Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change To Establish a Pilot Program To Modify FLEX Exercise Settlement Values and Minimum Value Sizes, 68435-68440 [E9-30545]
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Federal Register / Vol. 74, No. 246 / Thursday, December 24, 2009 / Notices
NYSE Arca Rule 2.100 at any time.19
NYSE Arca may request an extension of
this initial 10-day period for a specified
amount of time by filing a proposed rule
change with the Commission pursuant
to Section 19(b)(2) of the Act, and the
Commission must approve the NYSE
Arca’s proposal before any such
extension could take effect.20
NYSE Arca notes that NYSE Arca, like
other self-regulatory organizations
(‘‘SROs’’), currently has the authority to
halt trading in all stocks eligible for
trading on NYSE Arca in the event of
extraordinary market volatility.21 NYSE
Arca believes that the NYSE currently is
the only SRO that monitors for the
thresholds (i.e., specified declines in the
Dow Jones Industrial Average IndexSM
(‘‘DJIA’’) from the previous day’s close)
used in these SRO trading halt rules.
Accordingly, NYSE Arca proposes to
establish a mechanism to calculate the
DJIA thresholds in the event that trading
on the NYSE becomes inoperable and
NYSE Arca acts as the NYSE’s
alternative trading facility, as
contemplated by NYSE Arca Rule 2.100.
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III. Discussion and Commission
Findings
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.22 In particular, the
Commission finds that the proposal is
consistent with Section 6(b)(5) of the
Act,23 which requires, in part, that the
rules of a national securities exchange
be designed to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, 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
proposal is reasonably designed to
permit the NYSE to continue to operate
in the event of an emergency, as defined
in Section 12(k)(7) of the Act, by
allowing the NYSE’s corporate affiliate,
19 See NYSE Arca Rule 2.100(c)(2) and (3). NYSE
Arca will provide adequate prior notice to ETP
Holders, Sponsored Participants, and investors
regarding its intention to terminate any action taken
under the rule. See NYSE Arca Rule 2.100(c)(3).
20 See NYSE Arca Rule 2.100(c)(2).
21 See NYSE Arca Rule 7.12.
22 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).
23 15 U.S.C. 78f(b)(5).
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NYSE Arca, to receive and process
quotations in NYSE-listed securities and
to execute orders in NYSE-listed
securities on behalf of the NYSE in the
event of an emergency condition.24 A
qualified Corporation officer would
invoke the authority provided in NYSE
Arca Rule 2.100 only in an emergency,
as defined in Section 12(k)(7) of the
Act.25 NYSE Arca will make reasonable
efforts to consult with the Commission
prior to taking action under NYSE Arca
Rule 2.100.26 Any action taken under
NYSE Arca Rule 2.100 would be
operative for up to 10 calendar days
from the date that NYSE Arca invokes
its authority under the rule, and NYSE
Arca may terminate action taken under
the rule at any time.27 To extend an
action taken pursuant to NYSE Arca
Rule 2.100 beyond the initial 10calendar day period, NYSE Arca must
file a proposed rule change with the
Commission pursuant to Section
19(b)(2) under the Act, and the
Commission would need to approve
such an extension before it could take
effect.28 In addition, the Commission
could, at any time, exercise its authority
under Section 12(k)(2) of the Act 29 to
terminate an action taken by NYSE Arca
under NYSE Arca Rule 2.100.
NYSE Arca Rule 2.100 also addresses
surveillance and the disciplinary
procedures that would apply in the
event that NYSE Arca acts as the
NYSE’s alternative trading facility, as
provided in the rule. In particular,
NYSE Arca will conduct surveillance of
trading in NYSE-listed securities on
behalf of the NYSE.30 NYSE members,
member organizations, and sponsored
participants will remain subject to the
NYSE’s jurisdiction for any disciplinary
actions related to the trading of NYSElisted securities on or through the
systems and facilities of NYSE Arca,
and violations of NYSE Arca’s rules will
be referred to the NYSE for prosecution
according to the NYSE’s disciplinary
rules.31
The Commission believes that NYSE
Arca’s proposal to delete obsolete
language from NYSE Arca Rule 2.100 is
consistent with the Act because it is
designed to clarify the operation of
NYSE Arca Rule 2.100. Finally, the
Commission believes that NYSE Arca’s
proposal to establish a mechanism to
calculate the DJIA thresholds in the
event that trading on the NYSE becomes
inoperable is consistent with the Act
because it designed to help to maintain
a fair and orderly market.
24 The Commission previously has approved
proposals by other national securities exchanges to
establish back-up trading arrangements. See, e.g.,
Securities Exchange Act Release Nos. 51717 (May
19, 2005), 70 FR 30160 (May 25, 2005) (File No. SR–
CBOE–2004–59) (approving proposal by the
Chicago Board Options Exchange, Incorporated to
enter into back-up trading arrangements with other
exchanges); 51926 (June 27, 2005), 70 FR 38232
(July 1, 2005) (File No. SR–Phlx–2004–65)
(approving proposal by the Philadelphia Stock
Exchange (‘‘Phlx’’) to enter into back-up trading
arrangements with other exchanges); 40088 (June
12, 1998), 63 FR 33426 (June 18, 1998) (File No.
SR–Phlx–98–25) (approving the trading of Dell
options listed on the Phlx at the American Stock
Exchange on a temporary basis); and 27365
(October 19, 1989), 54 FR 43511 (October 25, 1989)
(File Nos. SR–Amex–89–26; CBOE–89–21; PSE–89–
28; and Phlx–89–52) (approving proposals to trade
options listed on the Pacific Stock Exchange on
other exchanges following an earthquake).
25 See NYSE Arca Rule 2.100(a)(2) and (3)(i). See
also note 10, supra, and accompanying text.
26 See NYSE Arca Rule 2.100(c)(1).
27 See NYSE Arca Rule 2.100(c)(2) and (3). NYSE
Arca would provide adequate prior notice to ETP
Holders, Sponsored Participants, and investors of
its intention to terminate any action taken pursuant
to NYSE Arca Rule 2.100. See NYSE Arca Rule
2.100(c)(3).
28 See NYSE Arca Rule 2.100(c)(2).
29 15 U.S.C. 78l(k)(2).
[Release No. 34–61183; File No. SR–CBOE–
2009–087]
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IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,32 that the
proposed rule change (File No. SR–
NYSE Arca–2009–90) is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–30543 Filed 12–23–09; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of a
Proposed Rule Change To Establish a
Pilot Program To Modify FLEX
Exercise Settlement Values and
Minimum Value Sizes
December 16, 2009.
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 3, 2009, Chicago Board
Options Exchange, Incorporated
(‘‘CBOE’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
30 See
NYSE Arca Rule 2.100(b)(5)(i).
NYSE Arca Rule 2.100(b)(5)(ii).
32 15 U.S.C. 78s(b)(2).
33 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
31 See
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Federal Register / Vol. 74, No. 246 / Thursday, December 24, 2009 / Notices
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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend its
rules regarding permissible exercise
settlement values and minimum value
sizes for Flexible Exchange Options
(‘‘FLEX Options’’).3 The text of the
proposed rule change is available on the
Exchange’s Web site (https://
www.cboe.org/Legal), at the Office of the
Secretary, CBOE and at the Commission.
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
self-regulatory organization 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 those 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 parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
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1. Purpose
The purpose of the filing is to modify
the permissible exercise settlement
values and minimum value sizes for
FLEX Options. These options are
governed by Exchange Chapters XXIVA
and XXIVB.
