[Federal Register Volume 77, Number 217 (Thursday, November 8, 2012)]
[Notices]
[Pages 67044-67047]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-27290]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68145; File No. SR-CBOE-2012-102]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change Related to Extending the FLEX Exercise Settlement Values
Pilot
November 2, 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 October 25, 2012, the Chicago Board Options Exchange, Incorporated
(``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 Exchange has designated the proposal as a ``non-
controversial'' proposed rule change pursuant to Section 19(b)(3)(A) of
the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing to extend the operation of its Flexible
Exchange Options (``FLEX Options'') pilot program regarding permissible
exercise settlement values for FLEX Index Options, which pilot program
is currently set to expire on November 2, 2012 or the date on which the
pilot program is approved on a permanent basis.\5\ The text of the
proposed rule
[[Page 67045]]
change is available on the Exchange's Web site (www.cboe.org/Legal), at
the Exchange's Office of the Secretary and at the Commission.
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\5\ FLEX Options provide investors with the ability to customize
basic option features including size, expiration date, exercise
style, and certain exercise prices. FLEX Options can be FLEX Index
Options or FLEX Equity Options. In addition, other products are
permitted to be traded pursuant to the FLEX trading procedures. For
example, credit options are eligible for trading as FLEX Options
pursuant to the FLEX rules in Chapters XXIVA and XXIVB. See CBOE
Rules 24A.1(e) and (f), 24A.4(b)(1) and (c)(1), 24B.1(f) and (g),
24B.4(b)(1) and (c)(1), and 28.17. The rules governing the trading
of FLEX Options on the FLEX Request for Quote (``RFQ'') System
platform are contained in Chapter XXIVA. The rules governing the
trading of FLEX Options on the FLEX Hybrid Trading System platform
are contained in Chapter XXIVB.
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of 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
On January 28, 2010, the Exchange received approval of a rule
change that, among other things, established a pilot program regarding
permissible exercise settlement values for FLEX Index Options. The
pilot program is currently set to expire on the earlier of November 2,
2012 or the date on which the pilot program is approved on a permanent
basis.\6\ The purpose of this rule change filing is to extend the pilot
program through the earlier of November 2, 2013 or the date on which
the pilot program is approved on a permanent basis. This filing simply
seeks to extend the operation of the pilot program and does not propose
any substantive changes to the pilot program.
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\6\ At the same time the permissible exercise settlement values
pilot was established for FLEX Index Options, the Exchange also
established a pilot program eliminating the minimum value size
requirements for all FLEX Options. Securities Exchange Act Release
Nos. 61439 (January 28, 2010), 75 FR 5831 (February 4, 2010) (SR-
CBOE-2009-087) (Approval Order); 61676 (March 9, 2010), 75 FR 13191
(March 18, 2010) (SR-CBOE-2010-026) (technical rule change to
include original pilots' conclusion date of March 28, 2011 in the
rule text); 64110 (March 24, 2011), 76 FR 17463 (March 29, 2011)
(SR-CBOE-2011-024) (extending the pilots through March 30, 2012);
and 66701 (March 30, 2012), 77 FR 20673 (April 5, 2012) (SR-CBOE-
2012-027) (extending the pilots through the earlier of November 2,
2012 or the date on which the respective pilot program is approved
on a permanent basis). The pilot program eliminating the minimum
value size requirements has been approved on a permanent basis in a
separate rule change filing. See Securities Exchange Act Release No.
67624 (August 8, 2012), 77 FR 48580 (August 14, 2012) (SR-CBOE-2012-
040).
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Background on the Pilot
Under Rules 24A.4, Terms of FLEX Options, and 24B.4, Terms of FLEX
Options, a FLEX Option may expire on any business day specified as to
day, month and year, not to exceed a maximum term of fifteen years. In
addition, the exercise settlement value for a FLEX Index Option can be
specified as the index value determined by reference to the reported
level of the index as derived from the opening or closing prices of the
component securities (``a.m. settlement'' or ``p.m. settlement,''
respectively) or as a specified average, provided that the average
index value must conform to the averaging parameters established by the
Exchange.\7\ However, prior to the initiation of the exercise
settlement values pilot, only a.m. settlements were permitted if a FLEX
Index Option expires on, or within two business days of, a third-
Friday-of-the-month expiration (``Expiration Friday'').\8\
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\7\ See Rules 24A.4(b)(3) and 24B.4(b)(3); see also Securities
Exchange Act Release No. 31920 (February 24, 1993), 58 FR 12280
(March 3, 1993) (SR-CBOE-92-17). The Exchange has determined to
limit the averaging parameters to three alternatives: the average of
the opening and closing index values on the expiration date; the
average of the intra-day high and low index values on the expiration
date; and the average of the opening, closing, and intra-day high
and low index values on the expiration date. Any changes to the
averaging parameters established by the Exchange would be announced
to Trading Permit Holders via circular.
\8\ For example, prior to the pilot, the exercise settlement
value of a FLEX Index Option that expires on the Tuesday before
Expiration Friday could have an a.m., p.m. or specified average
settlement. However, the exercise settlement value of a FLEX Index
Option that expires on the Wednesday before Expiration Friday could
only have an a.m. settlement.
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Under the exercise settlement values pilot, this restriction on
p.m. and specified average price settlements in FLEX Index Options was
eliminated.\9\ The exercise settlement values pilot is currently set to
expire on the earlier of November 2, 2012 or the date on which the
pilot program is approved on a permanent basis.
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\9\ No change was necessary or requested with respect to FLEX
Equity Options. Regardless of the expiration date, FLEX Equity
Options are settled by physical delivery of the underlying.
