Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Proposed Rule To Introduce Asian Style Settlement and Cliquet Style Settlement for FLexible Exchange Broad-Based Index Options, 27408-27415 [2015-11592]
Download as PDF
<![CDATA[
27408
Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices
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.
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 proposed rule change
does not (i) significantly affect the
protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate if
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to section 19(b)(3)(A)
of the Act 18 and Rule 19b–4(f)(6)
thereunder.19
The Exchange has asked the
Commission to waive the 30-day
operative delay so that the proposal may
become operative immediately upon
filing. The Commission believes that
waiving the 30-day operative delay is
consistent with the protection of
investors and the public interest, as it
will enable the Exchange to meet its
proposed implementation date of May 8,
2015, which will help facilitate the
implementation of harmonized rules
related to the adjustment and
nullification of erroneous options
transactions across the options
exchanges. For this reason, the
Commission designates the proposed
rule change to be operative upon
filing.20
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
18 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). As required under Rule
19b–4(f)(6)(iii), the Exchange provided the
Commission with written notice of its intent to file
the proposed rule change, along with a brief
description and the text of the proposed rule
change, at least five business days prior to the date
of filing of the proposed rule change, or such
shorter time as designated by the Commission.
20 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
asabaliauskas on DSK5VPTVN1PROD with NOTICES
19 17
VerDate Sep<11>2014
17:27 May 12, 2015
Jkt 235001
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.21
Robert W. Errett,
Deputy Secretary.
IV. Solicitation of Comments
whether an erroneous transaction has
occurred and, if so, how to adjust or
nullify a transaction.
[FR Doc. 2015–11485 Filed 5–12–15; 8:45 am]
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:
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–74914; File No. SR–CBOE–
2015–044]
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–
C2–2015–012 on the subject line.
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Proposed Rule
To Introduce Asian Style Settlement
and Cliquet Style Settlement for
FLexible Exchange Broad-Based Index
Options
Paper Comments
May 8, 2015.
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–C2–2015–012. 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
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–C2–
2015–012 and should be submitted on
or before June 3, 2015.
PO 00000
Frm 00125
Fmt 4703
Sfmt 4703
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 May 6,
2015, the Chicago Board Options
Exchange, Incorporated (the ‘‘Exchange’’
or ‘‘CBOE’’) filed with the Securities
and Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the 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
Chicago Board Options Exchange,
Incorporated (‘‘CBOE’’ or ‘‘Exchange’’)
proposes to introduce Asian style
settlement and Cliquet style settlement
for FLexible Exchange (‘‘FLEX’’) BroadBased Index options. The proposed rule
change would not amend the text of
Rule 12.4 (Portfolio Margin); however,
the Exchange believes that it would be
appropriate to include the proposed
options in portfolio margining. The text
of the proposed rule change is 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.
21 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\13MYN1.SGM
13MYN1
Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of
and basis for the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
asabaliauskas on DSK5VPTVN1PROD with NOTICES
1. Purpose
The purpose of this proposed rule
change is to permit the Exchange to
introduce Asian style settlement and
Cliquet style settlement for FLexible
Exchange (‘‘FLEX’’) Broad-Based Index
options. In general, Asian style
settlement provides for payout based on
the average of prices of a broad-based
index on pre-determined dates over a
specified time period and Cliquet style
settlement provides for a payout that is
the greater of $0 or the (positive) sum of
‘‘capped’’ monthly returns of a broadbased index on pre-determined dates
over a specified period of time.
FLEX Broad-Based Index options
provide users with the ability to
customize key contract terms, like
exercise prices, exercise styles,
expiration dates and exercise settlement
values. After surveying potential FLEX
Broad-Based index options users, the
Exchange learned that indexed annuity
writers (insurance companies)
extensively use over-the-counter (‘‘OTC)
options with Asian and Cliquet style
settlement as a crediting method.3
Because of the level of customization
that FLEX Broad-Based Index options
provide, the Exchange seeks to
introduce exchange-traded products that
would provide potential market users
with an alternative to the OTC market
in customized options.
Index Annuity Writer Use of Asian and
Cliquet Options
For background, an indexed annuity
is an insurance contract that is typically
3 A ‘‘crediting method’’ is the method used to
measure the change in the underlying index (e.g.,
point-to-point or annual reset).
VerDate Sep<11>2014
17:27 May 12, 2015
Jkt 235001
tied to a financial market index, e.g.,
S&P 500 Index, and the return is
guaranteed not to fall below a level
specified in the contract. Indexed
annuity contracts typically provide that
the contract holder will be credited
interest according to a specified formula
based on changes to the index to which
the annuity contract is linked. Indexed
annuity contracts often have exotic
option liabilities embedded within
those contracts.
One type of annuity contract is an
Asian contract (sometimes referred to as
an averaging contract) because the
settlement value is based on an average
of selected closing prices of an index
over a year. The contract holder of this
type of contract is typically entitled to
receive a credit on the anniversary date
in an amount equal to the greater of $0
and the difference between the average
price of an index and the level of the
index from the date of inception or the
previous anniversary date.
Another type of annuity contract is a
Cliquet contract (sometimes referred to
as a contract with a monthly return cap
with a global floor) because its payoff is
the greater of zero or the sum of
monthly capped returns of an index
over a year. The contract holder of this
type of contract is typically entitled to
receive a credit on the anniversary date
in an amount based on the sum of
monthly returns (subject to a monthly
cap) if the sum of monthly returns is
greater than 0. If the sum of the monthly
capped returns is 0 or less, the holder
would not realize a loss (other than the
premium paid) because the sum of
monthly capped returns has a global
floor of 0.
Insurance companies that write
indexed annuity contracts, therefore,
seek financial tools to manage and
hedge the embedded exotic option risk
in these contracts. Historically, these
insurers have traded exclusively in the
OTC market by entering into bilateral
contracts tailored to the terms of
indexed annuity contracts. CBOE
proposes to introduce two new kinds of
settlement styles for FLEX Broad-Based
Index options that would provide
insurers with alternative hedging tools
to OTC products, coupled with
traditional exchange-traded benefits like
price discovery, transparency and
centralized clearing.
4 Puts
PO 00000
would not be permitted.
Frm 00126
Fmt 4703
Sfmt 4703
27409
Asian Style Settlement
FLEX Broad-Based Index options with
Asian style settlement would be cashsettled call 4 option contracts for which
the final payout would be based on an
arithmetic average of specified closing
values of the underlying broad-based
index (‘‘Asian option’’). Exercise (strike)
prices and premium quotations for
Asian options would be expressed and
governed as provided for in Rules
24A.4(b)(2) and 24B.(b)(2). Asian
options would have a term of
approximately one year and would
expire anytime from 350 to 371 days
(which is approximately 50 to 53
calendar weeks) from the date of initial
listing. The contract multiplier for an
Asian option would be $100.5
The parties to an Asian option
contract would designate a set of
monthly observation dates and an
expiration date for each contract. The
monthly observation date would the
date each month on which the price of
the underlying broad-based index
would be observed for the purpose of
calculating the exercise settlement value
for Asian options. Each Asian option
would have 12 consecutive monthly
observation dates (which includes an
observation on the expiration date) and
each observation would be based on the
closing price of the underlying broadbased index. The specific monthly
observation dates would be determined
by working backward from the farthest
out observation date prior to the
expiration date. If a given monthly
observation date falls on a non CBOE
business day (e.g., holiday or weekend),
the monthly observation would be on
the immediately preceding business day
(‘‘preceding business day convention’’).
The parties may not designate a
subsequent business day convention for
Asian options.
Asian options would have Europeanstyle exercise and may not be exercised
prior to the expiration date. The
exercise settlement value for Asian
options would be the arithmetic average
of the closing values of the underlying
broad-based index on the 12
consecutive monthly observation dates,
which include the expiration date of the
option. Mathematically this is expressed
as:
5 See Rules 24A.1(i) and 24B.1(m). ‘‘The Index
Multiplier for FLEX Index Options is $100.’’
E:\FR\FM\13MYN1.SGM
13MYN1
27410
Where Si is the closing price of the
underlying broad-based index on monthly
observation date on the ith monthly
observation date.
The exercise settlement amount for
Asian options would be calculated
similarly to other options, i.e., the
difference between the strike price and
the averaged settlement value would
determine the value, or ‘‘moneyness’’ of
the contract at expiration.
An example of an Asian FLEX call
option expiring in-the-money follows.
On January 21, 2015, an investor
hedging the value of the S&P 500 Index
over a year purchases a call option
expiring on January 22, 2016 with a
strike price of 2000 and a contract
multiplier of $100. The option has
monthly observation dates occurring on
the 23rd of each month.
Monthly observation date
S&P 500 Index
closing value
23–Feb–15 ......................
23–Mar–15 ......................
23–Apr–15 ......................
22–May–15 * ...................