Exercise Settlement Values for FLEX
Index Options. We are proposing to
amend the permissible exercise
settlement values for FLEX Index
Options. Currently under Rules 24A.4
and 24B.4, FLEX Options may expire on
any business day specified as to day,
month and year, not to exceed a
maximum term of fifteen years. In
addition, the exercise settlement value
for FLEX Index Options can be specified
3 FLEX Options provide investors with the ability
to customize basic option features including size,
expiration date, exercise style, and certain exercise
prices. FLEX Options can be FLEX Index Options
or FLEX Equity Options. In addition, other products
are permitted to be traded pursuant to the FLEX
trading procedures. For example, credit options are
eligible for trading as FLEX Options pursuant to the
FLEX rules in Chapters XXIVA and XXIVB. See
CBOE Rules 24A.1(e) and (f), 24A.4(b)(1) and (c)(1),
24B.1(f) and (g), 24B.4(b)(1) and (c)(1), and 28.17.
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as the index value determined by
reference to the reported level of the
index as derived from the opening or
closing prices of the component
securities (‘‘a.m. settlement’’ or ‘‘p.m.
settlement,’’ respectively) or as a
specified average, provided that the
average index value must conform to the
averaging parameters established by the
Exchange.4 However, only a.m.
settlements are permitted if a FLEX
Index Option expires on, or within two
business days of, a third-Friday-of-themonth expiration (‘‘Expiration
Friday’’).5 We are proposing to
eliminate this latter restriction on p.m.
and specified average price settlements
in FLEX Index Options on a pilot
program basis.6
The proposal would become effective
on a pilot program basis for a period of
fourteen months. If the Exchange were
to propose an extension of the program
or should the Exchange propose to make
the program permanent, then the
Exchange would submit a filing
proposing such amendments to the
program. The Exchange notes that any
positions established under the pilot
would not be impacted by the
expiration of the pilot. For example, a
position in a PM-settled FLEX Index
Option series that expires on Expiration
Friday in January 2015 could be
established during the 14-month pilot. If
the pilot program were not extended,
then the position could continue to
exist. However, the Exchange notes that
any further trading in the series would
be restricted to transactions where at
least one side of the trade is a closing
transaction.7
As part of the pilot program, the
Exchange would also submit a pilot
program report to the Commission at
least two months prior to the expiration
4 See Rules 24A.4(b)(3) and 24B.4(b)(3); see also
Securities Exchange Act Release No. 31920
(February 24, 1993), 58 FR 12280 (March 3, 1993)
(SR–CBOE–92–17). The Exchange has determined
to limit the averaging parameters to three
alternatives: The average of the opening and closing
index values; the average of the intra-day high and
low index values; and the average of the opening,
closing, and intra-day high and low index values.
Any changes to the averaging parameters
established by the Exchange would be announced
to the membership via circular.
5 For example, under the current rules, the
exercise settlement value of a FLEX Index Option
that expires on the Tuesday before Expiration
Friday could have an a.m., p.m. or specified average
settlement. However, the exercise settlement value
of a FLEX Index Option that expires on the
Wednesday before Expiration Friday could only
have an a.m. settlement.
6 No change is necessary or being requested with
respect to FLEX Equity Options. Regardless of the
expiration date, FLEX Equity Options are settled by
physical delivery of the underlying.
7 The Exchange intends to address this point in
a circular to members should the Exchange receive
approval of this proposal.
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date of the program (the ‘‘annual
report’’). As described below, the annual
report would contain an analysis of
volume, open interest and trading
patterns. In addition, for series that
exceed certain minimum open interest
parameters, the annual report would
provide analysis of index price volatility
and share trading activity. The annual
report would be provided to the
Commission on a confidential basis.
Analysis of Volume and Open
Interest. For each broad-based FLEX
Index class overlying an Expiration
Friday, PM-settled FLEX Index series,
the annual report would contain the
following volume and open interest
data:
(1) Monthly volume aggregated for all
Expiration Friday, PM-settled FLEX
Index series trades;
(2) monthly volume for Expiration
Friday, PM-settled FLEX Index series
trades aggregated by expiration date;
(3) monthly volume for individual
Expiration Friday, PM-settled FLEX
Index series;
(4) month-end open interest
aggregated for all Expiration Friday, PMsettled FLEX Index series;
(5) month-end open interest for
Expiration Friday, PM-settled FLEX
Index series aggregated by expiration
date;
(6) month-end open interest for
individual Expiration Friday, PMsettled FLEX Index series; and
(7) ratios of monthly aggregate volume
and month-end open interest for
Expiration Friday, PM-settled FLEX
Index and all series of that class
(including the Expiration Friday, PMsettled FLEX Index series).
In addition to the annual report, the
Exchange would provide the
Commission with interim reports of the
information listed in Items (1) through
(7) above periodically as required by the
Commission while the pilot is in effect.
These interim reports would also be
provided on a confidential basis.
For each broad-based FLEX Index
class overlying an Expiration Friday,
PM-settled FLEX Index option, the
annual report would also contain the
information noted in Items (1) through
(7) above for Expiration Friday, AMsettled FLEX Index series. In addition,
for each broad-based Non-FLEX Index
class overlying the same index as an
Expiration Friday, PM-settled FLEX
Index option, the annual report would
also contain the information noted in
Items (1) through (7) above for
Expiration Friday Non-FLEX Index
series. This data on Expiration Friday,
AM-settled FLEX Index series and
Expiration Friday Non-FLEX Index
series would cover the period of the
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annual report as well as a pre-pilot
period to be determined by the
Exchange and the Commission.
Analysis of FLEX Trading Patterns.
The annual report would contain the
following analysis of FLEX trading
patterns:
(1) A time series analysis of open
interest in Expiration Friday, PM-settled
FLEX Index series; and
(2) an analysis of the distribution of
Expiration Friday, PM-settled FLEX
Index series trade sizes and of the
number of trades that occur in each
Expiration Friday, PM-settled FLEX
Index series.
Analysis of Index Price Volatility and
Share Trading Activity. For each broadbased index class overlying an
Expiration Friday, PM-settled FLEX
Index that has open interest in
Expiration Friday, PM-settled FLEX
Index series that exceed certain
minimum parameters, the annual report
would contain the following analysis
related to index price changes and
underlying share trading volume at the
close on Expiration Fridays:
(1) A comparison of index price
changes at the close of trading on a
given Expiration Friday with
comparable price changes from a control
sample. The data would include a
calculation of percentage price changes
for various time intervals and compare
that information to the respective
control sample. Raw percentage price
change data as well as percentage price
change data normalized for prevailing
market volatility, as measured by the
CBOE Volatility Index (VIX), would be
provided; and
(2) a calculation of share volume for
a sample set of the component securities
representing an upper limit on share
trading that could be attributable to
expiring in-the-money Expiration
Friday, PM-settled FLEX Index series.
The data would include a comparison of
the calculated share volume for
securities in the sample set to the
average daily trading volumes of those
securities over a sample period.
The minimum open interest
parameters, control sample, time
intervals, method for randomly selecting
the component securities, and sample
periods would be determined by the
Exchange and the Commission.
Minimum Value Size Requirements
for All FLEX Options. Second, we are
proposing to eliminate the minimum
value size requirements for FLEX
Options. Currently under Rules 24A.4
and 24B.4, the minimum value size
requirements are as follows:
• For opening transactions in any
FLEX series in which there is no open
interest at the time a FLEX Request for
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Quotes (‘‘RFQ’’) or FLEX Order, as
applicable, is submitted is (i) for FLEX
Equity Options, the lesser of 250
contracts or the number of contracts
overlying $1 million in the underlying
securities; and (ii) for FLEX Index
Options, $10 million Underlying
Equivalent Value. For a pilot period
ending February 28, 2010, the ‘‘250
contracts’’ component above has been
reduced to ‘‘150 contracts.’’
