Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving a Proposed Rule Change To List and Trade Options on the BXM Index (1/10th Value), 43963-43966 [E8-17310]

Download as PDF Federal Register / Vol. 73, No. 146 / Tuesday, July 29, 2008 / Notices jlentini on PROD1PC65 with NOTICES that the Governors have established prices and classifications not of general applicability for Express Mail Contract 1. Request at 2. In support of its Request, the Postal Service has also filed materials under seal, including an unredacted version of an explanation and justification in the Governors’ Decision and an unredacted analysis. Also filed under seal are the cost and revenue data and the certification of compliance with 39 U.S.C. 3633(a)(1) and (3). The Postal Service asserts ‘‘that the contract, related financial information, the customer’s name and the portions of the Governors’ Decision and accompanying analysis that provides prices, terms, and conditions should remain confidential.’’ Id. In Order No. 43, the Commission issued regulations establishing a modern system of rate regulation, including a list of competitive products. PRC Order No. 43, October 29, 2007, paras. 3061, 4013. Among other things, the Commission determined that each negotiated service agreement would initially be classified as a separate product. The specific Express Mail agreement filed in this docket will be classified as a new product. As noted above, the Postal Service filing in this docket was made pursuant to rule 3015.5 and rule 3020.30. As a consequence, the Commission will review the filing under both rule 3015 and part 3020, subpart B. Interested persons may express views and offer comments on whether the planned changes are consistent with the policies of 39 U.S.C. 3632, 3633 and/or 3642. Comments are due no later than July 31, 2008. Pursuant to 39 U.S.C. 505, Paul L. Harrington is appointed to serve as officer of the Commission (Public Representative) to represent the interests of the general public in the captioned docket. It is Ordered: 1. Comments on issues in this proceeding are due no later than July 31, 2008. 2. The Commission appoints Paul L. Harrington as Public Representative to represent the interests of the general public in this proceeding. 3. The Secretary shall arrange for publication of this Order in the Federal Register. SECURITIES AND EXCHANGE COMMISSION SECURITIES AND EXCHANGE COMMISSION Sunshine Act Meeting [Release No. 34–58207; File No. SR–CBOE– 2008–26] Notice is hereby given, pursuant to the provisions of the Government in the Sunshine Act, Public Law 94–409, that the Securities and Exchange Commission will hold a Closed Meeting on July 31, 2008 at 2 p.m. Commissioners, Counsel to the Commissioners, the Secretary to the Commission, and recording secretaries will attend the Closed Meeting. Certain staff members who have an interest in the matters also may be present. The General Counsel of the Commission, or his designee, has certified that, in his opinion, one or more of the exemptions set forth in 5 U.S.C. 552b(c)(3), (5), (7), (9)(B), and (10) and 17 CFR 200.402(a)(3), (5), (7), 9(ii) and (10), permit consideration of the scheduled matters at the Closed Meeting. Commissioner Walter, as duty officer, voted to consider the items listed for the Closed Meeting in closed session. The subject matter of the Closed Meeting scheduled for July 31, 2008 will be: Formal orders of investigation; institution and settlement of injunctive actions; institution and settlement of administrative proceedings of an enforcement nature; resolution of litigation claims; and other matters related to enforcement proceedings. At times, changes in Commission priorities require alterations in the scheduling of meeting items. For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact: The Office of the Secretary at (202) 551–5400. Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving a Proposed Rule Change To List and Trade Options on the BXM Index (1/10th Value) Dated: July 24, 2008. Florence E. Harmon, Acting Secretary. [FR Doc. E8–17414 Filed 7–28–08; 8:45 am] BILLING CODE 8010–01–P Jkt 214001 PO 00000 I. Introduction On June 2, 2008, the Chicago Board Options Exchange, Incorporated (‘‘CBOE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’)1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade options on the BXM Index (1/10th value). The proposed rule change was published for comment in the Federal Register on June 18, 2008.3 The Commission received no comments regarding the proposal. This order approves the proposed rule change. II. Description of the Proposal CBOE proposes to list and trade cashsettled, European-style options on an index that is equal to 1/10th of the value of the CBOE S&P 500 BuyWrite Index (‘‘BXM’’ or ‘‘BXM Index’’).4 Index Design The BXM Index measures the total rate of return of a hypothetical ‘‘covered call’’ strategy applied to the S&P 500 Composite Price Index (the ‘‘S&P 500 Index’’). This strategy, referred to as the ‘‘BXM covered call strategy,’’ consists of a hypothetical portfolio consisting of a ‘‘long’’ position indexed to the S&P 500 Index on which are deemed sold a succession of one-month, at-the-money call options on the S&P 500 Index listed on the Exchange. This hypothetical portfolio is referred to as the ‘‘covered S&P 500 Index portfolio.’’ The BXM Index provides a benchmark measure of the total return performance of this hypothetical portfolio. Dividends paid on the component stocks underlying the S&P U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 57946 (June 10, 2008), 73 FR 34811 (‘‘Notice’’). 4 The Exchange is not currently proposing to list and trade options that overlie the full-value BXM Index. CBOE Futures Exchange, LLC (‘‘CFE’’) currently lists and trades CBOE S&P 500 BuyWrite Index future contracts, which commenced trading on October 2, 2006. 2 17 BILLING CODE 7710–FW–P 16:12 Jul 28, 2008 July 22, 2008. 1 15 By the Commission. Issued July 23, 2008. Steven W. Williams, Secretary. [FR Doc. E8–17301 Filed 7–28–08; 8:45 am] VerDate Aug<31>2005 43963 Frm 00052 Fmt 4703 Sfmt 4703 E:\FR\FM\29JYN1.SGM 29JYN1 43964 Federal Register / Vol. 73, No. 146 / Tuesday, July 29, 2008 / Notices jlentini on PROD1PC65 with NOTICES 500 Index and the dollar value of option premium deemed received from the sold call options are functionally ‘‘reinvested’’ in the covered S&P 500 Index portfolio. The BXM Index is based on the cumulative gross rate of return of the covered S&P 500 Index portfolio since the inception of the BXM Index on June 1, 1988, when it was set to an initial value of 100.00. The BXM covered call strategy requires that each S&P 500 Index call option in the hypothetical portfolio be held to maturity, generally the third Friday of each month. The call option is settled against the Special Opening Quotation (‘‘SOQ’’) of the S&P 500 Index used as the final settlement price of S&P 500 Index call options.5 The SOQ is a special calculation of the S&P 500 Index that is compiled from the opening prices of component stocks underlying the S&P 500 Index that is performed when all 500 stocks underlying the S&P 500 Index have opened for trading, and is usually determined before 10 a.m. Chicago time.6 The final settlement price of the call option at maturity is the greater of 0 and the difference between the SOQ minus the strike price of the expiring call option. Subsequent to the settlement of the expiring call option, a new at-the-money call option expiring in the next month is then deemed written, or sold, a transaction commonly referred to as a ‘‘roll.’’ The strike price of the new call option is the S&P 500 Index call option listed on CBOE with the closest strike price above the last value of the S&P 500 Index reported before 10 a.m. Chicago time.7 Once the strike price of the new call option has been identified, the new call option is deemed sold at a price equal to the volume-weighted average of the traded prices (‘‘VWAP’’) of the new call option during the half-hour period beginning at 10:30 a.m. Chicago time. CBOE calculates the VWAP in a twostep process: First, CBOE excludes trades in the new call option between 10:30 a.m. and 11 a.m. Chicago time that are identified as having been executed as part of a ‘‘spread,’’ and then CBOE calculates the weighted average of all 5 If the third Friday of the month is an exchange holiday, the call option will be settled against the SOQ on the previous business day and the new call option will be selected on that day as well. 6 If one or more stocks in the S&P 500 Index do not open on the day the SOQ is calculated, the final settlement price for SPX options is determined in accordance with the Rules and By-Laws of The Options Clearing Corporation (‘‘OCC’’). 7 If the last value of the S&P 500 Index reported before 10 a.m. Chicago time is exactly equal to a listed S&P 500 Index call option strike price, then the new call option is the S&P 500 Index call option with that exact at-the-money strike price. VerDate Aug<31>2005 16:12 Jul 28, 2008 Jkt 214001 remaining transaction prices of the new call option between 10:30 a.m. and 11 a.m. Chicago time, with weights equal to the fraction of total non-spread volume transacted at each price during this period. The source of the transaction prices used in the calculation of the VWAP is CBOE’s Market Data Retrieval (‘‘MDR’’) System.8 If no transactions occur in the new call option between 10:30 a.m. and 11 a.m. Chicago time, then the new call option is deemed sold at the last bid price reported before 11 a.m. Chicago time. The value of option premium deemed received from the new call option is functionally ‘‘reinvested’’ in the portfolio. Index Calculation The BXM Index is calculated in realtime by CBOE every 15 seconds during each trading day, excluding roll dates (for the respective components of the covered S&P 500 Index portfolio). The BXM Index calculation is disseminated through OPRA and is publicly available through most price quote vendors.9 The BXM Index is a chained index, i.e. , its value is equal to 100 times the cumulative product of gross daily rates of return of the covered S&P 500 Index portfolio since the inception date of the BXM Index.10 Options Trading BXM options will be quoted in terms of the underlying BXM Index (1/10th value). Both options prices and cash index levels will be stated in decimal format and one point will equal $100. The minimum tick size for series trading below 3.00 will be 0.05 point ($5.00), and the minimum tick for series trading at and above 3.00 will be 0.10 point ($10.00). In accordance with Rule 24.9(a)(2), the Exchange will typically list three near-term expiration months and three additional expiration months from the March quarterly cycle (March, June, September and December). The minimum strike price interval for BXM options will be 0.01 point ($1.00). The Exchange will initially list at least two strike prices above and two strike prices below the current value of the BXM Index (1/10th value) at or about the time a series is opened for trading on the Exchange. As part of this initial listing, the Exchange will list strike prices that are within 5 points from the 8 Time and sales information from CBOE’s MDR System is disseminated through the Options Price Reporting Authority (‘‘OPRA’’) and is publicly available through most price quote vendors. 