Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Relating to Closing Rotation Procedures for S&P 500 Index Options, 32594-32599 [2014-13017]
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Federal Register / Vol. 79, No. 108 / Thursday, June 5, 2014 / Notices
Rule 5735(d)(2)(D), which sets forth
circumstances under which Shares of
the Fund may be halted. In addition, as
noted above, investors will have ready
access to information regarding the
Fund’s holdings, the Intraday Indicative
Value, the Disclosed Portfolio, and
quotation and last sale information for
the Shares.
The Fund’s investments will be
valued daily at market value or, in the
absence of market value with respect to
any investment, at fair value, in each
case in accordance with the Valuation
Procedures and the 1940 Act.
The proposed rule change is designed
to perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest in that
it will facilitate the listing and trading
of an additional type of activelymanaged exchange-traded product that
will enhance competition among market
participants, to the benefit of investors
and the marketplace. As noted above,
FINRA, on behalf of the Exchange, will
communicate as needed regarding
trading in the Shares and other
exchange-traded assets with other
markets and other entities that are
members of ISG and FINRA may obtain
trading information regarding trading in
the Shares and other exchange-traded
assets from such markets and other
entities. In addition, the Exchange may
obtain information regarding trading in
the Shares and other exchange-traded
assets from markets and other entities
that are members of ISG, which includes
securities and futures exchanges, or
with which the Exchange has in place
a comprehensive surveillance sharing
agreement. Furthermore, as noted above,
investors will have ready access to
information regarding the Fund’s
holdings, the Intraday Indicative Value,
the Disclosed Portfolio, and quotation
and last sale information for the Shares.
For the above reasons, Nasdaq
believes the proposed rule change is
consistent with the requirements of
Section 6(b)(5) of the Act.
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange believes that the proposed
rule change will facilitate the listing and
trading of an additional type of activelymanaged exchange-traded fund that will
enhance competition among market
participants, to the benefit of investors
and the marketplace.
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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
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will: (a) by order approve or disapprove
such proposed rule change, or (b)
institute proceedings to determine
whether the proposed rule change
should be disapproved.
BILLING CODE 8001–01–P
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 email to rulecomments@sec.gov. Please include File
Number SR–NASDAQ–2014–057 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NASDAQ–2014–057. This
file number should be included on the
subject line if email 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
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–13019 Filed 6–4–14; 8:45 am]
IV. Solicitation of Comments
PO 00000
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
10:00 a.m. and 3:00 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–2014–057 and should be
submitted on or before June 26, 2014.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72284; File No. SR–CBOE–
2014–043]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of a
Proposed Rule Change Relating to
Closing Rotation Procedures for S&P
500 Index Options
May 30, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on May 30,
2014 Chicago Board Options Exchange,
Incorporated (‘‘Exchange’’ or ‘‘CBOE’’)
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 Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to make
minor changes to Interpretation and
Policy .06 to Rule 6.2B (Hybrid Opening
System (‘‘HOSS’’)) relating to monthend closing price rotation procedures
for non-expiring S&P 500 Index (‘‘SPX’’)
32 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 79, No. 108 / Thursday, June 5, 2014 / Notices
options. The text of the proposed rule
change is provided below.
(additions are italicized; deletions are
[bracketed])
*
*
*
*
*
Chicago Board Options Exchange,
Incorporated Rules
*
*
*
*
*
Rule 6.2B. Hybrid Opening System (‘‘HOSS’’)
(a)–(h) No change.
* * * Interpretations and Policies:
.01–.05 No change.
.06 Following the 3:15 p.m. Chicago time
close of trading on the last business day of
each calendar month, the Exchange will
conduct special non-trading closing rotations
for each series of S&P 500 Index (‘‘SPX’’)
options in order to determine the theoretical
‘‘fair value’’ of such series as of 3:00 p.m.
Chicago time. During such special nontrading closing rotations, [the] an LMM in
[each series of] the SPX options designated
by the Exchange in each series of SPX
options, will provide bid and offer
quotations, the midpoint of which will reflect
the theoretical fair value of the series of SPX
options, as determined by the LMM pursuant
to the LMM’s algorithmic analysis of relevant
and available data. Notwithstanding that
trading in SPX options on the Exchange
continues until 3:15 p.m., on the last
business day of each month, after 3:15 p.m.
the Exchange shall disseminate the 3:00 p.m.
fair value quotations provided by [each] the
designated LMM as the quotations used to
calculate the theoretical fair value for each
series of SPX options, provided, however,
that the Exchange may determine, in the
interest of fair and orderly markets, not to
disseminate such quotations.
*
*
*
*
*
The text of the proposed rule change
is also available on the Exchange’s Web
site (https://www.cboe.com/AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
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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
Exchange 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
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to make
minor changes to Interpretation and
Policy .06 to Rule 6.2B (‘‘Interpretation
and Policy .06’’) to extend its SPX endof-month pricing procedures to series of
SPX options on the Hybrid Trading
System (‘‘Hybrid System’’).3 The
Exchange believes that the proposed
rule will add consistency to S&P 500
Index-related markets and make it easier
for investors to trade SPX options.
Background
In 2001, the Chicago Mercantile
Exchange (‘‘CME’’) adopted special
settlement procedures to determine endof-month settlement prices for its
domestic futures contracts.4
Specifically, CME adopted end-ofmonth valuation procedures to calculate
the price of S&P 500 futures contracts
based on the value of the underlying
S&P 500 Index at the close of trading.
CME has termed these procedures ‘‘Endof-Month Special Fair Value’’ (‘‘EOM
FV’’) or ‘‘Fair Value’’ (‘‘FV’’) settlement
procedures.
According to CME, ‘‘[f]air value
represents the level at which futures
theoretically should be priced in
relation to cash index values in the
absence of transaction costs—albeit not
where they necessarily will trade.’’ 5
Pursuant to its EOM FV settlement
procedures, CME calculates the end-ofmonth final settlement value of S&P 500
3 The Hybrid Platform refers to the Exchange’s
trading platform that allows automatic executions
to occur electronically and open outcry trades to
occur on the floor of the Exchange. To operate in
this ‘‘hybrid’’ environment, the Exchange has a
dynamic order handling system that has the
capability to route orders to the trade engine for
automatic execution and book entry, to Trading
Permit Holder and PAR Official workstations
located in the trading crowds for manual handling,
and/or to other order management terminals
generally located in booths on the trading floor for
manual handling. Classes of SPX options other than
standard SPX options are traded on the Hybrid
Platform. The Hybrid 3.0 Platform is an electronic
trading platform on the Hybrid Trading System that
allows one or more quoters to submit electronic
quotes which represent the aggregate Market-Maker
quoting interest in a series for the trading crowd.
Standard SPX options contracts are traded on the
Hybrid 3.0 Platform.
4 The CME originally instituted this practice for
the December 31, 1999 year-end, but has adopted
the practice for each month-end closing date since
January 2001. See generally CME Group, MonthEnd Fair Value Procedures, available at https://
www.cmegroup.com/trading/equity-index/
fairvaluefaq.html.
5 See generally CME Group, Month-End Fair
Value Procedures, available at https://
www.cmegroup.com/trading/equity-index/
fairvaluefaq.html.