• For a transaction in any currentlyopened FLEX series resulting from an
RFQ or from trading against the
electronic book (other than FLEX
Quotes responsive to a FLEX Request for
Quotes and FLEX Orders submitted to
rest in the electronic book) is (i) for
FLEX Equity Options, the lesser of 100
contracts or the number of contracts
overlying $1 million in the underlying
securities in the case of opening
transactions, and 25 contracts in the
case of closing transactions; and (ii) for
FLEX Index Options, $1 million
Underlying Equivalent Value in the case
of both opening and closing
transactions; or (iii) in either case the
remaining underlying size or
Underlying Equivalent Value on a
closing transaction, whichever is less.
• The minimum value size for FLEX
Quotes responsive to an RFQ and FLEX
Orders (undecremented size) submitted
to rest in the electronic book is 25
contracts in the case of FLEX Equity
Options, and $1 million Underlying
Equivalent Value in the case of FLEX
Index Options, or in either case the
remaining underlying size or
Underlying Equivalent Value on a
closing transaction, whichever is less. In
addition, with respect to FLEX Index
Appointed Market-Makers, FLEX
Quotes and FLEX Orders
(undecremented size) must be for at
least $10 million Underlying Equivalent
Value or the dollar amount indicated in
the Request for Quote (if applicable),
whichever is less.
We are proposing to eliminate these
minimum value size requirements on a
fourteen month pilot program basis. If
the Exchange were to propose an
extension or an expansion of the
minimum value size pilot program, or
should the Exchange propose to make
the program permanent, the Exchange
would submit, along with any filing
proposing such amendments to the
program, a pilot program report that
would provide an analysis of the
program covering the period during
which the program was in effect. This
minimum value size report would
include: (i) Data and analysis on the
open interest and trading volume in (a)
FLEX Equity Options for which series
were opened with a minimum opening
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68437
size of 0 to 249 contracts and less than
$1 million in underlying value; (b)
FLEX Index Options for which series
were opened with a minimum opening
size of less than $10 million in
underlying equivalent value; and (ii)
analysis on the types of investors that
initiated opening FLEX Equity and
Index Options transactions (i.e.,
institutional, high net worth, or retail).
The report would be submitted to the
Commission at least two months prior to
the expiration date of the pilot program
and would be provided on a
confidential basis.
The Exchange notes that any positions
established under this pilot would not
be impacted by the expiration of the
pilot. For example, a 10-contract FLEX
Equity Option opening position that
overlies less than $1 million in the
underlying security and expires in
January 2015 could be established
during the 14-month pilot. If the pilot
program were not extended, then the
position could continue to exist and any
further trading in the series would be
subject to the minimum value size
requirements for continued trading in
that series.
Discussion. CBOE believes that
expanding the exercise settlement
values for FLEX Index Options and
eliminating the minimum value size
requirements for all FLEX Options on
are [sic] important and necessary to the
Exchange’s efforts to create a product
and market that provides members and
investors interested in FLEX-type
options with an improved but
comparable alternative to the over-thecounter (‘‘OTC’’) market in customized
options, which can take on contract
characteristics similar to FLEX Options
but are not subject to the same
restrictions. By making these changes,
market participants would now have
greater flexibility in determining
whether to execute their customized
options in an exchange environment or
in the OTC market. CBOE believes
market participants benefit from being
able to trade these customized options
in an exchange environment in several
ways, including, but not limited to the
following: (1) Enhanced efficiency in
initiating and closing out positions; (2)
increased market transparency; and (3)
heightened contra-party
creditworthiness due to the role of The
Options Clearing Corporation (‘‘OCC’’)
as issuer and guarantor of FLEX
Options. The Exchange also believes the
proposed changes to the FLEX rules are
wholly consistent with recent comments
by Timothy F. Geithner, Secretary of the
Treasury, to the U.S. Senate. In
particular, Secretary Geithner has stated
that:
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‘‘Market efficiency and price
transparency should be improved in
derivatives markets by requiring the
clearing of standardized contracts
through regulated [central
counterparties] and by moving the
standardized part of these markets onto
regulated exchanges and regulated
transparent electronic trade execution
systems for OTC derivatives and by
requiring development of a system for
timely reporting of trades and prompt
dissemination of prices and other trade
information. Furthermore, regulated
financial institutions should be
encouraged to make greater use of
regulated exchange-traded derivatives.
Competition between appropriately
regulated OTC derivatives markets and
regulated exchanges will make both sets
of markets more efficient and thereby
better serve end-users of derivatives.’’ 8
CBOE notes that when the FLEX
Option rules were initially proposed
and approved almost sixteen years ago,
the Exchange was uncertain what
market impacts, if any, excessive FLEX
positions would have on the market or
on firms.9 To minimize the risk of
adverse market effects, at the time the
FLEX rules were first introduced the
Exchange put in place certain position
limit boundaries (which have been
modified over time) and the
requirement that the FLEX expiration
date be no closer than three business
days from any Non-FLEX Option
Expiration Friday (which has been
eliminated).10 Based on the Exchange’s
experience in trading FLEX Options to
date—specifically with respect to the
diversity in FLEX Option trading, the
relatively small percentage FLEX
Options trading compared to overall
trading on the Exchange, and the lack of
market disruptions or problems caused
by or on existing FLEX Option
8 See letter from Secretary Geithner to the
Honorable Harry Reid, United States Senate (May
13, 2009), located at https://
www.financialstability.gov/docs/OTCletter.pdf.
9 See Securities Exchange Act Release Nos. 31361
(October 27, 1992) 57 FR 52655 (November 4, 1992)
(SR–CBOE–92–17) (notice of filing of proposed rule
change relating to Flexible Exchange Options) and
31920 (February 24, 1993), 58 FR 12280 (March 3,
1993) (Order approving SR–CBOE–92–17). At the
time of the proposal, the Exchange also anticipated
that there would be limited secondary trading in
any FLEX Option series having a particular
expiration date due to the diversity inherent in
FLEX Options and that FLEX expiration
concentrations should be rare. These observations
appear to be accurate for the trading in FLEX
Options to date.
10 When the expiration date restrictions were
eliminated, the Exchange adopted the aforementioned restriction limiting exercise settlement
values for FLEX Index Options that expire on, or
within two business days of, an Expiration Friday
to a.m. settlements. See Securities Exchange Act
Release No. 59417 (February 18, 2009), 74 FR 8591
(February 25, 2009) (SR–CBOE–2008–115).
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expirations—CBOE no longer believes
the restrictions on exercise settlement
value are necessary to insulate NonFLEX expirations from the potential
adverse market impacts of FLEX
expirations.11 To the contrary, CBOE
believes that the restriction actually
places the Exchange at a competitive
disadvantage to its OTC counterparts in
the market for customized options, and
unnecessarily limits market
participants’ ability to trade in an
exchange environment that offers the
added benefits of transparency, price
discovery, liquidity, and financial
stability.