9 Information regarding the BXM Index may be found on CBOE’s Web site at the following Internet address: www.cboe.com/micro/bxm. 10 See Notice, supra note 3 for further discussion of the BXM Index calculation. PO 00000 Frm 00053 Fmt 4703 Sfmt 4703 closing value of the BXM Index (1/10th value) on the preceding day. The Exchange proposes to add additional series when the Exchange deems it necessary to maintain an orderly market, to meet customer demand, or when the underlying BXM Index (1/10th value) moves substantially from the initial exercise price or prices. To the extent that any additional strike prices are listed by the Exchange, such additional strike prices shall be within 30 percent above or below the closing value of the BXM Index (1/10th value). The Exchange will also be permitted to open additional strike prices that are more than 30 percent above or below the current BXM Index (1/10th value) provided that customer interest for such series is demonstrated and expressed by institutional, corporate or individual customers or their brokers. MarketMakers trading for their own account would not be considered when determining customer interest. In addition to the initial listed series, the Exchange may list up to 60 additional series per expiration month for each series in BXM options. In addition, the Exchange proposes that it shall not list LEAPS on BXM options at intervals less than $5. The Exchange also proposes to set forth a delisting policy with respect to BXM options. Specifically, the Exchange will, on a monthly basis, review series that are outside a range of five strikes above and five strikes below the current value of the BXM Index (1/ 10th value) and delist series with no open interest in both the put and the call series having a: (i) Strike higher than the highest strike price with open interest in the put and/or call series for a given expiration month; and (ii) strike lower than the lowest strike price with open interest in the put and/or call series for a given expiration month. Notwithstanding the proposed delisting policy, customer requests to add strikes and/or maintain strikes in BXM options in series eligible for delisting will be granted.11 Exercise and Settlement The proposed options will expire on the Saturday following the third Friday of the expiration month. Trading in the expiring contract month will normally cease at 3:15 p.m. Chicago time on the 11 The Exchange also proposes to add new Interpretation and Policy .11 to Rule 5.5, Series of Option Contracts Open for Trading, which would be an internal cross reference stating that the intervals between strike prices for BXM option series would be determined in accordance with proposed new Interpretation and Policy .01(f) to Rule 24.9. E:\FR\FM\29JYN1.SGM 29JYN1 Federal Register / Vol. 73, No. 146 / Tuesday, July 29, 2008 / Notices business day preceding the last day of trading (ordinarily the Thursday before expiration Saturday, unless there is an intervening holiday). When the last trading day is moved because of an Exchange holiday (such as when CBOE is closed on the Friday before expiration), the last trading day for expiring options will be Wednesday and the SOQ of the BXM Index will be calculated on Thursday. Exercise will result in delivery of cash on the business day following expiration. BXM options will be A.M.settled. As described above, the exercise settlement value of a BXM option shall be a SOQ of the BXM Index (1/10th value). The exercise-settlement amount is equal to the difference between the exercise-settlement value and the exercise price of the option, multiplied by $100. If the exercise settlement value is not available or the normal settlement procedure cannot be utilized due to a trading disruption or other unusual circumstance, the settlement value will be determined in accordance with the rules and bylaws of the OCC. Surveillance The Exchange states that it will use the same surveillance procedures currently utilized for each of the Exchange’s other index options to monitor trading in BXM options. The Exchange further represents that these surveillance procedures shall be adequate to monitor trading in options on these option products. For surveillance purposes, the Exchange will have complete access to information regarding trading activity in the pertinent underlying securities (i.e., S&P 500 Index component securities). jlentini on PROD1PC65 with NOTICES Position and Exercise Limits; Reporting of Positions The Exchange is not proposing to establish any position and exercise limits for BXM options. Because the BXM Index (1/10th value) is calculated using values of the S&P 500 Index, the Exchange believes that the position and exercise limits for this new product should be the same as those for broadbased index options (e.g. SPX) for which there are no position limits. BXM options will be subject to the same reporting and other requirements triggered for other options dealt in on the Exchange.12 12 See e.g., Rule 4.13, Reports Related to Position