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futures contracts based on the value of
the underlying S&P 500 Index cash
market, rather than the actual final
trading prices of S&P 500 futures
contracts. CME uses its end-of-month
theoretical fair value settlement prices
for all purposes, including account
value reporting and end-of-day variation
margin calls.6 These procedures
mitigate issues caused by the
misalignment of valuations in the S&P
500 futures market and the underlying
S&P 500 Index cash market due to the
extended trading hours for S&P 500
futures contracts after the close of
trading in the cash market.
The Exchange understands that CME
adopted its EOM FV procedures at the
request of institutional investors (active
in both the S&P 500 futures and S&P
500 Index cash markets), who wanted
the end-of-month value of their futures
positions to align with prices in the
underlying S&P 500 Index cash market.
If the month-end settlement price of
investors’ futures positions were based
on the actual closing trading prices as of
the 3:15 p.m.7 close of futures market
while the month-end closing price of
their cash positions were based on the
3:00 p.m. close of trading in the
underlying S&P 500 Index cash market,
investors might experience tracking
errors and/or financial reporting
incongruities that do not reflect actual
portfolio performance. Pricing model
discrepancies or misaligned pricing
between the S&P 500 futures and S&P
500 Index cash market could also lead
to unnecessary and/or unwarranted
margin calls and returns as well as other
hedging and accounting problems. The
EOM FV settlement procedures adopted
by CME mitigate these issues by
aligning the end-of-month settlement
prices of S&P 500 futures contracts with
closing prices in the underlying cash
market as of 3:00 p.m.8
6 Id.
7 All times referred to herein are stated as Chicago
Central Standard Time.
8 CME has explained the reason for maintaining
its 3:00 p.m. fair value procedure as follows:
Stock index products on the . . . [CME] normally
close and settle fifteen minutes after the daily close
of trading in cash equities. The cash/futures basis
may be affected to the extent that futures may
fluctuate—sometimes sharply—during those final
fifteen minutes. As such, this may become a
difficulty for institutional traders practicing
coordinated cash/futures strategies. Still, the
opportunity to lay off equity market exposure
during those fifteen minutes subsequent to the cash
close has proven quite beneficial. The use of FV
settlement procedures is intended to address this
so-called ‘‘tracking error’’ while still permitting
trade [sic] to continue for fifteen minutes past the
3:00 p.m. cash close. Conceptually, the fair value
settlement is determined when the cash market
closes at 3:00 p.m., since any new information
following 3:00 p.m. will not affect the closing price
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Federal Register / Vol. 79, No. 108 / Thursday, June 5, 2014 / Notices
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The S&P 500 futures market and SPX
options market are highly
interconnected. Many investors use SPX
options to hedge S&P 500 futures
positions. Because of the
interconnectedness between the S&P
500 futures and SPX options markets,
the Exchange believed that the use of
end-of-month pricing procedures that
diverged significantly form [sic] the
CME’s EOM FV pricing procedures
would be disruptive to fair and orderly
markets. Although the Exchange could
have aligned the end-of-month
settlement prices of standard nonexpiring SPX options with the end-ofmonth prices of the related S&P 500
futures contracts (and the underlying
S&P Index cash market) by simply
ending trading at 3:00 p.m. on the last
trading day of each month, the
Exchange determined that closing
trading in SPX options market prior to
the close of trading at the CME would
also be disruptive to fair and orderly
markets. In particular, the Exchange
believed that closing trading for
standard non-expiring SPX options
during S&P 500 futures trading hours
would be disruptive to many market
participants who hedge S&P 500 futures
positions with SPX options.
Accordingly, the Exchange adopted endof-month settlement practices designed
to align its end-of-month pricing with
CME’s EOM FV settlement procedures.
The Exchange’s end-of-month pricing
procedures were adopted through a
series of Regulatory Circulars and
subsequently codified in the Exchange’s
rules in Interpretation and Policy .06.9
Current Exchange Procedures
Currently, on days other than the last
business day of each month, the final
closing price of standard non-expiring
SPX options traded on the Hybrid 3.0
Platform is determined by the OCC
based on the final end-of-day trading
quotations that it receives from the
Exchange. In general, the OCC
determines the closing price of standard
non-expiring SPX options using the
midpoint between the final bid and final
offer quotations disseminated by the
Exchange through the Options Price
Reporting Authority (‘‘OPRA’’).
On the last business day of each
month, however, the Exchange conducts
special end-of-month non-trading
rotations for series of standard nonexpiring SPX options pursuant to
Interpretation and Policy .06. These
special non-trading closing rotations are
conducted on the same month-end
business days on which CME calculates
the EOM FV settlement prices of the
S&P 500 futures contracts based on the
theoretical fair value of the underlying
S&P 500 Index cash market at the close
of trading.10 The OCC calculates the
final month-end settlement prices for
standard non-expiring SPX options
based on non-trading quotations
provided by a designated Lead MarketMaker (‘‘LMM’’) or LMMs in the SPX,
which are then ‘‘smoothed’’ by the OCC
with an implied volatility curve. LMMs
calculate non-trading closing bid and
offer quotations to reflect the theoretical
fair value of the options through pricing
algorithms with a number of relevant
inputs, in particular, the EOM FV
of the stocks and the indexes. However, information
or events subsequent to the cash close may still
impact futures prices. Market participants should
be aware of the possibility that futures may trade
at prices apart from fair value settlement prices
between 3;00 [sic] p.m. and the close of the market
at 3:15 p.m. on days on which FV settlement
procedures are applied.
See id.
9 See CBOE Interpretation and Policy .06 to Rule
6.2B; Securities and Exchange Act Release No. 34–
67992; File No. SR–CBOE–2012–095 (October 5,
2012) (Notice of Filing and Immediate Effectiveness
of Proposed Rule Change Relating to Closing
Rotation Procedures for S&P 500 Index Options).
See also CBOE Regulatory Circular RG99–233
(Dec. 21, 1999), available at https://www.cboe.org/
publish/regcir/rg99-233.pdf; CBOE Regulatory
Circular RG00–049 (Mar. 29, 2000), available at
https://www.cboe.org/publish/regcir/rg00-049.pdf;
CBOE Regulatory Circular RG01–014 (Jan. 25,
2001), available at https://www.cboe.com/publish/
RegCir/RG01-014.pdf; CBOE Regulatory Circular
RG01–040 (Mar. 29, 2001), available at https://
www.cboe.org/publish/regcir/rg01-040.pdf; CBOE
Regulatory Circular RG01–058 (Apr. 27, 2001),
available at https://www.cboe.org/publish/regcir/
rg01-058.pdf; CBOE Regulatory Circular RG02–019
(Apr. 4, 2002), available at https://www.cboe.com/
publish/RegCir/RG02-019.pdf; CBOE Regulatory
Circular RG02–039 (June 12, 2002), available at
https://www.cboe.com/publish/RegCir/RG02039.pdf; CBOE Regulatory Circular RG02–073 (Sept.