The Exchange also notes that certain
position limit, aggregation and exercise
limit requirements would continue to
apply to FLEX Options in accordance
with Rules 24A.7, 24A.8, 24B.7 and
24B.8. Additionally, all FLEX options
remain subject to the position reporting
11 In further support of its proposal, the Exchange
also notes that the p.m. and specified average price
settlements are already permitted for FLEX Index
Options on any other business day except on, or
within two business days of, Expiration Friday. The
Exchange is not aware of any market disruptions or
problems caused by the use of these settlement
methodologies on these expiration dates. The
Exchange is also not aware of any market
disruptions or problems caused by the use of
customized options in the OTC markets that expire
on or near Expiration Friday and have a p.m. or
specified average exercise settlement value. In
addition, the Exchange believes the reasons for
limiting expirations to a.m. settlement, which is
something the SEC has imposed since the early
1990s for Non-FLEX Options, revolved around a
concern about expiration pressure on the New York
Stock Exchange (‘‘NYSE’’) at the close that are no
longer relevant in today’s market. Today, however,
the Exchange believes stock exchanges are much
better able to handle volume. There are multiple
primary listing and unlisted trading privilege
(‘‘UTP’’) markets, and trading is dispersed among
several exchanges and alternative trading systems.
In addition, the Exchange believes that surveillance
techniques are much more robust and automated.
In the early 1990s, it was also thought by some that
opening procedures allow more time to attract
contra-side interest to reduce imbalances. The
Exchange believes, however, that today order flow
is predominantly electronic and the ability to
smooth out openings and closings is greatly
reduced (e.g., market-on-close procedures work just
as well as openings). Also other markets, such as
the NASDAQ Stock Exchange, do not have the same
type of pre-opening imbalance disseminations as
the NYSE, so many stocks are not subject to the
same procedures on Expiration Friday. In addition,
the Exchange believes that the NYSE has reduced
the required time a specialist has to wait after
disseminating a pre-opening indication. So, in this
respect, the Exchange believes there is less time to
react in the opening than in the close. Moreover, to
the extent there may be a risk of adverse market
effects attributable to p.m. settled options (or
certain average price settled options related to the
closing price) that would otherwise be traded in a
non-transparent fashion in the OTC market, the
Exchange believes that such risk would be lessened
by making these customized options eligible for
trading in an exchange environment because of the
added transparency, price discovery, liquidity, and
financial stability available.
PO 00000
Frm 00023
Fmt 4703
Sfmt 4703
requirements of Rule 4.13(a).12
Moreover, the Exchange and member
organizations each have the authority,
pursuant to Rule 12.10, to impose
additional margin as deemed advisable.
CBOE believes these existing safeguards
serve sufficiently to help monitor open
interest in FLEX Option series and
significantly reduce any risk of adverse
market effects that might occur as a
result of large FLEX exercises in FLEX
Option series that expire near NonFLEX expirations and use a p.m.
settlement.
The Exchange likewise believes that
the elimination of the minimum value
size requirement would provide FLEXparticipating members with greater
flexibility in structuring the terms of
FLEX Options that best comports with
their and their customers’ particular
needs. In this regard, the Exchange
notes that the minimum value size
requirement was also originally put in
place over sixteen years ago to limit
participation in FLEX Options to
sophisticated, high net worth investors
rather than retail investors. However,
the Exchange believes the restriction is
no longer necessary and is overly
restrictive. Again, based on the
Exchange’s experience to date, the
minimum value size requirement is too
large to accommodate the needs of
members and their customers—who
may be institutional, high net worth or
retail—that currently participate in the
OTC market. In this regard, the
Exchange notes that it has recently
received numerous requests from
broker-dealers representing
institutional, high net worth and retail
investors indicating that the minimum
value size requirement prevents them
from bringing transactions that are
already taking place in the OTC market
to an exchange environment. Thus,
Exchange believes that eliminating the
minimum value size requirement would
further broaden the base of investors
that use FLEX Options to manage their
trading and investment risk, including
12 CBOE Rule 4.13(a) provides that ‘‘[i]n a manner
and form prescribed by the Exchange, each member
shall report to the Exchange, the name, address, and
social security or tax identification number of any
customer who, acting alone, or in concert with
others, on the previous business day maintained
aggregate long or short positions on the same side
of the market of 200 or more contracts of any single
class of option contracts dealt in on the Exchange.
The report shall indicate for each such class of
options, the number of option contracts comprising
each such position and, in the case of short
positions, whether covered or uncovered.’’ For
purposes of this Rule, the term ‘‘customer’’ in
respect of any member includes ‘‘the member, any
general or special partner of the member, any officer
or director of the member, or any participant, as
such, in any joint, group or syndicate account with
the member or with any partner, officer or director
thereof.’’ Rule 4.13(d).
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investors that currently trade in the OTC
market for customized options, where
similar size restrictions do not apply.
The Exchange also believes that this
may open up FLEX Options to more
retail investors. The Exchange does not
believe this raises any unique regulatory
concerns because, as indicated above,
existing safeguards—such as certain
position limit, aggregation and exercise
limit requirements, reporting
requirements, and margin
requirements—would continue to apply.
In addition, the Exchange notes that
FLEX Options are subject to the options
disclosure document (‘‘ODD’’)
requirements of Rule 9b–113 under the
Act.14 No broker or dealer can accept an
order from a customer to purchase or
sell an option contract relating to an
options class that is the subject of a
definitive ODD (including FLEX
Options), or approve the customer’s
account for the trading of such an
option, unless the broker or dealer
furnishes or has furnished to the
customer a copy of the definitive ODD.
The ODD contains a description, special
features, and special risks of FLEX
Options. Lastly, similar to any other
options, FLEX Options are subject to
member firm supervision and suitability
requirements, such as in CBOE Rules
9.8 and 9.9.
In proposing these changes, CBOE is
cognizant of the need for market
participants to have substantial options
transaction capacity and flexibility to
hedge their substantial investment
portfolios, on the one hand, and the
potential for adverse effects that the
exercise settlement value and minimum
value size restrictions were originally
designed to address, on the other. CBOE
is also cognizant of the OTC market, in
which similar restrictions on exercise
settlement value and minimum size do
not apply. In light of these
considerations and Secretary Geithner’s
recent comments on moving the
standardized parts of OTC contracts
onto regulated exchanges, CBOE
believes these changes are appropriate
and reasonable and would provide
market participants with additional
flexibility in determining whether to
execute their customized options in an
exchange environment or in the OTC
market. CBOE believes market
participants benefit from being able to
trade these customized options in an
exchange environment in several ways,
including, but not limited to, enhanced
efficiency in initiating and closing out
positions; increased market
transparency; and heightened contra13 17
14 15
15:40 Dec 23, 2009
2. Statutory Basis
By expanding permissible expiration
dates for FLEX Options, the Exchange
believes the proposed rule change is
consistent with Section 6(b) of the Act 15
in general and furthers the objectives of
Section 6(b)(5) of the Act 16 in particular
in that it should promote just and
equitable principles of trade, serve to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and
protect investors and the public interest.
The Exchange believes that the
elimination of the p.m. settlement date
restrictions for FLEX Index Options and
the minimum size requirements for all
FLEX Options in the manner proposed
does not raise any unique regulatory
concerns. In particular, although p.m.
settlements may raise questions with the
Commission, the Exchange believes that
market impact and investor protection
concerns will not be raised by this rule
change. The Exchange also believes that
the proposed rule change would provide
members and investors with additional
opportunities to trade customized
options in an exchange environment
and subject to exchange-based rules,
and investors would benefit as a result.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
CBOE does not believe that the
proposed rule change will impose any
burden on competition 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.
15 15
CFR 240.9b–1.
U.S.C. 78a et seq.
VerDate Nov<24>2008
party creditworthiness due to the role of
OCC as issuer and guarantor of FLEX
Options.
For the foregoing reasons, CBOE
believes that the proposed revisions to
the exercise settlement values and
minimum value size requirements are
reasonable and appropriate, would
promote just and equitable principles of
trade, and would facilitate transactions
in securities while continuing to foster
the pubic interest and investor
protection.
