Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Granting Approval of Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 1 Thereto To Trade Options on Certain Individual Stock Based Volatility Indexes and Exchange-Traded Fund Based Volatility Indexes, 32000-32004 [2011-13636]
Download as PDF
<![CDATA[
32000
Federal Register / Vol. 76, No. 106 / Thursday, June 2, 2011 / Notices
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change: (1) Does not significantly affect
the protection of investors or the public
interest; (2) does not impose any
significant burden on competition; and
(3) by its terms does not become
operative for 30 days after the date of
this filing, or such shorter time as the
Commission may designate if consistent
with the protection of investors and the
public interest, the proposed rule
change has become effective pursuant to
Section 19(b)(3)(A) of the Act 8 and Rule
19b–4(f)(6) thereunder.9
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
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–NASDAQ–2011–070 on the
subject line.
emcdonald on DSK2BSOYB1PROD with NOTICES
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NASDAQ–2011–070. This
8 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
provide the Commission with written notice of its
intent to file the proposed rule change, along with
a brief description and text of the proposed rule
change, at least five business days prior to the date
of filing of the proposed rule change, or such
shorter time as designated by the Commission. The
Exchange has fulfilled this requirement.
9 17
VerDate Mar<15>2010
16:40 Jun 01, 2011
Jkt 223001
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 Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NASDAQ–2011–070 and should be
submitted on or before June 23, 2011.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.10
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011–13624 Filed 6–1–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–64551; File No. SR–CBOE–
2011–026]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Order Granting Approval
of Proposed Rule Change and Notice
of Filing and Order Granting
Accelerated Approval to Amendment
No. 1 Thereto To Trade Options on
Certain Individual Stock Based
Volatility Indexes and ExchangeTraded Fund Based Volatility Indexes
Securities and Exchange Commission
(the ‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (the ‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
trade options on certain individual
stock based and exchange-traded fund
(‘‘ETF’’) based volatility indexes. The
proposed rule change was published for
comment in the Federal Register on
April 13, 2011.3 The Commission
received no comments in response to
the Notice.
On May 16, 2011, the Exchange
submitted Amendment No. 1 to the
proposed rule change, as described in
Items I and II below, which items have
been prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on Amendment No. 1
from interested persons and is
approving the proposed rule change, as
modified by Amendment No. 1, on an
accelerated basis.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
Amendment No. 1 to the Proposed Rule
Change
CBOE proposes to amend its rules to
list and trade options on certain
individual stock based volatility indexes
and ETF based volatility indexes. The
proposed options will be cash-settled
and will have European-style exercise.
The text of the rule proposal is available
on the Exchange’s Web site (https://
www.cboe.org/legal), at the Exchange’s
Office of the Secretary and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
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.
May 26, 2011.
On March 29, 2011, Chicago Board
Options Exchange, Incorporated (the
‘‘Exchange’’ or ‘‘CBOE’’) filed with the
10 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00074
Fmt 4703
Sfmt 4703
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 64245
(April 7, 2011), 76 FR 20784 (‘‘Notice’’).
2 17
E:\FR\FM\02JNN1.SGM
02JNN1
Federal Register / Vol. 76, No. 106 / Thursday, June 2, 2011 / Notices
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Amendment 1 replaces the original
filing in its entirety. The purpose of
Amendment 1 is to limit the original
proposal to specific individual stockbased and exchange-traded-fund based
(‘‘ETF’’) volatility indexes.
The purpose of this proposed rule
change is to permit the Exchange to list
and trade cash-settled, European-style
options on certain Individual Stock or
ETF Based Volatility Indexes
(collectively, ‘‘Vol Indexes’’).
Specifically, CBOE proposes to list
options on Vol Indexes comprised of
options on the following individual
stocks: Apple Computer, Amazon,
Goldman Sachs, Google and IBM. In
addition, CBOE will list Vol Indexes
comprised of options on the following
ETFs: the US Oil Fund, LP (‘‘USO’’), the
iShares MSCI Emerging Markets Index
Ticker symbol
CBOE
CBOE
CBOE
CBOE
CBOE
CBOE
CBOE
CBOE
CBOE
CBOE
CBOE
emcdonald on DSK2BSOYB1PROD with NOTICES
Index Design and Calculation
The calculation of a Vol Index will be
based on the VIX and GVZ methodology
applied to options on the individual
stock or ETF that is the subject of the
particular Vol Index. A Vol Index is an
up-to-the-minute market estimate of the
expected volatility of the underlying
individual stock or ETF calculated by
using real-time bid/ask quotes of CBOE
listed options on the underlying
instruments. A Vol Index uses nearby
and second nearby options with at least
8 days left to expiration and then
weights them to yield a constant, 30-day
measure of the expected (implied)
volatility.
For each contract month, CBOE will
determine the at-the-money strike price.
The Exchange will then select the atthe-money and out-of-the money series
with non-zero bid prices and determine
the midpoint of the bid-ask quote for
each of these series. The midpoint quote
of each series is then weighted so that
the further away that series is from the
at-the-money strike, the less weight that
is accorded to the quote. Then, to
compute the index level, CBOE will
calculate a volatility measure for the
nearby options and then for the second
nearby options. This is done using the
4 See Securities Exchange Act Release No. 62139
(May 19, 2010), 75 FR 29597 (May 26, 2010) (order
approving proposal to list and trade GVZ options
on the CBOE).
5 CBOE will be the reporting authority for any Vol
Index.
VerDate Mar<15>2010
16:40 Jun 01, 2011
Fund (‘‘EEM’’), the iShares FTSE China
25 Index Fund (‘‘FXI’’), the iShares MSCI
Brazil Index Fund (‘‘EWZ’’), the Market
Vectors Gold Miners ETF (‘‘GDX’’), and
the Energy Select Sector SPDR ETF
(‘‘XLE’’). These are in addition to options
on the CBOE Gold ETF Volatility Index
(‘‘GVZ’’), which has already been
approved for trading by the
Commission.4
Below is a chart identifying the
specific Vol Indexes the Exchange is
proposing to trade options on:
Underlying
option class
Volatility Index name
VXAPL .......................................................
VXAZN .......................................................
VXGS .........................................................
VXGOG .....................................................
VXIBM .......................................................
OVX ...........................................................
VXEEM ......................................................
VXFXI ........................................................
VXEWZ ......................................................
VXGDX ......................................................