Limits. For purposes of calculating reportable positions, the Exchange has employed a contract factor of 10 for determining reporting and other requirements for BXM options. For example, the reporting requirements of Rule 24.4.03 for BXM options will be triggered when an end of day aggregate position exceeds 1 million contracts. VerDate Aug<31>2005 16:12 Jul 28, 2008 Jkt 214001 Exchange Rules Applicable Except as modified herein, the rules in Chapters I through XIX, XXIV, XXIVA, and XXIVB will equally apply to BXM options. BXM options will be margined as ‘‘broad-based index’’ options, and under CBOE rules, especially, Rule 12.3(c)(5)(A), the margin requirement for a short put or call shall be 100% of the current market value of the contract plus up to 15% of the respective underlying indicator value. Additional margin may be required pursuant to Exchange Rule 12.10. The Exchange proposes to designate BXM options as eligible for trading as Flexible Exchange Options as provided for in Chapters XXIVA (Flexible Exchange Options) and XXIVB (FLEX Hybrid Trading System). Capacity CBOE represents that it believes the Exchange and the OPRA have the necessary systems capacity to handle the additional traffic associated with the listing of new series that would result from the introduction of BXM options. III. Discussion The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.13 Specifically, the Commission finds that the proposal is consistent with Section 6(b)(5) of the Act,14 which requires, among other things, that the rules of a national securities exchange be designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Commission believes that the BXM Index (1/10th value) options should provide investors with a potentially useful investment choice. The Commission believes that permitting $1.00 strike price intervals for BXM option series will provide investors with added flexibility in the trading of BXM options and further the public interest by allowing investors to establish positions that are better tailored to meet their investment objectives. Further, the Commission notes that it has previously approved Exchange rules that permit the 13 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 14 15 U.S.C. 78f(b)(5). PO 00000 Frm 00054 Fmt 4703 Sfmt 4703 43965 Exchange to list series at $1.00 or lower strike price intervals in similar option products.15 The Commission also believes that the proposal strikes a reasonable balance between the Exchange’s desire to accommodate market participants by offering a wider array of investment opportunities and the need to avoid unnecessary proliferation of options series and the corresponding increase in quotes. The Commission notes that the delisting policy proposed by the Exchange is designed to mitigate the number of options series with no open interest, which would reduce quote traffic accordingly. The Commission notes that the BXM Index is calculated in real time by CBOE every 15 seconds during each trading day. The BXM Index calculation is disseminated through OPRA, and is publicly available through most price quote vendors. Because the BXM Index is calculated using values of the S&P 500 Index, the Commission believes it is appropriate that the position and exercise limits for BXM options be the same as for other broad-based index options, which similarly have no position and exercise limits. Further, the Commission notes that the margin requirements for broadbased index options will also apply to BXM options. The Commission also believes that the Exchange’s proposal to allow BXM options to be eligible for trading as FLEX options is consistent with the Act. The Commission previously approved rules relating to the listing and trading of FLEX Options on CBOE, which gives investors and other market participants the ability to individually tailor, within specified limits, certain terms of those options.16 The current proposal incorporates BXM (1/10th value) options that trade as FLEX Options into these existing rules and regulatory framework. The Commission notes that CBOE represented that it had an adequate surveillance program to monitor trading of options on the BXM Index (1/10th Value) and intends to apply its existing 15 Rule 24.9.01(b) permits the CBOE to list series on options based on one-one hundredth (1/100th) of the value of the Dow Jones Industrial Average Index at no less than $0.50 intervals. See Securities Exchange Act Release No. 39011 (September 3, 1997), 62 FR 47840 (September 11, 1997) (SR– CBOE–1997–26). Rule 24.9.11 allows the Exchange to list strike price intervals at no less than $1 for the Mini-SPX option, which is based on 1/10th the value of the S&P 500 Index. See Securities Exchange Act Release Nos. 52625 (October 18, 2005), 70 FR 61479 (October 24, 2005) (SR–CBOE– 2005–81) and 57049 (December 27, 2007), 73 FR 528 (January 3, 2008) (SR–CBOE–2007–125). 16 See Securities Exchange Act Release No. 31910 (February 23, 1993), 58 FR 12056 (March 2, 1993). E:\FR\FM\29JYN1.SGM 29JYN1 43966 Federal Register / Vol. 73, No. 146 / Tuesday, July 29, 2008 / Notices surveillance program to support the trading of these options. In approving the proposed rule change, the Commission has also relied upon the Exchange’s representation that it has the necessary systems capacity to support new options series that will result from this proposal. The Commission expects the Exchange to continue to monitor for option series with little or no open interest and trading activity and, consistent with the delisting policy approved today as part of this proposed rule change, to act promptly to delist such options. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,17 that the proposed rule change (SR–CBOE–2008– 26) is approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.18 Florence E. Harmon, Acting Secretary. [FR Doc. E8–17310 Filed 7–28–08; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–58209; File No. SR– NASDAQ–2008–064] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Allow The NASDAQ Options Market To Participate in the Quarterly Options Series Pilot Program 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 July 18, 2008, The NASDAQ Stock Market LLC (‘‘NASDAQ’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by NASDAQ. NASDAQ has designated the proposed rule change as constituting a non-controversial rule change under Section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b–4(f)(6) thereunder,4 which renders the proposal effective upon filing with the Commission. The Commission is jlentini on PROD1PC65 with NOTICES I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change NASDAQ proposes to allow the NASDAQ Options Market (‘‘NOM’’) to participate in the Quarterly Options Series pilot program on the terms and conditions that currently apply to other national securities exchanges that trade standardized options. The text of the proposed rule change is available on NASDAQ’s Web site (https:// nasdaqomx.cchwallstreet.com), at NASDAQ’s principal office, 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, NASDAQ 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. NASDAQ 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 July 22, 2008. 17 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(iii). 4 17 CFR 240.19b–4(f)(6). 18 17 VerDate Aug<31>2005 publishing this notice to solicit comments on the proposed rule change from interested persons. 16:12 Jul 28, 2008 Jkt 214001 The Exchange is proposing to establish, until July 10, 2009, a pilot program to list options series that would expire at the close of business on the last business day of a calendar quarter (‘‘Quarterly Options Pilot Program’’). Under the proposal, the Exchange could select up to five approved options classes on which Quarterly Options series could be opened. A series could be opened on any business day and would expire at the close of business on the last business day of a calendar quarter. The Exchange also could list and trade Quarterly Options series on any options class that is selected by another exchange that employs a similar pilot program. For each class selected for the Pilot Program, the Exchange could list series that expire at the end of the next four consecutive calendar quarters, as well as the fourth quarter of the following calendar year. NASDAQ’s PO 00000 Frm 00055 Fmt 4703 Sfmt 4703 Pilot Program will cover exchange traded fund (‘‘ETF’’) options only.5 Quarterly Options series listed on currently approved options classes would be P.M. settled and, in all other respects, would settle in the same manner as do the monthly expiration series in the same options class. The strike price for each series would be fixed at a price per share, with two strike prices above and two strike prices below the value of the underlying security at about the time that a Quarterly Options series is opened for trading on the Exchange. The interval between strike prices on Quarterly Options series would be the same as the interval between strike prices for series in the same options class that expire in accordance with the normal monthly expiration cycles. Series listed by the Exchange under the Pilot Program at the time of initial listing would have strike prices that are within $5.00 from the closing price of the underlying security on the preceding trading day. The proposal would permit the Exchange to open for trading additional Quarterly Options series of the same class when the Exchange deems it necessary to maintain an orderly market, to meet customer demand, or when the market price of the underlying security moves substantially from the initial exercise price or prices. On August 7, 2007, the Chicago Board Options Exchange (‘‘CBOE’’) filed a proposal to revise the terms of their Quarterly Options Series Pilot Program. As part of this filing, the CBOE proposed to implement new policies related to the listing and delisting of additional strike prices for Quarterly Options Series. The proposal was approved, as amended, by the Commission on March 3, 2008.6 Nasdaq proposes to adopt the revised terms of the CBOE’s Pilot Program, for use in its own Pilot Program. Specifically, Nasdaq proposes to amend Chapter IV, Section 6 and Commentary.04 to permit the Exchange to list additional strike prices for Quarterly Option Series in ETF options that fall within a percentage range (30%) above and below the price of the underlying ETF. Additionally, upon demonstrated customer interest, the Exchange also will be permitted to open additional strike prices of Quarterly Option Series in ETF options that are more than 30% above or below the current price of the 5 See electronic mail sent July 21, 2008 from Jeffrey Davis, Exchange, to Heidi Pilpel, Attorney, Division of Trading and Markets, Commission. 6 See Securities Exchange Act Release No. 57410 (March 3, 2008), 73 FR 12483 (March 7, 2008) (SR– CBOE–2007–96). E:\FR\FM\29JYN1.SGM 29JYN1

