Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of Proposed Rule Change Relating to the Modified ROS Opening Procedure, 43726-43729 [E5-4018]
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43726
Federal Register / Vol. 70, No. 144 / Thursday, July 28, 2005 / Notices
Dated: July 26, 2005.
Jonathan G. Katz,
Secretary.
[FR Doc. 05–15103 Filed 7–26–05; 3:49 pm]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–52101; File No. SR–CBOE–
2004–86]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of
Proposed Rule Change Relating to the
Modified ROS Opening Procedure
July 21, 2005.
Pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
15, 2004, the Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’ or
‘‘Exchange’’) 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. On July 5,
2005, the Exchange filed Amendment
No. 1 to the proposed rule change.3 The
Commission is publishing this notice to
solicit comments on the proposed rule
change, as amended, from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to revise the
modified Rapid Opening System
(‘‘ROS’’) opening procedure set forth in
CBOE Rule 6.2A.03 to provide a greater
opportunity for market participants to
respond to order imbalances in the
electronic book and to move the cut-off
time for the submission of all orders for
participation in the modified ROS
opening procedure from 8:28 a.m. (CT)
to 8:25 a.m. (CT). Proposed new
language is in italics; proposed
deletions are in [brackets].
*
*
*
*
*
Chicago Board Options Exchange,
Incorporated
Rules
*
*
*
*
*
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Form 19b–4, dated July 1, 2005
(‘‘Amendment No. 1’’). Amendment No. 1 replaced
the original filing in its entirety.
2 17
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13:40 Jul 27, 2005
Jkt 205001
Rule 6.2A. Rapid Opening System
This rule has no applicability to series
trading on the CBOE Hybrid Opening
System. Such series will be governed by
Rule 6.2B.
(a)—(d) No change.
* * * Interpretation and Policies:
.01–.02 No change.
.03 Modified ROS Opening
Procedure For Calculation of Settlement
Prices of Volatility Indexes.
All provisions set forth in Rule 6.2A
and the accompanying interpretations
and policies shall remain in effect
unless superseded or modified by this
Rule 6.2A.03. To facilitate the
calculation of a settlement price for
futures and options contracts on
volatility indexes, the Exchange shall
utilize a modified ROS opening
procedure for any index option series
with respect to which a volatility index
is calculated (including any index
option series opened under Rule
6.2A.01). This modified ROS opening
procedure will be utilized only on the
final settlement date of the options and
futures contracts on the applicable
volatility index in each expiration
month.
The following provisions shall be
applicable when the modified ROS
opening procedure set forth in this Rule
6.2A.03 is in effect for an index option
with respect to which a volatility index
is calculated:
(i) [a]All orders (including public
customer, broker-dealer, Exchange
Market-Maker and away Market-Maker
and specialist orders), other than
contingency orders, will be eligible to be
placed on the Electronic Book for those
option contract months whose prices are
used to derive the volatility indexes on
which options and futures are traded,
for the purpose of permitting those
orders to participate in the ROS opening
price calculation for the applicable
index option series[;].
(ii) [a]All Market-Makers, including
any LMMs and SMMs, if applicable,
who are required to log on to ROS or
RAES for the current expiration cycle
shall be required to log on to ROS
during the modified ROS opening
procedure if the Market-Maker is
physically present in the trading crowd
for that index option class[;].
(iii) [i]If the ROS system is
implemented in an option contract for
which LMMs have been appointed, the
LMMs will collectively set the
Autoquote values that will be used by
ROS[;].
(iv) ROS contracts to trade for that
index option series will be assigned
equally, to the greatest extent possible,
to all logged-on Market-Makers,
PO 00000
Frm 00048
Fmt 4703
Sfmt 4703
including any LMMs and SMMs if
applicable[;].
(v) All index option orders for
participation in the modified ROS
opening procedure that are related to
positions in, or a trading strategy
involving, volatility index options or
futures, and any change to or
cancellation of any such order
(A) must be received prior to 8:00 a.m.
(CT), and
(B) may not be cancelled or changed
after 8:00 a.m. (CT), unless the order is
not executed in the modified ROS
opening procedure and the cancellation
or change is submitted after the
modified ROS opening procedure is
concluded (provided that any such
order may be changed or cancelled after
8:00 a.m. (CT) and prior to 8:25 a.m.
(CT) in order to correct a legitimate
error, in which case the member
submitting the change or cancellation
shall prepare and maintain a
memorandum setting forth the
circumstances that resulted in the
change or cancellation and shall file a
copy of the memorandum with the
Exchange no later than the next
business day in a form and manner
prescribed by the Exchange).