23–Jun–15 ......................
23–Jul–15 .......................
21–Aug–15 * ...................
23–Sep–15 .....................
23–Oct–15 ......................
23–Nov–15 .....................
23–Dec–15 .....................
22–Jan–16 ......................
Exercise (Averaged)
Settlement Value.
2025.36
2049.34
2019.77
1989.65
2005.64
2035.10
2032.15
2076.18
2099.01
2109.32
2085.42
2084.81
24,611.75/12 = 2050.98
asabaliauskas on DSK5VPTVN1PROD with NOTICES
* Because Asian FLEX options use the ‘‘preceding
business day convention,’’ the dates of May 23, 2015
and August 23, 2015, were not used in the above example because those dates will fall on a weekend or
a holiday. Instead the business days immediately
preceding those dates were used as the monthly observation date.
The exercise settlement amount for
this 2000 Asian FLEX call option would
be equal to $5,098. This amount would
be determined by adding the 12
observed closing values for the S&P 500
Index and dividing that amount by 12
(24,611.75/12), which is equal to
2050.98 (when rounded). As a result,
this 2000 call option would be $5,098
in-the-money (50.98 × $100).
If, in the above example, the strike
price for the Asian FLEX call option was
2060, that contract would have expired
out-of-the-money. This is because the
exercise settlement value for this 2060
call option is equal to 2050.98 (when
rounded). Since the strike price of 2060
is more than the 2050.98 exercise
settlement value, this option would not
be exercised and would expire
worthless.
VerDate Sep<11>2014
17:27 May 12, 2015
Jkt 235001
Cliquet Style Settlement
FLEX Broad-Based Index options with
Cliquet style settlement would be cashsettled call 6 option contracts for which
the final payout would be based on the
sum of monthly returns (i.e., percent
changes in the closing value of the
underlying broad-based index from one
monthly observation date to the next
monthly observation date), subject to a
monthly return ‘‘cap’’ (e.g., 2%) applied
over 12 monthly observation dates
(‘‘Cliquet option’’). Premium quotations
for Cliquet options would be expressed
and governed as provided for in Rules
24A.4(b)(2) and 24B.(b)(2). Cliquet
options would have a term of
approximately one year and would
expire anytime from 350 to 371 days
(which is approximately 50 to 53
calendar weeks) from the date of initial
listing. The contract multiplier for a
Cliquet option would be $100.7
The parties to a Cliquet option would
designate a set of monthly observation
dates for each contract and an
expiration date for each contract. The
monthly observation date would be the
date each month on which the price of
the underlying broad-based index
would be observed for the purpose of
calculating the exercise settlement value
for Cliquet FLEX options. Each Cliquet
FLEX option would have 12 consecutive
monthly observation dates (which
includes an observation on the
expiration date) and each observation
would be based on the closing price of
the underlying broad-based index. The
specific monthly observation dates
would be determined working backward
from the farther out observation date
prior to the expiration date. If a given
monthly observation date fell on a non
CBOE business day (e.g., holiday or
weekend), the monthly observation
would be on the immediately preceding
business day (‘‘preceding business day
convention’’). The parties may not
designate a subsequent business day
convention for Cliquet options.
The parties to a Cliquet option would
designate a capped monthly return
(percent change in the closing values of
the underlying broad-based index from
one month to the next month) for the
contract, which would be the maximum
monthly return that would be included
6 Puts
would not be permitted.
Rules 24A.1(i) and 24B.1(m). ‘‘The Index
Multiplier for FLEX Index Options is $100.’’
7 See
PO 00000
Frm 00127
Fmt 4703
Sfmt 4703
in the calculation of the exercise
settlement value for the contract. On
each monthly observation date, the
Exchange would determine the actual
monthly return (the percent change of
the underlying broad-based index) using
the closing value of the broad-based
index on the current monthly
observation date and the closing value
of the broad-based index on the
previous monthly observation date. The
Exchange would then compare the
actual monthly return to the capped
monthly return. The value to be
included as the monthly return for a
Cliquet option would be the lesser of the
actual monthly return or the capped
monthly return.
For example, if the actual monthly
return of the underlying broad-based
index was 1.75% and the designated
capped monthly return for a Cliquet
option was 2%, the 1.75% value would
be included (and not the 2%) as the
value for the observation date to
determine the exercise settlement value.
Using this same example, if the actual
monthly return of the underlying broadbased index was 3.30%, the 2% value
would be included (and not the 3.30%)
as the value of the observation date to
determine the exercise settlement value.
This latter example illustrates that,
Cliquet options have a capped upside.
Cliquet options do not, however, have a
capped downside for the monthly return
that would be included in determining
the exercise settlement value. Drawing
on this same example, if the actual
monthly return of the underlying broadbased index was ¥4.07%, the ¥4.07%
value would be included as the value
for the observation date to determine the
exercise settlement value. There would
be, however, be a global floor for Cliquet
options so that if the sum of the
monthly returns is negative, a Cliquet
option would expire worthless.
Unlike other options, Cliquet options
would not have a traditional exercise
(strike) price. Rather, the exercise
(strike) price field for a Cliquet option
would represent the designated capped
monthly return for the contract and
would be expressed in dollars and
cents. For example, a capped monthly
return of 2.25% would be represented
by the dollar amount of $2.25. The
‘‘strike’’ price for a Cliquet option may
only be expressed in a dollar and cents
amount and the ‘‘strike’’ price for a
Cliquet option may only span a range
E:\FR\FM\13MYN1.SGM
13MYN1
EN13MY15.005</GPH>
Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices
27411
Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices
between $0.05 and $25.95. In addition,
the ‘‘strike’’ price for a Cliquet option
may only be designated in $0.05
increments, e.g., $1.75, $2.50, $4.15.
Increments of $0.01 in the ‘‘strike’’ price
field (representing the capped monthly
return) would not be permitted.
The first ‘‘monthly’’ return for a
Cliquet option would be based on the
initial reference value, which would be
the closing value of the underlying
broad-based index on the date a new
Cliquet option is listed. The time period
measured for the first ‘‘monthly’’ return
would be between the initial listing date
and the first monthly observation date.
For example, if a Cliquet option was
opened on January 1 and the parties
designated the 31st of each month as the
monthly observation date, the
measurement period for the first
monthly return would span the time
period from January 1 to January 31.
The time period measured for the
second monthly return, and all
subsequent monthly returns, would run
from the 31st of one month to the 31st
of the next month (or the last CBOE
business day of each month depending
on the actual number of calendar days
in each month covered by the contract).
Cliquet options would have
European-style exercise and may not be
exercised prior to the expiration date.
The exercise settlement value for
Cliquet options would be equal to the
initial reference price of the underlying
broad-based index multiplied by the
sum of the monthly returns (with the
cap applied) on the 12 consecutive
monthly observation dates, which
include the expiration date of the
option, provided that the sum is greater
than 0. If the sum of the monthly returns
(with the applied cap) is 0 or a less, the
option would expire worthless.8
Mathematically this is expressed as:
An example of a Cliquet option follows. On
January 21, 2015, an investor hedging the
value of the S&P 500 Index over a year
purchases a Cliquet FLEX call option
expiring on January 22, 2016 with a capped
monthly return of 2% and a contract
multiplier of $100. The initial reference price
of the S&P 500 Index (closing value) on
January 21, 2015 is 2000. The option has
monthly observation dates occurring on the
23rd of each month.
asabaliauskas on DSK5VPTVN1PROD with NOTICES
23–Feb–15 .......................................................................................................
23–Mar–15 .......................................................................................................
23–Apr–15 .......................................................................................................
22–May–15* .....................................................................................................
23–Jun–15 .......................................................................................................
23–Jul–15 ........................................................................................................
21–Aug–15 * .....................................................................................................
23–Sep–15 .......................................................................................................
23–Oct–15 .......................................................................................................
23–Nov–15 .......................................................................................................
23–Dec–15 .......................................................................................................
22–Jan–16 .......................................................................................................
8 Prior to expiration, it is possible that the
accumulated monthly returns could become
negative to a point at which it is known that the
VerDate Sep<11>2014
17:27 May 12, 2015
Jkt 235001
2025.36
2049.34
2019.77
1989.65
2005.64
2035.10
2032.15
2076.18
2099.01
2109.32
2085.42
2084.81
value of the contract at expiration would be zero.
The holder or writer of such a position may choose
PO 00000
Frm 00128
Fmt 4703
Sfmt 4703
Actual monthly
return
(percent)
Capped
monthly return
(CMRi)
(percent)
Sum of monthly returns
(percent)
1.27
1.18
¥1.44
¥1.49
0.80
1.47
¥0.14
2.17
1.10
0.49
¥1.13
¥0.03
1.27
1.18
¥1.44
¥1.49
0.80
1.47
¥0.14
** 2.00
1.10
0.49
¥1.13
¥0.03
1.27
2.45
1.01
¥0.48
0.32
1.79
1.65
3.65
4.75
5.24
4.11
4.08
to exit the position prior to expiration for a
negligible credit or debit amount, respectively.