16 15
Jkt 220001
PO 00000
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
Frm 00024
Fmt 4703
Sfmt 4703
68439
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 self-regulatory
organization 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
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CBOE–2009–087 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
Station Place, 100 F Street, NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CBOE–2009–087. 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
Room, 100 F Street, NE., Washington,
DC 20549, on official business days
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between the hours of 10 a.m. and 3 p.m.
Copies of such filing also will be
available for inspection and copying at
the principal office of CBOE. 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 publicly available. All
submissions should refer to File
Number SR–CBOE–2009–087 and
should be submitted on or before
January 14, 2010.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.17
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–30545 Filed 12–23–09; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Self-Regulatory Organizations; Notice
of Filing and Immediate Effectiveness
of Proposed Rule Change by NYSE
Amex LLC Amending Rules 312– and
321–NYSE Amex Equities and Adopt
New Rules 2262– and 2269–NYSE
Amex Equities Filed by the Financial
Industry Regulatory Authority, Inc.
December 16, 2009.
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that on December
14, 2009, NYSE Amex LLC (the
‘‘Exchange’’ or ‘‘NYSE Amex’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rules 312– and 321–NYSE Amex
Equities and adopt new Rules 2262–
and 2269–NYSE Amex Equities to
correspond with rule changes filed by
the Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) and approved
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
15:40 Dec 23, 2009
1. Purpose
The purpose of the proposed rule
changes is to amend Rules 312–NYSE
Amex Equities (Changes Within
Member Organizations) and 321–NYSE
Amex Equities (Formation or
Acquisition of Subsidiaries) and adopt
new Rules 2262–NYSE Amex Equities
(Disclosure of Control Relationship with
Issuer) and 2269–NYSE Amex Equities
(Disclosure of Participation or Interest
in Primary or Secondary Distribution) to
correspond with rule changes filed by
FINRA and approved by the
Commission.
Background. On July 30, 2007,
FINRA’s predecessor, the National
Association of Securities Dealers, Inc.
(‘‘NASD’’), and NYSE Regulation, Inc.
(‘‘NYSER’’) consolidated their member
firm regulation operations into a
combined organization, FINRA.
Pursuant to Rule 17d–2 under the
Securities Exchange Act of 1934, as
amended (the ‘‘Act’’), the New York
Stock Exchange LLC (‘‘NYSE’’), NYSER
and FINRA entered into an agreement
(the ‘‘Agreement’’) to reduce regulatory
duplication for their members by
allocating to FINRA certain regulatory
responsibilities for certain NYSE rules
and rule interpretations (‘‘FINRA
Incorporated NYSE Rules’’). The
Exchange became a party to the
Agreement effective December 15,
2008.4
4 See Securities Exchange Act Release Nos. 56148
(July 26, 2007), 72 FR 42146 (August 1, 2007) (order
approving the Agreement); 56147 (July 26, 2007), 72
FR 42166 (August 1, 2007) (SR–NASD–2007–054)
1 15
VerDate Nov<24>2008
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
self-regulatory organization 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 those 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 parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
[Release No. 34–61179; File No. SR–
NYSEAmex–2009–89]
17 17
by the Securities and Exchange
Commission (the ‘‘Commission’’). The
text of the proposed rule change is
available at the Exchange, the
Commission’s Public Reference Room,
and https://www.nyse.com.
Jkt 220001
PO 00000
Frm 00025
Fmt 4703
Sfmt 4703
As part of its effort to reduce
regulatory duplication and relieve firms
that are members of FINRA, NYSE and
NYSE Amex of conflicting or
unnecessary regulatory burdens, FINRA
is now engaged in the process of
reviewing and amending the NASD and
FINRA Incorporated NYSE Rules in
order to create a consolidated FINRA
rulebook.5
Proposed Conforming Amendments to
NYSE Rules. FINRA adopted NASD
Rules 2240 (Disclosure of Control
Relationship with Issuer) and 2250
(Disclosure of Participation or Interest
in Primary or Secondary Distribution) as
consolidated FINRA Rules 2262 and
2269, respectively.6
Because the protection provided by
the new FINRA Rules, as well as
existing or proposed FINRA Rules and
SEC Rules,7 is generally broader than
that provided by FINRA Incorporated
NYSE Rules 312(f) and 321.24, FINRA
deleted those rules. Specifically, FINRA
noted that, unlike FINRA Incorporated
NYSE Rule 312(f)(2), consolidated
FINRA Rules 2262 and 2269 would
operate to protect customers without
regard as to whether or not a member or
member organization makes a
recommendation on a security to a
customer. In addition, FINRA noted that
the requirements of FINRA Incorporated
NYSE Rules 312(f)(1) and (3) are
sufficiently addressed by consolidated
FINRA Rules 2262 and 2269 and other
rules. FINRA also noted that, unlike
FINRA Incorporated NYSE Rule 321.24,
consolidated FINRA Rules 2262 and
2269 require disclosure in transactions
involving securities beyond those issued
(order approving the incorporation of certain NYSE
Rules as ‘‘Common Rules’’); and 60409 (July 30,
2009), 74 FR 39353 (August 6, 2009) (order
approving the amended and restated Agreement,
adding NYSE Amex LLC as a party). Paragraph 2(b)
of the Agreement sets forth procedures regarding
proposed changes by FINRA, NYSE or NYSE Amex
to the substance of any of the Common Rules.
5 FINRA’s rulebook currently has three sets of
rules: (1) NASD Rules, (2) FINRA Incorporated
NYSE Rules, and (3) consolidated FINRA Rules.
The FINRA Incorporated NYSE Rules apply only to
those members of FINRA that are also members of
the NYSE, while the consolidated FINRA Rules
apply to all FINRA members. For more information
about the FINRA rulebook consolidation process,
see FINRA Information Notice, March 12, 2008.
6 In its filing, FINRA also adopted NASD Rule
3340 (Prohibition on Transactions, Publication of
Quotations, or Publication of Indications of Interest
During Trading Halts) as consolidated FINRA Rule
5260. See Securities Exchange Act Release No.
60659 (September 11, 2009), 74 FR 48117
(September 21, 2009). NYSE Amex is not adopting
this FINRA Rule as it is not applicable to trading
on the Exchange.
7 According to FINRA, the requirements of
consolidated FINRA Rules 2262 and 2269 are
almost identical to SEA Rules 15c1–5 and 15c1–6,
respectively. See Securities Exchange Act Release
No. 60659 (September 11, 2009), 74 FR 48117
(September 21, 2009) (footnotes 4–6).
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]]>Agencies
[Federal Register Volume 74, Number 246 (Thursday, December 24, 2009)]
[Notices]
[Pages 68435-68440]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-30545]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61183; File No. SR-CBOE-2009-087]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change To Establish a
Pilot Program To Modify FLEX Exercise Settlement Values and Minimum
Value Sizes
December 16, 2009.
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 3, 2009, Chicago Board Options Exchange, Incorporated
(``CBOE'' or the ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') the
[[Page 68436]]
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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its rules regarding permissible
exercise settlement values and minimum value sizes for Flexible
Exchange Options (``FLEX Options'').\3\ The text of the proposed rule
change is available on the Exchange's Web site (https://www.cboe.org/Legal), at the Office of the Secretary, CBOE and at the Commission.