In general, the Exchange shall
consider index option orders to be
related to positions in, or a trading
strategy involving, volatility index
options or futures for purposes of this
Rule 6.2A.03(v) if the orders possess the
following three characteristics:
(i) The orders are for options series
with the expiration month that will be
used to calculate the settlement price of
the applicable volatility index option or
futures contract.
(ii) The orders are for options series
spanning the full range of strike prices
in the appropriate expiration month for
options series that will be used to
calculate the settlement price of the
applicable volatility index option or
futures contract, but not necessarily
every available strike price.
(iii) The orders are for put options
with strike prices less than the ‘‘at-themoney’’ strike price and for call options
with strike prices greater than the ‘‘atthe-money’’ strike price. The orders may
also be for put and call options with ‘‘atthe-money’’ strike prices.
Whether index option orders are
related to positions in, or a trading
strategy involving, volatility index
options or futures for purposes of this
Rule 6.2A.03(v) depends upon specific
facts and circumstances. Order types
other than those provided above may
also be deemed by the Exchange to fall
within this category of orders if the
Exchange determines that to be the case
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Federal Register / Vol. 70, No. 144 / Thursday, July 28, 2005 / Notices
based upon the applicable facts and
circumstances.
The provisions of this Rule 6.2A.03(v)
may be suspended by two Floor Officials
in the event of unusual market
conditions.
(vi) [a]All other index option orders
for participation in the modified ROS
opening procedure, and any change to
or cancellation of any such order, must
be received prior to 8:25 a.m. [8:28 a.m.]
(C[S]T) in order to participate at the
ROS opening price for the applicable
[that] index option series[;].
(vii) [a]All orders for participation in
the modified ROS opening procedure
must be submitted electronically, except
that Market-Makers on the Exchange’s
trading floor may submit paper tickets
for market orders only[; and].
(viii) [until the Exchange implements
a] The ROS system [change that] shall
automatically generate[s] cancellation
orders immediately prior to the opening
of the applicable index option series for
Exchange Market-Maker, away MarketMaker, specialist, and broker dealer
orders which remain on the Electronic
Book following the modified ROS
opening procedure[, any such orders
that were entered in the Electronic Book
but were not executed in the modified
ROS opening procedure must be
cancelled immediately following the
opening of the applicable option series].
(ix) Any imbalance of contracts to buy
over contracts to sell in the applicable
index option series, or vice versa, as
indicated on the Electronic Book, will be
published as soon as practicable after 8
a.m. (CT) and thereafter at
approximately 8:20 a.m. (CT) on days
that the modified ROS opening
procedure is utilized.
*
*
*
*
*
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.
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13:40 Jul 27, 2005
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Current CBOE Rule 6.2A.03 sets forth
certain procedures that modify the
normal operation of ROS 4 on the final
settlement date of futures and options
contracts on volatility indexes.5 The
final settlement date of futures and
options contracts on volatility indexes
occurs on the Wednesday that is
immediately prior to the third Friday of
the month that immediately precedes
the month in which the options used in
the calculation of that index expire
(‘‘Settlement Date’’). The proposed rule
change would implement additional
procedures for certain option orders that
are entered on the Exchange’s electronic
book on the Settlement Date.
The modified ROS opening procedure
permits all orders (including public
customer, broker-dealer, CBOE marketmaker and away market-maker and
specialist orders), other than
contingency orders, to be eligible to be
placed on the book on the Settlement
Date solely for the purpose of the
modified ROS opening procedure.
These orders may be placed on the book
in those index option contract months
whose prices are used to derive the
volatility indexes on which options and
futures are traded. For example, since
the launch of futures on the CBOE
Volatility Index (‘‘VIX futures’’), market
participants actively trading in VIX
futures have taken advantage of the
modified ROS opening procedure to
place SPX option orders on the book on
4 ROS is the Exchange’s automated system for
opening certain classes of options at the beginning
of the trading day or for re-opening those classes of
options during the trading day. The procedures
related to ROS are set forth in CBOE Rule 6.2A. The
modified ROS opening procedure set forth in Rule
6.2A.03 modifies the general ROS opening
procedures for index options that are used to
calculate a volatility index to facilitate the
settlement of futures contracts and options
contracts on those volatility indexes.
