Document ID: SEC-2023-0464-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2023-04-28T04:00Z

[Federal Register Volume 88, Number 82 (Friday, April 28, 2023)]
[Notices]
[Pages 26353-26359]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-08987]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97368; File No. SR-CBOE-2023-018]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Make Permanent the Operation of its 
Flexible Exchange Options Pilot Program Regarding Permissible Exercise 
Settlement Values for FLEX Index Options

April 24, 2023.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 10, 2023, Cboe Exchange, Inc. (``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to make permanent the operation of its Flexible Exchange Options 
(``FLEX Options'') pilot program (``Pilot Program'') regarding 
permissible exercise settlement values for FLEX Index Options. The text 
of the proposed rule change is provided below.

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

Rules of Cboe Exchange, Inc.

* * * * *

Rule 4.21. Series of FLEX Options

    (a) No change.
    (b) Terms. When submitting a FLEX Order for a FLEX Option series 
to the System, the submitting FLEX Trader must include one of each 
of the following terms in the FLEX Order (all other terms of a FLEX 
Option series are the same as those that apply to non-FLEX Options), 
provided that a FLEX Index Option with an index multiplier of one 
may not be the same type (put or call) and may not have the same 
exercise style, expiration date, settlement type, and exercise price 
as a non-FLEX Index Option overlying the same index listed for 
trading (regardless of the index multiplier of the non-FLEX Index 
Option), which terms constitute the FLEX Option series:
    (1)-(4) No change.
    (5) settlement type:
    (A) No change.
    (B) FLEX Index Options. FLEX Index Options are settled in U.S. 
dollars, and may be:
    (i) No change.
    (ii) p.m.-settled (with exercise settlement value determined by 
reference to the reported level of the index derived from the 
reported closing prices of the component securities)[, except for a 
FLEX Index Option that expires on any business day that falls on or 
within two business days of a third Friday-of-the-month expiration 
day for a non-FLEX Option (other than a QIX option) may only be 
a.m.-settled; however, for a pilot period ending the earlier of May 
8, 2023 or the date on which the pilot program is approved on a 
permanent basis, a FLEX Index Option with an expiration date on the 
third-Friday of the month may be p.m.-settled];
* * * * *

    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to make permanent its Pilot Program that 
permits the Exchange to list FLEX Options whose exercise settlement 
value is derived from closing prices on the last trading day prior to 
expiration that expire on or within two business days of a third 
Friday-of-the-month expiration day for a non-FLEX Option (other than 
QIX options) (``FLEX PM Third Friday''). The Securities and Exchange 
Commission (the ``Commission'') approved a Cboe Options rule change 
that, among other things, established a pilot program regarding 
permissible exercise settlement values for FLEX Index

[[Page 26354]]