VXXLE .......................................................
Jkt 223001
32001
Equity VIX on Apple ..........................................................................................
Equity VIX on Amazon ......................................................................................
Equity VIX on Goldman Sachs ..........................................................................
Equity VIX on Google ........................................................................................
Equity VIX on IBM .............................................................................................
Crude Oil ETF Volatility Index ...........................................................................
Emerging Markets ETF Volatility Index .............................................................
China ETF Volatility Index .................................................................................
Brazil ETF Volatility Index .................................................................................
Gold Miners ETF Volatility Index .......................................................................
Energy Sector ETF Volatility Index ...................................................................
AAPL
AMZN
GS
GOOG
IBM
USO
EEM
FXI
EWZ
GDX
XLE
weighted mid-point of the prevailing
bid-ask quotes for all included option
series with the same expiration date.
These volatility measures are then
interpolated to arrive at a single,
constant 30-day measure of volatility.5
CBOE will compute values for Vol
Index underlying option series on a realtime basis throughout each trading day,
from 8:30 a.m. until 3 p.m. (Chicago
time) (or until 3:15 p.m. (Chicago time)
as applicable for certain ETF Based
Volatility Index options). Vol Index
levels will be calculated by CBOE and
disseminated at 15-second intervals to
major market data vendors.
Transactions in Vol Index options
may be effected on the Exchange
between the hours of 8:30 a.m. Chicago
time and 3:15 p.m. (Chicago time),
except (for Exchange-Trade Fund Based
Volatility Index options) if the closing
time for traditional options on the ETF
is earlier than 3:15 p.m. (Chicago time),
the earlier closing time shall apply. The
Exchange is proposing to permit
different closing times for ETF Based
Volatility Index options because the
trading hours for traditional options on
ETFs vary.
Options Trading
The proposed options will typically
expire on the Wednesday that is 30 days
prior to the third Friday of the calendar
month immediately following the
expiration month (the expiration date of
the options used in the calculation of
the index). If the third Friday of the
calendar month immediately following
the expiring month is a CBOE holiday,
the expiration date will be 30 days prior
to the CBOE business day immediately
preceding that Friday. For example,
November 2011 Vol Index options
would expire on Wednesday, November
16, 2011, exactly 30 days prior to the
third Friday of the calendar month
Vol Index options will be quoted in
index points and fractions and one
point will equal $100. The minimum
tick size for series trading below $3 will
be 0.05 ($5.00) and above $3 will be
0.10 ($10).00). Initially, the Exchange
will list in-, at- and out-of-the-money
strike prices and the procedures for
adding additional series are provided in
Rule 5.5.6 Dollar strikes (or greater) will
be permitted for Vol Index options
where the strike price is $200 or less
and $5 or greater where the strike price
is greater than $200.
6 See Rule 5.5(c). ‘‘Additional series of options of
the same class may be opened for trading on the
Exchange when the Exchange deems it necessary to
maintain an orderly market, to meet customer
demand or when the market price of the underlying
* * * moves substantially from the initial exercise
PO 00000
Frm 00075
Fmt 4703
Sfmt 4703
Exercise and Settlement
price or prices.’’ For purposes of this rule, ‘‘market
price’’ shall mean the implied forward level based
on any corresponding futures price or the
calculated forward value of the respective Vol
index.
E:\FR\FM\02JNN1.SGM
02JNN1
32002
Federal Register / Vol. 76, No. 106 / Thursday, June 2, 2011 / Notices
immediately following the expiring
month.
Trading in the expiring contract
month will normally cease at 3 p.m.
(Chicago time) (or at 3:15 p.m. (Chicago
time) as applicable for ETF Based
Volatility Index options) on the business
day immediately preceding the
expiration date.7 Exercise will result in
delivery of cash on the business day
following expiration. Vol Index options
will be A.M.-settled.8 The exercise
settlement value will be determined by
a Special Opening Quotations (‘‘SOQ’’)
of a Vol Index calculated from the
sequence of opening prices of a single
strip of options expiring 30 days after
the settlement date. The opening price
for any series in which there are [sic] is
no trade shall be the average of that
options’ bid price and ask price as
determined at the opening of trading.9
The exercise-settlement amount will
be equal to the difference between the
exercise-settlement value and the
exercise price of the option, multiplied
by $100. When the last trading day is
moved because of a CBOE holiday, the
last trading day for expiring options will
be the day immediately preceding the
last regularly-scheduled trading day.
emcdonald on DSK2BSOYB1PROD with NOTICES
Position and Exercise Limits
For regular options trading, the
Exchange is proposing to establish
position limits for Vol Index options at
50,000 contracts on either side of the
market and no more than 30,000
contracts in the nearest expiration
month. CBOE believes that a 50,000
contract position limit is appropriate
due to the fact that the options which
are the underlying components for a Vol
Index are among the most actively
traded option classes currently listed. In
determining compliance with these
proposed position limits, Vol Index
options will not be aggregated with the
underlying ETF or individual stock
options. Exercise limits will be the
equivalent to the proposed position
limits.10 Vol Index options will be
subject to the same reporting
7 See proposed amendment to Rule 24.6, Days
and Hours of Business.
8 See proposed amendment to Rule 24.9(a)(4)
(adding Individual Stock or ETF Based Volatility
Indexes to the list of A.M.-settled index options
approved for trading on the Exchange).
9 See proposed amendment to Rule 24.9(a)(5)
(revising rule to make ‘‘Volatility Index’’ options
generic for purposes of this provision, which sets
forth the method of determining the day that the
exercise settlement value is calculated and of
determining the expiration date and the last trading
day for CBOE Volatility Index Options). The
Exchange is also proposing to make technical
changes to this rule provision as well.
10 See proposed amendment to rule 24.5 and
proposed new Interpretations and Policy .04 to rule
24.5.
VerDate Mar<15>2010
16:40 Jun 01, 2011
Jkt 223001
requirements triggered for other options
dealt in on the Exchange.
For FLEX options trading, the
Exchange is proposing that the position
limits for FLEX Vol Index Options will
be equal to the position limits for NonFLEX Options on the same Vol Index.