---------------------------------------------------------------------------
\3\ FLEX Options provide investors with the ability to customize
basic option features including size, expiration date, exercise
style, and certain exercise prices. FLEX Options can be FLEX Index
Options or FLEX Equity Options. In addition, other products are
permitted to be traded pursuant to the FLEX trading procedures. For
example, credit options are eligible for trading as FLEX Options
pursuant to the FLEX rules in Chapters XXIVA and XXIVB. See CBOE
Rules 24A.1(e) and (f), 24A.4(b)(1) and (c)(1), 24B.1(f) and (g),
24B.4(b)(1) and (c)(1), and 28.17.
---------------------------------------------------------------------------
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 self-regulatory organization
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 those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the filing is to modify the permissible exercise
settlement values and minimum value sizes for FLEX Options. These
options are governed by Exchange Chapters XXIVA and XXIVB.
Exercise Settlement Values for FLEX Index Options. We are proposing
to amend the permissible exercise settlement values for FLEX Index
Options. Currently under Rules 24A.4 and 24B.4, FLEX Options may expire
on any business day specified as to day, month and year, not to exceed
a maximum term of fifteen years. In addition, the exercise settlement
value for FLEX Index Options can be specified as the index value
determined by reference to the reported level of the index as derived
from the opening or closing prices of the component securities (``a.m.
settlement'' or ``p.m. settlement,'' respectively) or as a specified
average, provided that the average index value must conform to the
averaging parameters established by the Exchange.\4\ However, only a.m.
settlements are permitted if a FLEX Index Option expires on, or within
two business days of, a third-Friday-of-the-month expiration
(``Expiration Friday'').\5\ We are proposing to eliminate this latter
restriction on p.m. and specified average price settlements in FLEX
Index Options on a pilot program basis.\6\
---------------------------------------------------------------------------
\4\ See Rules 24A.4(b)(3) and 24B.4(b)(3); see also Securities
Exchange Act Release No. 31920 (February 24, 1993), 58 FR 12280
(March 3, 1993) (SR-CBOE-92-17). The Exchange has determined to
limit the averaging parameters to three alternatives: The average of
the opening and closing index values; the average of the intra-day
high and low index values; and the average of the opening, closing,
and intra-day high and low index values. Any changes to the
averaging parameters established by the Exchange would be announced
to the membership via circular.
\5\ For example, under the current rules, the exercise
settlement value of a FLEX Index Option that expires on the Tuesday
before Expiration Friday could have an a.m., p.m. or specified
average settlement. However, the exercise settlement value of a FLEX
Index Option that expires on the Wednesday before Expiration Friday
could only have an a.m. settlement.
\6\ No change is necessary or being requested with respect to
FLEX Equity Options. Regardless of the expiration date, FLEX Equity
Options are settled by physical delivery of the underlying.
---------------------------------------------------------------------------
The proposal would become effective on a pilot program basis for a
period of fourteen months. If the Exchange were to propose an extension
of the program or should the Exchange propose to make the program
permanent, then the Exchange would submit a filing proposing such
amendments to the program. The Exchange notes that any positions
established under the pilot would not be impacted by the expiration of
the pilot. For example, a position in a PM-settled FLEX Index Option
series that expires on Expiration Friday in January 2015 could be
established during the 14-month pilot. If the pilot program were not
extended, then the position could continue to exist. However, the
Exchange notes that any further trading in the series would be
restricted to transactions where at least one side of the trade is a
closing transaction.\7\
---------------------------------------------------------------------------
\7\ The Exchange intends to address this point in a circular to
members should the Exchange receive approval of this proposal.
---------------------------------------------------------------------------
As part of the pilot program, the Exchange would also submit a
pilot program report to the Commission at least two months prior to the
expiration date of the program (the ``annual report''). As described
below, the annual report would contain an analysis of volume, open
interest and trading patterns. In addition, for series that exceed
certain minimum open interest parameters, the annual report would
provide analysis of index price volatility and share trading activity.
The annual report would be provided to the Commission on a confidential
basis.
Analysis of Volume and Open Interest. For each broad-based FLEX
Index class overlying an Expiration Friday, PM-settled FLEX Index
series, the annual report would contain the following volume and open
interest data:
(1) Monthly volume aggregated for all Expiration Friday, PM-settled
FLEX Index series trades;
(2) monthly volume for Expiration Friday, PM-settled FLEX Index
series trades aggregated by expiration date;
(3) monthly volume for individual Expiration Friday, PM-settled
FLEX Index series;
(4) month-end open interest aggregated for all Expiration Friday,
PM-settled FLEX Index series;
(5) month-end open interest for Expiration Friday, PM-settled FLEX
Index series aggregated by expiration date;
(6) month-end open interest for individual Expiration Friday, PM-
settled FLEX Index series; and
(7) ratios of monthly aggregate volume and month-end open interest
for Expiration Friday, PM-settled FLEX Index and all series of that
class (including the Expiration Friday, PM-settled FLEX Index series).
In addition to the annual report, the Exchange would provide the
Commission with interim reports of the information listed in Items (1)
through (7) above periodically as required by the Commission while the
pilot is in effect. These interim reports would also be provided on a
confidential basis.
For each broad-based FLEX Index class overlying an Expiration
Friday, PM-settled FLEX Index option, the annual report would also
contain the information noted in Items (1) through (7) above for
Expiration Friday, AM-settled FLEX Index series. In addition, for each
broad-based Non-FLEX Index class overlying the same index as an
Expiration Friday, PM-settled FLEX Index option, the annual report
would also contain the information noted in Items (1) through (7) above
for Expiration Friday Non-FLEX Index series. This data on Expiration
Friday, AM-settled FLEX Index series and Expiration Friday Non-FLEX
Index series would cover the period of the
[[Page 68437]]
annual report as well as a pre-pilot period to be determined by the
Exchange and the Commission.
Analysis of FLEX Trading Patterns. The annual report would contain
the following analysis of FLEX trading patterns:
(1) A time series analysis of open interest in Expiration Friday,
PM-settled FLEX Index series; and
(2) an analysis of the distribution of Expiration Friday, PM-
settled FLEX Index series trade sizes and of the number of trades that
occur in each Expiration Friday, PM-settled FLEX Index series.
Analysis of Index Price Volatility and Share Trading Activity. For
each broad-based index class overlying an Expiration Friday, PM-settled
FLEX Index that has open interest in Expiration Friday, PM-settled FLEX
Index series that exceed certain minimum parameters, the annual report
would contain the following analysis related to index price changes and
underlying share trading volume at the close on Expiration Fridays:
(1) A comparison of index price changes at the close of trading on
a given Expiration Friday with comparable price changes from a control
sample. The data would include a calculation of percentage price
changes for various time intervals and compare that information to the
respective control sample. Raw percentage price change data as well as
percentage price change data normalized for prevailing market
volatility, as measured by the CBOE Volatility Index (VIX), would be
provided; and
(2) a calculation of share volume for a sample set of the component
securities representing an upper limit on share trading that could be
attributable to expiring in-the-money Expiration Friday, PM-settled
FLEX Index series. The data would include a comparison of the
calculated share volume for securities in the sample set to the average
daily trading volumes of those securities over a sample period.
The minimum open interest parameters, control sample, time
intervals, method for randomly selecting the component securities, and
sample periods would be determined by the Exchange and the Commission.
Minimum Value Size Requirements for All FLEX Options. Second, we
are proposing to eliminate the minimum value size requirements for FLEX
Options. Currently under Rules 24A.4 and 24B.4, the minimum value size
requirements are as follows:
For opening transactions in any FLEX series in which there
is no open interest at the time a FLEX Request for Quotes (``RFQ'') or
FLEX Order, as applicable, is submitted is (i) for FLEX Equity Options,
the lesser of 250 contracts or the number of contracts overlying $1
million in the underlying securities; and (ii) for FLEX Index Options,
$10 million Underlying Equivalent Value. For a pilot period ending
February 28, 2010, the ``250 contracts'' component above has been
reduced to ``150 contracts.''