Options on January 28, 2010.\3\ The Exchange has extended the pilot 
period numerous times, which is currently set to expire on the earlier 
of May 8, 2023 or the date on which the pilot program is approved on a 
permanent basis.\4\ The Exchange hereby requests that the Commission 
approve the FLEX PM Third Friday Pilot Program on a permanent basis.
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    \3\ Securities Exchange Act Release No. 61439 (January 28, 
2010), 75 FR 5831 (February 4, 2010) (SR-CBOE-2009-087) (``Approval 
Order''). The initial pilot period was set to expire on March 28, 
2011, which date was added to the rules in 2010. See Securities 
Exchange Act Release No. 61676 (March 9, 2010), 75 FR 13191 (March 
18, 2010) (SR-CBOE-2010-026).
    \4\ See Securities Exchange Act Release Nos. 64110 (March 23, 
2011), 76 FR 17463 (March 29, 2011) (SR-CBOE-2011-024); 66701 (March 
30, 2012), 77 FR 20673 (April 5, 2012) (SR-CBOE-2012-027); 68145 
(November 2, 2012), 77 FR 67044 (November 8, 2012) (SR-CBOE-2012-
102); 70752 (October 24, 2013), 78 FR 65023 (October 30, 2013) (SR-
CBOE-2013-099); 73460 (October 29, 2014), 79 FR 65464 (November 4, 
2014) (SR-CBOE-2014-080); 77742 (April 29, 2016), 81 FR 26857 (May 
4, 2016) (SR-CBOE-2016-032); 80443 (April 12, 2017), 82 FR 18331 
(April 18, 2017) (SR-CBOE-2017-032); 83175 (May 4, 2018), 83 FR 
21808 (May 10, 2018) (SR-CBOE-2018-037); 84537 (November 5, 2018), 
83 FR 56113 (November 9, 2018) (SR-CBOE-2018-071); 85707 (April 23, 
2019), 84 FR 18100 (April 29, 2019) (SR-CBOE-2019-021); 87515 
(November 13, 2020), 84 FR 63945 (November 19, 2019) (SR-CBOE-2019-
108); 88782 (April 30, 2020), 85 FR 27004 (May 6, 2020) (SR-CBOE-
2020-039); 90279 (October 28, 2020), 85 FR 69667 (November 3, 2020) 
(SR-CBOE-2020-103); 91782 (May 5, 2021), 86 FR 25915 (May 11, 2021) 
(SR-CBOE-2021-031); 93500 (November 1, 2021), 86 FR 61340 (November 
5, 2021) (SR-CBOE-2021-064); 94812 (April 28, 2022), 87 FR 26381 
(May 4, 2022) (SR-CBOE-2022-020); and 96239 (November 4, 2022), 87 
FR 67985 (November 10, 2022) (SR-CBOE-2022-053). At the same time 
the permissible exercise settlement values pilot was established for 
FLEX Index Options, the Exchange also established a pilot program 
eliminating the minimum value size requirements for all FLEX 
Options. See Approval Order, supra note 3. The pilot program 
eliminating the minimum value size requirements was extended twice 
pursuant to the same rule filings that extended the permissible 
exercise settlement values (for the same extended periods) and was 
approved on a permanent basis in a separate rule change filing. See 
id; and Securities Exchange Act Release No. 67624 (August 8, 2012), 
77 FR 48580 (August 14, 2012) (SR-CBOE-2012-040) (Order Granting 
Approval of Proposed Rule Change Related to Permanent Approval of 
Its Pilot on FLEX Minimum Value Sizes).
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    By way of background, when cash-settled \5\ index options were 
first introduced in the 1980s, settlement was based on the closing 
value of the underlying index on the option's expiration date. The 
Commission later became concerned about the impact of P.M.-settled, 
cash-settled index options on the markets for the underlying stocks at 
the close on expiration Fridays. Specifically, certain episodes of 
price reversals around the close on quarterly expiration dates 
attracted the attention of regulators to the possibility that the 
simultaneous expiration of index futures, futures options, and options 
might be inducing abnormal volatility in the index value around the 
close.\6\ Academic research at the time provided at least some evidence 
suggesting that futures and options expirations contributed to excess 
volatility and reversals around the close on those days.\7\ In light of 
the concerns with P.M.-settlement and to help ameliorate the price 
effects associated with expirations of P.M.-settled, cash-settled index 
products, in 1987, the Commodity Futures Trading Commission (``CFTC'') 
approved a rule change by the Chicago Mercantile Exchange (``CME'') to 
provide for A.M. settlement \8\ for index futures, including futures on 
the S&P 500.\9\ The Commission subsequently approved a rule change by 
Cboe Options to list and trade A.M.-settled SPX options.\10\ In 1992, 
the Commission approved Cboe Options' proposal to transition all of its 
European-style cash-settled options on the S&P 500 Index to A.M.-
settlement; \11\ however, in 1993, the Commission approved a rule 
allowing Cboe Options to list P.M.-settled options on certain broad-
based indices, including the S&P 500, expiring at the end of each 
calendar quarter (``Quarterly Index Expirations'') (since adopted as 
permanent).\12\ Starting in 2006, the Commission approved numerous rule 
changes, on a pilot basis, permitting the Cboe Options to introduce 