Similarly, the Exchange is proposing
that the exercise limits for FLEX Vol
Index Options will be equivalent to the
position limits established pursuant to
Rule 24.4. The proposed position and
exercise limits for FLEX Vol Index
Options are consistent with the
treatment of position and exercise limits
for Flex GVZ and other Flex Index
Options. The Exchange is also
proposing to amend subparagraph (4) to
Rules 24A.7(d) and 24B.7(d) to provide
that as long as the options positions
remain open, positions in FLEX Vol
Index Options that expire on the same
day as Non-FLEX Vol Index Options, as
determined pursuant to Rule 24.9(a)(5),
shall be aggregated with positions in
Non-FLEX Vol Index Options and shall
be subject to the position limits set forth
in Rules 4.11, 24.4, 24.4A and 24.4B,
and the exercise limits set forth in Rules
4.12 and 24.5.
The Exchange is proposing to
establish a Vol Index Hedge Exemption,
which would be in addition to the
standard limit and other exemptions
available under Exchange rules,
interpretations and policies. The
Exchange proposes to establish the
following procedures and criteria which
must be satisfied to qualify for a Vol
Index hedge exemption:
• The account in which the exempt
option positions are held (‘‘hedge
exemption account’’) has received prior
Exchange approval for the hedge
exemption specifying the maximum
number of contracts which may be
exempt under the proposed new
Interpretation. The hedge exemption
account has provided all information
required on Exchange-approved forms
and has kept such information current.
Exchange approval may be granted on
the basis of verbal representations, in
which event the hedge exemption
account shall within two (2) business
days or such other time period
designated by the Department of Market
Regulation furnish the Department of
Market Regulation with appropriate
forms and documentation substantiating
the basis for the exemption. The hedge
exemption account may apply from time
to time for an increase in the maximum
number of contracts exempt from the
position limits.
• A hedge exemption account that is
not carried by a CBOE member
organization must be carried by a
member of a self-regulatory organization
PO 00000
Frm 00076
Fmt 4703
Sfmt 4703
participating in the Intermarket
Surveillance Group.
• The hedge exemption account
maintains a qualified portfolio, or will
effect transactions necessary to obtain a
qualified portfolio concurrent with or at
or about the same time as the execution
of the exempt options positions, of a net
long or short position in Equity-Based
Volatility Index futures contracts or in
options on Vol Index futures contracts,
or long or short positions in Vol Index
options, for which the underlying Vol
Index is included in the same margin or
cross-margin product group cleared at
the Clearing Corporation as the Vol
Index option class to which the hedge
exemption applies. To remain qualified,
a portfolio must at all times meet these
standards notwithstanding trading
activity.
• The exemption applies to positions
in Vol Index options dealt in on the
Exchange and is applicable to the
unhedged value of the qualified
portfolio. The unhedged value will be
determined as follows: (1) The values of
the net long or short positions of all
qualifying products in the portfolio are
totaled; (2) for positions in excess of the
standard limit, the underlying market
value (a) of any economically equivalent
opposite side of the market calls and
puts in broad-based index options, and
(b) of any opposite side of the market
positions in Vol Index futures, options
on Vol Index futures, and any
economically equivalent opposite side
of the market positions, assuming no
other hedges for these contracts exist, is
subtracted from the qualified portfolio;
and (3) the market value of the resulting
unhedged portfolio is equated to the
appropriate number of exempt contracts
as follows—the unhedged qualified
portfolio is divided by the
correspondent closing index value and
the quotient is then divided by the
index multiplier or 100.
• Only the following qualified
hedging transactions and positions will
be eligible for purposes of hedging a
qualified portfolio (i.e. futures and
options) pursuant to the proposed new
Interpretation .01:
Æ Long put(s) used to hedge the
holdings of a qualified portfolio;
Æ Long call(s) used to hedge a short
position in a qualified portfolio;
Æ Short call(s) used to hedge the
holdings of a qualified portfolio; and
Æ Short put(s) used to hedge a short
position in a qualified portfolio.
• The following strategies may be
effected only in conjunction with a
qualified stock portfolio:
Æ A short call position accompanied
by long put(s), where the short call(s)
expires with the long put(s), and the
E:\FR\FM\02JNN1.SGM
02JNN1
Federal Register / Vol. 76, No. 106 / Thursday, June 2, 2011 / Notices
emcdonald on DSK2BSOYB1PROD with NOTICES
strike price of the short call(s) equals or
exceeds the strike price of the long
put(s) (a ‘‘collar’’). Neither side of the
collar transaction can be in-the-money
at the time the position is established.
For purposes of determining compliance
with Rules 4.11 and proposed Rule
24.4C, a collar position will be treated
as one (1) contract;
Æ A long put position coupled with a
short put position overlying the same
Vol Index and having an equivalent
underlying aggregate index value, where
the short put(s) expires with the long
put(s), and the strike price of the long
put(s) exceeds the strike price of the
short put(s) (a ‘‘debit put spread
position’’); and
Æ A short call position accompanied
by a debit put spread position, where
the short call(s) expires with the puts
and the strike price of the short call(s)
equals or exceeds the strike price of the
long put(s). Neither side of the short
call, long put transaction can be in-themoney at the time the position is
established. For purposes of
determining compliance with Rule 4.11
and proposed Rule 24.4C, the short call
and long put positions will be treated as
one (1) contract.
• The hedge exemption account shall:
Æ Liquidate and establish options,
their equivalent or other qualified
portfolio products in an orderly fashion;
not initiate or liquidate positions in a
manner calculated to cause
unreasonable price fluctuations or
unwarranted price changes.
Æ Liquidate any options prior to or
contemporaneously with a decrease in
the hedged value of the qualified
portfolio which options would thereby
be rendered excessive.
Æ Promptly notify the Exchange of
any material change in the qualified
portfolio which materially affects the
unhedged value of the qualified
portfolio.
• If an exemption is granted, it will be
effective at the time the decision is
communicated. Retroactive exemptions
will not be granted.
Exchange Rules Applicable
Except as modified herein, the rules
in Chapters I through XIX, XXIV,
XXIVA, and XXIVB will equally apply
to Vol Index options.
The Exchange is proposing that the
margin requirements for Vol Index
options be set at the same levels that
apply to equity options under Exchange
Rule 12.3. Margin of up to 100% of the
current market value of the option, plus
20% of the underlying volatility index
value must be deposited and
maintained. The pertinent provisions of
Rule 12.3, Margin Requirements, have
VerDate Mar<15>2010
16:40 Jun 01, 2011
Jkt 223001
32003
been amended to reflect these proposed
revisions. Additional margin may be
required pursuant to Exchange Rule
12.10.