17, 2002), available at https://www.cboe.com/
publish/RegCir/RG02-073.pdf; CBOE Regulatory
Circular RG02–118 (Dec. 19, 2002), available at
https://www.cboe.org/publish/regcir/rg02-118.pdf;
CBOE Regulatory Circular RG03–016 (Mar. 19,
2003), available at https://www.cboe.com/publish/
RegCir/RG03-016.pdf; CBOE Regulatory Circular
RG03–039 (June 11, 2003), available at https://
www.cboe.com/publish/RegCir/RG03-039.pdf;
CBOE Regulatory Circular RG03–075 (Sept. 10,
2003), available at https://www.cboe.com/publish/
RegCir/RG03-075.pdf; CBOE Regulatory Circular
RG03–082 (Sept. 22, 2003), available at https://
www.cboe.com/publish/RegCir/RG03-082.pdf;
CBOE Regulatory Circular RG03–110 (Dec. 17,
2003), available at https://www.cboe.com/publish/
RegCir/RG03-110.pdf; CBOE Regulatory Circular
RG04–132 (Dec. 30, 2004), available at https://
www.cboe.com/publish/RegCir/RG04-132.pdf;
CBOE Regulatory Circular RG05–130 (Dec. 29,
2005), available at https://www.cboe.com/publish/
RegCir/RG05-130.pdf; CBOE Regulatory Circular
RG06–130 (Dec. 19, 2006), available at https://
www.cboe.org/publish/regcir/rg06-130.pdf; CBOE
Regulatory Circular RG08–004 (Jan. 8, 2008),
available at https://www.cboe.com/publish/RegCir/
RG08-004.pdf; CBOE Regulatory Circular RG09–151
(Dec. 30, 2009), available at https://www.cboe.org/
publish/regcir/rg09-151.pdf; and CBOE Regulatory
Circular RG12–023 (Jan. 30, 2012), available at
https://www.cboe.org/publish/regcir/rg12-023.pdf.
10 See CBOE Interpretation and Policy .06 to Rule
6.2B.
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settlement prices of the related S&P 500
futures contracts at CME.11 The
theoretical fair value prices are
disseminated to the OCC via OPRA after
the 3:15 p.m. close of trading on the last
business day of each month (on the
same day that CME performs its end-ofmonth fair market valuations for the
S&P 500 futures). Consistent with CME’s
practices, the Exchange considers the
end-of-month theoretical fair value
closing prices of SPX options traded on
the Hybrid 3.0 Platform to be the final
month-end settlement prices for all
purposes, including OCC margin
calculations, even though no actual
trades occur at these prices.
Proposed Rule Change
The Exchange proposes minor
changes to its rules to extend its current
end-of-month settlement pricing
procedures for SPX options traded on
the Hybrid 3.0 Platform to series of SPX
options traded on the Hybrid System
(e.g., SPXW). The Exchange believes
that extending Interpretation and Policy
.06 to additional groups of series of SPX
options will allow investors to realize
consistency in the SPX options market
and with respect to valuations in the
S&P 500 futures market and underlying
S&P 500 Index cash market.
Although Interpretation and Policy
.06 does not restrict the Exchange from
conducting special end-of-month nontrading closing rotations for series of
SPX options traded on the Hybrid
System, Interpretation and Policy .06
does not contemplate the application of
month-end fair value pricing procedures
in groups of series of SPX options
without an LMM. Thus, under the
Exchange’s current rules, the Exchange
cannot extend Interpretation and Policy
.06 to series of SPX options traded on
the Hybrid System with no LMM.12 The
proposed changes to Interpretation and
Policy .06 will allow a designated LMM
in the SPX options class to conduct nontrading closing rotations for series of
SPX options on the Hybrid System.
Under the proposed rule, end-ofmonth settlement pricing procedures
will be conducted in the same manner
in all series of SPX options. The
Exchange expects that LMMs in the SPX
class will continue to base their end-ofmonth non-trading quotations
substantially and materially on the
closing prices of the related S&P 500
11 See Securities and Exchange Act Release No.
34–67992; File No. SR–CBOE–2012–095 (October 5,
2012) (Notice of Filing and Immediate Effectiveness
of Proposed Rule Change Relating to Closing
Rotation Procedures for S&P 500 Index Options).
12 Notably, the Exchange’s rules do not require
the appointment of an LMM in each options class
or group of series of options. See CBOE Rule 8.14.
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Federal Register / Vol. 79, No. 108 / Thursday, June 5, 2014 / Notices
futures contracts (which reflect the
theoretical fair value of the S&P 500
Index cash market as of 3:00 p.m. as
determined by CME), in all series of
SPX options. The Exchange believes
that the proposed rule will allow
investors to realize consistency in the
SPX options market by ensuring that the
same pricing models are applied to
determine the end-of-month theoretical
fair value of each non-expiring series of
SPX options. The Exchange believes
that the application of consistent pricing
models in the SPX options market will
protect investors’ interests by mitigating
the risk of tracking errors and
inconsistent reporting that may be
caused by the dissemination of closing
quotations derived from several
different pricing models.
The Exchange believes that extending
Interpretation and Policy .06 to
additional groups of series of SPX
options will promote the functioning of
a fair and orderly market in SPX
options. The misalignment of monthend S&P 500 futures valuations and SPX
options prices poses unnecessary risk to
investors who actively trade in these
markets. Such inconsistencies expose
investors to the possibility of
unwarranted and potentially significant
margin calls, which may not reflect
actual levels of portfolio risk or true
market exposure. The Exchange believes
that extending Interpretation and Policy
.06 to additional groups of series of SPX
options will mitigate these risks and
allow investors to realize consistency
with respect to the margin treatment of
SPX options.
Interpretation and Policy .06 was
adopted in response to investors’
requests for end-of-month pricing of
SPX options on the Hybrid 3.0 Platform
consistent with CME’s end-of-month
S&P 500 futures valuations. Similarly,
the Exchange is proposing this rule
change in response to investors’
requests for consistent pricing between
the S&P 500 futures and series of SPX
options traded on the Hybrid System.
The Exchange anticipates disseminating
end-of-month non-trading closing
rotation quotations for each series of
SPX options so long as doing so remains
consistent with CME’s end-of-month
pricing practices in the S&P 500 futures.
The Exchange, however, cannot predict
whether CME will change its EOM FV
procedures in the future. Accordingly,
the proposed rule change preserves the
Exchange’s discretion not to
disseminate the 3:00 p.m. fair value
quotations provided by a designated
LMM in a series, if the Exchange
determines that disseminating the
quotations would not be in the interests
of investors or fair and orderly markets.
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In the event that the CME determines
not to apply its special EOM FV
procedures, either on a particular
month-end trading day or otherwise, the
Exchange would allow the actual 3:15
p.m. closing quotations to act as the
final quotations, as occurs on other
trading days.
The Exchange believes that the
proposed rule is designed to guard
against unfair discrimination in the
application of its end-of-month
settlement pricing procedures. The
proposed rule merely extends the
Exchange’s current end-of-month
pricing procedures (which have been
reviewed and accepted by the
Commission), to additional series of
SPX options. Under the proposed rule
an LMM in the SPX class will provide
end-of-month non-trading quotations for
each series of SPX options. LMM
appointments in SPX options will
continue to be governed by CBOE Rules
8.15 and 8.15A and selected based on
the criteria set forth in those rules
including, but not limited to: adequacy
of capital; experience in trading index
options or options on ETPs; presence in
the trading crowd; and ability to meet
required quoting and market-making
obligations as described in the
Exchange’s rules.13 The Exchange
believes that the LMM appointment
process and procedures are objective; all
Trading Permit Holders may request an
LMM appointment subject to approval
based on nondiscriminatory criteria and
considerations designed to promote fair
and orderly markets. To the extent that
there may be more than one LMM
appointed in the SPX, the Exchange will
designate an LMM to provide end-ofmonth non-trading quotations for each
group of series of SPX options on a
monthly rotating basis.