other index options, including SPX options, with P.M.-settlement. These 
include P.M.-settled index options expiring weekly (other than the 
third Friday) and at the end of each month (``EOM''),\13\ P.M.-settled 
options on the S&P 500 Index that expire on the third Friday-of-the-
month (``SPXPM''),\14\ as well as P.M.-settled Mini-SPX Index (``XSP'') 
options and Mini-Russell 2000 Index (``MRUT'') options expiring on the 
third Friday.\15\
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    \5\ The seller of a ``cash-settled'' index option pays out the 
cash value of the applicable index on expiration or exercise. A 
``physically settled'' option, like equity and ETF options, involves 
the transfer of the underlying asset rather than cash. See 
Characteristics and Risks of Standardized Options, available at: 
https://www.theocc.com/Company-Information/Documents-and-Archives/Options-Disclosure-Document.
    \6\ The close of trading on the quarterly expiration Friday 
(i.e., the third Friday of March, June, September and December), 
when options, index futures, and options on index futures all expire 
simultaneously, became known as the ``triple witching hour.''
    \7\ See Securities and Exchange Commission, Division of Economic 
Risk and Analysis, Memorandum, Cornerstone Analysis of PM Cash-
Settled Index Option Pilots (February 2, 2021) (``DERA Staff PM 
Pilot Memo'') at 5, available at: https://www.sec.gov/files/Analysis_of_PM_Cash_Settled_Index_Option_Pilots.pdf.
    \8\ The exercise settlement value for an A.M.-settled index 
option is determined by reference to the reported level of the index 
as derived from the opening prices of the component securities on 
the business day before expiration.
    \9\ See Securities Exchange Act Release No. 24367 (April 17, 
1987), 52 FR 13890 (April 27, 1987) (SR-CBOE-87-11) (noting that CME 
moved S&P 500 futures contract's settlement value to opening prices 
on the delivery date).
    \10\ See id.
    \11\ See Securities Exchange Act Release No. 30944 (July 21, 
1992), 57 FR 33376 (July 28, 1992) (SR-CBOE-92-09). Thereafter, the 
Commission approved proposals by the options markets to transfer 
most of their cash-settled index products to A.M. settlement.
    \12\ See Securities Exchange Act Release No. 31800 (February 1, 
1993), 58 FR 7274 (February 5, 1993) (SR-CBOE-92-13); and see Rule 
4.13(a)(2)(B); see also Securities Exchange Act Release Nos. 54123 
(July 11, 2006), 71 FR 40558 (July 17, 2006) (SR-CBOE-2006-65); and 
60164 (June 23, 2009), 74 FR 31333 (June 30, 2009) (SR-CBOE-2009-
029).
    \13\ See Securities Exchange Act Release Nos. 62911 (September 
14, 2010), 75 FR 57539 (September 21, 2010) (SR-CBOE-2009-075); 
76529 (November 30, 2015), 80 FR 75695 (December 3, 2015) (SR-CBOE-
2015-106); 78132 (June 22, 2016), 81 FR 42018 (June 28, 2016) (SR-
CBOE-2016-046); and 78531 (August 10, 2016), 81 FR 54643 (August 16, 
2016) (SR-CBOE-2016-046).
    \14\ See Securities Exchange Act Release No. 68888 (February 8, 
2013), 78 FR 10668 (February 14, 2013) (SR-CBOE-2012-120) (the 
``SPXPM Approval Order''). Pursuant to Securities Exchange Act 
Release No. 80060 (February 17, 2017), 82 FR 11673 (February 24, 
2017) (SR-CBOE-2016-091), the Exchange moved third-Friday P.M.-
settled options into the S&P 500 Index options class, and as a 
result, the trading symbol for P.M.-settled S&P 500 Index options 
that have standard third Friday-of-the-month expirations changed 
from ``SPXPM'' to ``SPXW.'' This change went into effect on May 1, 
2017, pursuant to Cboe Options Regulatory Circular RG17-054.
    \15\ See Securities Exchange Act Release Nos. 70087 (July 31, 
2013), 78 FR 47809 (August 6, 2013) (SR-CBOE-2013-055); and 91067 
(February 5, 2021) 86 FR 9108 (February 11, 2021) (SR-CBOE-2020-
116).
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    As stated above, since its inception in 2010, the Exchange has 
continuously extended the FLEX PM Third Friday Pilot Program period 
and, during the course of the FLEX PM Third Friday Pilot Program and in 
support of the extensions of the FLEX PM Third Friday Pilot Program, 
the Exchange has submitted reports to the Commission regarding the 
Pilot Program that detail the Exchange's experience with the Pilot 
Program, pursuant to the FLEX PM Third Friday Pilot Program.\16\ 
Specifically, the Exchange provided the Commission with annual reports 
analyzing volume and open interest for each broad-based FLEX Index 
Options class overlying a third Friday-of-the-month expiration day, 
p.m.-settled FLEX Index Options series. The annual reports also 
contained certain pilot period and pre-pilot period analyses of volume 
and open interest for third Friday-of-the-month expiration days, a.m.-
settled FLEX Index series and third Friday-of-the-month expiration day 
Non-FLEX Index series overlying the