For a transaction in any currently-opened FLEX series
resulting from an RFQ or from trading against the electronic book
(other than FLEX Quotes responsive to a FLEX Request for Quotes and
FLEX Orders submitted to rest in the electronic book) is (i) for FLEX
Equity Options, the lesser of 100 contracts or the number of contracts
overlying $1 million in the underlying securities in the case of
opening transactions, and 25 contracts in the case of closing
transactions; and (ii) for FLEX Index Options, $1 million Underlying
Equivalent Value in the case of both opening and closing transactions;
or (iii) in either case the remaining underlying size or Underlying
Equivalent Value on a closing transaction, whichever is less.
The minimum value size for FLEX Quotes responsive to an
RFQ and FLEX Orders (undecremented size) submitted to rest in the
electronic book is 25 contracts in the case of FLEX Equity Options, and
$1 million Underlying Equivalent Value in the case of FLEX Index
Options, or in either case the remaining underlying size or Underlying
Equivalent Value on a closing transaction, whichever is less. In
addition, with respect to FLEX Index Appointed Market-Makers, FLEX
Quotes and FLEX Orders (undecremented size) must be for at least $10
million Underlying Equivalent Value or the dollar amount indicated in
the Request for Quote (if applicable), whichever is less.
We are proposing to eliminate these minimum value size requirements
on a fourteen month pilot program basis. If the Exchange were to
propose an extension or an expansion of the minimum value size pilot
program, or should the Exchange propose to make the program permanent,
the Exchange would submit, along with any filing proposing such
amendments to the program, a pilot program report that would provide an
analysis of the program covering the period during which the program
was in effect. This minimum value size report would include: (i) Data
and analysis on the open interest and trading volume in (a) FLEX Equity
Options for which series were opened with a minimum opening size of 0
to 249 contracts and less than $1 million in underlying value; (b) FLEX
Index Options for which series were opened with a minimum opening size
of less than $10 million in underlying equivalent value; and (ii)
analysis on the types of investors that initiated opening FLEX Equity
and Index Options transactions (i.e., institutional, high net worth, or
retail). The report would be submitted to the Commission at least two
months prior to the expiration date of the pilot program and would be
provided on a confidential basis.
The Exchange notes that any positions established under this pilot
would not be impacted by the expiration of the pilot. For example, a
10-contract FLEX Equity Option opening position that overlies less than
$1 million in the underlying security and expires in January 2015 could
be established during the 14-month pilot. If the pilot program were not
extended, then the position could continue to exist and any further
trading in the series would be subject to the minimum value size
requirements for continued trading in that series.
Discussion. CBOE believes that expanding the exercise settlement
values for FLEX Index Options and eliminating the minimum value size
requirements for all FLEX Options on are [sic] important and necessary
to the Exchange's efforts to create a product and market that provides
members and investors interested in FLEX-type options with an improved
but comparable alternative to the over-the-counter (``OTC'') market in
customized options, which can take on contract characteristics similar
to FLEX Options but are not subject to the same restrictions. By making
these changes, market participants would now have greater flexibility
in determining whether to execute their customized options in an
exchange environment or in the OTC market. CBOE believes market
participants benefit from being able to trade these customized options
in an exchange environment in several ways, including, but not limited
to the following: (1) Enhanced efficiency in initiating and closing out
positions; (2) increased market transparency; and (3) heightened
contra-party creditworthiness due to the role of The Options Clearing
Corporation (``OCC'') as issuer and guarantor of FLEX Options. The
Exchange also believes the proposed changes to the FLEX rules are
wholly consistent with recent comments by Timothy F. Geithner,
Secretary of the Treasury, to the U.S. Senate. In particular, Secretary
Geithner has stated that:
[[Page 68438]]
``Market efficiency and price transparency should be improved in
derivatives markets by requiring the clearing of standardized contracts
through regulated [central counterparties] and by moving the
standardized part of these markets onto regulated exchanges and
regulated transparent electronic trade execution systems for OTC
derivatives and by requiring development of a system for timely
reporting of trades and prompt dissemination of prices and other trade
information. Furthermore, regulated financial institutions should be
encouraged to make greater use of regulated exchange-traded
derivatives. Competition between appropriately regulated OTC
derivatives markets and regulated exchanges will make both sets of
markets more efficient and thereby better serve end-users of
derivatives.'' \8\
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\8\ See letter from Secretary Geithner to the Honorable Harry
Reid, United States Senate (May 13, 2009), located at https://www.financialstability.gov/docs/OTCletter.pdf.
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CBOE notes that when the FLEX Option rules were initially proposed
and approved almost sixteen years ago, the Exchange was uncertain what
market impacts, if any, excessive FLEX positions would have on the
market or on firms.\9\ To minimize the risk of adverse market effects,
at the time the FLEX rules were first introduced the Exchange put in
place certain position limit boundaries (which have been modified over
time) and the requirement that the FLEX expiration date be no closer
than three business days from any Non-FLEX Option Expiration Friday
(which has been eliminated).\10\ Based on the Exchange's experience in
trading FLEX Options to date--specifically with respect to the
diversity in FLEX Option trading, the relatively small percentage FLEX
Options trading compared to overall trading on the Exchange, and the
lack of market disruptions or problems caused by or on existing FLEX
Option expirations--CBOE no longer believes the restrictions on
exercise settlement value are necessary to insulate Non-FLEX
expirations from the potential adverse market impacts of FLEX
expirations.\11\ To the contrary, CBOE believes that the restriction
actually places the Exchange at a competitive disadvantage to its OTC
counterparts in the market for customized options, and unnecessarily
limits market participants' ability to trade in an exchange environment
that offers the added benefits of transparency, price discovery,
liquidity, and financial stability.
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\9\ See Securities Exchange Act Release Nos. 31361 (October 27,
1992) 57 FR 52655 (November 4, 1992) (SR-CBOE-92-17) (notice of
filing of proposed rule change relating to Flexible Exchange
Options) and 31920 (February 24, 1993), 58 FR 12280 (March 3, 1993)
(Order approving SR-CBOE-92-17). At the time of the proposal, the
Exchange also anticipated that there would be limited secondary
trading in any FLEX Option series having a particular expiration
date due to the diversity inherent in FLEX Options and that FLEX
expiration concentrations should be rare. These observations appear
to be accurate for the trading in FLEX Options to date.
\10\ When the expiration date restrictions were eliminated, the
Exchange adopted the afore-mentioned restriction limiting exercise
settlement values for FLEX Index Options that expire on, or within
two business days of, an Expiration Friday to a.m. settlements. See
Securities Exchange Act Release No. 59417 (February 18, 2009), 74 FR
8591 (February 25, 2009) (SR-CBOE-2008-115).
