Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Granting Approval of Proposed Rule Change as Modified by Amendment No. 1 Thereto To Allow the Exchange To List Up to Seven Expiration Months for Broad-Based Security Index Options Upon Which the Exchange Calculates a Constant Three-Month Volatility Index, 66210-66211 [E7-23001]

Download as PDF 66210 Federal Register / Vol. 72, No. 227 / Tuesday, November 27, 2007 / Notices Shares will be subject to CBOE Rule 52.3, which provides that, if the listing market halts trading when the IIV or value of the underlying index is not being calculated or disseminated, the Exchange also would halt trading. In support of this proposal, the Exchange has made the following additional representations: 1. The Exchange’s surveillance procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules. 2. Prior to the commencement of trading, the Exchange would inform its members in an Information Bulletin of the special characteristics and risks associated with trading the Shares. 3. The Information Bulletin also would discuss the requirement that members deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction. This approval order is based on the Exchange’s representations. The Commission notes that, if the Shares should be delisted by the listing exchange, the Exchange would no longer have authority to trade the Shares pursuant to this order. The Commission finds good cause for approving this proposal before the thirtieth day after the publication of notice thereof in the Federal Register. As noted above, the Commission previously found that the listing and trading of the Shares on Amex and the trading of the Shares on NYSE Arca and The NASDAQ Stock Market pursuant to UTP are consistent with the Act. The Commission presently is not aware of any regulatory issue that should cause it to revisit those findings or would preclude the trading of the Shares on the Exchange pursuant to UTP. Therefore, accelerating approval of this proposal should benefit investors by creating, without undue delay, additional competition in the market for the Shares. pwalker on PROD1PC71 with NOTICES V. Conclusion It is therefore ordered, pursuant to section 19(b)(2) of the Act,25 that the proposed rule change (SR–CBOE–2007– 124), as modified by Amendment No. 1 thereto, be, and it hereby is, approved on an accelerated basis. 25 15 U.S.C. 78s(b)(2). VerDate Aug<31>2005 17:26 Nov 26, 2007 Jkt 214001 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.26 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–23000 Filed 11–26–07; 8:45 am] Exchange to list only six expiration months in any index options at any one time. In the filing, CBOE explained that it had plans to introduce new volatility products and new volatility indexes in BILLING CODE 8011–01–P the near future, including the CBOE S&P 500 Three-Month Volatility Index (‘‘VXV’’).4 According to CBOE, VXV is SECURITIES AND EXCHANGE a measure of S&P 500 implied COMMISSION volatility—the volatility implied by S&P [Release No. 34–56821; File No. SR–CBOE– option prices—but instead of reflecting 2007–82] a constant 1-month implied volatility period (like other volatility indexes Self-Regulatory Organizations; such as the CBOE Volatility Index or Chicago Board Options Exchange, Incorporated; Order Granting Approval ‘‘VIX’’), VXV is designed to reflect the implied volatility of an option with a of Proposed Rule Change as Modified by Amendment No. 1 Thereto To Allow constant 3 months to expiration. Since there is only one day on which an the Exchange To List Up to Seven option has exactly 3 months to Expiration Months for Broad-Based expiration, VXV is calculated as a Security Index Options Upon Which weighted average of options expiring the Exchange Calculates a Constant immediately before and immediately Three-Month Volatility Index after the three-month standard. November 20, 2007. Accordingly, the Exchange would need to use four consecutive expiration I. Introduction months in order to calculate a constant On July 17, 2007, the Chicago Board three-month volatility index. Options Exchange, Incorporated CBOE stated in its filing that under (‘‘CBOE’’ or ‘‘Exchange’’) filed with the the current application of CBOE Rule Securities and Exchange Commission 24.9(a)(2), the Exchange generally lists (‘‘Commission’’) a proposed rule three consecutive near term months and change, pursuant to section 19(b)(1) of three months on a quarterly expiration the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 to cycle. One of the three consecutive near permit the Exchange to: (i) Amend Rule term months is always a quarterly month; however, that near term contract 24.9(a)(2), Terms of Index Option month (which is also a quarterly month) Contracts, to allow the Exchange to list is not included as part of the three up to seven expiration months for months listed on a quarterly expiration broad-based security index options cycle. Therefore, in order to permit the upon which the Exchange calculates a addition of four consecutive near term constant three-month volatility index; months under current Rule 24.9(a)(2), and (ii) remove outdated rule text from Rule 24.9(a)(2). On September 19, 2007, the Exchange would only be able to list two months on a quarterly expiration CBOE filed Amendment No. 1 to the cycle. Because of customer demand and proposed rule change. The proposed rule change, as modified by Amendment other investment strategy reasons for having three months on a quarterly No. 1, was published for comment in expiration cycle, the Exchange proposed the Federal Register on October 16, 2007.3 The Commission received no to increase, from six to seven, the comments on the proposal. This order number of expiration months for broadapproves the proposed rule change, as based security index options upon amended. which the Exchange calculates a constant three-month volatility index. II. Description of the Proposal CBOE explained that without this In its proposal, CBOE proposed to proposed rule change, if the Exchange amend Rule 24.9(a)(2), Terms of Index calculated a three-month volatility using Options, to allow the Exchange to list up only three consecutive near term to seven expiration months for broadmonths, this would result in the VXV based security index options upon being calculated with options expiring which the Exchange calculates a three months apart about one-third of constant three-month volatility index. Currently, Rule 24.9(a)(2) permits the 26 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 56632 (October 9, 2007), 72 FR 58694 (‘‘Notice’’). PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 