[[Page 26355]]

same index as a third Friday-of-the-month expiration day, p.m.-settled 
FLEX Index option. The annual reports also contained information and 
analysis of FLEX Index Options trading patterns, and index price 
volatility and underlying share trading activity for each broad-based 
index class overlying an Expiration Friday, p.m.-settled FLEX Index 
Option that exceeds certain minimum open interest parameters. The 
Exchange also provided the Commission, on a periodic basis, interim 
reports of volume and open interest.
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    \16\ See supra note 3.
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    Also, during the course of the FLEX PM Third Friday Pilot Program, 
the Exchange provided the Commission with any additional data or 
analyses the Commission requested if it deemed such data or analyses 
necessary to determine whether the Pilot Program was consistent with 
the Exchange Act. The Exchange has made public on its website all data 
and analyses previously submitted to the Commission under the FLEX PM 
Third Friday,\17\ and will continue to make public any data and 
analyses it submits to the Commission while the FLEX PM Third Friday is 
still in effect.
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    \17\ Available at https://www.cboe.com/aboutcboe/legal-regulatory/national-market-system-plans/pm-settlement-spxpm-data.
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    The Exchange has concluded that the FLEX PM Third Friday does not 
negatively impact market quality or raise any unique or prohibitive 
regulatory concerns. The Exchange has not identified any evidence from 
the pilot data indicating that the trading of P.M.-settled FLEX options 
has any adverse impact on fair and orderly markets on Expiration 
Fridays for broad-based indexes or the underlying securities comprising 
those indexes, nor have there been any observations of abnormal market 
movements attributable to P.M.-settled FLEX options from any market 
participants that have come to the attention of the Exchange.
    Based on a study conducted by the Commission's Division of Economic 
and Risk Analysis (``DERA'') staff on the pilot data from 2006 through 
2018,\18\ and the Exchange's review of the pilot data from 2019 through 
2021, the size of the market for P.M.-settled SPX options (including 
quarterly, weekly, EOM and third Friday expirations) since 2007 has 
grown from a trivial portion of the overall market to a substantial 
share (from around 0.1% of open interest in 2007 to 30% in 2021).\19\ 
Notional value of open interest in P.M.-settled SPX options increased 
from approximately a median of $1.5 billion in 2007 to $1.9 trillion in 
2021, approximately 1260 times its value in 2007. Notional open 
interest in A.M.-settled SPX options was already hovering around a 
median of $1.4 trillion in 2007, and it has since increased to 
approximately $4.4 trillion in 2021. It is also important to note that 
open interest on expiring P.M.-settled SPX options, as compared to 
A.M.-settled options, is spread out across a greater number of 
expiration dates, which results in a smaller percentage of open 
interest expiring on any one date, thus mitigating concerns that SPXPM 
option expiration may have a disruptive effect on the market.\20\ Daily 
trading volume in P.M.-settled SPX options has increased from a median 
of about 700 contracts in 2007 to nearly 1.9 million contracts in 
2021,\21\ and now exceeds trading volume in A.M.-settled SPX options.
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    \18\ See DERA Staff PM Pilot Memo, at 13 (``Option settlement 
quantity data for A.M.- and P.M.-settled options were obtained from 
the Cboe, including the number of contracts that settled in-the-
money for each exchange-traded option series on the S&P 500 index . 
. . on expiration days from January 20, 2006 through December 31, 
2018. Daily open interest and volume data for [SPX] option series 
were also obtained from Cboe, including open interest data from 
January 3, 2006 through December 31, 2018 and trading volume data 
from January 3, 2006 through December 31, 2018.'')
    \19\ The DERA staff study reviewed and provided statistics for 
market share, median notional value of open interest and median 
volume in 2007 and in 2018. The Exchange provides updated statistics 
for market share, median notional value of open interest and median 
volume in 2021, replacing the 2018 statistics provided in the 
Commission staff study.
    \20\ See DERA Staff PM Pilot Memo, at 2.
    \21\ The Exchange notes that the DERA staff study used two-sided 
volume data for the median volume in 2007 and in 2018; therefore, 
the Exchange provides two-sided volume data for the median volume in 
2021.
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    Moreover, the DERA staff study of the P.M.-settled SPX options 
pilot data (2006 through 2018) did not identify any significant 
economic impact on S&P 500 futures,\22\ the S&P 500, or the underlying 
component securities of the S&P 500 surrounding the close. For purposes 
of the study, volatility was by and large measured by using the 
standard deviation \23\ of one-minute returns of S&P 500 futures values 
and the index value during regular hours on each day reviewed 
(excluding the first and last 15 minutes of trading) and then compared 
with the standard deviation of one-minute returns (for S&P 500 futures, 
the S&P 500, and the underlying component securities of the S&P 500) 
over the last 15 minutes of a trading day.\24\ Using this as a general 
measure,\25\ the DERA staff study then reviewed whether, and to what 
extent, the settlement quantity of SPXPM options and the levels of open 
interest in SPXPM options on expiration days (as compared to non-
expiration days) may be associated with general price volatility and 
price reversals for S&P 500 futures, the S&P 500, and the underlying 
component securities of the S&P 500 near the close. From its review of 
the study, the Exchange agrees that, although volatility before the 
market close is generally higher than during the rest of the trading 
day, there is no evidence of any significant adverse economic impact to 
the futures, index, or underlying index component securities markets as 
a result of the quantity of P.M.-settled SPX options that settle at the 
close or the amount of expiring open interest in P.M.-settled SPX 
options. For example, the largest settlement event that occurred during 
the time period of the study (a settlement of $100.4 billion of 
notional on December 29, 2017) had an estimated impact on the futures 
price of only approximately 0.02% (a predicted impact of $0.54 relative 
to a closing futures price of $2,677).
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    \22\ Futures on the S&P 500 experience high volume and liquidity 
both before and after the close of the underlying market. Therefore, 
futures are a useful measure of abnormal volatility surrounding the 
close and the open. See DERA Staff PM Pilot Memo, at 14. The 
Exchange agrees with this approach.
    \23\ Standard deviation applied to a rate of return (in this 
case, one-minute) of an instrument can indicate that instrument's 
historical volatility. The greater the standard deviation, the 
greater the variance between price and the mean, which indicates a 
larger price range, i.e., higher volatility.
    \24\ For example, if on a particular day the standard deviation 
of one-minute returns between 3:45 p.m. ET and 4:00 p.m. ET is 0.004 
and the standard deviation of returns from 9:45 a.m. ET to 3:45 p.m. 
ET is 0.002, this metric would take on a value of 2 for that day, 
indicating that volatility during the last 15 minutes of the trading 
day was twice as high as it was during the rest of the trading day. 
See DERA Staff PM Pilot Memo, at 15; see also DERA Staff PM Pilot 
Memo, at Section V, which discusses in detail the metrics used to 
measure, for the purposes of the study, the extent to which the 
market may experience abnormal volatility surrounding SPXPM option 
settlement.
    \25\ See DERA Staff PM Pilot Memo, at Section V, which discusses 
in detail the metrics used to measure, for the purposes of the 
study, the extent to which the market may experience abnormal 
volatility surrounding SPXPM option settlement.
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    In particular, the DERA staff study found that an additional P.M.-
settled SPX options settlement quantity equal to $10 billion in 
notional value is associated with a marginal impact on futures prices 
during the last 15 minutes of the trading day of only about $0.06 
(where the hypothetical index level is 2,500), additional expiring open 
interest in P.M.-settled SPX options equal to $10 billion in notional 
value is associated with a marginal impact on futures prices during the 
last 15 minutes of the trading day of only about $0.05 (assumed index 
level is 2,500). Also, an additional

