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