The Exchange hereby designates Vol
Index options as eligible for trading as
Flexible Exchange Options as provided
for in Chapters XXIVA (Flexible
Exchange Options) and XXIVB (FLEX
Hybrid Trading System). The Exchange
notes that Vol Index FLEX Options will
only expire on business days that nonFLEX options on Vol Indexes expire.
This is because the term ‘‘exercise
settlement value’’ in Rules 24A.4(b)(3)
and 24B.4(b)(3), Special Terms for FLEX
Index Options, has the same meaning
set forth in Rule 24.9(5). As is described
earlier, the Exchange is proposing to
amend Rule 24.9(a)(5) to provide that
the exercise settlement value of Vol
Index options for all purposes under
CBOE Rules will be calculated as the
Wednesday that is thirty days prior to
the third Friday of the calendar month
immediately following the month in
which a Vol Index options expire.
acts, to remove impediments to and to
perfect the mechanism for a free and
open market and a national market
system, and, in general, to protect
investors and the public interest. The
Exchange believes that the introduction
of Vol Index options will attract order
flow to the Exchange, increase the
variety of listed options to investors,
and provide a valuable hedging tool to
investors.
Capacity
CBOE has analyzed its capacity and
represents that it believes the Exchange
and the Options Price Reporting
Authority have the necessary systems
capacity to handle the additional traffic
associated with the listing of new series
that would result from the introduction
of Vol Index options.
III. Discussion
Surveillance
The Exchange will use the same
surveillance procedures currently
utilized for each of the Exchange’s other
index options to monitor trading in Vol
Index options. The Exchange further
represents that these surveillance
procedures shall be adequate to monitor
trading in options on these volatility
indexes. For surveillance purposes, the
Exchange will have complete access to
information regarding trading activity in
the pertinent underlying securities.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the Act 11
and the rules and regulations
thereunder and, in particular, the
requirements of Section 6(b) of the
Act.12 Specifically, the Exchange
believes the proposed rule change is
consistent with the Section 6(b)(5) 13
requirements that the rules of an
exchange be designed to promote just
and equitable principles of trade, to
prevent fraudulent and manipulative
11 15
U.S.C. 78s(b)(1).
U.S.C. 78f(b).
13 15 U.S.C. 78f(b)(5).
12 15
PO 00000
Frm 00077
Fmt 4703
Sfmt 4703
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.
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.14 Specifically, the
Commission finds that the proposal is
consistent with Section 6(b)(5) of the
Act,15 which requires, among other
things, that the rules of a national
securities exchange be designed to
prevent fraudulent and manipulative
acts and practices, 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.
As a national securities exchange, the
CBOE is required under Section 6(b)(1)
of the Act 16 to enforce compliance by
its members, and persons associated
with its members, with the provisions of
the Act, Commission rules and
regulations thereunder, and its own
rules. In addition, brokers that trade
options on Vol Indexes will also be
subject to best execution obligations and
FINRA rules.17 Applicable exchange
rules also require that customers receive
appropriate disclosure before trading
14 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).
15 15 U.S.C. 78f(b)(5).
16 15 U.S.C. 78f(b)(1).
17 See NASD Rule 2320.
E:\FR\FM\02JNN1.SGM
02JNN1
emcdonald on DSK2BSOYB1PROD with NOTICES
32004
Federal Register / Vol. 76, No. 106 / Thursday, June 2, 2011 / Notices
options on Vol Indexes.18 Further,
brokers opening accounts and
recommending options transactions
must comply with relevant customer
suitability standards.19
Options on Vol Indexes will trade as
options under the trading rules of the
CBOE. The Commission believes that
the listing rules proposed by CBOE for
options on Vol Indexes are consistent
with the Act. Vol Index options will be
quoted in index points and fractions
and one point will equal $100. The
minimum tick size for series trading
below $3 will be 0.05 ($5.00) and above
$3 will be 0.10 ($10). Dollar strikes (or
greater) will be permitted for Vol Index
options where the strike price is $200 or
less and $ or greater where the strike
price is greater than $200. This should
provide investors with greater flexibility
in the trading of options on Vol Indexes
and further the public interest by
allowing investors to establish positions
that are better tailored to meet their
investment objectives. The Commission
notes that CBOE will compute Vol Index
levels and disseminate the values at 15second intervals to major market data
vendors.
The Commission believes that the
Exchange’s proposed position limits and
exercise limits for options on Vol
Indexes are appropriate and consistent
with the Act. The Commission notes
that the particular Vol Index options in
this proposed rule change track liquid
underlying stocks and ETFs. In
addition, the Commission notes that the
position limits are similar to those for
options on the GVZ which the
Commission previously approved. The
Commission also notes that the margin
requirements for equity options as
specified in CBOE Rule 12.3 will also
apply to options on Vol Indexes. The
Commission finds this to be reasonable
and consistent with the Act.
The Commission also believes that the
Exchange’s proposal to allow options on
Vol Indexes 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 give investors and other market
participants the ability to individually
tailor, within specified limits, certain
terms of those options.20 The current
proposal incorporates options on Vol
Indexes that trade as FLEX Options into
these existing rules and regulatory
framework. In addition, the Commission
18 See
19 See
CBOE Rule 9.15.
FINRA Rule 2360(b) and CBOE Rules 9.7
and 9.9.
20 See Securities Exchange Act Release No. 31910
(February 23, 1993), 58 FR 12056 (March 2, 1993).
VerDate Mar<15>2010
16:40 Jun 01, 2011
Jkt 223001
notes that the position and exercise
limits for FLEX options on Vol Indexes
will be the same as those previously
approved for options on the GVZ.
The Commission believes that the
hedge exemption for position limits on
options on Vol Indexes in proposed
Interpretations and Policies .01 to CBOE
Rule 24.4C are reasonable. The
exemption is limited and sets objective
standards for when the exemption
applies. The Commission believes that
this approach ensures that position
limits are not improperly circumvented
but at the same time are flexible enough
to accommodate hedging strategies
employed by market participants.
Lastly, the Commission notes that
CBOE represented that it has an
adequate surveillance program to
monitor trading of options on Vol
Indexes and intends to apply its existing
surveillance program to support the
trading of these options. Finally, 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.