[[Page 26356]]

increase in settlement quantity or in expiring open interest, each 
equal to $20 million in notional value, did not result in any 
meaningful futures price reversals near the close (neither was found to 
cause a price reversal of over one standard deviation \26\).
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    \26\ See supra note 22.
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    Likewise, the study identified that an additional total P.M.-
settled SPX options settlement quantity equal to $10 billion in 
notional value corresponds to price movement in the S&P 500 of only 
about $0.08 (assuming an index level of 2,500) during the last 15 
minutes of the trading day, and that additional expiring open interest 
equal to $10 billion in notional value corresponds to a price movement 
in the S&P 500 of only about $0.06 (assuming an index level of 2,500) 
during the last 15 minutes of the trading day. The study also 
identified that it would take an increase of $34 billion in notional 
value of total settlement quantity and of expiring open interest for 
one additional S&P 500 price reversal of greater than two standard 
deviations to occur in the last 15 minutes before the market close. 
Also, regarding potential impact to S&P 500 component securities, it 
would take an increase in total P.M.-settled SPX options settlement 
quantity equal to $20 billion to effect a price movement of only 
approximately $0.03 for a $200 stock, an increase in expiring open 
interest in P.M.-settled SPX options equal to $10 billion to effect a 
price movement less than half a standard deviation, and an increase in 
total P.M.-settled SPX settlement quantity equal to $7 billion to 
achieve a price reversal greater two standard deviations.
    The study employed the same metrics to determine whether there is 
greater price volatility for S&P 500 futures, the S&P 500, and the 
component securities of the S&P 500 related to SPXPM option settlements 
during an environment of high market volatility (i.e., on days in which 
the VIX Index was in the top 10% of closing index values) and did not 
identify indicators of any significant economic impact on these markets 
near the close as a result of the P.M.-settled SPX options 
settlement.\27\ In addition to this, the DERA staff study, applying the 
same metrics and analysis as for P.M.-settled SPX options to A.M.-
settled SPX options, did not identify any evidence of a statistically 
significant relationship between settlement quantity or expiring open 
interest of A.M.-settled options and volatility near the open.
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    \27\ The Exchange also notes that the study did not identify any 
evidence that less liquid S&P 500 constituent securities experienced 
any greater impact from the settlement of P.M.-settled SPX options.
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    Upon review of the results of the DERA staff study, the Exchange 
agrees that each of the above-described marginal price movements in S&P 
500 futures, the S&P 500, and the S&P 500 component securities affected 
by increases in P.M.-settled SPX options settlement quantity and 
expiring open interest appear to be de minimis pricing changes from 
those that occur over regular trading hours (outside of the last 15 
minutes of the trading day). Further, the Exchange has not observed any 
significant economic impact or other adverse effects on the market from 
similar reviews of its pilot reports and data submitted after 2018.\28\ 
In its review of a sample of the pilot data from 2019 through 2021, the 
Exchange similarly measured volatility over the final fifteen minutes 
of each trading day by taking the standard deviation of rolling one-
minute returns of the S&P 500 level (excluding the first and last 
fifteen minutes of trading) and comparing such with the standard 
deviation of one-minute returns \29\ of the S&P 500 level, over the 
last 15 minutes of a trading day. The Exchange identified an average 
standard deviation ratio of 1.42 for the S&P 500 on non-expiration days 
and an average standard deviation ratio of 1.54 for the S&P 500 on 
expiration days (a ratio between expiration days and non-expiration 
days of 1.09). The Exchange also notes that, using the same 
methodology, it observed that, from 2015 through 2019,\30\ the average 
standard deviation ratio for the S&P 500 on non-expiration days was 
1.11 and the average standard deviation ratio for the S&P 500 on 
expiration days was 1.22 (a ratio between expiration days and non-
expiration days of 1.10). While the average standard deviation ratio on 
both expiration and non-expiration days was higher in 2019 through 2021 
due to overall market volatility, the ratios between the standard 
deviation ratios on expiration days and non-expirations days remained 
nearly identical between the 2015 through 2019 timeframe and the 2019 
through 2021. This shows that, in cases where overall market volatility 
may increase, the normalized impact on expiration days to non-
expiration days generally remains consistent.
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    \28\ Total SPX open interest volumes were examined for 
expiration dates over a roughly two-year period between October 2019 
and November 2021.
    \29\ Calculated at every tick for the prior minute.
    \30\ November 2015 through November 2021.
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    In addition to this, the Exchange notes that the S&P 500 is 
rebalanced quarterly. The changes resulting from each rebalancing 
coincide with the third-Friday of the quarterly rebalancing month 
(i.e., March, June, September, October and December) \31\ and generally 
drive an increase in trading activity from investors that seek to track 
the S&P 500. As such, the Exchange measured volatility on quarterly 
rebalancing dates and found that the average standard deviation ratio 
was 1.62, which suggests more closing volatility on quarterly rebalance 
dates compared to non-quarterly expiration dates (for which the average 
standard deviation ratio was 1.22), thus indicating that the impact 
rebalancing may have on the S&P 500 is greater than any impact that 
P.M.-settled SPX options may have on the S&P 500.
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    \31\ See S&P Dow Jones Indices, Equity Indices Policies & 
Practices, Methodology (August 2021), at 15, available at https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-equity-indices-policies-practices.pdf.
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    The Exchange additionally focused its study of the post-2018 sample 
pilot data on reviewing for potential correlation between excess market 
volatility and price reversals and the hedging activity of liquidity 
providers. As explained in the DERA staff study, potential impact of 
P.M.-settled SPX options on the correlated equity markets is thought to 
stem from the hedging activity of liquidity providers in such 
options.\32\ To determine any such potential correlation, the Exchange 
studied the expected action of liquidity providers that are the primary 
source of the hedging on settlement days. These liquidity providers 
generally delta-hedge their S&P 500 index exposure via S&P 500 futures 
and on settlement day unwind their futures positions that correspond 
with the delta of their in-the-money (ITM) expiring P.M.-settled SPX 
options. Assuming such behavior, the Exchange estimated the Market-On-
Close (``MOC'') \33\ volume for the shares of the S&P 500 component 
securities (i.e., ``MOC share volume'') that could ultimately result 
from the unwinding of the liquidity providers' futures positions by 
equating the notional value of the futures positions that correspond to 
expiring ITM open interest to the number S&P 500 component security 
contracts (based on the weight of each S&P 500 component security). 
That is, the Exchange calculated (an estimate) of the amount of MOC 
volume in the S&P 500 component markets attributable hedging activity 
as a result of expiring ITM P.M.-settled SPX options (i.e., ``hedging 
MOC''). The Exchange then:

[[Page 26357]]

(1) compared the hedging MOC share volume to all MOC share volume on 
expiration days and non-expiration trading days; and (2) compared the 
notional value of the hedging futures positions (i.e., that correspond 
to expiring ITM P.M.-settled SPX options open interest) to the notional 
value of expiring ITM P.M.-settled SPX options open interest, the 
notional value of all expiring P.M.-settled SPX options open interest 
and the notional value of all P.M.-settled SPX options open interest.
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    \32\ See DERA Staff PM Pilot Memo, at 10-12.
    \33\ MOC orders allow a market participant to trade at the 
closing price. Market participants generally utilize MOC orders to 
ensure they exit positions at the end of the trading day.
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    The Exchange observed that, on average, there were approximately 
25% more MOC shares executed on expiration days (332 expiration days) 
than non-expiration days (209 non-expiration days). While, at first 
glance, the volume of MOC shares executed on expiration days seems much 
greater than the volume executed on non-expiration days, the Exchange 
notes that much of this difference is attributable to just eight 
expiration days--the quarterly index rebalancing dates captured within 
the scope of the post-2018 sample pilot data. The average MOC share 
volume on the eight quarterly rebalancing dates was approximately 4.8 
times the average MOC share volume on the non-quarterly rebalancing 
expiration dates; again, indicating that the impact rebalancing may 
have on the S&P 500 Index is greater than any impact that P.M.-settled 
SPX options may have on the S&P 500 Index. That is, the Exchange 
observed that the majority of closing volume on quarterly rebalance 
dates is driven by rebalancing of shares in in the S&P 500, and not by 
P.M.-settled SPX options expiration-related hedging activity. 
Notwithstanding the MOC share volume on quarterly rebalancing dates, 
the volume of MOC shares executed on expiration days (324 expiration 
days) was only approximately 13% more than that on non-expiration days, 
substantially less than the increase in volume over non-expiration days 
wherein the eight index rebalancing dates are included in expiration 
day volume. In addition to this, the Exchange observed that the hedging 
MOC share volume (i.e., the expected MOC share volume resulting from 
hedging activity in connection with expiring ITM P.M.-settled SPX 
options) was, on average, less than the MOC share volume on non-
expiration days, and was only approximately 20% of the total MOC share 
volume on expiration days, indicating that other sources of MOC share 
volume generally exceed the volume resulting from hedging activity of 
expiring ITM P.M.-settled SPX options and would more likely be a source 
of any potential market volatility.
    The Exchange also observed that, across all third-Friday 
expirations, the notional value of the hedging futures positions was 
approximately 25% of the notional value of expiring ITM P.M.-settled 
SPX options, approximately 3.8% of the notional value of all expiring 
P.M.-settled SPX options, and approximately only 0.5% of the notional 
value of all P.M.-settled SPX options. As such, the estimated hedging 
activity from liquidity providers on expiration days is a fraction of 
the expiring open interest in P.M.-settled SPX options, which, the 
Exchange notes, is only 14% of the total open interest in P.M.-settled 
SPX options; thus, indicating negligible capacity for hedging activity 
to increase volatility in the underlying markets.
    While unrelated to the initial concerns of P.M.-settlement as 
described above, at the request of the Commission, the Exchange 
recently completed an analysis intended to evaluate whether the 
introduction of P.M.-settled options impacted the quality of the A.M.-
settled option market. Specifically, the Exchange compared values of 
key market quality indicators (specifically, the bid-ask spread \34\ 
and effective spread \35\) in SPXW options both before and after the 
introduction of Tuesday expirations and Thursday expirations for SPXW 
options on April 18 and May 11, 2022, respectively.\36\ Options on the 
Standard & Poor's Depositary Receipts S&P 500 ETF (``SPY'') were used 
as a control group to account for any market factors that might 
influence key market quality indicators. The Exchange used data from 
January 3, 2022 through March 4, 2022 (the two-month period prior to 
the introduction of SPXW options with Tuesday expirations) and data 
from May 11, 2022 to July 10, 2022 (the two-month period following the 
introduction of SPXW options with Thursday expirations).\37\
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    \34\ The Exchange calculated for each of SPXW options (with 
Monday, Wednesday, and Friday expirations) and SPY Weekly options 
(with Monday, Wednesday, and Friday expirations) the daily time-
weighted bid-ask spread on the Exchange during its regular trading 
hours session, adjusted for the difference in size between SPXW 
options and SPY options (SPXW options are approximately ten times 
the value of SPY options).
    \35\ The Exchange calculated the volume-weighted average daily 
effective spread for simple trades for each of SPXW options (with 
Monday, Wednesday, and Friday expirations) and SPY Weekly options 
(with Monday, Wednesday, and Friday expirations) as twice the amount 
of the absolute value of the difference between an order execution 
price and the midpoint of the national best bid and offer at the 
time of execution, adjusted for the difference in size between SPXW 
options and SPY options.
    \36\ For purposes of comparison, the Exchange paired SPXW 
options and SPY options with the same moneyness and same days to 
expiration.
    \37\ The Exchange observed comparable market volatility levels 
during the pre-intervention and post-intervention time ranges.
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    Given the time that as passed since the introduction of FLEX P.M.-
settled options, the Exchange is unable to analyze whether the 
introduction of those options significantly impacted the market quality 
of FLEX P.M.-settled options. Additionally, the Exchange is unable to 
analyze whether the introduction of the FLEX P.M.-settled options 
significantly impacted the market quality of A.M.-settled FLEX options, 
as there is no book for FLEX options, as FLEX options are listed only 
if and when market participants create them for trading. However, the 
Exchange believes analyzing whether the introduction of new SPXW P.M.-
settled expirations (i.e., SPXW options with Tuesday and Thursday 
expirations) impacted the market quality of then-existing SPXW P.M.-
settled expirations (i.e., SPXW options with Monday, Wednesday, and 
Friday expirations) provides a reasonable substitute to evaluate 
whether the introduction of P.M.-settled index options impacted the 
market quality of the underlying cash markets when the pilot began. The 
full analysis is included in Exhibit 3 of this rule filing.
    As a result of this analysis, the Exchange believes the 
introduction of SPX options with Tuesday and Thursday options had no 
significant impact on the market quality of SPXW options with Monday, 
Wednesday, and Friday expirations. With respect to the majority of 
series analyzed, the Exchange observed no statistically significant 
difference in the bid-ask spread or the effective spread of the series 
in the period prior to introduction of the Tuesday and Thursday 
expirations and the period following the introduction of the Tuesday 
and Thursday expirations. While statistically insignificant, the 
Exchange notes that in many series, particularly as they were closer to 
expiration, the Exchange observed that the values of these spreads 
decreased during the period following the introduction of the Tuesday 
and Thursday expirations.\38\
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    \38\ In any series in which the Exchange observed an increase in 
the market quality indicators, the Exchange notes any such increase 
was also statistically insignificant.
---------------------------------------------------------------------------

