[Federal Register Volume 77, Number 144 (Thursday, July 26, 2012)]
[Notices]
[Pages 43897-43899]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-18219]
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SECURITIES AND EXCHANGE COMMISSION
Release No. 34-67478; File No. SR-CBOE-2012-066]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of Proposed Rule Change To Increase
Position and Exercise Limits for EEM Options
July 20, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 9, 2012, the Chicago Board Options Exchange, Incorporated
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CBOE proposes to amend Interpretation and Policy .07 to Rule 4.11
(Position Limits) to increase the position and exercise limits for
options on the iShares MSCI Emerging Markets Index Fund (``EEM'') to
500,000 contracts. 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.
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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange began trading options on the iShares MSCI Emerging
Markets Index Fund (``EEM'') on March 9, 2006. Position limits for
exchange-traded fund (``ETFs'') options, such as EEM options, are
determined pursuant to Rule 4.11 and vary according to the number of
outstanding share [sic] and past six-month trading volume of the
underlying stock or ETF. The largest in capitalization and most
frequently traded stocks and ETFs have an option position limit of
250,000 contracts (with adjustments for splits, re-capitalizations,
etc.) on the same side of the market; smaller capitalization stocks and
ETFs have position limits of 200,000, 75,000, 50,000 or 25,000
contracts (with adjustments for splits, re-capitalizations, etc.) on
the same side of the market. The current position limit for EEM options
is 250,000 contracts. The purpose of the proposed rule change is to
amend CBOE Rule 4.11, Interpretation and Policy .07 to increase the
position and exercise limits for EEM options to 500,000 contracts.\3\
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\3\ By virtue of CBOE Rule 4.12, Interpretation and Policy .02,
which is not being amended by this filing, the exercise limit for
EEM options would be similarly increased.
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There is precedent for establishing position limits for options on
actively-traded ETFs and these position limit levels are set forth in
Interpretation and Policy .07 to Rule 4.11.
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Position
Security underlying option limit
(contracts)
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The DIAMONDS Trust (DIA).................................. 300,000
The Standard and Poor's Depositary Receipts Trust (SPY)... 900,000
The iShares Russell 2000 Index Fund (IWM)................. 500,000
[[Page 43898]]
The PowerShares QQQ Trust (QQQQ).......................... 900,000
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In support of this proposed rule change, the Exchange has collected
trading statistics comparing EEM to IWM and SPY. As shown in the
following table, the average daily volume in 2011 for EEM was 65
million shares compared to 64.1 million shares for IWM and 213 million
shares for SPY. The total shares outstanding for EEM are 922.9 million
compared to 192.6 million shares for IWM and 716.1 million shares for
SPY. Further, the fund market cap for EEM is $41.1 billion compared to
$15.5 billion for IWM and $98.3 billion for SPY.
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2011 ADV (mil. 2011 ADV (option Shares outstanding Fund market cap
ETF shares) contracts) (mil.) ($bil)
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EEM........................................................... 65 280,000 922.9 41.1
IWM........................................................... 64.1 662,500 192.6 15.5
SPY........................................................... 213 2,892,000 716.1 98.3
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The Exchange believes that increasing position limits for EEM
options will lead to a more liquid and competitive market environment
for EEM options that will benefit customers interested in this product.
Under the Exchange's proposal, the options reporting requirement
for EEM options would continue unabated. Thus, the Exchange would still
require that each Trading Permit Holder (``TPH'') or TPH organization
that maintains a position in EEM options on the same side of the
market, for its own account or for the account of a customer, report
certain information to the Exchange. This information would include,
but would not be limited to, the option position, whether such position
is hedged and, if so, a description of the hedge, and the collateral
used to carry the position, if applicable. Exchange market-makers
(including Designated Primary Market-Makers) would continue to be
exempt from this reporting requirement, as market-maker information can
be accessed through the Exchange's market surveillance systems. In
addition, the general reporting requirement for customer accounts that
maintain an aggregate position of 200 or more option contracts would
remain at this level for EEM options.\4\
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\4\ For reporting requirements, see CBOE Rule 4.13.
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As the anniversary of listed options trading approaches its
fortieth year, the Exchange believes that the existing surveillance
procedures and reporting requirements at CBOE, other options exchanges,
and at the several clearing firms are capable of properly identifying
unusual and/or illegal trading activity. In addition, routine oversight
inspections of the Exchange's regulatory programs by the Commission
have not uncovered any material inconsistencies or shortcomings in the
manner in which the Exchange's market surveillance is conducted. These
procedures utilize daily monitoring of market movements via automated
surveillance techniques to identify unusual activity in both options
and underlying stocks.\5\
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\5\ These procedures have been effective for the surveillance of
EEM options trading and will continue to be employed.
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Furthermore, large stock holdings must be disclosed to the
Commission by way of Schedules 13D or 13G.\6\ Options positions are
part of any reportable positions and, thus, cannot be legally hidden.
Moreover, the Exchange's requirement that TPHs file reports with the
Exchange for any customer who held aggregate large long or short
positions of any single class for the previous day will continue to
serve as an important part of the Exchange's surveillance efforts.
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\6\ 17 CFR 240.13d-1.
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The Exchange believes that the current financial requirements
imposed by the Exchange and by the Commission adequately address
concerns that a TPH or its customer may try to maintain an inordinately
large un-hedged position in an option, particularly on EEM. Current
margin and risk-based haircut methodologies serve to limit the size of
positions maintained by any one account by increasing the margin and/or
capital that a TPH must maintain for a large position held by itself or
by its customer.\7\ In addition, the Commission's net capital rule,
Rule 15c3-1 \8\ under the Act,\9\ imposes a capital charge on TPHs to
the extent of any margin deficiency resulting from the higher margin
requirement.
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\7\ See CBOE Rule 12.3 for a description of margin requirements.
\8\ 17 CFR 240.15c3-1.
\9\ 15 U.S.C. 78s(b)(1) [sic].
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder, including the
requirements of Section 6(b) of the Act.\10\ In particular, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \11\ requirements that the rules of an exchange be
designed to promote just and equitable principles of trade, to prevent
fraudulent and manipulative acts, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, 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. Specifically, the proposed
rule change will benefit large market makers (which generally have the
greatest potential and actual ability to provide liquidity and depth in
the product), as well as retail traders, investors, and public
customers, by providing them with a more effective trading and hedging
vehicle. In addition, the Exchange believes that the structure of EEM
options and the considerable liquidity of the market for EEM options
diminish the opportunity to manipulate this product and disrupt the
underlying market that a lower position limit may protect against.
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\10\ 15 U.S.C. 78f(b).
\11\ 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. 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 (i) as the Commission may
designate up to
[[Page 43899]]
90 days of such date if it finds such longer period to be appropriate
and publishes its reasons for so finding or (ii) as to which the self-
regulatory organization 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 (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2012-066 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2012-066. 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 (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-CBOE-2012-066 and should be
submitted on or before August 16, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-18219 Filed 7-25-12; 8:45 am]
BILLING CODE 8011-01-P