IV. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 1
Amendment No. 1 limits the universe
of Vol Indexes to specific individual
stock-based and ETF based volatility
indexes. Amendment No. 1 does not
propose any new changes but instead
narrows the scope of the original
proposal. The Commission notes that
CBOE is required to file a rule filing
under Rule 19b–4 under the Act 21 that
would require Commission approval
before listing options on any additional
Vol Indexes. The Commission finds
good cause, pursuant to Section 19(b)(2)
of the Act,22 for approving the proposed
rule change, as modified by Amendment
No. 1, prior to the 30th day after the
date of publication of notice in the
Federal Register.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,23 that the
proposed rule change (SR–CBOE–2011–
026), as modified by Amendment No. 1,
be, and hereby is, approved on an
accelerated basis.
21 17
CFR 240.19b–4.
U.S.C. 78s(b)(2).
23 15 U.S.C. 78s(b)(2).
22 15
PO 00000
Frm 00078
Fmt 4703
Sfmt 4703
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.24
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011–13636 Filed 6–1–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–64549; File No. SR–Phlx–
2011–46]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Order
Granting Approval of Proposed Rule
Change To Expand the Number of
Components in the PHLX Gold/Silver
SectorSM Known as XAUSM, on Which
Options Are Listed and Traded
May 26, 2011.
On March 31, 2011, NASDAQ OMX
PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), 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 expand the number of
components in the PHLX Gold/Silver
SectorSM (the ‘‘Index’’ or ‘‘XAUSM’’), on
which options are listed and traded, and
to change the Index weighting
methodology.3 The proposed rule
change was published for comment in
the Federal Register on April 13, 2011.4
The Commission received no comment
letters on the proposal. This order
approves the proposed rule change.
The Gold/Silver Index is a P.M.
settled capitalization-weighted index
composed of the stocks of widely held
U.S. listed companies involved in the
gold/silver mining industry. Options on
the Index have an American-style
expiration and the settlement value is
based on the closing values of the
component stocks on the day exercised,
or on the last trading day prior to
expiration.
In 1996, the Exchange received
approval to apply to the Index all of the
Index Options Maintenance Standards
of Rule 1009A(c) except the requirement
that an index option be designated as
A.M. settled per subsection (b)(1).5
24 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 PHLX Gold/Silver SectorSM may also be known
as Gold/Silver Index.
4 See Securities Exchange Act Release No. 64244
(April 7, 2011), 76 FR 20775.
5 See Securities Exchange Act Release No. 37334
(June 19, 1996), 61 FR 33162 (June 26, 1996) (SR–
Phlx–96–03) (order approving use of modified Rule
1009A(c) generic maintenance standards in respect
of options on the Index).
1 15
E:\FR\FM\02JNN1.SGM
02JNN1
]]>Agencies
[Federal Register Volume 76, Number 106 (Thursday, June 2, 2011)]
[Notices]
[Pages 32000-32004]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-13636]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64551; File No. SR-CBOE-2011-026]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Granting Approval of Proposed Rule Change and
Notice of Filing and Order Granting Accelerated Approval to Amendment
No. 1 Thereto To Trade Options on Certain Individual Stock Based
Volatility Indexes and Exchange-Traded Fund Based Volatility Indexes
May 26, 2011.
On March 29, 2011, Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to trade options on certain
individual stock based and exchange-traded fund (``ETF'') based
volatility indexes. The proposed rule change was published for comment
in the Federal Register on April 13, 2011.\3\ The Commission received
no comments in response to the Notice.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 64245 (April 7,
2011), 76 FR 20784 (``Notice'').
---------------------------------------------------------------------------
On May 16, 2011, the Exchange submitted Amendment No. 1 to the
proposed rule change, as described in Items I and II below, which items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on Amendment No. 1 from interested persons
and is approving the proposed rule change, as modified by Amendment No.
1, on an accelerated basis.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of Amendment No. 1 to the Proposed Rule Change
CBOE proposes to amend its rules to list and trade options on
certain individual stock based volatility indexes and ETF based
volatility indexes. The proposed options will be cash-settled and will
have European-style exercise. The text of the rule proposal is
available on the Exchange's Web site (https://www.cboe.org/legal), at
the Exchange's Office of the Secretary and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the 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.
[[Page 32001]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Amendment 1 replaces the original filing in its entirety. The
purpose of Amendment 1 is to limit the original proposal to specific
individual stock-based and exchange-traded-fund based (``ETF'')
volatility indexes.
The purpose of this proposed rule change is to permit the Exchange
to list and trade cash-settled, European-style options on certain
Individual Stock or ETF Based Volatility Indexes (collectively, ``Vol
Indexes''). Specifically, CBOE proposes to list options on Vol Indexes
comprised of options on the following individual stocks: Apple
Computer, Amazon, Goldman Sachs, Google and IBM. In addition, CBOE will
list Vol Indexes comprised of options on the following ETFs: the US Oil
Fund, LP (``USO''), the iShares MSCI Emerging Markets Index Fund
(``EEM''), the iShares FTSE China 25 Index Fund (``FXI''), the iShares
MSCI Brazil Index Fund (``EWZ''), the Market Vectors Gold Miners ETF
(``GDX''), and the Energy Select Sector SPDR ETF (``XLE''). These are
in addition to options on the CBOE Gold ETF Volatility Index (``GVZ''),
which has already been approved for trading by the Commission.\4\
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 62139 (May 19,
2010), 75 FR 29597 (May 26, 2010) (order approving proposal to list
and trade GVZ options on the CBOE).
---------------------------------------------------------------------------
Below is a chart identifying the specific Vol Indexes the Exchange
is proposing to trade options on:
------------------------------------------------------------------------
Underlying option
Ticker symbol Volatility Index name class
------------------------------------------------------------------------
VXAPL......................... CBOE Equity VIX on AAPL
Apple.
VXAZN......................... CBOE Equity VIX on AMZN
Amazon.
VXGS.......................... CBOE Equity VIX on GS
Goldman Sachs.
VXGOG......................... CBOE Equity VIX on GOOG
Google.
VXIBM......................... CBOE Equity VIX on IBM
IBM.
OVX........................... CBOE Crude Oil ETF USO
Volatility Index.
VXEEM......................... CBOE Emerging Markets EEM
ETF Volatility Index.
VXFXI......................... CBOE China ETF FXI
Volatility Index.
