Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Granting Approval of Proposed Rule Change To List and Trade Single Stock Dividend Options, 47280-47283 [2011-19748]

Download as PDF 47280 Federal Register / Vol. 76, No. 150 / Thursday, August 4, 2011 / Notices of these statements may be examined at the places specified in Item IV below. The self-regulatory organization has prepared summaries, set forth in sections A, B and C below, of the most significant aspects of such statements. B. Self-Regulatory Organization’s Statement on Burden on Competition The proposed rule change does not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange has not solicited, and does not intend to solicit, comments on this proposed rule change. The Exchange has not received any unsolicited written comments from members or other interested parties. 1. Purpose The Exchange currently assesses a per contract transaction charge to market participants that add or remove liquidity from the Exchange (‘‘maker/ taker fees’’) in 99 options classes (the ‘‘Select Symbols’’).3 The purpose of this proposed rule change is to amend the list of Select Symbols on the Exchange’s Schedule of Fees, titled ‘‘Rebates and Fees for Adding and Removing Liquidity in Select Symbols.’’ Specifically, the Exchange proposes to add Motorola Solutions, Inc. (‘‘MSI’’) to the list of Select Symbols. While changes to the Fee Schedule pursuant to this proposal are effective upon filing, the Exchange has designated these changes to be operative on August 1, 2011. sroberts on DSK5SPTVN1PROD with NOTICES 2. Statutory Basis The Exchange believes that its proposal to amend its Fee Schedule is consistent with Section 6(b) of the Act 4 in general, and furthers the objectives of Section 6(b)(4) of the Act 5 in particular, in that it is an equitable allocation of reasonable fees and other charges among Exchange members and other persons using its facilities. The Exchange believes that it is reasonable to add MSI to its list of Select Symbols to attract additional order flow to the Exchange. The Exchange anticipates that the addition of MSI to the list of Select Symbols will attract market participants to transact equity options at the Exchange because of the available rebates. The Exchange believes that it is equitable to amend the list of Select Symbols by adding MSI because the list of Select Symbols would apply uniformly to all categories of participants in the same manner. All market participants who trade the Select Symbols would be subject to the applicable maker/taker fees and rebates. 3 Options classes subject to maker/taker fees are identified by their ticker symbol on the Exchange’s Schedule of Fees. 4 15 U.S.C. 78f(b). 5 15 U.S.C. 78f(b)(4). VerDate Mar<15>2010 17:29 Aug 03, 2011 Jkt 223001 III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act.6 At any time within 60 days of the filing of such 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. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–ISE–2011–43 on the subject line. 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–ISE–2011–43. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for 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–ISE– 2011–43 and should be submitted on or before August 25, 2011. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.7 Elizabeth M. Murphy, Secretary. [FR Doc. 2011–19727 Filed 8–3–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–64991; File No. SR–CBOE– 2011–039] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Granting Approval of Proposed Rule Change To List and Trade Single Stock Dividend Options July 29, 2011. On May 31, 2011, the Chicago Board Options Exchange, Incorporated (‘‘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 list and trade cash-settled options that overlie the ordinary cash 7 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 1 15 6 15 PO 00000 U.S.C. 78s(b)(3)(A)(ii). Frm 00141 Fmt 4703 Sfmt 4703 E:\FR\FM\04AUN1.SGM 04AUN1 Federal Register / Vol. 76, No. 150 / Thursday, August 4, 2011 / Notices dividends paid by an issuer over an annual, semi-annual, or quarterly ‘‘accrual period.’’ The proposed rule change was published for comment in the Federal Register on June 17, 2011.3 The Commission received no comments on the proposal. This order approves the proposed rule change. I. Description of Proposal CBOE proposes to list and trade cashsettled, P.M.