Agencies

[Federal Register Volume 73, Number 146 (Tuesday, July 29, 2008)]
[Notices]
[Pages 43963-43966]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-17310]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58207; File No. SR-CBOE-2008-26]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change To List and Trade 
Options on the BXM Index (1/10th Value)

July 22, 2008.

I. Introduction

    On June 2, 2008, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Pursuant to Section 19(b)(1) 
of the Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade options on the 
BXM Index (1/10th value). The proposed rule change was published for 
comment in the Federal Register on June 18, 2008.\3\ The Commission 
received no comments regarding the proposal. This order approves the 
proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 57946 (June 10, 
2008), 73 FR 34811 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

    CBOE proposes to list and trade cash-settled, European-style 
options on an index that is equal to 1/10th of the value of the CBOE 
S&P 500 BuyWrite Index (``BXM'' or ``BXM Index'').\4\
---------------------------------------------------------------------------

    \4\ The Exchange is not currently proposing to list and trade 
options that overlie the full-value BXM Index.
    CBOE Futures Exchange, LLC (``CFE'') currently lists and trades 
CBOE S&P 500 BuyWrite Index future contracts, which commenced 
trading on October 2, 2006.
---------------------------------------------------------------------------

Index Design

    The BXM Index measures the total rate of return of a hypothetical 
``covered call'' strategy applied to the S&P 500 Composite Price Index 
(the ``S&P 500 Index''). This strategy, referred to as the ``BXM 
covered call strategy,'' consists of a hypothetical portfolio 
consisting of a ``long'' position indexed to the S&P 500 Index on which 
are deemed sold a succession of one-month, at-the-money call options on 
the S&P 500 Index listed on the Exchange. This hypothetical portfolio 
is referred to as the ``covered S&P 500 Index portfolio.''
    The BXM Index provides a benchmark measure of the total return 
performance of this hypothetical portfolio. Dividends paid on the 
component stocks underlying the S&P

[[Page 43964]]

500 Index and the dollar value of option premium deemed received from 
the sold call options are functionally ``re-invested'' in the covered 
S&P 500 Index portfolio. The BXM Index is based on the cumulative gross 
rate of return of the covered S&P 500 Index portfolio since the 
inception of the BXM Index on June 1, 1988, when it was set to an 
initial value of 100.00.
    The BXM covered call strategy requires that each S&P 500 Index call 
option in the hypothetical portfolio be held to maturity, generally the 
third Friday of each month. The call option is settled against the 
Special Opening Quotation (``SOQ'') of the S&P 500 Index used as the 
final settlement price of S&P 500 Index call options.\5\ The SOQ is a 
special calculation of the S&P 500 Index that is compiled from the 
opening prices of component stocks underlying the S&P 500 Index that is 
performed when all 500 stocks underlying the S&P 500 Index have opened 
for trading, and is usually determined before 10 a.m. Chicago time.\6\ 
The final settlement price of the call option at maturity is the 
greater of 0 and the difference between the SOQ minus the strike price 
of the expiring call option.
---------------------------------------------------------------------------

    \5\ If the third Friday of the month is an exchange holiday, the 
call option will be settled against the SOQ on the previous business 
day and the new call option will be selected on that day as well.
    \6\ If one or more stocks in the S&P 500 Index do not open on 
the day the SOQ is calculated, the final settlement price for SPX 
options is determined in accordance with the Rules and By-Laws of 
The Options Clearing Corporation (``OCC'').
---------------------------------------------------------------------------

    Subsequent to the settlement of the expiring call option, a new at-
the-money call option expiring in the next month is then deemed 
written, or sold, a transaction commonly referred to as a ``roll.'' The 
strike price of the new call option is the S&P 500 Index call option 
listed on CBOE with the closest strike price above the last value of 
the S&P 500 Index reported before 10 a.m. Chicago time.\7\ Once the 
strike price of the new call option has been identified, the new call 
option is deemed sold at a price equal to the volume-weighted average 
of the traded prices (``VWAP'') of the new call option during the half-
hour period beginning at 10:30 a.m. Chicago time. CBOE calculates the 
VWAP in a two-step process: First, CBOE excludes trades in the new call 
option between 10:30 a.m. and 11 a.m. Chicago time that are identified 
as having been executed as part of a ``spread,'' and then CBOE 
calculates the weighted average of all remaining transaction prices of 
the new call option between 10:30 a.m. and 11 a.m. Chicago time, with 
weights equal to the fraction of total non-spread volume transacted at 
each price during this period. The source of the transaction prices 
used in the calculation of the VWAP is CBOE's Market Data Retrieval 
(``MDR'') System.\8\ If no transactions occur in the new call option 
between 10:30 a.m. and 11 a.m. Chicago time, then the new call option 
is deemed sold at the last bid price reported before 11 a.m. Chicago 
time. The value of option premium deemed received from the new call 
option is functionally ``reinvested'' in the portfolio.
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    \7\ If the last value of the S&P 500 Index reported before 10 
a.m. Chicago time is exactly equal to a listed S&P 500 Index call 
option strike price, then the new call option is the S&P 500 Index 
call option with that exact at-the-money strike price.
    \8\ Time and sales information from CBOE's MDR System is 
disseminated through the Options Price Reporting Authority 
(``OPRA'') and is publicly available through most price quote 
vendors.
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Index Calculation

    The BXM Index is calculated in real-time by CBOE every 15 seconds 
during each trading day, excluding roll dates (for the respective 
components of the covered S&P 500 Index portfolio). The BXM Index 
calculation is disseminated through OPRA and is publicly available 
through most price quote vendors.\9\ The BXM Index is a chained index, 
i.e. , its value is equal to 100 times the cumulative product of gross 
daily rates of return of the covered S&P 500 Index portfolio since the 
inception date of the BXM Index.\10\
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    \9\ Information regarding the BXM Index may be found on CBOE's 
Web site at the following Internet address: www.cboe.com/micro/bxm.
    \10\ See Notice, supra note 3 for further discussion of the BXM 
Index calculation.
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Options Trading