E:\FR\FM\13MYN1.SGM
13MYN1
EN13MY15.006</GPH>
S&P 500
Index closing
value
(Si)
Monthly observation date
27412
Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices
S&P 500
Index closing
value
(Si)
Monthly observation date
Exercise Settlement Value:
Actual monthly
return
(percent)
Capped
monthly return
(CMRi)
(percent)
Sum of monthly returns
(percent)
[(4.08% * 2000.00)] + 2 = 83.60
* Because Cliquet FLEX options use the ‘‘preceding business day convention,’’ the dates of May 23, 2015, and August 23, 2015, were not
used in the above example because those dates will fall on a weekend or a holiday. Instead the business days immediately preceding those
dates were used as the monthly observation dates.
** Monthly capped return applied.
The exercise settlement amount for this
January 22, 2016 Cliquet option, with a
capped monthly 2% return (‘‘strike price’’)
and a contract multiplier of $100 would be
equal to $8,360. This value would be
calculated by summing the monthly capped
returns (equal to 4.08%) and multiplying that
amount by the initial reference price (equal
to 2000), which equals 81.60. The ‘‘strike
price’’ (2%) amount would then be added to
that amount (81.60) to arrive at an exercise
settlement value of 83.60. Because the ‘‘strike
price’’ field for a Cliquet option would be the
manner in which the designated capped
monthly return would be identified for the
contract and because the designated monthly
return for the contract would have been
already substantively applied to determine
the exercise settlement value, the ‘‘strike
price’’ of 2.0 would be subtracted from the
exercise settlement value before the contract
multiplier ($100) would be applied [(83.60 ¥
2) * 100]. Accordingly, resulting payout for
this contract would be $8,160.
If the sum of the monthly capped returns
had been negative, this option would have
expired worthless.
Specific Rule Text Changes
To expressly permit Asian style settlement
and Cliquet style settlement for FLEX BroadBased Index options, CBOE is proposing to
amend Rules 24A.1 (Definitions), 24A.4
(Terms of FLEX Options), 24B.1 (Definitions)
and 24B.4 (Terms of FLEX Options).9 First,
CBOE proposes to amend Rules 24A.1 10 and
24B.1 11 by adding the below definitions to
those rules:
asabaliauskas on DSK5VPTVN1PROD with NOTICES
The term ‘‘Asian style settlement’’ is a
settlement style that may be designated for
FLEX Broad-Based Index Options and results
in the contract settling to an exercise
settlement value that is based on an
arithmetic average of the specified closing
prices of an underlying broad-based index
taken on 12 predetermined monthly
observation dates (including on the
expiration date). FLEX Broad-Based Index
Options with Asian style settlement have
‘‘preceding business day convention,’’
meaning that if a monthly observation date
falls on a non CBOE business day (e.g.,
holiday or weekend), the monthly
9 Chapter XXIVA sets forth Flexible Exchange
Options rules and Chapter XXIVB sets forth FLEX
Hybrid Trading System rules.
10 The Exchange proposes to add the definitions
of ‘‘Asian style settlement’’ and ‘‘Cliquet style
settlement’’ to Rule 24A.1 as new subparagraphs (r)
and (s), respectively.
11 The Exchange proposes to add the definitions
of ‘‘Asian style settlement’’ and ‘‘Cliquet style
settlement’’ to Rule 24B.1 as new subparagraphs
(aa) and (bb), respectively.
VerDate Sep<11>2014
17:27 May 12, 2015
Jkt 235001
observation would be on the immediately
preceding business day. FLEX Broad-Based
Index Options with Asian style settlement
have European-style exercise.
The term ‘‘Cliquet style settlement’’ is a
settlement style that may be designated for
FLEX Broad-Based Index Options and results
in the contract settling to an exercise
settlement value that is equal to the greater
of $0 or the sum of capped monthly returns
(i.e., percent changes in the closing value of
the underlying broad-based index from one
month to the next month) applied over 12
predetermined monthly observation dates
(including on the expiration date). FLEX
Broad-Based Index Options with Cliquet
style settlement have ‘‘preceding business
day convention,’’ meaning that if a monthly
observation date falls on a non CBOE
business day (e.g., holiday or weekend), the
monthly observation would be on the
immediately preceding business day. FLEX
Broad-Based Index Options with Cliquet
style settlement have European-style
exercise.
increments not less than $0.05 and must be
a value between $0.05 and $25.95; (iii) the
expiration date which must be a CBOE
business day; and (iv) a set of monthly
observation dates. The capped monthly
return will serve as the ‘‘exercise (strike)
price’’ for a FLEX Broad-Based Index Option
with Cliquet style settlement.
Asian style settlement. The parties to FLEX
Broad-Based Index Options may designate
Asian style settlement. FLEX Broad-Based
Index Options with Asian style settlement
shall be call options (no puts) and designated
by: (i) The duration of the contract which
may range from 350 to 371 days (which is
approximately 50 to 53 calendar weeks) from
the date of listing; (ii) the strike price; (iii)
the expiration date which must be a CBOE
business day; and (iv) a set of monthly
observation dates.
Cliquet style settlement. The parties to
FLEX Broad-Based Index Options may
designate Cliquet style settlement. FLEX
Broad-Based Index Options with Cliquet
style settlement shall be call options (no
puts) and be designated by: (i) The duration
of the contract which may range from 350 to
371 days (which is approximately 50 to 53
calendar weeks) from the date of listing; (ii)
the capped monthly return that must be
expressed in dollars and cents and in
Exhibit 3 presents contract
specifications for Asian style settlement
and Cliquet style settlement for FLEX
Broad-Based Index options.
In CBOE’s experience, successful and
popular products have often originated
in the OTC marketplace. When such
products lend themselves to more
standardized terms, there is a natural
migration to exchange trading which
benefits the users of exchange listed
products. CBOE believes that market
participants can benefit from being able
to trade these customized options in an
exchange environment in several ways,
including, but not limited to the
following: (1) Enhanced efficiency in
initiating and closing out positions; (2)
increased market transparency; and (3)
heightened contra-party
creditworthiness due to the role of The
Options Clearing Corporation (‘‘OCC’’)
as issuer and guarantor of FLEX BroadBased Index options.14
CBOE believes that expressly
permitting Asian and Cliquet FLEX
Broad-Based Index options is important
and necessary to the Exchange’s efforts
to create a market that provides
individuals interested in FLEX-type
options with an improved but
comparable alternative to the OTC
market in customized options, which
can take on contract characteristics
similar to FLEX Options but are not
subject to the same restrictions. By
making these changes, market
participants would now have greater
flexibility in determining whether to
execute their customized options in an
exchange environment or in the OTC
market.
12 The Exchange proposes to set forth the terms
for Asian options and Cliquet options to Rule
24A.4(b) as new subparagraphs (5) and (6),
respectively.
13 The Exchange proposes to set forth the terms
for Asian options and Cliquet options to Rule
24B.4(b) as new subparagraphs (5) and (6),
respectively.
14 The launch of Asian and Cliquet options would
be permitted subject to the Commission’s approval
of an OCC rule filing to make risk model changes
necessary to accommodate the clearance and
settlement of the proposed options. The Exchange
would issue a circular to Trading Permit Holders to
announce a specific launch date for the proposed
options.
Second, the CBOE proposes to amend
Rules 24A.4(b) 12 and 24B.4(b) 13 by
adding the below terms that the parties
to Asian options and Cliquet options
must designate and the parameters
governing the parties’ designations:
PO 00000
Frm 00129
Fmt 4703
Sfmt 4703
E:\FR\FM\13MYN1.SGM
13MYN1
Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices
asabaliauskas on DSK5VPTVN1PROD with NOTICES
Margin
CBOE proposes a strategy-based
margin requirement in Rule 12.3
(Margin Requirements) for short Asian
options that would incrementally
decrease over time. Settlement of Asian
options would be based on the
arithmetic average of closing values (on
specified observation dates) of the
underlying broad-based index. Volatility
would be generally lowered due to the
averaging effect. A cumulative average
develops as observation dates pass, and
subsequent observation date broadbased index values have gradually less
influence on the average. Because of the
averaging effect, CBOE believes that a
margin requirement that incrementally
decreases over time is warranted.
For an Asian option having an
underlying index that is broad-based,
CBOE proposes that the same margin
requirement currently applicable to a
standard broad-based index call option
be applied to an Asian option during the
first quartile of its life, which ends with
the third observation date. The current
initial and maintenance margin
requirement for a standard broad-based
index call option carried short is the
option premium received (or current
market value), plus 15% of the
underlying broad-based index value less
any out-of-the-money amount, to a
minimum of the option premium
received (or current market value), plus
10% of the underlying broad-based
index value. CBOE proposes to decrease
the 15% basic and 10% minimum to 8%
and 6%, respectively, after the third
observation date; to 6% and 4% after
the sixth observation date; and lastly, to
5% and 3% after the ninth observation
date.