5 Volatility indexes provide investors with up-tothe-minute market estimates of expected near-term
volatility of the prices of a broad-based group of
stocks by extracting volatilities from real-time index
option bid/ask quotes. Volatility indexes are
calculated using real-time quotes of the nearby and
second nearby index puts and calls on established
broad-based market indexes. For example, the
CBOE Volatility Index measures the near-term
volatility of options on the S&P Index (‘‘SPX’’) and
the CBOE DJIA Volatility Index measures the nearterm volatility of options on the Dow Jones
Industrial Average (‘‘DJX’’). Futures contracts on the
CBOE Volatility Index and the CBOE DJIA Volatility
Index are currently trading on the Exchange’s
wholly-owned subsidiary, CBOE Futures Exchange,
LLC. The Commission has approved for trading on
the Exchange option contracts on volatility indexes
and the Exchange may also list those contracts for
trading.
PO 00000
Frm 00049
Fmt 4703
Sfmt 4703
43727
the Settlement Date to unwind hedge
strategies involving SPX options that
were initially entered into upon the
purchase or sale of VIX futures. In
particular, the commonly-used hedge
for VIX futures involves holding a
portfolio of the SPX options that will be
used to calculate the settlement value of
the VIX futures contract on the
Settlement Date. Traders holding
hedged VIX futures positions to
settlement can be expected to trade out
of their SPX options on the Settlement
Date. Traders who hold short, hedged
VIX futures would liquidate that hedge
by selling their SPX options, while
traders holding long, hedged VIX
futures would liquidate their hedge by
buying SPX options. In order to seek
convergence with the VIX futures final
settlement value, these traders would be
expected to liquidate their hedges by
submitting market orders or limit
orders6 in the appropriate SPX option
series during the SPX opening on the
Settlement Date of the VIX futures
contract. To the extent (i) traders who
are liquidating hedges predominately
are on one side of the market (e.g., seek
to buy the particular SPX options) and
(ii) those traders’ orders predominate
over other orders during the SPX
opening on Settlement Date, trades to
liquidate hedges may contribute to an
order imbalance during the SPX
opening on Settlement Date. The
purpose of the proposed rule filing is to
implement changes to the modified ROS
opening procedure that are intended to
encourage additional participation in
the modified ROS opening procedure
among market participants who may
wish to place off-setting orders against
the imbalances. Information regarding
the imbalances would be published on
the Exchange’s Web site at least two
times prior to 8:25 a.m. (CT) on the
Settlement Date. The first publication
will occur as soon as practicable after 8
a.m. (CT) and the second publication
will occur approximately at 8:20 a.m.
(CT).
To encourage more participation in
the volatility index futures and options
settlement process, proposed CBOE
Rule 6.2A.03(v) would require that all
index option orders for participation in
the modified ROS opening that are
related to positions in, or a trading
strategy involving, volatility index
options or futures, and any changes or
cancellations to these orders, be
received prior to 8 a.m. (CT). Under the
proposed rule change, in general, the
6 The Exchange understands that some market
participants choose to unwind their hedges using
limit orders to ensure that the hedge is effected at
a certain price.
E:\FR\FM\28JYN1.SGM
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Federal Register / Vol. 70, No. 144 / Thursday, July 28, 2005 / Notices
Exchange would consider index option
orders to be related to positions in, or
a trading strategy involving, volatility
index options or futures for purposes of
proposed CBOE Rule 6.2A.03(v) if the
orders possess the following three
characteristics:
(i) The orders are for options series
with the expiration month that will be
used to calculate the settlement price of
the applicable volatility index option or
futures contract.
(ii) The orders are for options series
spanning the full range of strike prices
in the appropriate expiration month for
options series that will be used to
calculate the settlement price of the
applicable volatility index option or
futures contract, but not necessarily
every available strike price.
(iii) The orders are for put options
with strike prices less than the ‘‘at-themoney’’ strike price and for call options
with strike prices greater than the ‘‘atthe-money’’ strike price. The orders may
also be for put and call options with ‘‘atthe-money’’ strike prices.
Whether index option orders are
related to positions in, or a trading
strategy involving, volatility index
options or futures for purposes of
proposed CBOE Rule 6.2A.03(v)
depends upon specific facts and
circumstances. Under the proposed rule
change, order types other than those
provided above may also be deemed by
the Exchange to fall within this category
of orders if the Exchange determines
that to be the case based upon the
applicable facts and circumstances.