The Exchange recognizes that LMMs
may have an interest in the outcome of
month-end valuation determinations
based on the composition of their own
proprietary positions. For example, an
LMM may have an incentive to skew
their fair value determinations to
minimize the risk of potential variation
margin calls from the OCC to cover
proprietary holdings. The Exchange
believes, however, that these risks are
substantially mitigated by the weight
given to the CME’s valuations of related
S&P 500 futures contracts. The
Exchange expects that under the
proposed rule the end-of-month nontrading closing quotations provided by
the designated LMM in each series of
SPX options will continue to be
materially, if not directly, based on
CME’s EOM FV calculations. The
Exchange believes that the risk of
market manipulation is further limited
by the fact that fair valuations can
generally be approximated by other
third parties and verified through
independent checks.
In addition, the Exchange is equipped
to monitor LMMs’ end-of-month fair
value calculations. The Exchange
currently monitors the fair value
calculations of LMMs who quote end-ofmonth fair value settlement prices for
SPX options on the Hybrid 3.0 Platform.
The Exchange also conducts
surveillance and oversight of LMMs’ fair
value quotations to monitor for potential
attempts at manipulation. Should the
proposed rule change take effect, the
Exchange would extend its regulatory
practices to monitor the end-of-month
fair valuation calculations of LMMs who
quote any series of SPX options under
Interpretation and Policy .06.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the Act
and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.14 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 15 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, 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.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 16 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the proposed rule
change furthers the interests of fair and
orderly markets by allowing investors to
realize consistency across the SPX
options, S&P 500 futures and S&P 500
Index cash markets. The Exchange
proposes to extend the end-of-month
fair value pricing procedures in
Interpretation and Policy .06 to
additional series of SPX options traded
on the Hybrid System to better align
end-of-month prices in the SPX options
14 15
15 15
13 CBOE
PO 00000
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32597
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
16 Id.
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market with prices of related S&P 500
futures contracts and prices in the
underlying cash market. The Exchange
believes that greater consistency in SPX
options market is in the best interests of
investors.
The Exchange also believes that the
proposed rule change will contribute to
more robust and competitive markets by
making it easier for investors to trade
S&P 500 Index-related securities and, in
particular, making it easier for investors
to use SPX options to hedge S&P 500
futures positions. Thus, the proposed
rule change will facilitate investors’ use
of risk-reducing trading strategies and
promote robust trading activity in the
S&P 500 Index-related markets. The
Exchange also believes that extending
its fair value pricing procedures to
additional groups of series of SPX
options will mitigate risk to investors,
including investors’ risk of tracking
errors, misrepresentative financial
reporting, and potential unwarranted
margin calls that may be caused by
misaligned end-of-month settlement
pricing in the S&P 500 Index-related
markets, rather than actual portfolio risk
or market exposure.
The Exchange believes that the
proposed rule change is designed to
guard against unfair discrimination in
the application of its end-of-month
settlement pricing procedures. The
proposed rule merely extends the
Exchange’s current procedures (which
have been reviewed and approved by
the Commission), to additional series of
SPX options. Under the proposed rule a
designated LMM in each series of the
SPX options will provide end-of-month
non-trading settlement pricing
quotations for series of SPX options.
LMM appointments in SPX options will
continue to be governed by CBOE Rules
8.15 and 8.15A and selected based on
the criteria set forth in those rules
including, but not limited to: adequacy
of capital; experience in trading index
options or options on ETPs; presence in
the trading crowd; and ability to meet
the required quoting and market-making
obligations described in the Exchange’s
rules.17 The Exchange believes that the
LMM appointment procedures and
process set forth in Rules 8.15 and
8.15A are objective; all TPHs may
request an appointment subject to the
nondiscriminatory criteria set forth in
Rules 8.15 and 8.15A, which are
designed to promote fair and orderly
markets.
The Exchange recognizes that LMMs
may have an interest in the outcome of
month-end valuation determinations
based on the composition of their own
17 CBOE
Rules 8.15(a) and 8.15A(a).
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14:59 Jun 04, 2014
Jkt 232001
proprietary positions. For example, an
LMM may have an incentive to skew
their fair value determinations to
minimize the risk of potential of
variation margin calls from the OCC to
cover proprietary holdings. The
Exchange believes, however, that these
risks are substantially mitigated by the
weight given to fair valuations of the
related S&P 500 futures contracts at
CME. The Exchange expects that the
end-of-month non-trading closing price
quotations provided by LMMs for series
of SPX options on the Hybrid System
will continue to be materially, if not
directly, based on CME’s EOM FV
calculations under the proposed rule.
The Exchange believes that the risk of
market manipulation is further limited
by the fact that fair valuations can
generally be approximated by other
third parties and verified through
independent checks.
In addition, the Exchange is equipped
to protect investors through end-ofmonth fair value calculations
monitoring practices. The Exchange
currently monitors the fair value
calculations of LMMs who quote end-ofmonth fair value settlement prices for
SPX options on the Hybrid 3.0 Platform.
The Exchange also conducts
surveillance and oversight of LMMs’ fair
value quotations to monitor for potential
attempts at manipulation. Under the
proposed rule, the Exchange would
extend its regulatory practices to
monitor LMMs’ end-of-month price
calculations for all series of SPX options
quoted in accordance with
Interpretation and Policy .06.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. Extending
the Exchange’s current end-of-month
fair value settlement procedures to other
series of SPX options will not adversely
affect investors. These procedures will
be equally applied to affect all market
participants equally in the SPX options
market. Furthermore, the Exchange
believes that the proposed rule will
bolster competition and contribute to
more robust markets by making it easier
for investors to trade SPX options and
use SPX options to hedge S&P 500
futures positions. The Exchange
believes that the proposed rule will
bolster competition with other
exchanges by making it easier for
investors to trade S&P 500 Index-related
securities listed on exchanges other than
CBOE.
PO 00000
Frm 00071
Fmt 4703
Sfmt 4703
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not:
A. Significantly affect the protection
of investors or the public interest;
B. impose any significant burden on
competition; and
C. become operative for 30 days from
the date on which it was filed, or such
shorter time as the Commission may
designate, it has become effective
pursuant to Section 19(b)(3)(A) of the
Act 18 and Rule 19b–4(f)(6) 19
thereunder. 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. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change 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 email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2014–043 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CBOE–2014–043. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
18 15
19 17
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U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6).
05JNN1
Federal Register / Vol. 79, No. 108 / Thursday, June 5, 2014 / Notices
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
10:00 a.m. and 3:00 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–CBOE–
2014–043 and should be submitted on
or before June 26, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–13017 Filed 6–4–14; 8:45 am]
BILLING CODE 8001–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72283; File No. SR–DTC–
2014–06]
Self-Regulatory Organizations; The
Depository Trust Company; Notice of
Filing of Proposed Rule Change To
Modify the Receiver Authorized
Delivery and Reclaim Processing Value
Limits by Transaction
rmajette on DSK2TPTVN1PROD with NOTICES
MAY 30, 2014
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on May 22,
2014, The Depository Trust Company
(‘‘DTC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the proposed rule change described in
Items I, II and III below, which Items
have been prepared primarily by DTC.