\11\ In further support of its proposal, the Exchange also notes
that the p.m. and specified average price settlements are already
permitted for FLEX Index Options on any other business day except
on, or within two business days of, Expiration Friday. The Exchange
is not aware of any market disruptions or problems caused by the use
of these settlement methodologies on these expiration dates. The
Exchange is also not aware of any market disruptions or problems
caused by the use of customized options in the OTC markets that
expire on or near Expiration Friday and have a p.m. or specified
average exercise settlement value. In addition, the Exchange
believes the reasons for limiting expirations to a.m. settlement,
which is something the SEC has imposed since the early 1990s for
Non-FLEX Options, revolved around a concern about expiration
pressure on the New York Stock Exchange (``NYSE'') at the close that
are no longer relevant in today's market. Today, however, the
Exchange believes stock exchanges are much better able to handle
volume. There are multiple primary listing and unlisted trading
privilege (``UTP'') markets, and trading is dispersed among several
exchanges and alternative trading systems. In addition, the Exchange
believes that surveillance techniques are much more robust and
automated. In the early 1990s, it was also thought by some that
opening procedures allow more time to attract contra-side interest
to reduce imbalances. The Exchange believes, however, that today
order flow is predominantly electronic and the ability to smooth out
openings and closings is greatly reduced (e.g., market-on-close
procedures work just as well as openings). Also other markets, such
as the NASDAQ Stock Exchange, do not have the same type of pre-
opening imbalance disseminations as the NYSE, so many stocks are not
subject to the same procedures on Expiration Friday. In addition,
the Exchange believes that the NYSE has reduced the required time a
specialist has to wait after disseminating a pre-opening indication.
So, in this respect, the Exchange believes there is less time to
react in the opening than in the close. Moreover, to the extent
there may be a risk of adverse market effects attributable to p.m.
settled options (or certain average price settled options related to
the closing price) that would otherwise be traded in a non-
transparent fashion in the OTC market, the Exchange believes that
such risk would be lessened by making these customized options
eligible for trading in an exchange environment because of the added
transparency, price discovery, liquidity, and financial stability
available.
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The Exchange also notes that certain position limit, aggregation
and exercise limit requirements would continue to apply to FLEX Options
in accordance with Rules 24A.7, 24A.8, 24B.7 and 24B.8. Additionally,
all FLEX options remain subject to the position reporting requirements
of Rule 4.13(a).\12\ Moreover, the Exchange and member organizations
each have the authority, pursuant to Rule 12.10, to impose additional
margin as deemed advisable. CBOE believes these existing safeguards
serve sufficiently to help monitor open interest in FLEX Option series
and significantly reduce any risk of adverse market effects that might
occur as a result of large FLEX exercises in FLEX Option series that
expire near Non-FLEX expirations and use a p.m. settlement.
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\12\ CBOE Rule 4.13(a) provides that ``[i]n a manner and form
prescribed by the Exchange, each member shall report to the
Exchange, the name, address, and social security or tax
identification number of any customer who, acting alone, or in
concert with others, on the previous business day maintained
aggregate long or short positions on the same side of the market of
200 or more contracts of any single class of option contracts dealt
in on the Exchange. The report shall indicate for each such class of
options, the number of option contracts comprising each such
position and, in the case of short positions, whether covered or
uncovered.'' For purposes of this Rule, the term ``customer'' in
respect of any member includes ``the member, any general or special
partner of the member, any officer or director of the member, or any
participant, as such, in any joint, group or syndicate account with
the member or with any partner, officer or director thereof.'' Rule
4.13(d).
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The Exchange likewise believes that the elimination of the minimum
value size requirement would provide FLEX-participating members with
greater flexibility in structuring the terms of FLEX Options that best
comports with their and their customers' particular needs. In this
regard, the Exchange notes that the minimum value size requirement was
also originally put in place over sixteen years ago to limit
participation in FLEX Options to sophisticated, high net worth
investors rather than retail investors. However, the Exchange believes
the restriction is no longer necessary and is overly restrictive.
Again, based on the Exchange's experience to date, the minimum value
size requirement is too large to accommodate the needs of members and
their customers--who may be institutional, high net worth or retail--
that currently participate in the OTC market. In this regard, the
Exchange notes that it has recently received numerous requests from
broker-dealers representing institutional, high net worth and retail
investors indicating that the minimum value size requirement prevents
them from bringing transactions that are already taking place in the
OTC market to an exchange environment. Thus, Exchange believes that
eliminating the minimum value size requirement would further broaden
the base of investors that use FLEX Options to manage their trading and
investment risk, including
[[Page 68439]]
investors that currently trade in the OTC market for customized
options, where similar size restrictions do not apply. The Exchange
also believes that this may open up FLEX Options to more retail
investors. The Exchange does not believe this raises any unique
regulatory concerns because, as indicated above, existing safeguards--
such as certain position limit, aggregation and exercise limit
requirements, reporting requirements, and margin requirements--would
continue to apply. In addition, the Exchange notes that FLEX Options
are subject to the options disclosure document (``ODD'') requirements
of Rule 9b-1\13\ under the Act.\14\ No broker or dealer can accept an
order from a customer to purchase or sell an option contract relating
to an options class that is the subject of a definitive ODD (including
FLEX Options), or approve the customer's account for the trading of
such an option, unless the broker or dealer furnishes or has furnished
to the customer a copy of the definitive ODD. The ODD contains a
description, special features, and special risks of FLEX Options.
Lastly, similar to any other options, FLEX Options are subject to
member firm supervision and suitability requirements, such as in CBOE
Rules 9.8 and 9.9.
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\13\ 17 CFR 240.9b-1.
\14\ 15 U.S.C. 78a et seq.
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In proposing these changes, CBOE is cognizant of the need for
market participants to have substantial options transaction capacity
and flexibility to hedge their substantial investment portfolios, on
the one hand, and the potential for adverse effects that the exercise
settlement value and minimum value size restrictions were originally
designed to address, on the other. CBOE is also cognizant of the OTC
market, in which similar restrictions on exercise settlement value and
minimum size do not apply. In light of these considerations and
Secretary Geithner's recent comments on moving the standardized parts
of OTC contracts onto regulated exchanges, CBOE believes these changes
are appropriate and reasonable and would provide market participants
with additional flexibility in determining whether to execute their
customized options in an exchange environment or in the OTC market.
CBOE believes market participants benefit from being able to trade
these customized options in an exchange environment in several ways,
including, but not limited to, enhanced efficiency in initiating and
closing out positions; increased market transparency; and heightened
contra-party creditworthiness due to the role of OCC as issuer and
guarantor of FLEX Options.
For the foregoing reasons, CBOE believes that the proposed
revisions to the exercise settlement values and minimum value size
requirements are reasonable and appropriate, would promote just and
equitable principles of trade, and would facilitate transactions in
securities while continuing to foster the pubic interest and investor
protection.
2. Statutory Basis
By expanding permissible expiration dates for FLEX Options, the
Exchange believes the proposed rule change is consistent with Section
6(b) of the Act \15\ in general and furthers the objectives of Section
6(b)(5) of the Act \16\ in particular in that it should promote just
and equitable principles of trade, serve to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and protect investors and the public interest. The Exchange
believes that the elimination of the p.m. settlement date restrictions
for FLEX Index Options and the minimum size requirements for all FLEX
Options in the manner proposed does not raise any unique regulatory
concerns. In particular, although p.m. settlements may raise questions
with the Commission, the Exchange believes that market impact and
investor protection concerns will not be raised by this rule change.
The Exchange also believes that the proposed rule change would provide
members and investors with additional opportunities to trade customized
options in an exchange environment and subject to exchange-based rules,
and investors would benefit as a result.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
burden on competition 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 self-regulatory organization 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
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-CBOE-2009-087 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2009-087. 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 Room, 100 F Street, NE.,
Washington, DC 20549, on official business days
[[Page 68440]]
between the hours of 10 a.m. and 3 p.m. Copies of such filing also will
be available for inspection and copying at the principal office of
CBOE. 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
publicly available. All submissions should refer to File Number SR-
CBOE-2009-087 and should be submitted on or before January 14, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-30545 Filed 12-23-09; 8:45 am]
BILLING CODE 8011-01-P