The proposed rule change also
provides a limited exception that would
permit cancellations and changes to
these booked orders solely to correct a
legitimate error (e.g., side, size, symbol,
price or duplication of an order). Under
the proposed rule change, the member
submitting the change or cancellation
would be required to prepare and
maintain a memorandum setting forth
the circumstances that resulted in the
change or cancellation and would be
required to file a copy of the
memorandum with the Exchange no
later than the next business day in a
form and manner prescribed by the
Exchange. In addition, two Floor
Officials would have the ability to
suspend proposed CBOE Rule
6.2A.03(v) in the event of unusual
market conditions. For example, if a
significant market event occurs between
8 a.m. (CT) and 8:25 a.m. (CT), Floor
Officials may determine to suspend the
rule provision in the interest of
maintaining a fair and orderly market so
that limit orders placed in the book to
unwind hedged volatility index futures
positions are not unfairly disadvantaged
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13:40 Jul 27, 2005
Jkt 205001
as a result of a significant market move
that would result in limit orders going
unexecuted.7
Separately, the Exchange proposes to
move the cut-off time for the submission
of all orders for participation in the ROS
opening on Settlement Date mornings
from 8:28 a.m. (CT) to 8:25 a.m. (CT).
Lead Market-Makers, who collectively
set the Autoquote values for the SPX
options on the Settlement Date, have
noted to the Exchange that they desire
additional time to review the order
imbalances on the book in order to set
the Autoquote values that are used in
the modified ROS opening procedure.
The Exchange believes that the earlier
cut-off time will be beneficial to all
index option classes that are used to
settle volatility index futures and
options.
The Exchange notes that since the last
day of trading in volatility index futures
in the applicable expiring month occurs
on the day before Settlement Date,
holders of open volatility index futures
are generally aware before 8 a.m. (CT) of
the related index option series that they
would need to place on the book in
order to adequately unwind their
hedges. Therefore, the Exchange
believes the index option market
participants who would be subject to
these proposed rules would not be
materially affected by the 8 a.m. (CT)
cut-off time.
The Exchange also notes that it has
filed with the Commission surveillance
procedures to monitor whether index
option orders that are subject to the
proposed rule change are submitted for
placement on the electronic book in
accordance with the proposed rule.
In addition, the Exchange is making
certain technical changes to current
CBOE Rule 6.2A.03 to change the time
standards reflected in the rule from CST
to CT, since Chicago is in the Central
Time zone. The Exchange is also
revising the rule language in current
CBOE Rule 6.2A.03(viii) to reflect that
the Exchange has recently implemented
a system change to ROS that
automatically generates cancellation
orders for Exchange market-maker, away
market-maker, specialist, and broker
dealer orders which remain on the
electronic book following the modified
ROS opening procedure. Therefore,
members will no longer need to submit
cancellations for these orders following
the opening of the applicable index
option series.
2. Statutory Basis
The Exchange believes the proposed
rule change will improve the modified
PO 00000
ROS opening procedure by exposing for
a longer period of time order imbalances
resulting from the unwinding of hedged
volatility index futures positions. The
Exchange believes this will allow
market participants a greater
opportunity to review these order
imbalances and to place off-setting
orders in the book, thereby resulting in
the reflection of additional market
participant interest in the applicable
index option opening. For these reasons,
the Exchange believes the proposed rule
change is consistent with the Act and
the rules and regulations under the Act
applicable to a national securities
exchange and, in particular, the
requirements of section 6(b) of the Act.8
Specifically, the Exchange believes the
proposed rule change is consistent with
the section 6(b)(5)9 requirements that
the rules of an exchange be designed to
promote just and equitable principles of
trade, to prevent fraudulent and
manipulative acts and, in general, to
protect investors and the public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange believes that the
proposed rule change does not impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date 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 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
8 15
7 Id.
Frm 00050
9 15
Fmt 4703
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E:\FR\FM\28JYN1.SGM
U.S.C. 78(f)(b).
U.S.C. 78(f)(b)(5).
28JYN1
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Federal Register / Vol. 70, No. 144 / Thursday, July 28, 2005 / Notices
change, as amended, is consistent with
the Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CBOE–2004–86 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–9303.
All submissions should refer to File
Number SR–CBOE–2004–86. This file
number should be included on the
subject line if e-mail 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 Web site (https://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 inspection and copying in
the Commission’s Public Reference
Section. Copies of such filing also will
be available for inspection and copying
at the principal office of the Exchange.
All comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–CBOE–2004–86 and should
be submitted on or before August 18,
2005.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.10
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–4018 Filed 7–27–05; 8:45 am]
BILLING CODE 8010–01–P
[Release No. 34–52111; File No. SR–CBOE–
2005–52]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Relating to an Extension
of Its Prospective Fee Reduction
Program
July 22, 2005.
Pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934,1 and
Rule 19b–4 thereunder,2 notice is
hereby given that on June 30, 2005, the
Chicago Board Options Exchange,
Incorporated (‘‘CBOE’’ or ‘‘Exchange’’)
FY05 YTD avg. CPD
1,300,000
1,400,000
1,500,000
1,600,000
1,700,000
1,800,000
1,900,000
2,000,000
.......................................................................................
.......................................................................................
.......................................................................................