CBOE believes it is appropriate to
include Asian options in portfolio
margining.15
CBOE proposes a strategy-based
margin requirement in Rule 12.3 for
short Cliquet options that, with one
exception, would also incrementally
decrease over time. Settlement of
Cliquet options would be based on the
sum of the returns for 12 consecutive
time periods of approximately 30 days
in length, each ending on an observation
date. In the case of Cliquet options with
capped monthly returns, volatility
would be generally lowered because of
the capping effect. In addition, the
lower the capped monthly return, the
15 A
theoretical pricing model would continue to
be used to derive position values at each valuation
point for the purpose of determining the gain or
loss. Currently the only model that qualifies is
OCC’s Theoretical Intermarket Margining System
(‘‘TIMS’’).
VerDate Sep<11>2014
17:27 May 12, 2015
Jkt 235001
lower the sensitivity to moves in the
underlying broad-based index.
Also, the sum of returns for 12
consecutive time periods, based on
historical analysis, is expected to be less
than the return on the underlying broadbased index from beginning to end of
the same 12 consecutive month time
period, except in the case of a negative
return. However, with a Cliquet option,
a negative sum of returns would be
excluded as a possibility because a floor
of zero would be set for the sum of
returns. Additionally, a cumulative
return develops as observation dates
pass, and as subsequent observation
date returns compile, the likelihood of
the sum of returns increasing or
decreasing significantly would
gradually be lowered. Because of these
influences, CBOE believes that a margin
requirement that incrementally
decreases over time is warranted.
Because Cliquet options would not
have a traditional exercise (strike) price,
no out-of-the-money amount deduction
would be calculated for margin
purposes. Therefore, no minimum
percentage margin requirement would
be necessary in that, without an out-ofthe-money calculation, the margin
requirement calculated using the basic
margin requirement percentage would
never be reduced.
For Cliquet options, three separate
categories, based on a time frame within
the life of a Cliquet option, would be
established for margin requirement
purposes. The three categories proposed
are: (1) The time period starting with the
trade through the 10th observation date;
(2) the time period starting after the 10th
observation date through the 11th
observation date; and (3) the time period
starting after the 11th observation date
through the 12th (final) observation
date.
During the time period starting with
a Cliquet option’s trade date through its
10th observation date, in the case of an
index that is broad-based, CBOE
proposes a margin requirement of 100%
of the current market value of the option
plus the percentage of the current
‘‘underlying component value.’’ The
percentage required would be the lesser
of: the cap percentage multiplied by
three (3) or 15%.16
CBOE proposes to decrease the
percentage requirement to the lesser of:
The cap percentage multiplied by two
(2) or 15% beginning after the 10th
observation date through the 11th
observation date, and to further decrease
the percentage requirement to the lesser
16 As noted previously, proposed CBOE Rules
24A.4(b) and 24B.4(b) would not permit the
monthly return cap to exceed 25.95%.
PO 00000
Frm 00130
Fmt 4703
Sfmt 4703
27413
of: the cap percentage or 15% beginning
after the 11th observation date through
the 12th (final) observation date.
CBOE believes it is appropriate to
include Cliquet options in portfolio
margining.17
Exchange Rules Applicable
Except as modified herein, the rules
in Chapters I through XIX, XXIV,
XXIVA and XXIVB would equally apply
to Asian and Cliquet options. For
example, per Rule 6.1A (Extended
Trading Hours), Asian and Cliquet
options would not be eligible for trading
during Extended Trading Hours. Also,
for example, Rules 24A.7 and 24A.8 set
forth the position limits and reporting
requirements applicable to FLEX BroadBased Index options and Rules 24A.7
and 24B.7 set forth the exercise limits
applicable to FLEX Broad-Based Index
options. Respecting positions and
exercise limits, these provisions set
forth general rules and carve-outs for
certain broad-based FLEX Broad-Based
Index options, which would apply with
equal force to Asian and Cliquet
options.
Surveillance
The Exchange would use the same
surveillance procedures currently
utilized for the Exchange’s other FLEX
Broad-Based Index options to monitor
trading in Asian and Cliquet options.
The Exchange further represents that
these surveillance procedures shall be
adequate to monitor trading in options
on these option products. For
surveillance purposes, the Exchange
will have complete access to
information regarding trading activity in
the pertinent underlying securities.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the Act
and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.18 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 19 requirements that the rules of
an exchange be designed to promote just
and equitable principles of trade, to
prevent fraudulent and manipulative
acts, to remove impediments to and to
perfect the mechanism for a free and
open market and a national market
17 A theoretical pricing model would continue to
be used to derive position values at each valuation
point for the purpose of determining the gain or
loss. Currently the only model that qualifies is
OCC’s TIMS.
18 15 U.S.C. 78f(b).
19 15 U.S.C. 78f(b)(5).
E:\FR\FM\13MYN1.SGM
13MYN1
asabaliauskas on DSK5VPTVN1PROD with NOTICES
27414
Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices
system, and, in general, to protect
investors and the public interest.
The Exchange believes that the
proposed rule change is designed to
promote just and equitable principles of
trade in that the availability of Asian
and Cliquet FLEX Broad-Based Index
options would give market participants
greater flexibility in determining where
they will execute their customized
options. By trading a product in an
exchange traded environment (that is
currently being used extensively in the
OTC market) would also enable the
Exchange to compete more effectively
with the OTC market.
The Exchange believes that the
proposed rule change is designed to
prevent fraudulent and manipulative
acts and practices in that it would
hopefully lead to the migration of
options currently trading in the OTC
market to trading to the Exchange and
the development of more standardized
products. Also, any migration to the
Exchange would result in increased
market transparency.
Additionally, the Exchange believes
that the proposed rule change is
designed to remove impediments to and
to perfect the mechanism for a free and
open market and a national market
system, and, in general, to protect
investors and the public interest in that
it should create greater trading and
hedging opportunities and flexibility.
The proposed rule change should also
result in enhanced efficiency in
initiating and closing out positions and
heightened contra-party
creditworthiness due to the role of OCC
as issuer and guarantor of FLEX BroadBased Index options. Further, the
proposal would result in increased
competition by permitting the Exchange
to offer products that are currently used
extensively in the OTC market.
The Exchange believes that the
proposed strategy-based margin
requirements for Asian and Cliquet
options are consistent with the Act
because they are designed to protect
investors and the public interest by
setting margin levels at appropriate
levels for these instruments. First, the
proposed options are limited to broadbased indexes and the index on which
the Exchange expects the most interest
is the S&P 500 Index, which has deep
and liquid markets. Second, the short
option margin levels proposed to be
established would apply to retail
customers, whom the Exchange does not
believe to be the primary sellers (i.e.,
writers) of the proposed options. Third,
as to short Asian and Cliquet positions,
the Exchange notes that the proposed
margin levels would start at the same
level that is required for regular options
VerDate Sep<11>2014
17:27 May 12, 2015
Jkt 235001
on broad-based indexes (15%) and
would incrementally decrease over
time. The Exchange believes that the
incremental decrease over time is
appropriate given the nature of the
proposed options (i.e., the risk
associated with the options decreases as
the time to expiration nears). Also, the
Exchange represents that it conducted
an extensive analysis over various time
periods when considering the proposed
margin levels and represents that for
each percentage movement observed,
the proposed margin level percentages
closely track the percentage movements
observed. In other words, the Exchange
is proposing conservative and wellfounded margin levels for the proposed
options. As a result, the Exchange
believes that the proposed margin levels
would protect the integrity of the
Exchange’s marketplace by setting
margins at levels that are appropriate for
these instruments.
IV. Solicitation of Comments
B. Self-Regulatory Organization’s
Statement on Burden on Competition
All submissions should refer to File
Number SR–CBOE–2015–044. 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
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 such
filing also will be available for
inspection and copying at the principal
office of the CBOE. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–CBOE–
2015–044 and should be submitted on
or before June 3, 2015.
CBOE does not believe that the
proposed rule change will impose any
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Act. Specifically, CBOE
believes that the introduction of new
settlement types (Asian and Cliquet) for
FLEX Broad-Based Index options would
enhance competition among market
participants and would also enable the
Exchange to compete more effectively
with the OTC market by offering a
product that is currently use extensively
in the OTC market.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 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.
PO 00000
Frm 00131
Fmt 4703
Sfmt 4703
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–2015–044 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.
E:\FR\FM\13MYN1.SGM
13MYN1
Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015–11592 Filed 5–12–15; 8:45 am]
BILLING CODE 8011–01–P
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–74897; File No. SR–
ISEGemini–2015–11]
1. Purpose
Self-Regulatory Organizations; ISE
Gemini, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Related to the
Nullification and Adjustment of
Options Transactions Including
Obvious Errors
May 7, 2015.