20 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
VerDate Mar<15>2010
14:59 Jun 04, 2014
Jkt 232001
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The proposed rule change consists of
changes to the DTC Settlement Service
Guide (the ‘‘Guide’’) 3 to modify the
Receiver Authorized Delivery (‘‘RAD’’)
functionality as more fully described
below to reduce the intraday
uncertainty that may arise from reclaim
transactions linked to Deliver Orders
(‘‘DOs’’) and Payment Orders (‘‘POs’’) 4
and any potential credit and liquidity
risk from such reclaims.5
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
DTC 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. DTC
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
By this rule filing, DTC seeks to
modify the RAD functionality to reduce
the intraday uncertainty that may arise
from reclaim transactions linked to DOs
and POs and any potential credit and
liquidity risk from such reclaims, as
more fully described below.
Currently, as set forth in the DTC
Settlement Service Guide (the ‘‘Guide’’),
all valued DOs and POs in amounts
above $7.5 million and $500,000,
respectively, are subject to the RAD
process, which allows a receiver of DOs
3 The
Guide is available at https://www.dtcc.com/
∼/media/Files/Downloads/legal/service-guides/
Settlement.ashx.
4 A DO is a book-entry movement of a particular
security between two DTC Participants. A PO is a
method for settling funds related to transactions
and payments not associated with a DO. For
purposes of this proposed rule change the defined
term ‘‘DOs’’ includes all valued DOs except for DOs
of: (i) Money Market Instruments and (ii)
Institutional Deliveries affirmed through Omego,
both of which are not impacted by the proposed
rule change.
5 Terms not defined herein have the meaning set
forth in DTC’s Rules & Procedures (the ‘‘Rules’’).
PO 00000
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32599
and/or POs (‘‘Receiver’’) to review and
reject transactions that it does not
recognize prior to DTC’s processing of
the transactions in accordance with the
Rules. In contrast, lower valued DOs
and POs do not require the Receiver’s
acceptance prior to processing; instead,
if the Receiver does not recognize a DO
or PO it has received, the DO or PO may
be returned by the Receiver to the
original deliverer of the DO or PO
(‘‘Deliverer’’) in a reclaim transaction.
While both the reclaim and RAD
functionalities allow a Receiver to
exercise control over which transactions
to accept, reclaims tend to create
uncertainty because transactions may be
returned late in the day, when the
Deliverer may have limited options to
respond. Because such reclaims are
permitted without regard to risk
management controls, the Deliverer may
then incur a greater settlement
obligation, increasing credit and
liquidity risk to the Deliverer and to
DTC.6
Therefore, pre-settlement matching of
transactions through RAD without the
ability of the Receiver to reclaim those
transactions is the preferred approach as
this would eliminate the uncertainty
and credit and liquidity implications
associated with reclaims. In 2013, DTC
took an initial step to address this
uncertainty by lowering the RAD
‘‘threshold’’ over which transactions
must be matched for DOs and POs from
$15 million and $1 million,
respectively, to the current limits
mentioned above.7 Under the proposed
rule change, DTC would further change
RAD to require Participants to match
valued DOs and POs, prior to processing
the associated deliveries. These
matched transactions would be
processed through DTC subject to risk
management controls.
Likewise, under the proposed rule
change, each return of a matched DO or
PO attempted to be made by a Receiver
to the Deliverer would no longer be
processed as a reclaim, but rather would
be treated as an original instruction that
6 DTC’s risk management controls, including
Collateral Monitor and Net Debit Cap (as defined in
DTC Rule 1), are designed so that DTC can effect
system-wide settlement notwithstanding the failure
to settle of its largest Participant or affiliated family
of Participants. Net Debit Cap limits the net debit
balance a Participant can incur so that the unpaid
settlement obligation of the Participant, if any,
cannot exceed DTC liquidity resources. The
Collateral Monitor tests that a Receiver has
adequate collateral to secure the amount of its net
debit balance so that DTC may borrow funds to
cover that amount for system-wide settlement if the
Participant defaults.
7 Securities Exchange Act Release No. 69985 (Jul.
12, 2013); 78 FR 42991 (Jul. 18, 2013) (SR–DTC–
2013–04).
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]]>Agencies
[Federal Register Volume 79, Number 108 (Thursday, June 5, 2014)]
[Notices]
[Pages 32594-32599]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-13017]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72284; File No. SR-CBOE-2014-043]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change Relating to
Closing Rotation Procedures for S&P 500 Index Options
May 30, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on May 30, 2014 Chicago Board Options Exchange, Incorporated
(``Exchange'' or ``CBOE'') 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
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to make minor changes to Interpretation and
Policy .06 to Rule 6.2B (Hybrid Opening System (``HOSS'')) relating to
month-end closing price rotation procedures for non-expiring S&P 500
Index (``SPX'')
[[Page 32595]]
options. The text of the proposed rule change is provided below.
(additions are italicized; deletions are [bracketed])
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
Rule 6.2B. Hybrid Opening System (``HOSS'')
(a)-(h) No change.
* * * Interpretations and Policies:
.01-.05 No change.
.06 Following the 3:15 p.m. Chicago time close of trading on the
last business day of each calendar month, the Exchange will conduct
special non-trading closing rotations for each series of S&P 500
Index (``SPX'') options in order to determine the theoretical ``fair
value'' of such series as of 3:00 p.m. Chicago time. During such
special non-trading closing rotations, [the] an LMM in [each series
of] the SPX options designated by the Exchange in each series of SPX
options, will provide bid and offer quotations, the midpoint of
which will reflect the theoretical fair value of the series of SPX
options, as determined by the LMM pursuant to the LMM's algorithmic
analysis of relevant and available data. Notwithstanding that
trading in SPX options on the Exchange continues until 3:15 p.m., on
the last business day of each month, after 3:15 p.m. the Exchange
shall disseminate the 3:00 p.m. fair value quotations provided by
[each] the designated LMM as the quotations used to calculate the
theoretical fair value for each series of SPX options, provided,
however, that the Exchange may determine, in the interest of fair
and orderly markets, not to disseminate such quotations.
* * * * *
The text of the proposed rule change is also available on the
Exchange's Web site (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), 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 Exchange 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 Exchange 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
The Exchange proposes to make minor changes to Interpretation and
Policy .06 to Rule 6.2B (``Interpretation and Policy .06'') to extend
its SPX end-of-month pricing procedures to series of SPX options on the
Hybrid Trading System (``Hybrid System'').\3\ The Exchange believes
that the proposed rule will add consistency to S&P 500 Index-related
markets and make it easier for investors to trade SPX options.
---------------------------------------------------------------------------
\3\ The Hybrid Platform refers to the Exchange's trading
platform that allows automatic executions to occur electronically
and open outcry trades to occur on the floor of the Exchange. To
operate in this ``hybrid'' environment, the Exchange has a dynamic
order handling system that has the capability to route orders to the
trade engine for automatic execution and book entry, to Trading
Permit Holder and PAR Official workstations located in the trading
crowds for manual handling, and/or to other order management
terminals generally located in booths on the trading floor for
manual handling. Classes of SPX options other than standard SPX
options are traded on the Hybrid Platform. The Hybrid 3.0 Platform
is an electronic trading platform on the Hybrid Trading System that
allows one or more quoters to submit electronic quotes which
represent the aggregate Market-Maker quoting interest in a series
for the trading crowd. Standard SPX options contracts are traded on
the Hybrid 3.0 Platform.