.......................................................................................
.......................................................................................
.......................................................................................
.......................................................................................
.......................................................................................
20.–23. Unchanged.
Remainder of Fee Schedule—
Unchanged.
*
*
*
*
*
10
15
20
25
30
35
40
45
VerDate jul<14>2003
13:40 Jul 27, 2005
1 15
Jkt 205001
PO 00000
U.S.C. 78s(b)(1).
Frm 00051
Fmt 4703
1.–4. Unchanged.
Footnotes: (1)–(16) Unchanged.
5.–18. Unchanged.
19. PROSPECTIVE FEE REDUCTION
PROGRAM
Fee reductions will be in effect
August 1, 2004 through December 31,
2005 under the following scenarios:
If CBOE volume exceeds
predetermined average contracts per day
(CPD) thresholds at the end of any
month on a fiscal year-to-date (YTD)
basis, Market-Maker and DPM
transaction and floor brokerage fees will
be reduced in the subsequent month
according to the schedule presented
below:
QQQQ/
SPDR/Index
marketmaker/DPM
reductions
Equities DPM
trans. fees
reductions
$.022
.033
.044
.055
.066
.077
.088
.099
$.024
.036
.048
.060
.072
.084
.096
.108
$.012
.018
.024
.030
.036
.042
.048
.054
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
CFR 200.30–3(a)(12).
CBOE proposes to amend its Fees
Schedule to extend the Prospective Fee
Reduction Program through the close of
the current Exchange fiscal year on
December 31, 2005. Below is the text of
the proposed rule change. Proposed new
language is italicized; proposed
deletions are in brackets.
Equities
market-maker
reductions
In its filing with the Commission,
CBOE included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
10 17
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
CHICAGO BOARD OPTIONS
EXCHANGE, INC. FEES SCHEDULE
[MAY 23]JUNE 30, 2005
SECURITIES AND EXCHANGE
COMMISSION
Fees
discount
(percent)
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 CBOE. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
$.004
.006
.008
.010
.012
.014
.016
.018
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 CBOE has
prepared summaries, set forth in
sections A, B, and C below, of the most
significant aspects of such statements.
2 17
Sfmt 4703
Floor
brokerage
reductions
E:\FR\FM\28JYN1.SGM
CFR 240.19b–4.
28JYN1
]]>Agencies
[Federal Register Volume 70, Number 144 (Thursday, July 28, 2005)]
[Notices]
[Pages 43726-43729]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-4018]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52101; File No. SR-CBOE-2004-86]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of Proposed Rule Change Relating to the
Modified ROS Opening Procedure
July 21, 2005.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 15, 2004, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') 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. On July 5, 2005, the Exchange filed Amendment No. 1 to the
proposed rule change.\3\ The Commission is publishing this notice to
solicit comments on the proposed rule change, as amended, from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Form 19b-4, dated July 1, 2005 (``Amendment No. 1'').
Amendment No. 1 replaced the original filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to revise the modified Rapid Opening System
(``ROS'') opening procedure set forth in CBOE Rule 6.2A.03 to provide a
greater opportunity for market participants to respond to order
imbalances in the electronic book and to move the cut-off time for the
submission of all orders for participation in the modified ROS opening
procedure from 8:28 a.m. (CT) to 8:25 a.m. (CT). Proposed new language
is in italics; proposed deletions are in [brackets].
* * * * *
Chicago Board Options Exchange, Incorporated
Rules
* * * * *
Rule 6.2A. Rapid Opening System
This rule has no applicability to series trading on the CBOE Hybrid
Opening System. Such series will be governed by Rule 6.2B.
(a)--(d) No change.
* * * Interpretation and Policies:
.01-.02 No change.
.03 Modified ROS Opening Procedure For Calculation of Settlement
Prices of Volatility Indexes.
All provisions set forth in Rule 6.2A and the accompanying
interpretations and policies shall remain in effect unless superseded
or modified by this Rule 6.2A.03. To facilitate the calculation of a
settlement price for futures and options contracts on volatility
indexes, the Exchange shall utilize a modified ROS opening procedure
for any index option series with respect to which a volatility index is
calculated (including any index option series opened under Rule
6.2A.01). This modified ROS opening procedure will be utilized only on
the final settlement date of the options and futures contracts on the
applicable volatility index in each expiration month.
The following provisions shall be applicable when the modified ROS
opening procedure set forth in this Rule 6.2A.03 is in effect for an
index option with respect to which a volatility index is calculated:
(i) [a]All orders (including public customer, broker-dealer,
Exchange Market-Maker and away Market-Maker and specialist orders),
other than contingency orders, will be eligible to be placed on the
Electronic Book for those option contract months whose prices are used
to derive the volatility indexes on which options and futures are
traded, for the purpose of permitting those orders to participate in
the ROS opening price calculation for the applicable index option
series[;].