VXEWZ......................... CBOE Brazil ETF EWZ
Volatility Index.
VXGDX......................... CBOE Gold Miners ETF GDX
Volatility Index.
VXXLE......................... CBOE Energy Sector XLE
ETF Volatility Index.
------------------------------------------------------------------------
Index Design and Calculation
The calculation of a Vol Index will be based on the VIX and GVZ
methodology applied to options on the individual stock or ETF that is
the subject of the particular Vol Index. A Vol Index is an up-to-the-
minute market estimate of the expected volatility of the underlying
individual stock or ETF calculated by using real-time bid/ask quotes of
CBOE listed options on the underlying instruments. A Vol Index uses
nearby and second nearby options with at least 8 days left to
expiration and then weights them to yield a constant, 30-day measure of
the expected (implied) volatility.
For each contract month, CBOE will determine the at-the-money
strike price. The Exchange will then select the at-the-money and out-
of-the money series with non-zero bid prices and determine the midpoint
of the bid-ask quote for each of these series. The midpoint quote of
each series is then weighted so that the further away that series is
from the at-the-money strike, the less weight that is accorded to the
quote. Then, to compute the index level, CBOE will calculate a
volatility measure for the nearby options and then for the second
nearby options. This is done using the weighted mid-point of the
prevailing bid-ask quotes for all included option series with the same
expiration date. These volatility measures are then interpolated to
arrive at a single, constant 30-day measure of volatility.\5\
---------------------------------------------------------------------------
\5\ CBOE will be the reporting authority for any Vol Index.
---------------------------------------------------------------------------
CBOE will compute values for Vol Index underlying option series on
a real-time basis throughout each trading day, from 8:30 a.m. until 3
p.m. (Chicago time) (or until 3:15 p.m. (Chicago time) as applicable
for certain ETF Based Volatility Index options). Vol Index levels will
be calculated by CBOE and disseminated at 15-second intervals to major
market data vendors.
Options Trading
Vol Index options will be quoted in index points and fractions and
one point will equal $100. The minimum tick size for series trading
below $3 will be 0.05 ($5.00) and above $3 will be 0.10 ($10).00).
Initially, the Exchange will list in-, at- and out-of-the-money strike
prices and the procedures for adding additional series are provided in
Rule 5.5.\6\ Dollar strikes (or greater) will be permitted for Vol
Index options where the strike price is $200 or less and $5 or greater
where the strike price is greater than $200.
---------------------------------------------------------------------------
\6\ See Rule 5.5(c). ``Additional series of options of the same
class may be opened for trading on the Exchange when the Exchange
deems it necessary to maintain an orderly market, to meet customer
demand or when the market price of the underlying * * * moves
substantially from the initial exercise price or prices.'' For
purposes of this rule, ``market price'' shall mean the implied
forward level based on any corresponding futures price or the
calculated forward value of the respective Vol index.
---------------------------------------------------------------------------
Transactions in Vol Index options may be effected on the Exchange
between the hours of 8:30 a.m. Chicago time and 3:15 p.m. (Chicago
time), except (for Exchange-Trade Fund Based Volatility Index options)
if the closing time for traditional options on the ETF is earlier than
3:15 p.m. (Chicago time), the earlier closing time shall apply. The
Exchange is proposing to permit different closing times for ETF Based
Volatility Index options because the trading hours for traditional
options on ETFs vary.
Exercise and Settlement
The proposed options will typically expire on the Wednesday that is
30 days prior to the third Friday of the calendar month immediately
following the expiration month (the expiration date of the options used
in the calculation of the index). If the third Friday of the calendar
month immediately following the expiring month is a CBOE holiday, the
expiration date will be 30 days prior to the CBOE business day
immediately preceding that Friday. For example, November 2011 Vol Index
options would expire on Wednesday, November 16, 2011, exactly 30 days
prior to the third Friday of the calendar month
[[Page 32002]]
immediately following the expiring month.
Trading in the expiring contract month will normally cease at 3
p.m. (Chicago time) (or at 3:15 p.m. (Chicago time) as applicable for
ETF Based Volatility Index options) on the business day immediately
preceding the expiration date.\7\ Exercise will result in delivery of
cash on the business day following expiration. Vol Index options will
be A.M.-settled.\8\ The exercise settlement value will be determined by
a Special Opening Quotations (``SOQ'') of a Vol Index calculated from
the sequence of opening prices of a single strip of options expiring 30
days after the settlement date. The opening price for any series in
which there are [sic] is no trade shall be the average of that options'
bid price and ask price as determined at the opening of trading.\9\
---------------------------------------------------------------------------
\7\ See proposed amendment to Rule 24.6, Days and Hours of
Business.
\8\ See proposed amendment to Rule 24.9(a)(4) (adding Individual
Stock or ETF Based Volatility Indexes to the list of A.M.-settled
index options approved for trading on the Exchange).
\9\ See proposed amendment to Rule 24.9(a)(5) (revising rule to
make ``Volatility Index'' options generic for purposes of this
provision, which sets forth the method of determining the day that
the exercise settlement value is calculated and of determining the
expiration date and the last trading day for CBOE Volatility Index
Options). The Exchange is also proposing to make technical changes
to this rule provision as well.
---------------------------------------------------------------------------
The exercise-settlement amount will be equal to the difference
between the exercise-settlement value and the exercise price of the
option, multiplied by $100. When the last trading day is moved because
of a CBOE holiday, the last trading day for expiring options will be
the day immediately preceding the last regularly-scheduled trading day.
Position and Exercise Limits
For regular options trading, the Exchange is proposing to establish
position limits for Vol Index options at 50,000 contracts on either
side of the market and no more than 30,000 contracts in the nearest
expiration month. CBOE believes that a 50,000 contract position limit
is appropriate due to the fact that the options which are the
underlying components for a Vol Index are among the most actively
traded option classes currently listed. In determining compliance with
these proposed position limits, Vol Index options will not be
aggregated with the underlying ETF or individual stock options.
Exercise limits will be the equivalent to the proposed position
limits.\10\ Vol Index options will be subject to the same reporting
requirements triggered for other options dealt in on the Exchange.
---------------------------------------------------------------------------
\10\ See proposed amendment to rule 24.5 and proposed new
Interpretations and Policy .04 to rule 24.5.