4 The Exchange calculates volatility indexes on other broad-based security indexes, such as the Dow Jones Industrial Average index (‘‘DJX’’), the Nasdaq–100 index (‘‘NDX’’), and the Russell 2000 index (‘‘RUT’’). The Exchange may calculate a constant three-month volatility index on DJX, NDX or RUT in the future. E:\FR\FM\27NON1.SGM 27NON1 Federal Register / Vol. 72, No. 227 / Tuesday, November 27, 2007 / Notices the time.5 Another one-third of the time, VXV would be calculated with options expiring two months apart. And the final one-third of the time, VXV would be calculated with options expiring one month apart. As a result, the calculation of the three-month VXV under current Rule 24.9(a)(2) would render the VXV subject to inconsistencies that, according to CBOE, may make the index unattractive as an underlying for volatility products. Under the proposed rule change, however, the Exchange will be permitted, eight times a year, to add an additional seventh month in order to maintain four consecutive near term contract months. The Exchange also proposed to remove outdated rule text from Rule 24.9(a)(2). Specifically, the Exchange proposed to delete the provision that permitted the Exchange to list up to seven expiration months at any one time for the SPX, MNX and DJX index option contracts, provided that one of those expiration months is November 2004.6 Capacity CBOE represented that it has analyzed its capacity and represents that it believes the Exchange and the Options Price Reporting Authority have the necessary systems capacity to handle the additional traffic associated with the additional listing of a seventh contract month in order to maintain four consecutive near term contract months for those broad-based security index options upon which the Exchange calculates a constant three-month volatility index. III. Discussion pwalker on PROD1PC71 with NOTICES After careful review, the Commission finds that CBOE’s proposal to amend Rule 24.9(a)(2), Terms of Index Option Contracts, to allow the Exchange to list up to seven expiration months for broad-based security index options upon which the Exchange calculates a constant three-month volatility index, and to remove certain outdated rule text from Rule 24.9(a)(2) is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities 5 See Notice, supra note 3, at 58695 (providing examples to illustrate the effect of the proposed rule change). 6 This provision was added in July 2004 in response to customer demand for index options expiring in November 2004 to hedge positions in stocks overlying particular index options or to hedge market exposure to the equity markets generally against the uncertainty presented by the elections. See Securities Exchange Act Release No. 50063 (July 22, 2004), 69 FR 45357 (July 29, 2004)(SR–CBOE–2004–49). VerDate Aug<31>2005 17:26 Nov 26, 2007 Jkt 214001 exchange 7 and, in particular, the requirements of section 6 of the Act 8 and the rules and regulations thereunder. The Commission believes that increasing, from six to seven, the number of expiration months for broadbased security indexes on which the Exchange calculates a constant threemonth volatility index (to accommodate a fourth consecutive near-term month while maintaining the listing of three months on a quarterly expiration cycle) will result in a more consistent and predictable calculation in which the option series that bracket three months to expiration will always expire one month apart, thereby promoting just and equitable principles of trade while protecting investors and the public interest. The Commission also notes CBOE’s representations that it possesses the necessary systems capacity to handle the additional traffic associated with the additional listing of a seventh contract month in order to maintain four consecutive near term contract months for those broad-based security index options upon which the Exchange calculates a constant three-month volatility index. IV. Conclusion It is therefore ordered, pursuant to section 19(b)(2) of the Act,9 that the proposed rule change (SR–CBOE–2007– 82), as amended, be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.10 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–23001 Filed 11–26–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56813; File No. SR-CBOE– 2007–52] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Granting Approval of Proposed Rule Change as Modified by Amendment No. 1 Thereto Relating to $1 Strikes for VXD and VXN Options and $1 Strikes for RVX, VIX, VXD and VXN LEAPs November 19, 2007. I. Introduction On July 11, 2007, the Chicago Board Options Exchange, Incorporated (‘‘CBOE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change, pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder, 2 to permit the Exchange to: (i) List and trade CBOE Dow Jones Industrial Average Volatility Index (‘‘VXD’’) options and Nasdaq-100 Volatility Index (‘‘VXN’’) options in $1 strike price intervals; and (ii) list and trade CBOE Russell 2000 Volatility Index (‘‘RVX’’), VXD, VXN and CBOE Volatility Index (‘‘VIX’’) LEAPs in $1 strike price intervals. On August 20, 2007, CBOE filed Amendment No. 1 to the proposed rule change. The proposed rule change, as modified by Amendment No. 1, was published for comment in the Federal Register on September 24, 2007. 3 The Commission received one comment letter regarding the proposal. 4 This order approves the proposed rule change, as amended. II. Description of the Proposal In its proposal, CBOE proposed rules to permit the Exchange to list and trade options on the CBOE Dow Jones Industrial Average Volatility Index (‘‘VXD’’) and the Nasdaq-100 Volatility Index (‘‘VXN’’) in $1 strike price intervals within certain parameters described below. 5 Additionally, the rule change proposed to permit the Exchange 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 56449 (September 17, 2007), 72 FR 54306 (‘‘Notice’’). 4 See Letter from John C. Nagel, Director & Associate General Counsel, Citadel Investment Group, L.L.C. (‘‘Citadel’’) to Nancy Morris, Secretary, Commission, dated November 2, 2007 (‘‘Citadel Comment’’). 5 The Commission previously approved the listing and trading of VXD and VXN options, which the Exchange anticipates trading shortly. See Securities Exchange Act Release No. 49563 (April 14, 2004), 69 FR 21589 (April 21, 2004) (approving SR-CBOE–2003–40). 2 17 7 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 8 15 U.S.C. 78f. 9 15 U.S.C. 78s(b)(2). 10 17 CFR 200.30–3(a)(12). PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 66211 E:\FR\FM\27NON1.SGM 27NON1