(ii) [a]All Market-Makers, including any LMMs and SMMs, if
applicable, who are required to log on to ROS or RAES for the current
expiration cycle shall be required to log on to ROS during the modified
ROS opening procedure if the Market-Maker is physically present in the
trading crowd for that index option class[;].
(iii) [i]If the ROS system is implemented in an option contract for
which LMMs have been appointed, the LMMs will collectively set the
Autoquote values that will be used by ROS[;].
(iv) ROS contracts to trade for that index option series will be
assigned equally, to the greatest extent possible, to all logged-on
Market-Makers, including any LMMs and SMMs if applicable[;].
(v) All index option orders for participation in the modified ROS
opening procedure that are related to positions in, or a trading
strategy involving, volatility index options or futures, and any change
to or cancellation of any such order
(A) must be received prior to 8:00 a.m. (CT), and
(B) may not be cancelled or changed after 8:00 a.m. (CT), unless
the order is not executed in the modified ROS opening procedure and the
cancellation or change is submitted after the modified ROS opening
procedure is concluded (provided that any such order may be changed or
cancelled after 8:00 a.m. (CT) and prior to 8:25 a.m. (CT) in order to
correct a legitimate error, in which case the member submitting the
change or cancellation shall prepare and maintain a memorandum setting
forth the circumstances that resulted in the change or cancellation and
shall file a copy of the memorandum with the Exchange no later than the
next business day in a form and manner prescribed by the Exchange).
In general, the Exchange shall consider index option orders to be
related to positions in, or a trading strategy involving, volatility
index options or futures for purposes of this Rule 6.2A.03(v) if the
orders possess the following three characteristics:
(i) The orders are for options series with the expiration month
that will be used to calculate the settlement price of the applicable
volatility index option or futures contract.
(ii) The orders are for options series spanning the full range of
strike prices in the appropriate expiration month for options series
that will be used to calculate the settlement price of the applicable
volatility index option or futures contract, but not necessarily every
available strike price.
(iii) The orders are for put options with strike prices less than
the ``at-the-money'' strike price and for call options with strike
prices greater than the ``at-the-money'' strike price. The orders may
also be for put and call options with ``at-the-money'' strike prices.
Whether index option orders are related to positions in, or a
trading strategy involving, volatility index options or futures for
purposes of this Rule 6.2A.03(v) depends upon specific facts and
circumstances. Order types other than those provided above may also be
deemed by the Exchange to fall within this category of orders if the
Exchange determines that to be the case
[[Page 43727]]
based upon the applicable facts and circumstances.
The provisions of this Rule 6.2A.03(v) may be suspended by two
Floor Officials in the event of unusual market conditions.
(vi) [a]All other index option orders for participation in the
modified ROS opening procedure, and any change to or cancellation of
any such order, must be received prior to 8:25 a.m. [8:28 a.m.] (C[S]T)
in order to participate at the ROS opening price for the applicable
[that] index option series[;].
(vii) [a]All orders for participation in the modified ROS opening
procedure must be submitted electronically, except that Market-Makers
on the Exchange's trading floor may submit paper tickets for market
orders only[; and].
(viii) [until the Exchange implements a] The ROS system [change
that] shall automatically generate[s] cancellation orders immediately
prior to the opening of the applicable index option series for Exchange
Market-Maker, away Market-Maker, specialist, and broker dealer orders
which remain on the Electronic Book following the modified ROS opening
procedure[, any such orders that were entered in the Electronic Book
but were not executed in the modified ROS opening procedure must be
cancelled immediately following the opening of the applicable option
series].
(ix) Any imbalance of contracts to buy over contracts to sell in
the applicable index option series, or vice versa, as indicated on the
Electronic Book, will be published as soon as practicable after 8 a.m.
(CT) and thereafter at approximately 8:20 a.m. (CT) on days that the
modified ROS opening procedure is utilized.
* * * * *
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Current CBOE Rule 6.2A.03 sets forth certain procedures that modify
the normal operation of ROS \4\ on the final settlement date of futures
and options contracts on volatility indexes.\5\ The final settlement
date of futures and options contracts on volatility indexes occurs on
the Wednesday that is immediately prior to the third Friday of the
month that immediately precedes the month in which the options used in
the calculation of that index expire (``Settlement Date''). The
proposed rule change would implement additional procedures for certain
option orders that are entered on the Exchange's electronic book on the
Settlement Date.
