, and the Commission's approval of which the Exchange 
seeks, would impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The Exchange 
does not believe the continued listing would impose any burden on 
intramarket competition that is not necessary or appropriate in 
furtherance of the Act as it would facilitate the continued, 
uninterrupted trading of options on the EM Index, on which series are 
currently listed and readily available for all market participants to 
trade, as would be the case for series added following the approval for 
the EM Index's continued listing.
    The Exchange does not believe that the continued listing of options 
on the EM Index would impose any burden on intermarket competition that 
is not necessary or appropriate in furtherance of the Act as it does 
not alter the types of products offered by the Exchange in which market 
participants already may choose to participate. The Commission's 
approval would merely allow the Exchange to continue listing certain 
index options in light of the MSCI's recent completion of its inclusion 
plan and the Exchange would continue to adequately surveil for any 
concerning changes.

[[Page 72413]]

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. 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 Exchange 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 rule-comments@sec.gov. Please include 
File Number SR-CBOE-2019-122 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-2019-122. 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 this filing will also 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-2019-122 and should be submitted on 
or before January 21, 2020.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    After careful review, the Commission finds that the Exchange's 
proposal is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\20\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) \21\ of the 
Exchange Act, 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, and not be designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \20\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b)(5).
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    The Commission first notes the Exchange's statement that the 17% 
increase in component securities from July 2019 to November 2019 under 
MSCI's recent inclusion plans is an isolated departure from the 4.5% 
average six-month increases the MSCI EM Index has since 2015. 
Additionally, the Exchange points out that the 10% component-securities 
threshold was the only threshold implicated as a result of MSCI's 
inclusion plan, and that the other threshold tests applicable to the EM 
Index under Rule 4.10(h) will be met as-of January 1, 2020.
    Furthermore, the Exchange explains that the 10% component-
securities threshold under Rule 4.10(i) is designed to prevent 
significant adjustments to the number of EM Index constituents, 
particularly decreases, that could: (i) Reduce component securities in 
the EM Index to a point that would raise manipulation concerns; or (ii) 
change the general character of the EM Index over which index options 
are issued. The Exchange states that the 10% component-securities 
threshold is designed to allow for the more rapid, shorter-term 
changes, such as the recent 4.5% average six-month increases the MSCI 
EM Index has typically and steadily experienced since 2015. The 
Exchange also does not believe that the EM Index is otherwise easily 
susceptible to manipulation, as it is a broad-based index, its 
component securities have a high market capitalization, it has an 
average daily volume of over 42 billion, and no single component 
comprises more than 4.5% of the index. Finally, the Exchange asserts 
that as a general principle, increases in the elements that make up an 
index, such as market capitalization and the weight and number 
component securities, do not in and of themselves lead to manipulation 
and/or disruption; the Exchange then concludes that this general 
principle applies to the recent MSCI inclusions of its EM Index.
    Based on the foregoing and after careful consideration, the 
Commission finds it consistent with Exchange Act to to allow the 
Exchange to open for trading any additional series of options of MSCI 
EM options class notwithstanding the maintence standard set forth in 
Rule 4.10(i). The Commission believes that allowing an exception to the 
10% component-securities threshold under these specific circumstances 
is consistent with the purpose behind Rule 4.10, and therefore, is 
designed to promote just and equitable principles of trade and to 
remove impediments to and perfect the mechanism of a free and open 
market. Specifically, the increase in component securities under the 
recent MSCI inclusion plan does not appear likely to lead to market 
manipulation or disruption. Furthermore, this 17% increase in component 
securities does not appear to change the general character of the EM 
Index over which index options are issued. Accordingly, Commission 
finds that the proposed rule change is consistent with the requirements 
of the Exchange Act.
    The Exchange has requested that Commission finds good cause for 
approving the proposed rule change prior to the 30th day after the date 
of publication of notice of in the Federal Register. The Exchange 
represents that, although MSCI announced the inclusion phase-in plan 
prior to its implementation, the number of component securities 
actually added (or removed as part of MSCI's regular quarterly reviews) 
in each phase was unknown until the August 2019 and November 2019 
review releases. Furthemore, the Exchange asserts that investors and 
other market participants will likely be harmed if the Exchange is not 
able to list new series of weekly or monthly options on the EM Index 
after January 1, 2020. First, market participants that intend to write 
optionality with weekly expiration dates in the first weeks of January 
2020 will, instead, have to take their volume OTC; the Exchange 
believes that OTC poses

[[Page 72414]]

counter party risks for investors that they would not normally 
otherwise choose to be subject to if series on the EM Index were 
available for trading. Next, the Exchange states that the inability to 
add the EM options would be a detriment to market participants seeking 
to hedge positions in ETPs based on the EM Index (e.g., EEM), options 
on EEM and EM futures, and European-traded derivatives on the EM Index. 
Likewise, the Exchange notes that there are ETPs that use options on 
the EM Index as part of their investment strategy. Without the ability 
to add the EM options, these ETPs could be unable to achieve their 
investment objective, which the Exchange believes would be to the 
detriment of investors. Additionally, the Exchange states that market 
participants that wish to roll a position in EM options that expire in 
January to a position in a series with a later expiration month at a 
favorable or comparable price, will be prevented from doing so should 
the Commission not approve this proposal prior to January 1, 2020.
    Based on the foregoing, the Commission believes that good cause 
exists to issue this order approving a one-time exception to the 10% 
component-securities threshold under Rule 4.10(i) prior to the 30th day 
after the date of publication of notice of in the Federal Register. 
Approving the proposed rule change on an accelerated basis should 
protect investors and the public interest from potential harm that 
might arise from a disruption in the listing of classes of options on 
the MSCI Emerging Markets Index. Accordingly, pursuant to Section 
19(b)(2) of the Exchange Act,\22\ the Commission finds good cause to 
approve the proposed rule change on an accelerated basis.
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    \22\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\23\ that the proposed rule change (SR-CBOE-2019-122) be, 
and it hereby is, approved on an accelerated basis.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-28215 Filed 12-30-19; 8:45 am]
 BILLING CODE 8011-01-P