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 May 6,
2015 ISE Gemini, LLC (the ‘‘Exchange’’
or ‘‘ISE Gemini’’) filed with the
Securities and Exchange Commission
the proposed rule change, as described
in Items I and II 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
ISE Gemini proposes to amend
current Rule 720 (‘‘Current Rule’’), and
rename it ‘‘Nullification and
Adjustment of Options Transactions
including Obvious Errors’’ (‘‘Proposed
Rule’’). Rule 720 relates to the
adjustment and nullification of options
transactions executed on the Exchange
(‘‘ISE Gemini Options’’). The text of the
proposed rule change is available on the
Exchange’s Web site (https://
www.ise.com), at the principal office of
the Exchange, and at the Commission’s
Public Reference Room.
asabaliauskas on DSK5VPTVN1PROD with NOTICES
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
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
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.
Background
For several months the Exchange has
been working with other options
exchanges to identify ways to improve
the process related to the adjustment
and nullification of erroneous options
transactions. The goal of the process
that the options exchanges have
undertaken is to adopt harmonized rules
related to the adjustment and
nullification of erroneous options
transactions as well as a specific
provision related to coordination in
connection with large-scale events
involving erroneous options
transactions. As described below, the
Exchange believes that the changes the
options exchanges and the Exchange
have agreed to propose will provide
transparency and finality with respect to
the adjustment and nullification of
erroneous options transactions.
Particularly, the proposed changes seek
to achieve consistent results for
participants across U.S. options
exchanges while maintaining a fair and
orderly market, protecting investors and
protecting the public interest.
The Proposed Rule is the culmination
of this coordinated effort and reflects
discussions by the options exchanges to
universally adopt: (1) Certain provisions
already in place on one or more options
exchanges; and (2) new provisions that
the options exchanges collectively
believe will improve the handling of
erroneous options transactions. Thus,
although the Proposed Rule is in many
ways similar to and based on the
Exchange’s Current Rule, the Exchange
is adopting various provisions to
conform with existing rules of one or
more options exchanges and also to
adopt rules that are not currently in
place on any options exchange. As
noted above, in order to adopt a rule
that is similar in most material respects
to the rules adopted by other options
exchanges, the Exchange proposes to
delete the Current Rule in its entirety,
with one exception,3 and to replace it
with the Proposed Rule.
20 17
1 15
VerDate Sep<11>2014
17:27 May 12, 2015
3 The Exchange proposes to keep language in
Supplementary Material .01 to Rule 720 that
Jkt 235001
PO 00000
Frm 00132
Fmt 4703
Sfmt 4703
27415
The Exchange notes that it has
proposed additional objective standards
in the Proposed Rule as compared to the
Current Rule. The Exchange also notes
that the Proposed Rule will ensure that
the Exchange will have the same
standards as all other options
exchanges. However, there are still areas
under the Proposed Rule where
subjective determinations need to be
made by Exchange personnel with
respect to the calculation of Theoretical
Price. The Exchange notes that the
Exchange and all other options
exchanges have been working to further
improve the review of potentially
erroneous transactions as well as their
subsequent adjustment by creating an
objective and universal way to
determine Theoretical Price in the event
a reliable NBBO is not available. For
instance, the Exchange and all other
options exchanges may utilize an
independent third party to calculate and
disseminate or make available
Theoretical Price. However, this
initiative requires additional exchange
and industry discussion as well as
additional time for development and
implementation. The Exchange will
continue to work with other options
exchanges and the options industry
towards the goal of additional
objectivity and uniformity with respect
to the calculation of Theoretical Price.
As additional background, the
Exchange believes that the Proposed
Rule supports an approach consistent
with long-standing principles in the
options industry under which the
general policy is to adjust rather than
nullify transactions. The Exchange
acknowledges that adjustment of
transactions is contrary to the operation
of analogous rules applicable to the
equities markets, where erroneous
transactions are typically nullified
rather than adjusted and where there is
no distinction between the types of
market participants involved in a
transaction. For the reasons set forth
below, the Exchange believes that the
distinctions in market structure between
equities and options markets continue
to support these distinctions between
the rules for handling obvious errors in
the equities and options markets. The
Exchange also believes that the
Proposed Rule properly balances several
authorizes the Exchange to disclose the identity of
parties to a trade to each other when the Market
Control determines that an Obvious or Catastrophic
Error has occurred. The Exchange believes that this
provision is important to encourage conflict
resolution between two parties to a trade.
With the remaining text in the Supplementary
Material to Rule 720 now being deleted, the
Exchange proposes to renumber Supplementary
Material .01.
E:\FR\FM\13MYN1.SGM
13MYN1
]]>Agencies
[Federal Register Volume 80, Number 92 (Wednesday, May 13, 2015)]
[Notices]
[Pages 27408-27415]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-11592]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74914; File No. SR-CBOE-2015-044]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Proposed Rule To Introduce Asian Style
Settlement and Cliquet Style Settlement for FLexible Exchange Broad-
Based Index Options
May 8, 2015.
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 May 6, 2015, the Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I and II below, which Items have been prepared by the
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
Chicago Board Options Exchange, Incorporated (``CBOE'' or
``Exchange'') proposes to introduce Asian style settlement and Cliquet
style settlement for FLexible Exchange (``FLEX'') Broad-Based Index
options. The proposed rule change would not amend the text of Rule 12.4
(Portfolio Margin); however, the Exchange believes that it would be
appropriate to include the proposed options in portfolio margining. The
text of the proposed rule change is 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.
[[Page 27409]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this proposed rule change is to permit the Exchange
to introduce Asian style settlement and Cliquet style settlement for
FLexible Exchange (``FLEX'') Broad-Based Index options. In general,
Asian style settlement provides for payout based on the average of
prices of a broad-based index on pre-determined dates over a specified
time period and Cliquet style settlement provides for a payout that is
the greater of $0 or the (positive) sum of ``capped'' monthly returns
of a broad-based index on pre-determined dates over a specified period
of time.
FLEX Broad-Based Index options provide users with the ability to
customize key contract terms, like exercise prices, exercise styles,
expiration dates and exercise settlement values. After surveying
potential FLEX Broad-Based index options users, the Exchange learned
that indexed annuity writers (insurance companies) extensively use
over-the-counter (``OTC) options with Asian and Cliquet style
settlement as a crediting method.\3\ Because of the level of
customization that FLEX Broad-Based Index options provide, the Exchange
seeks to introduce exchange-traded products that would provide
potential market users with an alternative to the OTC market in
customized options.
---------------------------------------------------------------------------
\3\ A ``crediting method'' is the method used to measure the
change in the underlying index (e.g., point-to-point or annual
reset).
---------------------------------------------------------------------------
Index Annuity Writer Use of Asian and Cliquet Options
For background, an indexed annuity is an insurance contract that is
typically tied to a financial market index, e.g., S&P 500 Index, and
the return is guaranteed not to fall below a level specified in the
contract. Indexed annuity contracts typically provide that the contract
holder will be credited interest according to a specified formula based
on changes to the index to which the annuity contract is linked.
Indexed annuity contracts often have exotic option liabilities embedded
within those contracts.
One type of annuity contract is an Asian contract (sometimes
referred to as an averaging contract) because the settlement value is
based on an average of selected closing prices of an index over a year.
The contract holder of this type of contract is typically entitled to
receive a credit on the anniversary date in an amount equal to the
greater of $0 and the difference between the average price of an index
and the level of the index from the date of inception or the previous
anniversary date.
Another type of annuity contract is a Cliquet contract (sometimes
referred to as a contract with a monthly return cap with a global
floor) because its payoff is the greater of zero or the sum of monthly
capped returns of an index over a year. The contract holder of this
type of contract is typically entitled to receive a credit on the
anniversary date in an amount based on the sum of monthly returns
(subject to a monthly cap) if the sum of monthly returns is greater
than 0. If the sum of the monthly capped returns is 0 or less, the
holder would not realize a loss (other than the premium paid) because
the sum of monthly capped returns has a global floor of 0.
Insurance companies that write indexed annuity contracts,
therefore, seek financial tools to manage and hedge the embedded exotic
option risk in these contracts. Historically, these insurers have
traded exclusively in the OTC market by entering into bilateral
contracts tailored to the terms of indexed annuity contracts. CBOE
proposes to introduce two new kinds of settlement styles for FLEX
Broad-Based Index options that would provide insurers with alternative
hedging tools to OTC products, coupled with traditional exchange-traded
benefits like price discovery, transparency and centralized clearing.