-settled, European-style exercise options that overlie the ordinary cash dividends paid by an issuer (‘‘SSDO’’) over an annual accrual period. CBOE also may list series of SSDOs with an accrual period of less than a year, but in no event less than one quarter of a year. Product Design Each SSDO represents the accumulated ordinary dividend amounts paid by a specific issuer over a specified accrual period.4 Each annual accrual period will run from the business day after the third Friday of December through the third Friday of the following December. For an SSDO with an accrual period of less than a year, the accrual period runs from the business day after the third Friday of the month beginning the accrual period through the third Friday of the month ending the accrual period.5 The underlying value for SSDOs will be equal to ten (10) times the exdividend amounts of an issuer accumulated over the specified accrual period. Each day, CBOE will calculate the aggregate daily dividend totals for the specific issuer, which are summed up over any accrual period. During each business day, CBOE will disseminate the underlying SSDO value, multiplied by ten (10), through the Options Price Reporting Authority (‘‘OPRA’’), the Consolidated Tape Association (‘‘CTA’’) tape and/or the Market Data Index (‘‘MDI’’) feed. sroberts on DSK5SPTVN1PROD with NOTICES Options Trading Each SSDO will be quoted in decimals and one point will be equal to $100. The Exchange proposes that the minimum price variation for quotes shall be established on a class-by-class basis by the Exchange and shall not be less than $0.01. CBOE also proposes to list series at 1 point ($1.00) or greater strike price intervals if the strike price 3 See Securities Exchange Act Release No. 64654 (June 13, 2011), 76 FR 35503 (‘‘Notice’’). 4 For purposes of SSDOs, dividends are deemed to be ‘‘paid’’ on the ex-dividend date. 5 The Exchange will assign separate trading symbols to SSDOs overlying the accumulated exdividends of the same issuer that have different accrual periods. VerDate Mar<15>2010 17:29 Aug 03, 2011 Jkt 223001 is equal to or less than $200 and 2.5 points ($2.50) or greater strike price intervals if the strike price exceeds $200. Initially, the Exchange will list in-, at- and out-of-the-money strike prices and may open for trading up to five annual contract months expiring in December in different years for any single stock underlying an SSDO and up to ten contract months for accrual periods of less than a year.6 The Exchange is proposing to use the expected dividend (i.e., the aggregate value of dividends that are expected to be paid by the issuer over a given accrual period) amount for setting the initial strikes. Near-term SSDOs will reflect dividends accumulating in the then-current accrual period. All other SSDO options (i.e., contracts listed for trading that are not in the then-current accrual period) will reflect dividends expected in comparable accrual periods beyond the current accrual period. The Exchange may open for trading additional series, either in response to customer demand or as the price of the expected dividends for an issuer changes. Exercise and Settlement The proposed options will expire on the Saturday following the third Friday of the expiring month. Trading in the expiring contract month will normally cease at 3 p.m. Chicago time on the last day of trading (ordinarily the Friday before expiration Saturday, unless there is an intervening holiday). When the last trading day is moved because of an Exchange holiday (such as when CBOE is closed on the Friday before expiration), the last trading day for expiring options will be Thursday. Exercise will result in delivery of cash on the business day following expiration. SSDOs will be P.M.-settled. The Exchange is proposing P.M.settlement for SSDOs because options trading on individual stocks are P.M. settled. As a result, the Exchange is proposing to match the expiration style for SSDOs to individual stock option exercise. The exercise-settlement amount will be equal to ten times the ordinary cash dividends paid by the issuer over the accrual period. The exercise settlement amount is equal to the difference between the exercisesettlement value and the exercise price of the option, multiplied by the contract multiplier ($100). If the exercise settlement value is not available or the normal settlement procedure cannot be utilized due to a 6 See Notice, supra note 3, for an example of listing five annual contract months expiring in December in different years. PO 00000 Frm 00142 Fmt 4703 Sfmt 4703 47281 trading disruption or other unusual circumstance, the settlement value will be determined in accordance with the rules and bylaws of the OCC. Surveillance CBOE has represented that it will use the same surveillance procedures currently utilized for each of the Exchange’s other single stock options to monitor trading in SSDOs. Such procedures include, for example, monitoring dividend announcements. The Exchange represents that these surveillance procedures shall be adequate to monitor trading in these option products. For surveillance purposes, the CBOE has represented that it will have complete access to information regarding trading activity in the pertinent