Agencies

[Federal Register Volume 72, Number 227 (Tuesday, November 27, 2007)]
[Notices]
[Pages 66210-66211]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-23001]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56821; File No. SR-CBOE-2007-82]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change as 
Modified by Amendment No. 1 Thereto To Allow the Exchange To List Up to 
Seven Expiration Months for Broad-Based Security Index Options Upon 
Which the Exchange Calculates a Constant Three-Month Volatility Index

November 20, 2007.

I. Introduction

    On July 17, 2007, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change, pursuant to section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ to permit the Exchange to: (i) Amend Rule 
24.9(a)(2), Terms of Index Option Contracts, to allow the Exchange to 
list up to seven expiration months for broad-based security index 
options upon which the Exchange calculates a constant three-month 
volatility index; and (ii) remove outdated rule text from Rule 
24.9(a)(2). On September 19, 2007, CBOE filed Amendment No. 1 to the 
proposed rule change. The proposed rule change, as modified by 
Amendment No. 1, was published for comment in the Federal Register on 
October 16, 2007.\3\ The Commission received no comments on the 
proposal. This order approves the proposed rule change, as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 56632 (October 9, 
2007), 72 FR 58694 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

    In its proposal, CBOE proposed to amend Rule 24.9(a)(2), Terms of 
Index Options, to allow the Exchange to list up to seven expiration 
months for broad-based security index options upon which the Exchange 
calculates a constant three-month volatility index. Currently, Rule 
24.9(a)(2) permits the Exchange to list only six expiration months in 
any index options at any one time.
    In the filing, CBOE explained that it had plans to introduce new 
volatility products and new volatility indexes in the near future, 
including the CBOE S&P 500 Three-Month Volatility Index (``VXV'').\4\ 
According to CBOE, VXV is a measure of S&P 500 implied volatility--the 
volatility implied by S&P option prices--but instead of reflecting a 
constant 1-month implied volatility period (like other volatility 
indexes such as the CBOE Volatility Index or ``VIX''), VXV is designed 
to reflect the implied volatility of an option with a constant 3 months 
to expiration. Since there is only one day on which an option has 
exactly 3 months to expiration, VXV is calculated as a weighted average 
of options expiring immediately before and immediately after the three-
month standard. Accordingly, the Exchange would need to use four 
consecutive expiration months in order to calculate a constant three-
month volatility index.
---------------------------------------------------------------------------