    BXM options will be quoted in terms of the underlying BXM Index (1/
10th value). Both options prices and cash index levels will be stated 
in decimal format and one point will equal $100. The minimum tick size 
for series trading below 3.00 will be 0.05 point ($5.00), and the 
minimum tick for series trading at and above 3.00 will be 0.10 point 
($10.00). In accordance with Rule 24.9(a)(2), the Exchange will 
typically list three near-term expiration months and three additional 
expiration months from the March quarterly cycle (March, June, 
September and December).
    The minimum strike price interval for BXM options will be 0.01 
point ($1.00). The Exchange will initially list at least two strike 
prices above and two strike prices below the current value of the BXM 
Index (1/10th value) at or about the time a series is opened for 
trading on the Exchange. As part of this initial listing, the Exchange 
will list strike prices that are within 5 points from the closing value 
of the BXM Index (1/10th value) on the preceding day.
    The Exchange proposes to add additional series when the Exchange 
deems it necessary to maintain an orderly market, to meet customer 
demand, or when the underlying BXM Index (1/10th value) moves 
substantially from the initial exercise price or prices. To the extent 
that any additional strike prices are listed by the Exchange, such 
additional strike prices shall be within 30 percent above or below the 
closing value of the BXM Index (1/10th value). The Exchange will also 
be permitted to open additional strike prices that are more than 30 
percent above or below the current BXM Index (1/10th value) provided 
that customer interest for such series is demonstrated and expressed by 
institutional, corporate or individual customers or their brokers. 
Market-Makers trading for their own account would not be considered 
when determining customer interest. In addition to the initial listed 
series, the Exchange may list up to 60 additional series per expiration 
month for each series in BXM options. In addition, the Exchange 
proposes that it shall not list LEAPS on BXM options at intervals less 
than $5.
    The Exchange also proposes to set forth a delisting policy with 
respect to BXM options. Specifically, the Exchange will, on a monthly 
basis, review series that are outside a range of five strikes above and 
five strikes below the current value of the BXM Index (1/10th value) 
and delist series with no open interest in both the put and the call 
series having a: (i) Strike higher than the highest strike price with 
open interest in the put and/or call series for a given expiration 
month; and (ii) strike lower than the lowest strike price with open 
interest in the put and/or call series for a given expiration month. 
Notwithstanding the proposed delisting policy, customer requests to add 
strikes and/or maintain strikes in BXM options in series eligible for 
delisting will be granted.\11\
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    \11\ The Exchange also proposes to add new Interpretation and 
Policy .11 to Rule 5.5, Series of Option Contracts Open for Trading, 
which would be an internal cross reference stating that the 
intervals between strike prices for BXM option series would be 
determined in accordance with proposed new Interpretation and Policy 
.01(f) to Rule 24.9.
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Exercise and Settlement

    The proposed options will expire on the Saturday following the 
third Friday of the expiration month. Trading in the expiring contract 
month will normally cease at 3:15 p.m. Chicago time on the

[[Page 43965]]

business day preceding the last day of trading (ordinarily the Thursday 
before expiration Saturday, unless there is an intervening holiday). 
When the last trading day is moved because of an Exchange holiday (such 
as when CBOE is closed on the Friday before expiration), the last 
trading day for expiring options will be Wednesday and the SOQ of the 
BXM Index will be calculated on Thursday.
    Exercise will result in delivery of cash on the business day 
following expiration. BXM options will be A.M.-settled. As described 
above, the exercise settlement value of a BXM option shall be a SOQ of 
the BXM Index (1/10th value). The exercise-settlement amount is equal 
to the difference between the exercise-settlement value and the 
exercise price of the option, multiplied by $100.
    If the exercise settlement value is not available or the normal 
settlement procedure cannot be utilized due to a trading disruption or 
other unusual circumstance, the settlement value will be determined in 
accordance with the rules and bylaws of the OCC.

Surveillance

    The Exchange states that it will use the same surveillance 
procedures currently utilized for each of the Exchange's other index 
options to monitor trading in BXM options. The Exchange further 
represents that these surveillance procedures shall be adequate to 
monitor trading in options on these option products. For surveillance 
purposes, the Exchange will have complete access to information 
regarding trading activity in the pertinent underlying securities 
(i.e., S&P 500 Index component securities).