Asian Style Settlement
FLEX Broad-Based Index options with Asian style settlement would be
cash-settled call \4\ option contracts for which the final payout would
be based on an arithmetic average of specified closing values of the
underlying broad-based index (``Asian option''). Exercise (strike)
prices and premium quotations for Asian options would be expressed and
governed as provided for in Rules 24A.4(b)(2) and 24B.(b)(2). Asian
options would have a term of approximately one year and would expire
anytime from 350 to 371 days (which is approximately 50 to 53 calendar
weeks) from the date of initial listing. The contract multiplier for an
Asian option would be $100.\5\
---------------------------------------------------------------------------
\4\ Puts would not be permitted.
\5\ See Rules 24A.1(i) and 24B.1(m). ``The Index Multiplier for
FLEX Index Options is $100.''
---------------------------------------------------------------------------
The parties to an Asian option contract would designate a set of
monthly observation dates and an expiration date for each contract. The
monthly observation date would the date each month on which the price
of the underlying broad-based index would be observed for the purpose
of calculating the exercise settlement value for Asian options. Each
Asian option would have 12 consecutive monthly observation dates (which
includes an observation on the expiration date) and each observation
would be based on the closing price of the underlying broad-based
index. The specific monthly observation dates would be determined by
working backward from the farthest out observation date prior to the
expiration date. If a given monthly observation date falls on a non
CBOE business day (e.g., holiday or weekend), the monthly observation
would be on the immediately preceding business day (``preceding
business day convention''). The parties may not designate a subsequent
business day convention for Asian options.
Asian options would have European-style exercise and may not be
exercised prior to the expiration date. The exercise settlement value
for Asian options would be the arithmetic average of the closing values
of the underlying broad-based index on the 12 consecutive monthly
observation dates, which include the expiration date of the option.
Mathematically this is expressed as:
[[Page 27410]]
[GRAPHIC] [TIFF OMITTED] TN13MY15.005
Where Si is the closing price of the underlying broad-based
index on monthly observation date on the ith monthly observation
date.
The exercise settlement amount for Asian options would be
calculated similarly to other options, i.e., the difference between the
strike price and the averaged settlement value would determine the
value, or ``moneyness'' of the contract at expiration.
An example of an Asian FLEX call option expiring in-the-money
follows. On January 21, 2015, an investor hedging the value of the S&P
500 Index over a year purchases a call option expiring on January 22,
2016 with a strike price of 2000 and a contract multiplier of $100. The
option has monthly observation dates occurring on the 23rd of each
month.
------------------------------------------------------------------------
Monthly observation date S&P 500 Index closing value
------------------------------------------------------------------------
23-Feb-15................................. 2025.36
23-Mar-15................................. 2049.34
23-Apr-15................................. 2019.77
22-May-15 *............................... 1989.65
23-Jun-15................................. 2005.64
23-Jul-15................................. 2035.10
21-Aug-15 *............................... 2032.15
23-Sep-15................................. 2076.18
23-Oct-15................................. 2099.01
23-Nov-15................................. 2109.32
23-Dec-15................................. 2085.42
22-Jan-16................................. 2084.81
Exercise (Averaged) Settlement Value.... 24,611.75/12 = 2050.98
------------------------------------------------------------------------
* Because Asian FLEX options use the ``preceding business day
convention,'' the dates of May 23, 2015 and August 23, 2015, were not
used in the above example because those dates will fall on a weekend
or a holiday. Instead the business days immediately preceding those
dates were used as the monthly observation date.
The exercise settlement amount for this 2000 Asian FLEX call option
would be equal to $5,098. This amount would be determined by adding the
12 observed closing values for the S&P 500 Index and dividing that
amount by 12 (24,611.75/12), which is equal to 2050.98 (when rounded).
As a result, this 2000 call option would be $5,098 in-the-money (50.98
x $100).
If, in the above example, the strike price for the Asian FLEX call
option was 2060, that contract would have expired out-of-the-money.
This is because the exercise settlement value for this 2060 call option
is equal to 2050.98 (when rounded). Since the strike price of 2060 is
more than the 2050.98 exercise settlement value, this option would not
be exercised and would expire worthless.
Cliquet Style Settlement
FLEX Broad-Based Index options with Cliquet style settlement would
be cash-settled call \6\ option contracts for which the final payout
would be based on the sum of monthly returns (i.e., percent changes in
the closing value of the underlying broad-based index from one monthly
observation date to the next monthly observation date), subject to a
monthly return ``cap'' (e.g., 2%) applied over 12 monthly observation
dates (``Cliquet option''). Premium quotations for Cliquet options
would be expressed and governed as provided for in Rules 24A.4(b)(2)
and 24B.(b)(2). Cliquet options would have a term of approximately one
year and would expire anytime from 350 to 371 days (which is
approximately 50 to 53 calendar weeks) from the date of initial
listing. The contract multiplier for a Cliquet option would be $100.\7\
---------------------------------------------------------------------------
\6\ Puts would not be permitted.
\7\ See Rules 24A.1(i) and 24B.1(m). ``The Index Multiplier for
FLEX Index Options is $100.''
---------------------------------------------------------------------------
The parties to a Cliquet option would designate a set of monthly
observation dates for each contract and an expiration date for each
contract. The monthly observation date would be the date each month on
which the price of the underlying broad-based index would be observed
for the purpose of calculating the exercise settlement value for
Cliquet FLEX options. Each Cliquet FLEX option would have 12
consecutive monthly observation dates (which includes an observation on
the expiration date) and each observation would be based on the closing
price of the underlying broad-based index. The specific monthly
observation dates would be determined working backward from the farther
out observation date prior to the expiration date. If a given monthly
observation date fell on a non CBOE business day (e.g., holiday or
weekend), the monthly observation would be on the immediately preceding
business day (``preceding business day convention''). The parties may
not designate a subsequent business day convention for Cliquet options.
The parties to a Cliquet option would designate a capped monthly
return (percent change in the closing values of the underlying broad-
based index from one month to the next month) for the contract, which
would be the maximum monthly return that would be included in the
calculation of the exercise settlement value for the contract. On each
monthly observation date, the Exchange would determine the actual
monthly return (the percent change of the underlying broad-based index)
using the closing value of the broad-based index on the current monthly
observation date and the closing value of the broad-based index on the
previous monthly observation date. The Exchange would then compare the
actual monthly return to the capped monthly return. The value to be
included as the monthly return for a Cliquet option would be the lesser
of the actual monthly return or the capped monthly return.
For example, if the actual monthly return of the underlying broad-
based index was 1.75% and the designated capped monthly return for a
Cliquet option was 2%, the 1.75% value would be included (and not the
2%) as the value for the observation date to determine the exercise
settlement value. Using this same example, if the actual monthly return
of the underlying broad-based index was 3.30%, the 2% value would be
included (and not the 3.30%) as the value of the observation date to
determine the exercise settlement value. This latter example
illustrates that, Cliquet options have a capped upside. Cliquet options
do not, however, have a capped downside for the monthly return that
would be included in determining the exercise settlement value. Drawing
on this same example, if the actual monthly return of the underlying
broad-based index was -4.07%, the -4.07% value would be included as the
value for the observation date to determine the exercise settlement
value. There would be, however, be a global floor for Cliquet options
so that if the sum of the monthly returns is negative, a Cliquet option
would expire worthless.
Unlike other options, Cliquet options would not have a traditional
exercise (strike) price. Rather, the exercise (strike) price field for
a Cliquet option would represent the designated capped monthly return
for the contract and would be expressed in dollars and cents. For
example, a capped monthly return of 2.25% would be represented by the
dollar amount of $2.25. The ``strike'' price for a Cliquet option may
only be expressed in a dollar and cents amount and the ``strike'' price
for a Cliquet option may only span a range
[[Page 27411]]
between $0.05 and $25.95. In addition, the ``strike'' price for a
Cliquet option may only be designated in $0.05 increments, e.g., $1.75,
$2.50, $4.15. Increments of $0.01 in the ``strike'' price field
(representing the capped monthly return) would not be permitted.
The first ``monthly'' return for a Cliquet option would be based on
the initial reference value, which would be the closing value of the
underlying broad-based index on the date a new Cliquet option is
listed. The time period measured for the first ``monthly'' return would
be between the initial listing date and the first monthly observation
date. For example, if a Cliquet option was opened on January 1 and the
parties designated the 31st of each month as the monthly observation
date, the measurement period for the first monthly return would span
the time period from January 1 to January 31. The time period measured
for the second monthly return, and all subsequent monthly returns,
would run from the 31st of one month to the 31st of the next month (or
the last CBOE business day of each month depending on the actual number
of calendar days in each month covered by the contract).