securities whose dividend payment is the basis for particular SSDOs. Position Limits CBOE proposes that position and exercise limits for SSDOs will be the same as those for standard options overlying the same security. While positions in SSDOs will be aggregated with longer-dated positions in SSDOs with the same underlying stock for position and exercise limits purposes, they will not be aggregated with positions in the ordinary options overlying the stock of the issuer paying the dividends underlying the SSDO. CBOE represents that the reason for not aggregating positions with ordinary options is that SSDOs are based solely on expected dividends for an issuer and will reflect the forward value of that expectation. CBOE states that because the pricing of ordinary options versus SSDOs will differ dramatically, the Exchange believes there is no need to aggregate positions to prevent manipulative practices involving the underlying options. Exchange Rules Applicable New Rule 5.9 is proposed to govern the listing and trading of SSDOs. In addition, SSDOs will be margined in the same manner as single stock options under Exchange Rule 12.3. Purchasers of puts or calls, however, must be paid in full, even if there remains longer than nine months until expiration for the position. For SSDOs, the aggregate contract value on which the margin amount will be calculated will be the product of the forward expected dividend amount for the accrual period (as adjusted for any contract scaling factor) and the applicable multiplier ($100). CBOE proposes to designate SSDO options as eligible for trading as Flexible E:\FR\FM\04AUN1.SGM 04AUN1 47282 Federal Register / Vol. 76, No. 150 / Thursday, August 4, 2011 / Notices Exchange Options (‘‘FLEX options’’) as provided for in Chapters XXIVA (Flexible Exchange Options) and XXIVB (FLEX Hybrid Trading System). Capacity CBOE represents that it has analyzed its capacity and believes that the Exchange and OPRA have the necessary systems capacity to handle the additional traffic associated with the listing of new series that will result from the introduction of SSDOs. II. Discussion and Commission Findings sroberts on DSK5SPTVN1PROD with NOTICES 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.7 Specifically, the Commission finds that the proposal is consistent with Section 6(b)(5) of the Act,8 which requires, among other things, that the rules of a national securities exchange be designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Commission believes that CBOE’s proposal gives options investors the ability to make an additional investment choice in a manner consistent with the requirements of Section 6(b)(5) of the Act.9 The Commission notes that SSDOs will allow market participants to hedge their exposure to changes in the dividend payment policies of the underlying securities. Further, the Commission believes that the listing rules proposed by CBOE for SSDOs are reasonable and consistent with the Act, as discussed below. The Commission believes that permitting $1.00 strike price intervals if the strike price is equal to or less than $200 will provide investors with added flexibility in the trading of these options and will further the public interest by allowing investors to establish positions that are better tailored to meet their investment objectives. As explained by CBOE, the underlying value of an SSDO is expected to fluctuate around a limited expected dividend value range,10 and 7 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). 8 15 U.S.C. 78f(b)(5). 9 15 U.S.C. 78f(b)(5). 10 The Commission notes that, in the Notice the Exchange provided a number of examples of values underlying SSDOs using past ordinary dividend payouts over varying accrual periods, and these VerDate Mar<15>2010 17:29 Aug 03, 2011 Jkt 223001 therefore, the implementation of $1.00 strike price intervals is designed to provide investors with flexibility. Because of this characteristic the Commission believes that the implementation of $1 strike price intervals for SSDOs, within the parameters of the rule, is appropriate. The Commission believes that CBOE’s proposal to allow the minimum price variation to be no less than $0.01, as established on a class-by-class basis, is consistent with the Act, given the expected low underlying dividend values for SSDOs. CBOE has represented that it expects that the underlying dividend values for SSDOs will be relatively low, and that granular pricing will provide for more pricing points. Further, CBOE has represented that it has analyzed its capacity and believes that it and OPRA have the necessary systems capacity to handle the additional traffic associated with the listing of new series that will result from the introduction of SSDOs. In particular, the Exchange noted that expected dividend payments, on which the value