    To further note, given the significant changes in the closing 
procedures of the primary markets in recent decades, including 
considerable advances in trading systems and technology, the Exchange 
believes that the risks of any potential impact of P.M.-, cash-settled

[[Page 26358]]

FLEX options on the underlying cash markets are also de minimis.
    The Exchange proposes to make the FLEX PM Third Friday Program 
permanent as P.M.-settled index products have become an integral part 
of the Exchange's product offerings, providing investors with greater 
trading opportunities and flexibility. As indicated by the significant 
growth in the size of the market for P.M.-settled options, such options 
have been, and continue to be, well-received and widely used by market 
participants. Therefore, the Exchange wishes to be able to continue to 
provide investors with the ability to trade FLEX PM options on a 
permanent basis. The Exchange believes that the permanent continuation 
of the FLEX PM Third Friday Pilot Program will serve to maintain the 
status quo by continuing to offer a product to which investors have 
become accustomed and have incorporated into their business models and 
day-to-day trading methodologies for nearly ten years. As such, the 
Exchange also believes that ceasing to offer FLEX PM options may result 
in significant market disruption and investor confusion. The Exchange 
has not identified any significant impact on market quality nor any 
unique or prohibitive regulatory concerns as a result of the FLEX PM 
Third Friday Pilot Program, and, as such, the Exchange believes that 
the continuation of the FLEX PM Third Friday Pilot Program as a pilot, 
including the use of time and resources to compile and analyze 
quarterly and annual pilot reports and pilot data, is no longer 
necessary and that making the FLEX PM Third Friday Pilot Program 
permanent will allow the Exchange to otherwise allocate time and 
resources to other industry initiatives.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of section 6(b) of the Act.\39\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
section 6(b)(5) \40\ 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.
---------------------------------------------------------------------------