Cliquet options would have European-style exercise and may not be
exercised prior to the expiration date. The exercise settlement value
for Cliquet options would be equal to the initial reference price of
the underlying broad-based index multiplied by the sum of the monthly
returns (with the cap applied) on the 12 consecutive monthly
observation dates, which include the expiration date of the option,
provided that the sum is greater than 0. If the sum of the monthly
returns (with the applied cap) is 0 or a less, the option would expire
worthless.\8\ Mathematically this is expressed as:
---------------------------------------------------------------------------
\8\ Prior to expiration, it is possible that the accumulated
monthly returns could become negative to a point at which it is
known that the value of the contract at expiration would be zero.
The holder or writer of such a position may choose to exit the
position prior to expiration for a negligible credit or debit
amount, respectively.
[GRAPHIC] [TIFF OMITTED] TN13MY15.006
An example of a Cliquet option follows. On January 21, 2015, an
investor hedging the value of the S&P 500 Index over a year
purchases a Cliquet FLEX call option expiring on January 22, 2016
with a capped monthly return of 2% and a contract multiplier of
$100. The initial reference price of the S&P 500 Index (closing
value) on January 21, 2015 is 2000. The option has monthly
observation dates occurring on the 23rd of each month.
----------------------------------------------------------------------------------------------------------------
S&P 500 Index Actual monthly Capped monthly Sum of monthly
Monthly observation date closing value return return (CMRi) returns
(Si) (percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
23-Feb-15....................................... 2025.36 1.27 1.27 1.27
23-Mar-15....................................... 2049.34 1.18 1.18 2.45
23-Apr-15....................................... 2019.77 -1.44 -1.44 1.01
22-May-15*...................................... 1989.65 -1.49 -1.49 -0.48
23-Jun-15....................................... 2005.64 0.80 0.80 0.32
23-Jul-15....................................... 2035.10 1.47 1.47 1.79
21-Aug-15 *..................................... 2032.15 -0.14 -0.14 1.65
23-Sep-15....................................... 2076.18 2.17 ** 2.00 3.65
23-Oct-15....................................... 2099.01 1.10 1.10 4.75
23-Nov-15....................................... 2109.32 0.49 0.49 5.24
23-Dec-15....................................... 2085.42 -1.13 -1.13 4.11
22-Jan-16....................................... 2084.81 -0.03 -0.03 4.08
[[Page 27412]]
Exercise Settlement Value: [(4.08% * 2000.00)] + 2 = 83.60
----------------------------------------------------------------------------------------------------------------
* Because Cliquet FLEX options use the ``preceding business day convention,'' the dates of May 23, 2015, and
August 23, 2015, were not used in the above example because those dates will fall on a weekend or a holiday.
Instead the business days immediately preceding those dates were used as the monthly observation dates.
** Monthly capped return applied.
The exercise settlement amount for this January 22, 2016 Cliquet
option, with a capped monthly 2% return (``strike price'') and a
contract multiplier of $100 would be equal to $8,360. This value
would be calculated by summing the monthly capped returns (equal to
4.08%) and multiplying that amount by the initial reference price
(equal to 2000), which equals 81.60. The ``strike price'' (2%)
amount would then be added to that amount (81.60) to arrive at an
exercise settlement value of 83.60. Because the ``strike price''
field for a Cliquet option would be the manner in which the
designated capped monthly return would be identified for the
contract and because the designated monthly return for the contract
would have been already substantively applied to determine the
exercise settlement value, the ``strike price'' of 2.0 would be
subtracted from the exercise settlement value before the contract
multiplier ($100) would be applied [(83.60 - 2) * 100]. Accordingly,
resulting payout for this contract would be $8,160.
If the sum of the monthly capped returns had been negative, this
option would have expired worthless.
Specific Rule Text Changes
To expressly permit Asian style settlement and Cliquet style
settlement for FLEX Broad-Based Index options, CBOE is proposing to
amend Rules 24A.1 (Definitions), 24A.4 (Terms of FLEX Options),
24B.1 (Definitions) and 24B.4 (Terms of FLEX Options).\9\ First,
CBOE proposes to amend Rules 24A.1 \10\ and 24B.1 \11\ by adding the
below definitions to those rules:
---------------------------------------------------------------------------
\9\ Chapter XXIVA sets forth Flexible Exchange Options rules and
Chapter XXIVB sets forth FLEX Hybrid Trading System rules.
\10\ The Exchange proposes to add the definitions of ``Asian
style settlement'' and ``Cliquet style settlement'' to Rule 24A.1 as
new subparagraphs (r) and (s), respectively.
\11\ The Exchange proposes to add the definitions of ``Asian
style settlement'' and ``Cliquet style settlement'' to Rule 24B.1 as
new subparagraphs (aa) and (bb), respectively.
The term ``Asian style settlement'' is a settlement style that
may be designated for FLEX Broad-Based Index Options and results in
the contract settling to an exercise settlement value that is based
on an arithmetic average of the specified closing prices of an
underlying broad-based index taken on 12 predetermined monthly
observation dates (including on the expiration date). FLEX Broad-
Based Index Options with Asian style settlement have ``preceding
business day convention,'' meaning that if a monthly observation
date falls on a non CBOE business day (e.g., holiday or weekend),
the monthly observation would be on the immediately preceding
business day. FLEX Broad-Based Index Options with Asian style
settlement have European-style exercise.
The term ``Cliquet style settlement'' is a settlement style that
may be designated for FLEX Broad-Based Index Options and results in
the contract settling to an exercise settlement value that is equal
to the greater of $0 or the sum of capped monthly returns (i.e.,
percent changes in the closing value of the underlying broad-based
index from one month to the next month) applied over 12
predetermined monthly observation dates (including on the expiration
date). FLEX Broad-Based Index Options with Cliquet style settlement
have ``preceding business day convention,'' meaning that if a
monthly observation date falls on a non CBOE business day (e.g.,
holiday or weekend), the monthly observation would be on the
immediately preceding business day. FLEX Broad-Based Index Options
with Cliquet style settlement have European-style exercise.
Second, the CBOE proposes to amend Rules 24A.4(b) \12\ and 24B.4(b)
\13\ by adding the below terms that the parties to Asian options and
Cliquet options must designate and the parameters governing the
parties' designations:
---------------------------------------------------------------------------
\12\ The Exchange proposes to set forth the terms for Asian
options and Cliquet options to Rule 24A.4(b) as new subparagraphs
(5) and (6), respectively.
\13\ The Exchange proposes to set forth the terms for Asian
options and Cliquet options to Rule 24B.4(b) as new subparagraphs
(5) and (6), respectively.
Asian style settlement. The parties to FLEX Broad-Based Index
Options may designate Asian style settlement. FLEX Broad-Based Index
Options with Asian style settlement shall be call options (no puts)
and designated by: (i) The duration of the contract which may range
from 350 to 371 days (which is approximately 50 to 53 calendar
weeks) from the date of listing; (ii) the strike price; (iii) the
expiration date which must be a CBOE business day; and (iv) a set of
monthly observation dates.
Cliquet style settlement. The parties to FLEX Broad-Based Index
Options may designate Cliquet style settlement. FLEX Broad-Based
Index Options with Cliquet style settlement shall be call options
(no puts) and be designated by: (i) The duration of the contract
which may range from 350 to 371 days (which is approximately 50 to
53 calendar weeks) from the date of listing; (ii) the capped monthly
return that must be expressed in dollars and cents and in increments
not less than $0.05 and must be a value between $0.05 and $25.95;
(iii) the expiration date which must be a CBOE business day; and
(iv) a set of monthly observation dates. The capped monthly return
will serve as the ``exercise (strike) price'' for a FLEX Broad-Based
Index Option with Cliquet style settlement.
Exhibit 3 presents contract specifications for Asian style
settlement and Cliquet style settlement for FLEX Broad-Based Index
options.
In CBOE's experience, successful and popular products have often
originated in the OTC marketplace. When such products lend themselves
to more standardized terms, there is a natural migration to exchange
trading which benefits the users of exchange listed products. CBOE
believes that market participants can benefit from being able to trade
these customized options in an exchange environment in several ways,
including, but not limited to the following: (1) Enhanced efficiency in
initiating and closing out positions; (2) increased market
transparency; and (3) heightened contra-party creditworthiness due to
the role of The Options Clearing Corporation (``OCC'') as issuer and
guarantor of FLEX Broad-Based Index options.\14\
---------------------------------------------------------------------------
\14\ The launch of Asian and Cliquet options would be permitted
subject to the Commission's approval of an OCC rule filing to make
risk model changes necessary to accommodate the clearance and
settlement of the proposed options. The Exchange would issue a
circular to Trading Permit Holders to announce a specific launch
date for the proposed options.
---------------------------------------------------------------------------
CBOE believes that expressly permitting Asian and Cliquet FLEX
Broad-Based Index options is important and necessary to the Exchange's
efforts to create a market that provides individuals interested in
FLEX-type options with an improved but comparable alternative to the
OTC market in customized options, which can take on contract
characteristics similar to FLEX Options but are not subject to the same
restrictions. By making these changes, market participants would now
have greater flexibility in determining whether to execute their
customized options in an exchange environment or in the OTC market.