of SSDOs are predicated, are generally much less volatile than share prices, and thus there is less need to list numerous strike prices for each expiration date of an SSDO or to add many new strikes over the life of an SSDO. The Commission notes that, on a daily basis, CBOE will calculate the aggregate daily dividend totals for the specific issuer, and will disseminate the underlying SSDO value, multiplied by ten (10), through OPRA, the CTA and/ or the MDI feed. The Exchange has proposed to apply the same position and exercise limits as those for standard options overlying the same security. However, the Exchange notes that positions in SSDOs will not be aggregated with positions in the ordinary positions overlying the stock of the issuer paying the dividends underlying the SSDO, because the pricing of ordinary options and SSDOs vary greatly and thus it is unnecessary to aggregate the positions to prevent manipulative practices involving the underlying. The Commission believes that CBOE’s proposed rules relating to position and exercise limits are appropriate and consistent with the Act. The Exchange also proposes to margin SSDOs in the same manner as single stock options; however, the aggregate contract value on which the margin amount will be calculated will be the product of the forward expected dividend amount for the accrual period values ranged from 1 to 22.70. See Notice, supra note 3. PO 00000 Frm 00143 Fmt 4703 Sfmt 4703 and the applicable modifier. The Commission believes that CBOE’s proposed rules relating to margin requirements are appropriate. The Commission also believes that CBOE’s proposal to allow SSDOs 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.11 The Commission notes that CBOE represented that it has an adequate surveillance program to monitor trading of SSDOs and intends to apply its existing surveillance program for single stock options to support the trading of these options. As with other securities, there is a potential risk that a corporate insider may exploit his or her advance knowledge of changes to an issuer’s dividend policy through the purchase or sale of an SSDO. The Commission has taken a number of enforcement actions in cases where insiders executed securities transactions to exploit their knowledge of changes in issuers’ dividend policies.12 Accordingly, adequate surveillance is an important responsibility of the CBOE. In addition, CBOE has represented that it is confident that it has adequate tools in place to surveil for market manipulation. Further, CBOE is a member of the ISG and can obtain trading activity in information in the underlying securities whose dividend payment is the basis for particular SSDOs from the exchanges that list the securities. The Commission believes that CBOE should have the ability and resources to adequately surveil for manipulation in SSDOs. In approving the proposed rule change, the Commission has also relied upon CBOE’s representation that it has the necessary systems capacity to support the new options series that will result from this proposal. 11 See Securities Exchange Act Release No. 31910 (February 23, 1993), 58 FR 12056 (March 2, 1993). 12 See, e.g., SEC v. David L. Johnson, Civil Action No. 05–CV–4789 (USDC E.D. Pa.) (Sept. 7, 2005) (consent to permanent injunction, disgorgement and civil penalty for a person who allegedly sold shares of an issuer based on inside information of a dividend cut, and tipped his son to do likewise); SEC v. Barry Hertz, Civil Action No. 05–2848 (USDC E.D.N.Y.) (Mar. 16, 2007) (consent to final judgment, including an injunction and two-year bar from serving as an officer or director of a public corporation, for a person alleged to have traded on inside information, including purchasing shares of an issuer while in possession of positive news of a first time dividend issuance). E:\FR\FM\04AUN1.SGM 04AUN1 Federal Register / Vol. 76, No. 150 / Thursday, August 4, 2011 / Notices III. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,13 that the proposed rule change (SR–CBOE–2011– 039) is hereby approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.14 Elizabeth M. Murphy, Secretary. [FR Doc. 2011–19748 Filed 8–3–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–64989; File No. SR–EDGA– 2011–23] Self-Regulatory Organizations; EDGA Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Amendments to the EDGA Exchange, Inc. Fee Schedule July 29, 2011. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on July 27, 2011, the EDGA Exchange, Inc. (the ‘‘Exchange’’ or the ‘‘EDGA’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which items have been prepared by the selfregulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change sroberts on DSK5SPTVN1PROD with NOTICES The Exchange proposes to amend its fees and rebates applicable to Members 3 of the Exchange pursuant to EDGA Rule 15.1(a) and (c). All of the changes described herein are applicable to EDGA Members. The text of the proposed rule change is available on the Exchange’s Internet Web site at https:// www.directedge.com. 13 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 A Member is any registered broker or dealer, or any person associated with a registered broker or dealer, that has been admitted to membership in the Exchange. 14 17 VerDate Mar<15>2010 17:29 Aug 03, 2011 Jkt 223001 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 these statements may be examined at the places specified in Item IV below. The self-regulatory organization has prepared summaries, set forth in sections A, B and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose With respect to the category of securities priced at or above $1.00, when Members add liquidity, they are currently assessed a charge of $0.00025 per share. Alternatively, when Members remove liquidity, they are currently rebated in the amount of $0.00015 per share. The Exchange proposes to amend the fee structure (and related Flags) set forth in the fee schedule to instead provide a rebate for Members in the amount of $0.0005 per share when adding liquidity and assess a $0.0006 per share charge when removing liquidity. The Exchange proposes to make conforming changes to the relevant flags, as described below, for adding and removing liquidity from the EDGA book. Specifically, the Exchange proposes to: (a) Discontinue the $0.00025 per share charge for adding liquidity to EDGA book in Tape B securities (Flag B) and instead offer a rebate of $0.0005 per share; (b) discontinue the rebate of $0.00015 per share for removing liquidity from the EDGA book in Tapes B and C securities (Flag N) and instead assess a $0.0006 per share charge; (c) discontinue the $0.00025 per share charge for adding liquidity to the EDGA book in Tape A securities (Flag V) and instead offer a rebate of $0.0005 per share; (d) discontinue the rebate of $0.00015 per share for removing liquidity from the EDGA book in Tape A securities (Flag W) and instead assess a $0.0006 per share charge; (e) discontinue the $0.00025 per share charge for adding liquidity to the EDGA book in Tape C securities (Flag Y) and instead offer a rebate of $0.0005 per share; (f) discontinue the $0.00025 per share charge for adding liquidity in the pre- and post-market trading sessions in Tapes A and C securities (Flag 3) and PO 00000 Frm 00144 Fmt 4703 Sfmt 4703 47283 instead offer a rebate of $0.0005 per share; (g) discontinue the $0.00025 per share charge for adding liquidity in the pre- and post-market trading sessions in Tape B securities (Flag 4) and instead offer a rebate of $0.0005 per share; and (h) discontinue the rebate of $0.00015 per share for removing liquidity in the pre- and post-market trading sessions in securities on all Tapes (Flag 6) and instead assess a $0.0006 per share charge. The Exchange also proposes to delete, in its entirety, footnote 12, which describes a tiered rate ($0.00005 per share) if Members, measured monthly, post 0.9% of the Total Consolidated Volume (‘‘TCV’’) in average daily volume to EDGA. As a result of the deletion of footnote 12, current footnotes 13–14 have been re-numbered as footnotes 12–13. Currently, the BY flag is yielded when an order is routed to BATS BYX Exchange and removes liquidity using order types ROUC, ROBY, ROBB, or ROCO, as defined in Exchange Rules 11.9(b)(3)(a), (c), and (g). The Exchange proposes to decrease the rebate from $0.0004 to $0.0002 when an order is routed to BATS BYX Exchange and removes liquidity. The Exchange also proposes to eliminate the text in footnote 7, which describes the INET tier, and replace it with the words ‘‘intentionally omitted.’’ This tier provides that ‘‘Members routing an average daily volume (‘‘ADV’’): (i) Less than 5,000,000 shares will be charged $0.0030 per share, as described in the schedule; (ii) equal to or greater than 5,000,000 shares but less than 20,000,000 shares will be charged Nasdaq’s best removal tier rate per share; (iii) equal to or greater than 20,000,000 shares but less than 30,000,001 shares will be charged Nasdaq’s best removal tier rate—$0.0001 per share; and (iv) equal to or greater than 30,000,001 shares will be charged Nasdaq’s best removal tier rate—$0.0002 per share. The rates, in all cases, are calculated for shares removed from Nasdaq.’’ Conforming changes have been made to eliminate the references to footnotes 7 and a on Flags 2 and L, as they are no longer applicable. The Exchange proposes to implement these amendments to its fee schedule on August 1, 2011. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with the objectives of Section 6 of the Exchange Act,4 in general, and furthers 4 15 E:\FR\FM\04AUN1.SGM U.S.C. 78f. 04AUN1