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\4\ ROS is the Exchange's automated system for opening certain
classes of options at the beginning of the trading day or for re-
opening those classes of options during the trading day. The
procedures related to ROS are set forth in CBOE Rule 6.2A. The
modified ROS opening procedure set forth in Rule 6.2A.03 modifies
the general ROS opening procedures for index options that are used
to calculate a volatility index to facilitate the settlement of
futures contracts and options contracts on those volatility indexes.
\5\ Volatility indexes provide investors with up-to-the-minute
market estimates of expected near-term volatility of the prices of a
broad-based group of stocks by extracting volatilities from real-
time index option bid/ask quotes. Volatility indexes are calculated
using real-time quotes of the nearby and second nearby index puts
and calls on established broad-based market indexes. For example,
the CBOE Volatility Index measures the near-term volatility of
options on the S&P Index (``SPX'') and the CBOE DJIA Volatility
Index measures the near-term volatility of options on the Dow Jones
Industrial Average (``DJX''). Futures contracts on the CBOE
Volatility Index and the CBOE DJIA Volatility Index are currently
trading on the Exchange's wholly-owned subsidiary, CBOE Futures
Exchange, LLC. The Commission has approved for trading on the
Exchange option contracts on volatility indexes and the Exchange may
also list those contracts for trading.
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The modified ROS opening procedure permits all orders (including
public customer, broker-dealer, CBOE market-maker and away market-maker
and specialist orders), other than contingency orders, to be eligible
to be placed on the book on the Settlement Date solely for the purpose
of the modified ROS opening procedure. These orders may be placed on
the book in those index option contract months whose prices are used to
derive the volatility indexes on which options and futures are traded.
For example, since the launch of futures on the CBOE Volatility Index
(``VIX futures''), market participants actively trading in VIX futures
have taken advantage of the modified ROS opening procedure to place SPX
option orders on the book on the Settlement Date to unwind hedge
strategies involving SPX options that were initially entered into upon
the purchase or sale of VIX futures. In particular, the commonly-used
hedge for VIX futures involves holding a portfolio of the SPX options
that will be used to calculate the settlement value of the VIX futures
contract on the Settlement Date. Traders holding hedged VIX futures
positions to settlement can be expected to trade out of their SPX
options on the Settlement Date. Traders who hold short, hedged VIX
futures would liquidate that hedge by selling their SPX options, while
traders holding long, hedged VIX futures would liquidate their hedge by
buying SPX options. In order to seek convergence with the VIX futures
final settlement value, these traders would be expected to liquidate
their hedges by submitting market orders or limit orders\6\ in the
appropriate SPX option series during the SPX opening on the Settlement
Date of the VIX futures contract. To the extent (i) traders who are
liquidating hedges predominately are on one side of the market (e.g.,
seek to buy the particular SPX options) and (ii) those traders' orders
predominate over other orders during the SPX opening on Settlement
Date, trades to liquidate hedges may contribute to an order imbalance
during the SPX opening on Settlement Date. The purpose of the proposed
rule filing is to implement changes to the modified ROS opening
procedure that are intended to encourage additional participation in
the modified ROS opening procedure among market participants who may
wish to place off-setting orders against the imbalances. Information
regarding the imbalances would be published on the Exchange's Web site
at least two times prior to 8:25 a.m. (CT) on the Settlement Date. The
first publication will occur as soon as practicable after 8 a.m. (CT)
and the second publication will occur approximately at 8:20 a.m. (CT).
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\6\ The Exchange understands that some market participants
choose to unwind their hedges using limit orders to ensure that the
hedge is effected at a certain price.
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To encourage more participation in the volatility index futures and
options settlement process, proposed CBOE Rule 6.2A.03(v) would require
that all index option orders for participation in the modified ROS
opening that are related to positions in, or a trading strategy
involving, volatility index options or futures, and any changes or
cancellations to these orders, be received prior to 8 a.m. (CT). Under
the proposed rule change, in general, the
[[Page 43728]]
Exchange would consider index option orders to be related to positions
in, or a trading strategy involving, volatility index options or
futures for purposes of proposed CBOE Rule 6.2A.03(v) if the orders
possess the following three characteristics:
(i) The orders are for options series with the expiration month
that will be used to calculate the settlement price of the applicable
volatility index option or futures contract.
(ii) The orders are for options series spanning the full range of
strike prices in the appropriate expiration month for options series
that will be used to calculate the settlement price of the applicable
volatility index option or futures contract, but not necessarily every
available strike price.
(iii) The orders are for put options with strike prices less than
the ``at-the-money'' strike price and for call options with strike
prices greater than the ``at-the-money'' strike price. The orders may
also be for put and call options with ``at-the-money'' strike prices.