[[Page 27413]]
Margin
CBOE proposes a strategy-based margin requirement in Rule 12.3
(Margin Requirements) for short Asian options that would incrementally
decrease over time. Settlement of Asian options would be based on the
arithmetic average of closing values (on specified observation dates)
of the underlying broad-based index. Volatility would be generally
lowered due to the averaging effect. A cumulative average develops as
observation dates pass, and subsequent observation date broad-based
index values have gradually less influence on the average. Because of
the averaging effect, CBOE believes that a margin requirement that
incrementally decreases over time is warranted.
For an Asian option having an underlying index that is broad-based,
CBOE proposes that the same margin requirement currently applicable to
a standard broad-based index call option be applied to an Asian option
during the first quartile of its life, which ends with the third
observation date. The current initial and maintenance margin
requirement for a standard broad-based index call option carried short
is the option premium received (or current market value), plus 15% of
the underlying broad-based index value less any out-of-the-money
amount, to a minimum of the option premium received (or current market
value), plus 10% of the underlying broad-based index value. CBOE
proposes to decrease the 15% basic and 10% minimum to 8% and 6%,
respectively, after the third observation date; to 6% and 4% after the
sixth observation date; and lastly, to 5% and 3% after the ninth
observation date.
CBOE believes it is appropriate to include Asian options in
portfolio margining.\15\
---------------------------------------------------------------------------
\15\ A theoretical pricing model would continue to be used to
derive position values at each valuation point for the purpose of
determining the gain or loss. Currently the only model that
qualifies is OCC's Theoretical Intermarket Margining System
(``TIMS'').
---------------------------------------------------------------------------
CBOE proposes a strategy-based margin requirement in Rule 12.3 for
short Cliquet options that, with one exception, would also
incrementally decrease over time. Settlement of Cliquet options would
be based on the sum of the returns for 12 consecutive time periods of
approximately 30 days in length, each ending on an observation date. In
the case of Cliquet options with capped monthly returns, volatility
would be generally lowered because of the capping effect. In addition,
the lower the capped monthly return, the lower the sensitivity to moves
in the underlying broad-based index.
Also, the sum of returns for 12 consecutive time periods, based on
historical analysis, is expected to be less than the return on the
underlying broad-based index from beginning to end of the same 12
consecutive month time period, except in the case of a negative return.
However, with a Cliquet option, a negative sum of returns would be
excluded as a possibility because a floor of zero would be set for the
sum of returns. Additionally, a cumulative return develops as
observation dates pass, and as subsequent observation date returns
compile, the likelihood of the sum of returns increasing or decreasing
significantly would gradually be lowered. Because of these influences,
CBOE believes that a margin requirement that incrementally decreases
over time is warranted.
Because Cliquet options would not have a traditional exercise
(strike) price, no out-of-the-money amount deduction would be
calculated for margin purposes. Therefore, no minimum percentage margin
requirement would be necessary in that, without an out-of-the-money
calculation, the margin requirement calculated using the basic margin
requirement percentage would never be reduced.
For Cliquet options, three separate categories, based on a time
frame within the life of a Cliquet option, would be established for
margin requirement purposes. The three categories proposed are: (1) The
time period starting with the trade through the 10th observation date;
(2) the time period starting after the 10th observation date through
the 11th observation date; and (3) the time period starting after the
11th observation date through the 12th (final) observation date.
During the time period starting with a Cliquet option's trade date
through its 10th observation date, in the case of an index that is
broad-based, CBOE proposes a margin requirement of 100% of the current
market value of the option plus the percentage of the current
``underlying component value.'' The percentage required would be the
lesser of: the cap percentage multiplied by three (3) or 15%.\16\
---------------------------------------------------------------------------
\16\ As noted previously, proposed CBOE Rules 24A.4(b) and
24B.4(b) would not permit the monthly return cap to exceed 25.95%.
---------------------------------------------------------------------------
CBOE proposes to decrease the percentage requirement to the lesser
of: The cap percentage multiplied by two (2) or 15% beginning after the
10th observation date through the 11th observation date, and to further
decrease the percentage requirement to the lesser of: the cap
percentage or 15% beginning after the 11th observation date through the
12th (final) observation date.
CBOE believes it is appropriate to include Cliquet options in
portfolio margining.\17\
---------------------------------------------------------------------------
\17\ A theoretical pricing model would continue to be used to
derive position values at each valuation point for the purpose of
determining the gain or loss. Currently the only model that
qualifies is OCC's TIMS.
---------------------------------------------------------------------------
Exchange Rules Applicable
Except as modified herein, the rules in Chapters I through XIX,
XXIV, XXIVA and XXIVB would equally apply to Asian and Cliquet options.
For example, per Rule 6.1A (Extended Trading Hours), Asian and Cliquet
options would not be eligible for trading during Extended Trading
Hours. Also, for example, Rules 24A.7 and 24A.8 set forth the position
limits and reporting requirements applicable to FLEX Broad-Based Index
options and Rules 24A.7 and 24B.7 set forth the exercise limits
applicable to FLEX Broad-Based Index options. Respecting positions and
exercise limits, these provisions set forth general rules and carve-
outs for certain broad-based FLEX Broad-Based Index options, which
would apply with equal force to Asian and Cliquet options.
Surveillance
The Exchange would use the same surveillance procedures currently
utilized for the Exchange's other FLEX Broad-Based Index options to
monitor trading in Asian and Cliquet options. The Exchange further
represents that these surveillance procedures shall be adequate to
monitor trading in options on these option products. For surveillance
purposes, the Exchange will have complete access to information
regarding trading activity in the pertinent underlying securities.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\18\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \19\ requirements that the rules
of an exchange be designed to promote just and equitable principles of
trade, to prevent fraudulent and manipulative acts, to remove
impediments to and to perfect the mechanism for a free and open market
and a national market
[[Page 27414]]
system, and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposed rule change is designed to
promote just and equitable principles of trade in that the availability
of Asian and Cliquet FLEX Broad-Based Index options would give market
participants greater flexibility in determining where they will execute
their customized options. By trading a product in an exchange traded
environment (that is currently being used extensively in the OTC
market) would also enable the Exchange to compete more effectively with
the OTC market.
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that it would
hopefully lead to the migration of options currently trading in the OTC
market to trading to the Exchange and the development of more
standardized products. Also, any migration to the Exchange would result
in increased market transparency.
Additionally, the Exchange believes that the proposed rule change
is designed to remove impediments to and to perfect the mechanism for a
free and open market and a national market system, and, in general, to
protect investors and the public interest in that it should create
greater trading and hedging opportunities and flexibility. The proposed
rule change should also result in enhanced efficiency in initiating and
closing out positions and heightened contra-party creditworthiness due
to the role of OCC as issuer and guarantor of FLEX Broad-Based Index
options. Further, the proposal would result in increased competition by
permitting the Exchange to offer products that are currently used
extensively in the OTC market.
The Exchange believes that the proposed strategy-based margin
requirements for Asian and Cliquet options are consistent with the Act
because they are designed to protect investors and the public interest
by setting margin levels at appropriate levels for these instruments.
First, the proposed options are limited to broad-based indexes and the
index on which the Exchange expects the most interest is the S&P 500
Index, which has deep and liquid markets. Second, the short option
margin levels proposed to be established would apply to retail
customers, whom the Exchange does not believe to be the primary sellers
(i.e., writers) of the proposed options. Third, as to short Asian and
Cliquet positions, the Exchange notes that the proposed margin levels
would start at the same level that is required for regular options on
broad-based indexes (15%) and would incrementally decrease over time.
The Exchange believes that the incremental decrease over time is
appropriate given the nature of the proposed options (i.e., the risk
associated with the options decreases as the time to expiration nears).
Also, the Exchange represents that it conducted an extensive analysis
over various time periods when considering the proposed margin levels
and represents that for each percentage movement observed, the proposed
margin level percentages closely track the percentage movements
observed. In other words, the Exchange is proposing conservative and
well-founded margin levels for the proposed options. As a result, the
Exchange believes that the proposed margin levels would protect the
integrity of the Exchange's marketplace by setting margins at levels
that are appropriate for these instruments.
B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act. Specifically, CBOE believes that the
introduction of new settlement types (Asian and Cliquet) for FLEX
Broad-Based Index options would enhance competition among market
participants and would also enable the Exchange to compete more
effectively with the OTC market by offering a product that is currently
use extensively in the OTC market.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 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.
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-2015-044 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-2015-044. 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 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 such filing also will be available
for inspection and copying at the principal office of the CBOE. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-CBOE-2015-044 and should be
submitted on or before June 3, 2015.
[[Page 27415]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
---------------------------------------------------------------------------
\20\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-11592 Filed 5-12-15; 8:45 am]
BILLING CODE 8011-01-P