---------------------------------------------------------------------------
For FLEX options trading, the Exchange is proposing that the
position limits for FLEX Vol Index Options will be equal to the
position limits for Non-FLEX Options on the same Vol Index. Similarly,
the Exchange is proposing that the exercise limits for FLEX Vol Index
Options will be equivalent to the position limits established pursuant
to Rule 24.4. The proposed position and exercise limits for FLEX Vol
Index Options are consistent with the treatment of position and
exercise limits for Flex GVZ and other Flex Index Options. The Exchange
is also proposing to amend subparagraph (4) to Rules 24A.7(d) and
24B.7(d) to provide that as long as the options positions remain open,
positions in FLEX Vol Index Options that expire on the same day as Non-
FLEX Vol Index Options, as determined pursuant to Rule 24.9(a)(5),
shall be aggregated with positions in Non-FLEX Vol Index Options and
shall be subject to the position limits set forth in Rules 4.11, 24.4,
24.4A and 24.4B, and the exercise limits set forth in Rules 4.12 and
24.5.
The Exchange is proposing to establish a Vol Index Hedge Exemption,
which would be in addition to the standard limit and other exemptions
available under Exchange rules, interpretations and policies. The
Exchange proposes to establish the following procedures and criteria
which must be satisfied to qualify for a Vol Index hedge exemption:
The account in which the exempt option positions are held
(``hedge exemption account'') has received prior Exchange approval for
the hedge exemption specifying the maximum number of contracts which
may be exempt under the proposed new Interpretation. The hedge
exemption account has provided all information required on Exchange-
approved forms and has kept such information current. Exchange approval
may be granted on the basis of verbal representations, in which event
the hedge exemption account shall within two (2) business days or such
other time period designated by the Department of Market Regulation
furnish the Department of Market Regulation with appropriate forms and
documentation substantiating the basis for the exemption. The hedge
exemption account may apply from time to time for an increase in the
maximum number of contracts exempt from the position limits.
A hedge exemption account that is not carried by a CBOE
member organization must be carried by a member of a self-regulatory
organization participating in the Intermarket Surveillance Group.
The hedge exemption account maintains a qualified
portfolio, or will effect transactions necessary to obtain a qualified
portfolio concurrent with or at or about the same time as the execution
of the exempt options positions, of a net long or short position in
Equity-Based Volatility Index futures contracts or in options on Vol
Index futures contracts, or long or short positions in Vol Index
options, for which the underlying Vol Index is included in the same
margin or cross-margin product group cleared at the Clearing
Corporation as the Vol Index option class to which the hedge exemption
applies. To remain qualified, a portfolio must at all times meet these
standards notwithstanding trading activity.
The exemption applies to positions in Vol Index options
dealt in on the Exchange and is applicable to the unhedged value of the
qualified portfolio. The unhedged value will be determined as follows:
(1) The values of the net long or short positions of all qualifying
products in the portfolio are totaled; (2) for positions in excess of
the standard limit, the underlying market value (a) of any economically
equivalent opposite side of the market calls and puts in broad-based
index options, and (b) of any opposite side of the market positions in
Vol Index futures, options on Vol Index futures, and any economically
equivalent opposite side of the market positions, assuming no other
hedges for these contracts exist, is subtracted from the qualified
portfolio; and (3) the market value of the resulting unhedged portfolio
is equated to the appropriate number of exempt contracts as follows--
the unhedged qualified portfolio is divided by the correspondent
closing index value and the quotient is then divided by the index
multiplier or 100.
Only the following qualified hedging transactions and
positions will be eligible for purposes of hedging a qualified
portfolio (i.e. futures and options) pursuant to the proposed new
Interpretation .01:
[cir] Long put(s) used to hedge the holdings of a qualified
portfolio;
[cir] Long call(s) used to hedge a short position in a qualified
portfolio;
[cir] Short call(s) used to hedge the holdings of a qualified
portfolio; and
[cir] Short put(s) used to hedge a short position in a qualified
portfolio.
The following strategies may be effected only in
conjunction with a qualified stock portfolio:
[cir] A short call position accompanied by long put(s), where the
short call(s) expires with the long put(s), and the
[[Page 32003]]
strike price of the short call(s) equals or exceeds the strike price of
the long put(s) (a ``collar''). Neither side of the collar transaction
can be in-the-money at the time the position is established. For
purposes of determining compliance with Rules 4.11 and proposed Rule
24.4C, a collar position will be treated as one (1) contract;
[cir] A long put position coupled with a short put position
overlying the same Vol Index and having an equivalent underlying
aggregate index value, where the short put(s) expires with the long
put(s), and the strike price of the long put(s) exceeds the strike
price of the short put(s) (a ``debit put spread position''); and
[cir] A short call position accompanied by a debit put spread
position, where the short call(s) expires with the puts and the strike
price of the short call(s) equals or exceeds the strike price of the
long put(s). Neither side of the short call, long put transaction can
be in-the-money at the time the position is established. For purposes
of determining compliance with Rule 4.11 and proposed Rule 24.4C, the
short call and long put positions will be treated as one (1) contract.
The hedge exemption account shall:
[cir] Liquidate and establish options, their equivalent or other
qualified portfolio products in an orderly fashion; not initiate or
liquidate positions in a manner calculated to cause unreasonable price
fluctuations or unwarranted price changes.
[cir] Liquidate any options prior to or contemporaneously with a
decrease in the hedged value of the qualified portfolio which options
would thereby be rendered excessive.
[cir] Promptly notify the Exchange of any material change in the
qualified portfolio which materially affects the unhedged value of the
qualified portfolio.
If an exemption is granted, it will be effective at the
time the decision is communicated. Retroactive exemptions will not be
granted.
Exchange Rules Applicable
Except as modified herein, the rules in Chapters I through XIX,
XXIV, XXIVA, and XXIVB will equally apply to Vol Index options.
The Exchange is proposing that the margin requirements for Vol
Index options be set at the same levels that apply to equity options
under Exchange Rule 12.3. Margin of up to 100% of the current market
value of the option, plus 20% of the underlying volatility index value
must be deposited and maintained. The pertinent provisions of Rule
12.3, Margin Requirements, have been amended to reflect these proposed
revisions. Additional margin may be required pursuant to Exchange Rule
12.10.