Whether index option orders are related to positions in, or a
trading strategy involving, volatility index options or futures for
purposes of proposed CBOE Rule 6.2A.03(v) depends upon specific facts
and circumstances. Under the proposed rule change, order types other
than those provided above may also be deemed by the Exchange to fall
within this category of orders if the Exchange determines that to be
the case based upon the applicable facts and circumstances.
The proposed rule change also provides a limited exception that
would permit cancellations and changes to these booked orders solely to
correct a legitimate error (e.g., side, size, symbol, price or
duplication of an order). Under the proposed rule change, the member
submitting the change or cancellation would be required to prepare and
maintain a memorandum setting forth the circumstances that resulted in
the change or cancellation and would be required to file a copy of the
memorandum with the Exchange no later than the next business day in a
form and manner prescribed by the Exchange. In addition, two Floor
Officials would have the ability to suspend proposed CBOE Rule
6.2A.03(v) in the event of unusual market conditions. For example, if a
significant market event occurs between 8 a.m. (CT) and 8:25 a.m. (CT),
Floor Officials may determine to suspend the rule provision in the
interest of maintaining a fair and orderly market so that limit orders
placed in the book to unwind hedged volatility index futures positions
are not unfairly disadvantaged as a result of a significant market move
that would result in limit orders going unexecuted.\7\
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\7\ Id.
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Separately, the Exchange proposes to move the cut-off time for the
submission of all orders for participation in the ROS opening on
Settlement Date mornings from 8:28 a.m. (CT) to 8:25 a.m. (CT). Lead
Market-Makers, who collectively set the Autoquote values for the SPX
options on the Settlement Date, have noted to the Exchange that they
desire additional time to review the order imbalances on the book in
order to set the Autoquote values that are used in the modified ROS
opening procedure. The Exchange believes that the earlier cut-off time
will be beneficial to all index option classes that are used to settle
volatility index futures and options.
The Exchange notes that since the last day of trading in volatility
index futures in the applicable expiring month occurs on the day before
Settlement Date, holders of open volatility index futures are generally
aware before 8 a.m. (CT) of the related index option series that they
would need to place on the book in order to adequately unwind their
hedges. Therefore, the Exchange believes the index option market
participants who would be subject to these proposed rules would not be
materially affected by the 8 a.m. (CT) cut-off time.
The Exchange also notes that it has filed with the Commission
surveillance procedures to monitor whether index option orders that are
subject to the proposed rule change are submitted for placement on the
electronic book in accordance with the proposed rule.
In addition, the Exchange is making certain technical changes to
current CBOE Rule 6.2A.03 to change the time standards reflected in the
rule from CST to CT, since Chicago is in the Central Time zone. The
Exchange is also revising the rule language in current CBOE Rule
6.2A.03(viii) to reflect that the Exchange has recently implemented a
system change to ROS that automatically generates cancellation orders
for Exchange market-maker, away market-maker, specialist, and broker
dealer orders which remain on the electronic book following the
modified ROS opening procedure. Therefore, members will no longer need
to submit cancellations for these orders following the opening of the
applicable index option series.
2. Statutory Basis
The Exchange believes the proposed rule change will improve the
modified ROS opening procedure by exposing for a longer period of time
order imbalances resulting from the unwinding of hedged volatility
index futures positions. The Exchange believes this will allow market
participants a greater opportunity to review these order imbalances and
to place off-setting orders in the book, thereby resulting in the
reflection of additional market participant interest in the applicable
index option opening. For these reasons, the Exchange believes the
proposed rule change is consistent with the Act and the rules and
regulations under the Act applicable to a national securities exchange
and, in particular, the requirements of section 6(b) of the Act.\8\
Specifically, the Exchange believes the proposed rule change is
consistent with the section 6(b)(5)\9\ requirements that the rules of
an exchange be designed to promote just and equitable principles of
trade, to prevent fraudulent and manipulative acts and, in general, to
protect investors and the public interest.
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\8\ 15 U.S.C. 78(f)(b).
\9\ 15 U.S.C. 78(f)(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposed rule change does not impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date 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 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
[[Page 43729]]
change, as amended, is consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-CBOE-2004-86 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-9303.
All submissions should refer to File Number SR-CBOE-2004-86. This
file number should be included on the subject line if e-mail 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 Web site (https://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 inspection
and copying in the Commission's Public Reference Section. Copies of
such filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-CBOE-2004-86 and should be submitted on or before August
18, 2005.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4018 Filed 7-27-05; 8:45 am]
BILLING CODE 8010-01-P