    \4\ The Exchange calculates volatility indexes on other broad-
based security indexes, such as the Dow Jones Industrial Average 
index (``DJX''), the Nasdaq-100 index (``NDX''), and the Russell 
2000 index (``RUT''). The Exchange may calculate a constant three-
month volatility index on DJX, NDX or RUT in the future.
---------------------------------------------------------------------------

    CBOE stated in its filing that under the current application of 
CBOE Rule 24.9(a)(2), the Exchange generally lists three consecutive 
near term months and three months on a quarterly expiration cycle. One 
of the three consecutive near term months is always a quarterly month; 
however, that near term contract month (which is also a quarterly 
month) is not included as part of the three months listed on a 
quarterly expiration cycle. Therefore, in order to permit the addition 
of four consecutive near term months under current Rule 24.9(a)(2), the 
Exchange would only be able to list two months on a quarterly 
expiration cycle. Because of customer demand and other investment 
strategy reasons for having three months on a quarterly expiration 
cycle, the Exchange proposed to increase, from six to seven, the number 
of expiration months for broad-based security index options upon which 
the Exchange calculates a constant three-month volatility index.
    CBOE explained that without this proposed rule change, if the 
Exchange calculated a three-month volatility using only three 
consecutive near term months, this would result in the VXV being 
calculated with options expiring three months apart about one-third of

[[Page 66211]]

the time.\5\ Another one-third of the time, VXV would be calculated 
with options expiring two months apart. And the final one-third of the 
time, VXV would be calculated with options expiring one month apart. As 
a result, the calculation of the three-month VXV under current Rule 
24.9(a)(2) would render the VXV subject to inconsistencies that, 
according to CBOE, may make the index unattractive as an underlying for 
volatility products.
---------------------------------------------------------------------------

    \5\ See Notice, supra note 3, at 58695 (providing examples to 
illustrate the effect of the proposed rule change).
---------------------------------------------------------------------------

    Under the proposed rule change, however, the Exchange will be 
permitted, eight times a year, to add an additional seventh month in 
order to maintain four consecutive near term contract months.
    The Exchange also proposed to remove outdated rule text from Rule 
24.9(a)(2). Specifically, the Exchange proposed to delete the provision 
that permitted the Exchange to list up to seven expiration months at 
any one time for the SPX, MNX and DJX index option contracts, provided 
that one of those expiration months is November 2004.\6\
---------------------------------------------------------------------------

    \6\ This provision was added in July 2004 in response to 
customer demand for index options expiring in November 2004 to hedge 
positions in stocks overlying particular index options or to hedge 
market exposure to the equity markets generally against the 
uncertainty presented by the elections. See Securities Exchange Act 
Release No. 50063 (July 22, 2004), 69 FR 45357 (July 29, 2004)(SR-
CBOE-2004-49).
---------------------------------------------------------------------------

Capacity

    CBOE represented that it has analyzed its capacity and represents 
that it believes the Exchange and the Options Price Reporting Authority 
have the necessary systems capacity to handle the additional traffic 
associated with the additional listing of a seventh contract month in 
order to maintain four consecutive near term contract months for those 
broad-based security index options upon which the Exchange calculates a 
constant three-month volatility index.

III. Discussion

    After careful review, the Commission finds that CBOE's proposal to 
amend Rule 24.9(a)(2), Terms of Index Option Contracts, to allow the 
Exchange to list up to seven expiration months for broad-based security 
index options upon which the Exchange calculates a constant three-month 
volatility index, and to remove certain outdated rule text from Rule 
24.9(a)(2) is consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to a national securities exchange 
\7\ and, in particular, the requirements of section 6 of the Act \8\ 
and the rules and regulations thereunder. The Commission believes that 
increasing, from six to seven, the number of expiration months for 
broad-based security indexes on which the Exchange calculates a 
constant three-month volatility index (to accommodate a fourth 
consecutive near-term month while maintaining the listing of three 
months on a quarterly expiration cycle) will result in a more 
consistent and predictable calculation in which the option series that 
bracket three months to expiration will always expire one month apart, 
thereby promoting just and equitable principles of trade while 
protecting investors and the public interest.
---------------------------------------------------------------------------

    \7\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f.
---------------------------------------------------------------------------

    The Commission also notes CBOE's representations that it possesses 
the necessary systems capacity to handle the additional traffic 
associated with the additional listing of a seventh contract month in 
order to maintain four consecutive near term contract months for those 
broad-based security index options upon which the Exchange calculates a 
constant three-month volatility index.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-CBOE-2007-82), as amended, 
be, and hereby is, approved.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-23001 Filed 11-26-07; 8:45 am]
BILLING CODE 8011-01-P