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 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 (http://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 (http://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 (http:// 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]


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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.
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    \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'').
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    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 (http://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\
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    \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).
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    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\
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    \5\ CBOE will be the reporting authority for any Vol Index.
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    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.
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    \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.
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    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\
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    \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.
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    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.
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    \10\ See proposed amendment to rule 24.5 and proposed new 
Interpretations and Policy .04 to rule 24.5.
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    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.
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    \11\ 15 U.S.C. 78s(b)(1).
    \12\ 15 U.S.C. 78f(b).
    \13\ 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. 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.
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    \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).
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    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\
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    \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.
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    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.
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    \20\ See Securities Exchange Act Release No. 31910 (February 23, 
1993), 58 FR 12056 (March 2, 1993).
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    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.
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    \21\ 17 CFR 240.19b-4.
    \22\ 15 U.S.C. 78s(b)(2).
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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.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-13636 Filed 6-1-11; 8:45 am]
BILLING CODE 8011-01-P