---------------------------------------------------------------------------
Background
In 2001, the Chicago Mercantile Exchange (``CME'') adopted special
settlement procedures to determine end-of-month settlement prices for
its domestic futures contracts.\4\ Specifically, CME adopted end-of-
month valuation procedures to calculate the price of S&P 500 futures
contracts based on the value of the underlying S&P 500 Index at the
close of trading. CME has termed these procedures ``End-of-Month
Special Fair Value'' (``EOM FV'') or ``Fair Value'' (``FV'') settlement
procedures.
---------------------------------------------------------------------------
\4\ The CME originally instituted this practice for the December
31, 1999 year-end, but has adopted the practice for each month-end
closing date since January 2001. See generally CME Group, Month-End
Fair Value Procedures, available at https://www.cmegroup.com/trading/equity-index/fairvaluefaq.html.
---------------------------------------------------------------------------
According to CME, ``[f]air value represents the level at which
futures theoretically should be priced in relation to cash index values
in the absence of transaction costs--albeit not where they necessarily
will trade.'' \5\ Pursuant to its EOM FV settlement procedures, CME
calculates the end-of-month final settlement value of S&P 500 futures
contracts based on the value of the underlying S&P 500 Index cash
market, rather than the actual final trading prices of S&P 500 futures
contracts. CME uses its end-of-month theoretical fair value settlement
prices for all purposes, including account value reporting and end-of-
day variation margin calls.\6\ These procedures mitigate issues caused
by the misalignment of valuations in the S&P 500 futures market and the
underlying S&P 500 Index cash market due to the extended trading hours
for S&P 500 futures contracts after the close of trading in the cash
market.
---------------------------------------------------------------------------
\5\ See generally CME Group, Month-End Fair Value Procedures,
available at https://www.cmegroup.com/trading/equity-index/fairvaluefaq.html.
\6\ Id.
---------------------------------------------------------------------------
The Exchange understands that CME adopted its EOM FV procedures at
the request of institutional investors (active in both the S&P 500
futures and S&P 500 Index cash markets), who wanted the end-of-month
value of their futures positions to align with prices in the underlying
S&P 500 Index cash market. If the month-end settlement price of
investors' futures positions were based on the actual closing trading
prices as of the 3:15 p.m.\7\ close of futures market while the month-
end closing price of their cash positions were based on the 3:00 p.m.
close of trading in the underlying S&P 500 Index cash market, investors
might experience tracking errors and/or financial reporting
incongruities that do not reflect actual portfolio performance. Pricing
model discrepancies or misaligned pricing between the S&P 500 futures
and S&P 500 Index cash market could also lead to unnecessary and/or
unwarranted margin calls and returns as well as other hedging and
accounting problems. The EOM FV settlement procedures adopted by CME
mitigate these issues by aligning the end-of-month settlement prices of
S&P 500 futures contracts with closing prices in the underlying cash
market as of 3:00 p.m.\8\
---------------------------------------------------------------------------
\7\ All times referred to herein are stated as Chicago Central
Standard Time.
\8\ CME has explained the reason for maintaining its 3:00 p.m.
fair value procedure as follows:
Stock index products on the . . . [CME] normally close and
settle fifteen minutes after the daily close of trading in cash
equities. The cash/futures basis may be affected to the extent that
futures may fluctuate--sometimes sharply--during those final fifteen
minutes. As such, this may become a difficulty for institutional
traders practicing coordinated cash/futures strategies. Still, the
opportunity to lay off equity market exposure during those fifteen
minutes subsequent to the cash close has proven quite beneficial.
The use of FV settlement procedures is intended to address this so-
called ``tracking error'' while still permitting trade [sic] to
continue for fifteen minutes past the 3:00 p.m. cash close.
Conceptually, the fair value settlement is determined when the cash
market closes at 3:00 p.m., since any new information following 3:00
p.m. will not affect the closing price of the stocks and the
indexes. However, information or events subsequent to the cash close
may still impact futures prices. Market participants should be aware
of the possibility that futures may trade at prices apart from fair
value settlement prices between 3;00 [sic] p.m. and the close of the
market at 3:15 p.m. on days on which FV settlement procedures are
applied.
See id.
---------------------------------------------------------------------------
[[Page 32596]]
The S&P 500 futures market and SPX options market are highly
interconnected. Many investors use SPX options to hedge S&P 500 futures
positions. Because of the interconnectedness between the S&P 500
futures and SPX options markets, the Exchange believed that the use of
end-of-month pricing procedures that diverged significantly form [sic]
the CME's EOM FV pricing procedures would be disruptive to fair and
orderly markets. Although the Exchange could have aligned the end-of-
month settlement prices of standard non-expiring SPX options with the
end-of-month prices of the related S&P 500 futures contracts (and the
underlying S&P Index cash market) by simply ending trading at 3:00 p.m.
on the last trading day of each month, the Exchange determined that
closing trading in SPX options market prior to the close of trading at
the CME would also be disruptive to fair and orderly markets. In
particular, the Exchange believed that closing trading for standard
non-expiring SPX options during S&P 500 futures trading hours would be
disruptive to many market participants who hedge S&P 500 futures
positions with SPX options. Accordingly, the Exchange adopted end-of-
month settlement practices designed to align its end-of-month pricing
with CME's EOM FV settlement procedures. The Exchange's end-of-month
pricing procedures were adopted through a series of Regulatory
Circulars and subsequently codified in the Exchange's rules in
Interpretation and Policy .06.\9\
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\9\ See CBOE Interpretation and Policy .06 to Rule 6.2B;
Securities and Exchange Act Release No. 34-67992; File No. SR-CBOE-
2012-095 (October 5, 2012) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change Relating to Closing Rotation
Procedures for S&P 500 Index Options).
See also CBOE Regulatory Circular RG99-233 (Dec. 21, 1999),
available at https://www.cboe.org/publish/regcir/rg99-233.pdf; CBOE
Regulatory Circular RG00-049 (Mar. 29, 2000), available at https://www.cboe.org/publish/regcir/rg00-049.pdf; CBOE Regulatory Circular
RG01-014 (Jan. 25, 2001), available at https://www.cboe.com/publish/RegCir/RG01-014.pdf; CBOE Regulatory Circular RG01-040 (Mar. 29,
2001), available at https://www.cboe.org/publish/regcir/rg01-040.pdf; CBOE Regulatory Circular RG01-058 (Apr. 27, 2001),
available at https://www.cboe.org/publish/regcir/rg01-058.pdf; CBOE
Regulatory Circular RG02-019 (Apr. 4, 2002), available at https://www.cboe.com/publish/RegCir/RG02-019.pdf; CBOE Regulatory Circular
RG02-039 (June 12, 2002), available at https://www.cboe.com/publish/RegCir/RG02-039.pdf; CBOE Regulatory Circular RG02-073 (Sept. 17,
2002), available at https://www.cboe.com/publish/RegCir/RG02-073.pdf;
CBOE Regulatory Circular RG02-118 (Dec. 19, 2002), available at
https://www.cboe.org/publish/regcir/rg02-118.pdf; CBOE Regulatory
Circular RG03-016 (Mar. 19, 2003), available at https://www.cboe.com/publish/RegCir/RG03-016.pdf; CBOE Regulatory Circular RG03-039 (June
11, 2003), available at https://www.cboe.com/publish/RegCir/RG03-039.pdf; CBOE Regulatory Circular RG03-075 (Sept. 10, 2003),
available at https://www.cboe.com/publish/RegCir/RG03-075.pdf; CBOE
Regulatory Circular RG03-082 (Sept. 22, 2003), available at https://www.cboe.com/publish/RegCir/RG03-082.pdf; CBOE Regulatory Circular
RG03-110 (Dec. 17, 2003), available at https://www.cboe.com/publish/RegCir/RG03-110.pdf; CBOE Regulatory Circular RG04-132 (Dec. 30,
2004), available at https://www.cboe.com/publish/RegCir/RG04-132.pdf;
CBOE Regulatory Circular RG05-130 (Dec. 29, 2005), available at
https://www.cboe.com/publish/RegCir/RG05-130.pdf; CBOE Regulatory
Circular RG06-130 (Dec. 19, 2006), available at https://www.cboe.org/publish/regcir/rg06-130.pdf; CBOE Regulatory Circular RG08-004 (Jan.