Agencies

[Federal Register Volume 76, Number 150 (Thursday, August 4, 2011)]
[Notices]
[Pages 47280-47283]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-19748]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64991; File No. SR-CBOE-2011-039]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change To List 
and Trade Single Stock Dividend Options

July 29, 2011.
    On May 31, 2011, the Chicago Board Options Exchange, Incorporated 
(``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 list and trade cash-settled 
options that overlie the ordinary cash

[[Page 47281]]

dividends paid by an issuer over an annual, semi-annual, or quarterly 
``accrual period.'' The proposed rule change was published for comment 
in the Federal Register on June 17, 2011.\3\ The Commission received no 
comments on the proposal. This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 64654 (June 13, 
2011), 76 FR 35503 (``Notice'').
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I. Description of Proposal

    CBOE proposes to list and trade cash-settled, P.M.-settled, 
European-style exercise options that overlie the ordinary cash 
dividends paid by an issuer (``SSDO'') over an annual accrual period. 
CBOE also may list series of SSDOs with an accrual period of less than 
a year, but in no event less than one quarter of a year.

Product Design

    Each SSDO represents the accumulated ordinary dividend amounts paid 
by a specific issuer over a specified accrual period.\4\ Each annual 
accrual period will run from the business day after the third Friday of 
December through the third Friday of the following December. For an 
SSDO with an accrual period of less than a year, the accrual period 
runs from the business day after the third Friday of the month 
beginning the accrual period through the third Friday of the month 
ending the accrual period.\5\
---------------------------------------------------------------------------

    \4\ For purposes of SSDOs, dividends are deemed to be ``paid'' 
on the ex-dividend date.
    \5\ The Exchange will assign separate trading symbols to SSDOs 
overlying the accumulated ex-dividends of the same issuer that have 
different accrual periods.
---------------------------------------------------------------------------

    The underlying value for SSDOs will be equal to ten (10) times the 
ex-dividend amounts of an issuer accumulated over the specified accrual 
period. Each day, CBOE will calculate the aggregate daily dividend 
totals for the specific issuer, which are summed up over any accrual 
period. During each business day, CBOE will disseminate the underlying 
SSDO value, multiplied by ten (10), through the Options Price Reporting 
Authority (``OPRA''), the Consolidated Tape Association (``CTA'') tape 
and/or the Market Data Index (``MDI'') feed.

Options Trading

    Each SSDO will be quoted in decimals and one point will be equal to 
$100. The Exchange proposes that the minimum price variation for quotes 
shall be established on a class-by-class basis by the Exchange and 
shall not be less than $0.01. CBOE also proposes to list series at 1 
point ($1.00) or greater strike price intervals if the strike price is 
equal to or less than $200 and 2.5 points ($2.50) or greater strike 
price intervals if the strike price exceeds $200. Initially, the 
Exchange will list in-, at- and out-of-the-money strike prices and may 
open for trading up to five annual contract months expiring in December 
in different years for any single stock underlying an SSDO and up to 
ten contract months for accrual periods of less than a year.\6\ The 
Exchange is proposing to use the expected dividend (i.e., the aggregate 
value of dividends that are expected to be paid by the issuer over a 
given accrual period) amount for setting the initial strikes. Near-term 
SSDOs will reflect dividends accumulating in the then-current accrual 
period. All other SSDO options (i.e., contracts listed for trading that 
are not in the then-current accrual period) will reflect dividends 
expected in comparable accrual periods beyond the current accrual 
period. The Exchange may open for trading additional series, either in 
response to customer demand or as the price of the expected dividends 
for an issuer changes.
---------------------------------------------------------------------------

    \6\ See Notice, supra note 3, for an example of listing five 
annual contract months expiring in December in different years.
---------------------------------------------------------------------------

Exercise and Settlement

    The proposed options will expire on the Saturday following the 
third Friday of the expiring month. Trading in the expiring contract 
month will normally cease at 3 p.m. Chicago time on the last day of 
trading (ordinarily the Friday before expiration Saturday, unless there 
is an intervening holiday). When the last trading day is moved because 
of an Exchange holiday (such as when CBOE is closed on the Friday 
before expiration), the last trading day for expiring options will be 
Thursday.
    Exercise will result in delivery of cash on the business day 
following expiration. SSDOs will be P.M.-settled. The Exchange is 
proposing P.M.-settlement for SSDOs because options trading on 
individual stocks are P.M. settled. As a result, the Exchange is 
proposing to match the expiration style for SSDOs to individual stock 
option exercise. The exercise-settlement amount will be equal to ten 
times the ordinary cash dividends paid by the issuer over the accrual 
period. The exercise settlement amount is equal to the difference 
between the exercise-settlement value and the exercise price of the 
option, multiplied by the contract multiplier ($100).
    If the exercise settlement value is not available or the normal 
settlement procedure cannot be utilized due to a trading disruption or 
other unusual circumstance, the settlement value will be determined in 
accordance with the rules and bylaws of the OCC.