The Exchange hereby designates Vol Index options as eligible for
trading as Flexible Exchange Options as provided for in Chapters XXIVA
(Flexible Exchange Options) and XXIVB (FLEX Hybrid Trading System). The
Exchange notes that Vol Index FLEX Options will only expire on business
days that non-FLEX options on Vol Indexes expire. This is because the
term ``exercise settlement value'' in Rules 24A.4(b)(3) and
24B.4(b)(3), Special Terms for FLEX Index Options, has the same meaning
set forth in Rule 24.9(5). As is described earlier, the Exchange is
proposing to amend Rule 24.9(a)(5) to provide that the exercise
settlement value of Vol Index options for all purposes under CBOE Rules
will be calculated as the Wednesday that is thirty days prior to the
third Friday of the calendar month immediately following the month in
which a Vol Index options expire.
Capacity
CBOE has analyzed its capacity and represents that it believes the
Exchange and the Options Price Reporting Authority have the necessary
systems capacity to handle the additional traffic associated with the
listing of new series that would result from the introduction of Vol
Index options.
Surveillance
The Exchange will use the same surveillance procedures currently
utilized for each of the Exchange's other index options to monitor
trading in Vol Index options. The Exchange further represents that
these surveillance procedures shall be adequate to monitor trading in
options on these volatility indexes. For surveillance purposes, the
Exchange will have complete access to information regarding trading
activity in the pertinent underlying securities.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act \11\ and the rules and regulations thereunder and, in
particular, the requirements of Section 6(b) of the Act.\12\
Specifically, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \13\ requirements that the rules of
an exchange be designed to promote just and equitable principles of
trade, to prevent fraudulent and manipulative acts, to remove
impediments to and to perfect the mechanism for a free and open market
and a national market system, and, in general, to protect investors and
the public interest. The Exchange believes that the introduction of Vol
Index options will attract order flow to the Exchange, increase the
variety of listed options to investors, and provide a valuable hedging
tool to investors.
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78s(b)(1).
\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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. 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.\14\
Specifically, the Commission finds that the proposal is consistent with
Section 6(b)(5) of the Act,\15\ which requires, among other things,
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, 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.
---------------------------------------------------------------------------
\14\ 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).
\15\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
As a national securities exchange, the CBOE is required under
Section 6(b)(1) of the Act \16\ to enforce compliance by its members,
and persons associated with its members, with the provisions of the
Act, Commission rules and regulations thereunder, and its own rules. In
addition, brokers that trade options on Vol Indexes will also be
subject to best execution obligations and FINRA rules.\17\ Applicable
exchange rules also require that customers receive appropriate
disclosure before trading
[[Page 32004]]
options on Vol Indexes.\18\ Further, brokers opening accounts and
recommending options transactions must comply with relevant customer
suitability standards.\19\
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78f(b)(1).
\17\ See NASD Rule 2320.
\18\ See CBOE Rule 9.15.
\19\ See FINRA Rule 2360(b) and CBOE Rules 9.7 and 9.9.
---------------------------------------------------------------------------
Options on Vol Indexes will trade as options under the trading
rules of the CBOE. The Commission believes that the listing rules
proposed by CBOE for options on Vol Indexes are consistent with the
Act. Vol Index options will be quoted in index points and fractions and
one point will equal $100. The minimum tick size for series trading
below $3 will be 0.05 ($5.00) and above $3 will be 0.10 ($10). Dollar
strikes (or greater) will be permitted for Vol Index options where the
strike price is $200 or less and $ or greater where the strike price is
greater than $200. This should provide investors with greater
flexibility in the trading of options on Vol Indexes and further the
public interest by allowing investors to establish positions that are
better tailored to meet their investment objectives. The Commission
notes that CBOE will compute Vol Index levels and disseminate the
values at 15-second intervals to major market data vendors.
The Commission believes that the Exchange's proposed position
limits and exercise limits for options on Vol Indexes are appropriate
and consistent with the Act. The Commission notes that the particular
Vol Index options in this proposed rule change track liquid underlying
stocks and ETFs. In addition, the Commission notes that the position
limits are similar to those for options on the GVZ which the Commission
previously approved. The Commission also notes that the margin
requirements for equity options as specified in CBOE Rule 12.3 will
also apply to options on Vol Indexes. The Commission finds this to be
reasonable and consistent with the Act.
The Commission also believes that the Exchange's proposal to allow
options on Vol Indexes 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 give
investors and other market participants the ability to individually
tailor, within specified limits, certain terms of those options.\20\
The current proposal incorporates options on Vol Indexes that trade as
FLEX Options into these existing rules and regulatory framework. In
addition, the Commission notes that the position and exercise limits
for FLEX options on Vol Indexes will be the same as those previously
approved for options on the GVZ.
---------------------------------------------------------------------------
\20\ See Securities Exchange Act Release No. 31910 (February 23,
1993), 58 FR 12056 (March 2, 1993).
---------------------------------------------------------------------------
The Commission believes that the hedge exemption for position
limits on options on Vol Indexes in proposed Interpretations and
Policies .01 to CBOE Rule 24.4C are reasonable. The exemption is
limited and sets objective standards for when the exemption applies.
The Commission believes that this approach ensures that position limits
are not improperly circumvented but at the same time are flexible
enough to accommodate hedging strategies employed by market
participants.
Lastly, the Commission notes that CBOE represented that it has an
adequate surveillance program to monitor trading of options on Vol
Indexes and intends to apply its existing surveillance program to
support the trading of these options. Finally, 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.
IV. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
Amendment No. 1 limits the universe of Vol Indexes to specific
individual stock-based and ETF based volatility indexes. Amendment No.
1 does not propose any new changes but instead narrows the scope of the
original proposal. The Commission notes that CBOE is required to file a
rule filing under Rule 19b-4 under the Act \21\ that would require
Commission approval before listing options on any additional Vol
Indexes. The Commission finds good cause, pursuant to Section 19(b)(2)
of the Act,\22\ for approving the proposed rule change, as modified by
Amendment No. 1, prior to the 30th day after the date of publication of
notice in the Federal Register.
---------------------------------------------------------------------------
\21\ 17 CFR 240.19b-4.
\22\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\23\ that the proposed rule change (SR-CBOE-2011-026), as modified
by Amendment No. 1, be, and hereby is, approved on an accelerated
basis.
---------------------------------------------------------------------------
\23\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
---------------------------------------------------------------------------
\24\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-13636 Filed 6-1-11; 8:45 am]
BILLING CODE 8011-01-P