Position and Exercise Limits; Reporting of Positions

    The Exchange is not proposing to establish any position and 
exercise limits for BXM options. Because the BXM Index (1/10th value) 
is calculated using values of the S&P 500 Index, the Exchange believes 
that the position and exercise limits for this new product should be 
the same as those for broad-based index options (e.g. SPX) for which 
there are no position limits.
    BXM options will be subject to the same reporting and other 
requirements triggered for other options dealt in on the Exchange.\12\
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    \12\ See e.g., Rule 4.13, Reports Related to Position Limits. 
For purposes of calculating reportable positions, the Exchange has 
employed a contract factor of 10 for determining reporting and other 
requirements for BXM options. For example, the reporting 
requirements of Rule 24.4.03 for BXM options will be triggered when 
an end of day aggregate position exceeds 1 million contracts.
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Exchange Rules Applicable

    Except as modified herein, the rules in Chapters I through XIX, 
XXIV, XXIVA, and XXIVB will equally apply to BXM options. BXM options 
will be margined as ``broad-based index'' options, and under CBOE 
rules, especially, Rule 12.3(c)(5)(A), the margin requirement for a 
short put or call shall be 100% of the current market value of the 
contract plus up to 15% of the respective underlying indicator value. 
Additional margin may be required pursuant to Exchange Rule 12.10.
    The Exchange proposes to designate BXM options as eligible for 
trading as Flexible Exchange Options as provided for in Chapters XXIVA 
(Flexible Exchange Options) and XXIVB (FLEX Hybrid Trading System).

Capacity

    CBOE represents that it believes the Exchange and the OPRA have the 
necessary systems capacity to handle the additional traffic associated 
with the listing of new series that would result from the introduction 
of BXM options.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\13\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\14\ which requires, among other things, 
that the rules of a national securities exchange be designed to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest.
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    \13\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the BXM Index (1/10th value) options 
should provide investors with a potentially useful investment choice. 
The Commission believes that permitting $1.00 strike price intervals 
for BXM option series will provide investors with added flexibility in 
the trading of BXM options and further the public interest by allowing 
investors to establish positions that are better tailored to meet their 
investment objectives. Further, the Commission notes that it has 
previously approved Exchange rules that permit the Exchange to list 
series at $1.00 or lower strike price intervals in similar option 
products.\15\ The Commission also believes that the proposal strikes a 
reasonable balance between the Exchange's desire to accommodate market 
participants by offering a wider array of investment opportunities and 
the need to avoid unnecessary proliferation of options series and the 
corresponding increase in quotes. The Commission notes that the 
delisting policy proposed by the Exchange is designed to mitigate the 
number of options series with no open interest, which would reduce 
quote traffic accordingly.
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    \15\ Rule 24.9.01(b) permits the CBOE to list series on options 
based on one-one hundredth (1/100th) of the value of the Dow Jones 
Industrial Average Index at no less than $0.50 intervals. See 
Securities Exchange Act Release No. 39011 (September 3, 1997), 62 FR 
47840 (September 11, 1997) (SR-CBOE-1997-26). Rule 24.9.11 allows 
the Exchange to list strike price intervals at no less than $1 for 
the Mini-SPX option, which is based on 1/10th the value of the S&P 
500 Index. See Securities Exchange Act Release Nos. 52625 (October 
18, 2005), 70 FR 61479 (October 24, 2005) (SR-CBOE-2005-81) and 
57049 (December 27, 2007), 73 FR 528 (January 3, 2008) (SR-CBOE-
2007-125).
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    The Commission notes that the BXM Index is calculated in real time 
by CBOE every 15 seconds during each trading day. The BXM Index 
calculation is disseminated through OPRA, and is publicly available 
through most price quote vendors.
    Because the BXM Index is calculated using values of the S&P 500 
Index, the Commission believes it is appropriate that the position and 
exercise limits for BXM options be the same as for other broad-based 
index options, which similarly have no position and exercise limits. 
Further, the Commission notes that the margin requirements for broad-
based index options will also apply to BXM options.
    The Commission also believes that the Exchange's proposal to allow 
BXM options to be eligible for trading as FLEX options is consistent 
with the Act. The Commission previously approved rules relating to the 
listing and trading of FLEX Options on CBOE, which gives investors and 
other market participants the ability to individually tailor, within 
specified limits, certain terms of those options.\16\ The current 
proposal incorporates BXM (1/10th value) options that trade as FLEX 
Options into these existing rules and regulatory framework.
---------------------------------------------------------------------------

    \16\ See Securities Exchange Act Release No. 31910 (February 23, 
1993), 58 FR 12056 (March 2, 1993).
---------------------------------------------------------------------------

    The Commission notes that CBOE represented that it had an adequate 
surveillance program to monitor trading of options on the BXM Index (1/
10th Value) and intends to apply its existing

[[Page 43966]]

surveillance program to support the trading of these options. In 
approving the proposed rule change, the Commission has also relied upon 
the Exchange's representation that it has the necessary systems 
capacity to support new options series that will result from this 
proposal. The Commission expects the Exchange to continue to monitor 
for option series with little or no open interest and trading activity 
and, consistent with the delisting policy approved today as part of 
this proposed rule change, to act promptly to delist such options.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-CBOE-2008-26) is approved.
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    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Florence E. Harmon,
Acting Secretary.
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    \18\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E8-17310 Filed 7-28-08; 8:45 am]
BILLING CODE 8010-01-P
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