Surveillance

    CBOE has represented that it will use the same surveillance 
procedures currently utilized for each of the Exchange's other single 
stock options to monitor trading in SSDOs. Such procedures include, for 
example, monitoring dividend announcements. The Exchange represents 
that these surveillance procedures shall be adequate to monitor trading 
in these option products. For surveillance purposes, the CBOE has 
represented that it will have complete access to information regarding 
trading activity in the pertinent securities whose dividend payment is 
the basis for particular SSDOs.

Position Limits

    CBOE proposes that position and exercise limits for SSDOs will be 
the same as those for standard options overlying the same security. 
While positions in SSDOs will be aggregated with longer-dated positions 
in SSDOs with the same underlying stock for position and exercise 
limits purposes, they will not be aggregated with positions in the 
ordinary options overlying the stock of the issuer paying the dividends 
underlying the SSDO. CBOE represents that the reason for not 
aggregating positions with ordinary options is that SSDOs are based 
solely on expected dividends for an issuer and will reflect the forward 
value of that expectation. CBOE states that because the pricing of 
ordinary options versus SSDOs will differ dramatically, the Exchange 
believes there is no need to aggregate positions to prevent 
manipulative practices involving the underlying options.

Exchange Rules Applicable

    New Rule 5.9 is proposed to govern the listing and trading of 
SSDOs. In addition, SSDOs will be margined in the same manner as single 
stock options under Exchange Rule 12.3. Purchasers of puts or calls, 
however, must be paid in full, even if there remains longer than nine 
months until expiration for the position. For SSDOs, the aggregate 
contract value on which the margin amount will be calculated will be 
the product of the forward expected dividend amount for the accrual 
period (as adjusted for any contract scaling factor) and the applicable 
multiplier ($100).
    CBOE proposes to designate SSDO options as eligible for trading as 
Flexible

[[Page 47282]]

Exchange Options (``FLEX options'') as provided for in Chapters XXIVA 
(Flexible Exchange Options) and XXIVB (FLEX Hybrid Trading System).

Capacity

    CBOE represents that it has analyzed its capacity and believes that 
the Exchange and OPRA have the necessary systems capacity to handle the 
additional traffic associated with the listing of new series that will 
result from the introduction of SSDOs.

II. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\7\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\8\ which requires, among other things, that 
the rules of a national securities exchange be designed to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest.
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    \7\ 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).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that CBOE's proposal gives options 
investors the ability to make an additional investment choice in a 
manner consistent with the requirements of Section 6(b)(5) of the 
Act.\9\ The Commission notes that SSDOs will allow market participants 
to hedge their exposure to changes in the dividend payment policies of 
the underlying securities. Further, the Commission believes that the 
listing rules proposed by CBOE for SSDOs are reasonable and consistent 
with the Act, as discussed below.
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    \9\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that permitting $1.00 strike price 
intervals if the strike price is equal to or less than $200 will 
provide investors with added flexibility in the trading of these 
options and will further the public interest by allowing investors to 
establish positions that are better tailored to meet their investment 
objectives. As explained by CBOE, the underlying value of an SSDO is 
expected to fluctuate around a limited expected dividend value 
range,\10\ and therefore, the implementation of $1.00 strike price 
intervals is designed to provide investors with flexibility. Because of 
this characteristic the Commission believes that the implementation of 
$1 strike price intervals for SSDOs, within the parameters of the rule, 
is appropriate.
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    \10\ The Commission notes that, in the Notice the Exchange 
provided a number of examples of values underlying SSDOs using past 
ordinary dividend payouts over varying accrual periods, and these 
values ranged from 1 to 22.70. See Notice, supra note 3.
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    The Commission believes that CBOE's proposal to allow the minimum 
price variation to be no less than $0.01, as established on a class-by-
class basis, is consistent with the Act, given the expected low 
underlying dividend values for SSDOs. CBOE has represented that it 
expects that the underlying dividend values for SSDOs will be 
relatively low, and that granular pricing will provide for more pricing 
points. Further, CBOE has represented that it has analyzed its capacity 
and believes that it and OPRA have the necessary systems capacity to 
handle the additional traffic associated with the listing of new series 
that will result from the introduction of SSDOs. In particular, the 
Exchange noted that expected dividend payments, on which the value of 
SSDOs are predicated, are generally much less volatile than share 
prices, and thus there is less need to list numerous strike prices for 
each expiration date of an SSDO or to add many new strikes over the 
life of an SSDO.
    The Commission notes that, on a daily basis, CBOE will calculate 
the aggregate daily dividend totals for the specific issuer, and will 
disseminate the underlying SSDO value, multiplied by ten (10), through 
OPRA, the CTA and/or the MDI feed.
    The Exchange has proposed to apply the same position and exercise 
limits as those for standard options overlying the same security. 
However, the Exchange notes that positions in SSDOs will not be 
aggregated with positions in the ordinary positions overlying the stock 
of the issuer paying the dividends underlying the SSDO, because the 
pricing of ordinary options and SSDOs vary greatly and thus it is 
unnecessary to aggregate the positions to prevent manipulative 
practices involving the underlying. The Commission believes that CBOE's 
proposed rules relating to position and exercise limits are appropriate 
and consistent with the Act.
    The Exchange also proposes to margin SSDOs in the same manner as 
single stock options; however, the aggregate contract value on which 
the margin amount will be calculated will be the product of the forward 
expected dividend amount for the accrual period and the applicable 
modifier. The Commission believes that CBOE's proposed rules relating 
to margin requirements are appropriate.
    The Commission also believes that CBOE's proposal to allow SSDOs 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.\11\
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    \11\ See Securities Exchange Act Release No. 31910 (February 23, 
1993), 58 FR 12056 (March 2, 1993).
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    The Commission notes that CBOE represented that it has an adequate 
surveillance program to monitor trading of SSDOs and intends to apply 
its existing surveillance program for single stock options to support 
the trading of these options. As with other securities, there is a 
potential risk that a corporate insider may exploit his or her advance 
knowledge of changes to an issuer's dividend policy through the 
purchase or sale of an SSDO. The Commission has taken a number of 
enforcement actions in cases where insiders executed securities 
transactions to exploit their knowledge of changes in issuers' dividend 
policies.\12\ Accordingly, adequate surveillance is an important 
responsibility of the CBOE. In addition, CBOE has represented that it 
is confident that it has adequate tools in place to surveil for market 
manipulation. Further, CBOE is a member of the ISG and can obtain 
trading activity in information in the underlying securities whose 
dividend payment is the basis for particular SSDOs from the exchanges 
that list the securities. The Commission believes that CBOE should have 
the ability and resources to adequately surveil for manipulation in 
SSDOs.
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    \12\ See, e.g., SEC v. David L. Johnson, Civil Action No. 05-CV-
4789 (USDC E.D. Pa.) (Sept. 7, 2005) (consent to permanent 
injunction, disgorgement and civil penalty for a person who 
allegedly sold shares of an issuer based on inside information of a 
dividend cut, and tipped his son to do likewise); SEC v. Barry 
Hertz, Civil Action No. 05-2848 (USDC E.D.N.Y.) (Mar. 16, 2007) 
(consent to final judgment, including an injunction and two-year bar 
from serving as an officer or director of a public corporation, for 
a person alleged to have traded on inside information, including 
purchasing shares of an issuer while in possession of positive news 
of a first time dividend issuance).
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    In approving the proposed rule change, the Commission has also 
relied upon CBOE's representation that it has the necessary systems 
capacity to support the new options series that will result from this 
proposal.

[[Page 47283]]

III. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-CBOE-2011-039) is hereby 
approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-19748 Filed 8-3-11; 8:45 am]
BILLING CODE 8011-01-P
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