    \39\ 15 U.S.C. 78f(b).
    \40\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In particular, the Exchange believes that the making the FLEX PM 
Third Friday Pilot Program permanent will allow the Exchange to be able 
to continue to offer FLEX PM options on a continuous and permanent 
basis. These products have been, and continue to be, well-received and 
widely used by market participants, providing investors with greater 
trading opportunities and flexibility. The Exchange believes that the 
permanent continuation of the FLEX PM Third Friday Pilot Program will 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, protect investors 
and the public interest by continuing to offer a product to which 
investors have become accustomed and have incorporated into their 
business models and day-to-day trading strategies for approximately 13 
years. The Exchange believes ceasing to offer the FLEX PM Third Friday 
Pilot Program may result in significant market disruption and investor 
confusion, as P.M.-settled index products, particularly SPX options, 
have become an integral part of the Exchange's product offerings, 
providing investors with greater trading opportunities and flexibility.
    The Exchange further believes that making the FLEX PM Third Friday 
Pilot Program permanent will remove impediments to and perfect the 
mechanism of a free and open market and a national market system and 
protect investors, while maintaining a fair and orderly market, as the 
Exchange believes that previous concerns (arising in the 1980s) 
regarding options expirations potentially contributing to excess 
volatility and reversals around the close have been adequately 
diminished. As described in detail above, the Exchange has observed no 
significant adverse market impact or identified any meaningful 
regulatory concerns during the approximately 13-year operation of the 
FLEX PM Third Friday Program as a pilot nor during the 15 years since 
P.M.-settled index options (SPX) were reintroduced to the 
marketplace.\41\ Notably, the Exchange did not identify any significant 
economic impact (including on pricing or volatility or in connection 
with reversals) on related futures, the underlying indexes, or the 
underlying component securities of the underlying indexes surrounding 
the close as a result of the quantity of P.M.-settled FLEX options that 
settle at the close or the amount of expiring open interest in P.M.-
settled FLEX options, nor any demonstrated capacity for options hedging 
activity to impact volatility in the underlying markets. While the DERA 
staff study and corresponding Exchange study described above 
specifically evaluated SPX options, P.M.-settled FLEX options overlay 
broad-based indexes (including the S&P 500), the Exchange believes it 
is appropriate to extrapolate the data to apply the FLEX PM options. 
This is particularly true given that the reports submitted by the 
Exchange during the pilot period have similarly demonstrated no 
significant economic impact on the respective underlying indexes or 
other products.
---------------------------------------------------------------------------

    \41\ See supra notes 18-31.
---------------------------------------------------------------------------

    The Exchange also believes the introduction of FLEX PM options had 
no significant impact on the market quality of corresponding A.M.-
settled options or other options. The Exchange believes this as a 
result of its analysis conducted after the introduction of SPXW options 
with Tuesday and Thursday expirations, which demonstrated no 
statistically significant impact on the bid-ask or effective spreads of 
SPXW options with Monday, Wednesday, and Friday expirations after 
trading in the SPXW options with Tuesday and Thursday expirations 
began. FLEX options are nearly identical to non-FLEX options and 
overlay the same indexes. Therefore, the Exchange believes analyzing 
the impact of new SPXW options on then-existing SPXW options permit the 
Exchange to extrapolate from this data that it is unlikely the 
introduction of P.M.-settled FLEX options significantly impacted the 
market quality of A.M.-settled options when the pilot began.
    Additionally, the significant changes in the closing procedures of 
the primary markets in recent decades, including considerable advances 
in trading systems and technology, has significantly minimized risks of 
any potential impact of P.M.-, cash-settled FLEX options on the 
underlying cash markets. As such, the Exchange believes that a 
permanent FLEX PM Third Friday Pilot Program does not raise any unique 
or prohibitive regulatory concerns and that such trading has not, and 
will not, adversely impact fair and orderly markets on Expiration 
Fridays for the underlying indexes or their component securities. 
Further, as the Exchange has not identified any significant impact on 
market quality or any unique or prohibitive regulatory concerns as a 
result of offering FLEX PM options, the

[[Page 26359]]

Exchange believes that the continuation of the FLEX PM Third Friday 
Pilot Program as a pilot, including the gathering, submission and 
review of the pilot reports and data, is no longer necessary and that 
making the FLEX PM Third Friday Pilot Program permanent will allow the 
Exchange to otherwise allocate time and resources to other industry 
initiatives.

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

    Cboe Options does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe that making the FLEX PM Third Friday Pilot Program permanent 
will impose any unnecessary or inappropriate burden on intramarket 
competition because FLEX PM options will continue to be available to 
all market participants who wish to participate in the FLEX PM options 
market. The Exchange believes that the growth that the P.M.-settled 
options market, including FLEX PM options, has experienced since their 
reintroduction through pilot programs indicates strong, continued 
investor interest and demand, warranting a permanent FLEX PM Third 
Friday Pilot Program. The Exchange believes that, for the period that 
P.M.-settled FLEX options have been in operation as pilot programs, 
they have provided investors with a desirable product with which to 
trade and wishes to permanently offer this product to investors. 
Furthermore, during the pilot period, the Exchange has not observed any 
significant adverse market effects nor identified any regulatory 
concerns as a result of the FLEX PM Third Friday Pilot Program, and, as 
such, the continuation of the FLEX PM Third Friday Pilot Program as a 
pilot, including the gathering, submission and review of the pilot 
reports and data, is no longer necessary--a permanent FLEX PM Third 
Friday Pilot Program will allow the Exchange to otherwise allocate time 
and resources to other industry initiatives.
    The Exchange further does not believe that making the FLEX PM Third 
Friday Pilot Program permanent will impose any burden on intermarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act because it applies to a class of options listed 
only for trading on Cboe Options. The Exchange notes that other 
exchanges are free to and do offer competing products. To the extent 
that the permanent offering and continued trading of FLEX PM options 
may make Cboe Options a more attractive marketplace to market 
participants at other exchanges, such market participants may elect to 
become Cboe Options market participants.

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

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

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2023-018 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2023-018. 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. Do not include 
personal identifiable information in submissions; you should submit 
only information that you wish to make available publicly. We may 
redact in part or withhold entirely from publication submitted material 
that is obscene or subject to copyright protection. All submissions 
should refer to File Number SR-CBOE-2023-018, and should be submitted 
on or before May 19, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-08987 Filed 4-27-23; 8:45 am]
BILLING CODE 8011-01-P