8, 2008), available at https://www.cboe.com/publish/RegCir/RG08-004.pdf; CBOE Regulatory Circular RG09-151 (Dec. 30, 2009),
available at https://www.cboe.org/publish/regcir/rg09-151.pdf; and
CBOE Regulatory Circular RG12-023 (Jan. 30, 2012), available at
https://www.cboe.org/publish/regcir/rg12-023.pdf.
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Current Exchange Procedures
Currently, on days other than the last business day of each month,
the final closing price of standard non-expiring SPX options traded on
the Hybrid 3.0 Platform is determined by the OCC based on the final
end-of-day trading quotations that it receives from the Exchange. In
general, the OCC determines the closing price of standard non-expiring
SPX options using the midpoint between the final bid and final offer
quotations disseminated by the Exchange through the Options Price
Reporting Authority (``OPRA'').
On the last business day of each month, however, the Exchange
conducts special end-of-month non-trading rotations for series of
standard non-expiring SPX options pursuant to Interpretation and Policy
.06. These special non-trading closing rotations are conducted on the
same month-end business days on which CME calculates the EOM FV
settlement prices of the S&P 500 futures contracts based on the
theoretical fair value of the underlying S&P 500 Index cash market at
the close of trading.\10\ The OCC calculates the final month-end
settlement prices for standard non-expiring SPX options based on non-
trading quotations provided by a designated Lead Market-Maker (``LMM'')
or LMMs in the SPX, which are then ``smoothed'' by the OCC with an
implied volatility curve. LMMs calculate non-trading closing bid and
offer quotations to reflect the theoretical fair value of the options
through pricing algorithms with a number of relevant inputs, in
particular, the EOM FV settlement prices of the related S&P 500 futures
contracts at CME.\11\ The theoretical fair value prices are
disseminated to the OCC via OPRA after the 3:15 p.m. close of trading
on the last business day of each month (on the same day that CME
performs its end-of-month fair market valuations for the S&P 500
futures). Consistent with CME's practices, the Exchange considers the
end-of-month theoretical fair value closing prices of SPX options
traded on the Hybrid 3.0 Platform to be the final month-end settlement
prices for all purposes, including OCC margin calculations, even though
no actual trades occur at these prices.
---------------------------------------------------------------------------
\10\ See CBOE Interpretation and Policy .06 to Rule 6.2B.
\11\ See Securities and Exchange Act Release No. 34-67992; File
No. SR-CBOE-2012-095 (October 5, 2012) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change Relating to Closing
Rotation Procedures for S&P 500 Index Options).
---------------------------------------------------------------------------
Proposed Rule Change
The Exchange proposes minor changes to its rules to extend its
current end-of-month settlement pricing procedures for SPX options
traded on the Hybrid 3.0 Platform to series of SPX options traded on
the Hybrid System (e.g., SPXW). The Exchange believes that extending
Interpretation and Policy .06 to additional groups of series of SPX
options will allow investors to realize consistency in the SPX options
market and with respect to valuations in the S&P 500 futures market and
underlying S&P 500 Index cash market.
Although Interpretation and Policy .06 does not restrict the
Exchange from conducting special end-of-month non-trading closing
rotations for series of SPX options traded on the Hybrid System,
Interpretation and Policy .06 does not contemplate the application of
month-end fair value pricing procedures in groups of series of SPX
options without an LMM. Thus, under the Exchange's current rules, the
Exchange cannot extend Interpretation and Policy .06 to series of SPX
options traded on the Hybrid System with no LMM.\12\ The proposed
changes to Interpretation and Policy .06 will allow a designated LMM in
the SPX options class to conduct non-trading closing rotations for
series of SPX options on the Hybrid System.
---------------------------------------------------------------------------
\12\ Notably, the Exchange's rules do not require the
appointment of an LMM in each options class or group of series of
options. See CBOE Rule 8.14.
---------------------------------------------------------------------------
Under the proposed rule, end-of-month settlement pricing procedures
will be conducted in the same manner in all series of SPX options. The
Exchange expects that LMMs in the SPX class will continue to base their
end-of-month non-trading quotations substantially and materially on the
closing prices of the related S&P 500
[[Page 32597]]
futures contracts (which reflect the theoretical fair value of the S&P
500 Index cash market as of 3:00 p.m. as determined by CME), in all
series of SPX options. The Exchange believes that the proposed rule
will allow investors to realize consistency in the SPX options market
by ensuring that the same pricing models are applied to determine the
end-of-month theoretical fair value of each non-expiring series of SPX
options. The Exchange believes that the application of consistent
pricing models in the SPX options market will protect investors'
interests by mitigating the risk of tracking errors and inconsistent
reporting that may be caused by the dissemination of closing quotations
derived from several different pricing models.
The Exchange believes that extending Interpretation and Policy .06
to additional groups of series of SPX options will promote the
functioning of a fair and orderly market in SPX options. The
misalignment of month-end S&P 500 futures valuations and SPX options
prices poses unnecessary risk to investors who actively trade in these
markets. Such inconsistencies expose investors to the possibility of
unwarranted and potentially significant margin calls, which may not
reflect actual levels of portfolio risk or true market exposure. The
Exchange believes that extending Interpretation and Policy .06 to
additional groups of series of SPX options will mitigate these risks
and allow investors to realize consistency with respect to the margin
treatment of SPX options.
Interpretation and Policy .06 was adopted in response to investors'
requests for end-of-month pricing of SPX options on the Hybrid 3.0
Platform consistent with CME's end-of-month S&P 500 futures valuations.
Similarly, the Exchange is proposing this rule change in response to
investors' requests for consistent pricing between the S&P 500 futures
and series of SPX options traded on the Hybrid System. The Exchange
anticipates disseminating end-of-month non-trading closing rotation
quotations for each series of SPX options so long as doing so remains
consistent with CME's end-of-month pricing practices in the S&P 500
futures. The Exchange, however, cannot predict whether CME will change
its EOM FV procedures in the future. Accordingly, the proposed rule
change preserves the Exchange's discretion not to disseminate the 3:00
p.m. fair value quotations provided by a designated LMM in a series, if
the Exchange determines that disseminating the quotations would not be
in the interests of investors or fair and orderly markets. In the event
that the CME determines not to apply its special EOM FV procedures,
either on a particular month-end trading day or otherwise, the Exchange
would allow the actual 3:15 p.m. closing quotations to act as the final
quotations, as occurs on other trading days.
The Exchange believes that the proposed rule is designed to guard
against unfair discrimination in the application of its end-of-month
settlement pricing procedures. The proposed rule merely extends the
Exchange's current end-of-month pricing procedures (which have been
reviewed and accepted by the Commission), to additional series of SPX
options. Under the proposed rule an LMM in the SPX class will provide
end-of-month non-trading quotations for each series of SPX options. LMM
appointments in SPX options will continue to be governed by CBOE Rules
8.15 and 8.15A and selected based on the criteria set forth in those
rules including, but not limited to: adequacy of capital; experience in
trading index options or options on ETPs; presence in the trading
crowd; and ability to meet required quoting and market-making
obligations as described in the Exchange's rules.\13\ The Exchange
believes that the LMM appointment process and procedures are objective;
all Trading Permit Holders may request an LMM appointment subject to
approval based on nondiscriminatory criteria and considerations
designed to promote fair and orderly markets. To the extent that there
may be more than one LMM appointed in the SPX, the Exchange will
designate an LMM to provide end-of-month non-trading quotations for
each group of series of SPX options on a monthly rotating basis.
---------------------------------------------------------------------------
\13\ CBOE Rules 8.15(a) and 8.15A(a).
---------------------------------------------------------------------------
The Exchange recognizes that LMMs may have an interest in the
outcome of month-end valuation determinations based on the composition
of their own proprietary positions. For example, an LMM may have an
incentive to skew their fair value determinations to minimize the risk
of potential variation margin calls from the OCC to cover proprietary
holdings. The Exchange believes, however, that these risks are
substantially mitigated by the weight given to the CME's valuations of
related S&P 500 futures contracts. The Exchange expects that under the
proposed rule the end-of-month non-trading closing quotations provided
by the designated LMM in each series of SPX options will continue to be
materially, if not directly, based on CME's EOM FV calculations. The
Exchange believes that the risk of market manipulation is further
limited by the fact that fair valuations can generally be approximated
by other third parties and verified through independent checks.
In addition, the Exchange is equipped to monitor LMMs' end-of-month
fair value calculations. The Exchange currently monitors the fair value
calculations of LMMs who quote end-of-month fair value settlement
prices for SPX options on the Hybrid 3.0 Platform. The Exchange also
conducts surveillance and oversight of LMMs' fair value quotations to
monitor for potential attempts at manipulation. Should the proposed
rule change take effect, the Exchange would extend its regulatory
practices to monitor the end-of-month fair valuation calculations of
LMMs who quote any series of SPX options under Interpretation and
Policy .06.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\14\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \15\ requirements that the rules
of an exchange be designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, 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.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \16\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
\16\ Id.
---------------------------------------------------------------------------
In particular, the proposed rule change furthers the interests of
fair and orderly markets by allowing investors to realize consistency
across the SPX options, S&P 500 futures and S&P 500 Index cash markets.
The Exchange proposes to extend the end-of-month fair value pricing
procedures in Interpretation and Policy .06 to additional series of SPX
options traded on the Hybrid System to better align end-of-month prices
in the SPX options
[[Page 32598]]
market with prices of related S&P 500 futures contracts and prices in
the underlying cash market. The Exchange believes that greater
consistency in SPX options market is in the best interests of
investors.
The Exchange also believes that the proposed rule change will
contribute to more robust and competitive markets by making it easier
for investors to trade S&P 500 Index-related securities and, in
particular, making it easier for investors to use SPX options to hedge
S&P 500 futures positions. Thus, the proposed rule change will
facilitate investors' use of risk-reducing trading strategies and
promote robust trading activity in the S&P 500 Index-related markets.
The Exchange also believes that extending its fair value pricing
procedures to additional groups of series of SPX options will mitigate
risk to investors, including investors' risk of tracking errors,
misrepresentative financial reporting, and potential unwarranted margin
calls that may be caused by misaligned end-of-month settlement pricing
in the S&P 500 Index-related markets, rather than actual portfolio risk
or market exposure.
The Exchange believes that the proposed rule change is designed to
guard against unfair discrimination in the application of its end-of-
month settlement pricing procedures. The proposed rule merely extends
the Exchange's current procedures (which have been reviewed and
approved by the Commission), to additional series of SPX options. Under
the proposed rule a designated LMM in each series of the SPX options
will provide end-of-month non-trading settlement pricing quotations for
series of SPX options. LMM appointments in SPX options will continue to
be governed by CBOE Rules 8.15 and 8.15A and selected based on the
criteria set forth in those rules including, but not limited to:
adequacy of capital; experience in trading index options or options on
ETPs; presence in the trading crowd; and ability to meet the required
quoting and market-making obligations described in the Exchange's
rules.\17\ The Exchange believes that the LMM appointment procedures
and process set forth in Rules 8.15 and 8.15A are objective; all TPHs
may request an appointment subject to the nondiscriminatory criteria
set forth in Rules 8.15 and 8.15A, which are designed to promote fair
and orderly markets.
---------------------------------------------------------------------------
\17\ CBOE Rules 8.15(a) and 8.15A(a).
---------------------------------------------------------------------------
The Exchange recognizes that LMMs may have an interest in the
outcome of month-end valuation determinations based on the composition
of their own proprietary positions. For example, an LMM may have an
incentive to skew their fair value determinations to minimize the risk
of potential of variation margin calls from the OCC to cover
proprietary holdings. The Exchange believes, however, that these risks
are substantially mitigated by the weight given to fair valuations of
the related S&P 500 futures contracts at CME. The Exchange expects that
the end-of-month non-trading closing price quotations provided by LMMs
for series of SPX options on the Hybrid System will continue to be
materially, if not directly, based on CME's EOM FV calculations under
the proposed rule. The Exchange believes that the risk of market
manipulation is further limited by the fact that fair valuations can
generally be approximated by other third parties and verified through
independent checks.
In addition, the Exchange is equipped to protect investors through
end-of-month fair value calculations monitoring practices. The Exchange
currently monitors the fair value calculations of LMMs who quote end-
of-month fair value settlement prices for SPX options on the Hybrid 3.0
Platform. The Exchange also conducts surveillance and oversight of
LMMs' fair value quotations to monitor for potential attempts at
manipulation. Under the proposed rule, the Exchange would extend its
regulatory practices to monitor LMMs' end-of-month price calculations
for all series of SPX options quoted in accordance with Interpretation
and Policy .06.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. Extending the Exchange's
current end-of-month fair value settlement procedures to other series
of SPX options will not adversely affect investors. These procedures
will be equally applied to affect all market participants equally in
the SPX options market. Furthermore, the Exchange believes that the
proposed rule will bolster competition and contribute to more robust
markets by making it easier for investors to trade SPX options and use
SPX options to hedge S&P 500 futures positions. The Exchange believes
that the proposed rule will bolster competition with other exchanges by
making it easier for investors to trade S&P 500 Index-related
securities listed on exchanges other than CBOE.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not:
A. Significantly affect the protection of investors or the public
interest;
B. impose any significant burden on competition; and
C. become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \18\ and
Rule 19b-4(f)(6) \19\ thereunder. 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. If the Commission takes such action, the
Commission will institute proceedings to determine whether the proposed
rule change should be approved or disapproved.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78s(b)(3)(A).
\19\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
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 email to rule-comments@sec.gov. Please include
File Number SR-CBOE-2014-043 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2014-043. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use
[[Page 32599]]
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 10:00 a.m. and
3:00 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-CBOE-2014-043 and should be
submitted on or before June 26, 2014.
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\20\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-13017 Filed 6-4-14; 8:45 am]
BILLING CODE 8001-01-P