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Proposal
CBOE is proposing to extend the pilot program through the earlier
of November 2, 2013 or the date on which the pilot program is approved
on a permanent basis. CBOE believes the pilot program has been
successful and well received by its membership and the investing public
for the period that it has been in operation as a pilot. In support of
the proposed extension of the pilot program, and as required by the
pilot program's Approval Order, the Exchange has submitted to the
Commission pilot program reports regarding the pilot, which detail the
Exchange's experience with the program. Specifically, the Exchange
provided the Commission an annual report analyzing volume and open
interest for each broad-based FLEX Index Options class overlying an
Expiration Friday, p.m.-settled FLEX Index Options series.\10\ The
annual report also contained information and analysis of FLEX Index
Options trading patterns. The Exchange also provided the Commission, on
a periodic basis, interim reports of volume and open interest. The
reports were provided to the Commission on a confidential basis.\11\
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\10\ The annual report also contained certain pilot period and
pre-pilot period analyses of volume and open interest for Expiration
Friday, a.m.-settled FLEX Index series and Expiration Friday Non-
FLEX Index series overlying the same index as an Expiration Friday,
p.m.-settled FLEX Index option.
\11\ The Commission notes that although CBOE requested
confidential treatment of the pilot reports under the Freedom of
Information Act (``FOIA''), such confidentiality is subject to the
provisions of FOIA. 5 U.S.C. 552.
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The Exchange believes there is sufficient investor interest and
demand in the pilot program to warrant its extension. The Exchange
believes that, for the period that the pilot has been in operation, the
program has provided investors with additional means of managing their
risk exposures and carrying out their investment objectives.
Furthermore, the Exchange believes that it has not experienced any
adverse market effects with respect to the pilot program, including any
adverse market volatility effects that might occur as a result of large
FLEX exercises in FLEX Option series that expire near Non-FLEX
expirations and use a p.m. settlement (as discussed below).
In that regard, based on the Exchange's experience in trading FLEX
Options to date and over the pilot period, CBOE continues to believe
that the restrictions on exercise settlement values are no longer
necessary to insulate Non-FLEX expirations from the potential adverse
market impacts of FLEX expirations.\12\ To the contrary,
[[Page 67046]]
CBOE believes that the restriction actually places the Exchange at a
competitive disadvantage to its OTC counterparts in the market for
customized options, and unnecessarily limits market participants'
ability to trade in an exchange environment that offers the added
benefits of transparency, price discovery, liquidity, and financial
stability.
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\12\ In further support, the Exchange also notes that the p.m.
and specified average price settlements are already permitted for
FLEX Index Options on any other business day except on, or within
two business days of, Expiration Friday. The Exchange is not aware
of any market disruptions or problems caused by the use of these
settlement methodologies on these expiration dates (or on the
expiration dates addressed under the pilot program). The Exchange is
also not aware of any market disruptions or problems caused by the
use of customized options in the OTC markets that expire on or near
Expiration Friday and have a p.m. or specified average exercise
settlement value. In addition, the Exchange believes the reasons for
limiting expirations to a.m. settlement, which is something the SEC
has imposed since the early 1990s for Non-FLEX Options, revolved
around a concern about expiration pressure on the New York Stock
Exchange (``NYSE'') at the close that are no longer relevant in
today's market. Today, however, the Exchange believes stock
exchanges are much better able to handle volume. There are multiple
primary listing and unlisted trading privilege (``UTP'') markets,
and trading is dispersed among several exchanges and alternative
trading systems. In addition, the Exchange believes that
surveillance techniques are much more robust and automated. In the
early 1990s, it was also thought by some that opening procedures
allow more time to attract contra-side interest to reduce
imbalances. The Exchange believes, however, that today order flow is
predominantly electronic and the ability to smooth out openings and
closes is greatly reduced (e.g., market-on-close procedures work
just as well as openings). Also other markets, such as the NASDAQ
Stock Exchange, do not have the same type of pre-opening imbalance
disseminations as the NYSE, so many stocks are not subject to the
same procedures on Expiration Friday. In addition, the Exchange
believes that the NYSE has reduced the required time a specialist
has to wait after disseminating a pre-opening indication. So, in
this respect, the Exchange believes there is less time to react in
the opening than in the close. Moreover, to the extent there may be
a risk of adverse market effects attributable to p.m. settled
options (or certain average price settled options related to the
closing price) that would otherwise be traded in a non-transparent
fashion in the OTC market, the Exchange continues to believe that
such risk would be lessened by making these customized options
eligible for trading in an exchange environment because of the added
transparency, price discovery, liquidity, and financial stability
available.
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The Exchange also notes that certain position limit, aggregation
and exercise limit requirements continue to apply to FLEX Index Options
in accordance with Rules 24A.7, Position Limits and Reporting
Requirements, 24A.8, Exercise Limits, 24B.7, Position Limits and
Reporting Requirements, and 24B.8, Exercise Limits. Additionally, all
FLEX Options remain subject to the position reporting requirements in
paragraph (a) of CBOE Rule 4.13, Reports Related to Position
Limits.\13\ Moreover, the Exchange and its Trading Permit Holder
organizations each have the authority, pursuant to CBOE Rule 12.10,
Margin Required is Minimum, to impose additional margin as deemed
advisable. CBOE continues to believe these existing safeguards serve
sufficiently to help monitor open interest in FLEX Option series and
significantly reduce any risk of adverse market effects that might
occur as a result of large FLEX exercises in FLEX Option series that
expire near Non-FLEX expirations and use a p.m. settlement.
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\13\ CBOE Rule 4.13(a) provides that ``[i]n a manner and form
prescribed by the Exchange, each Trading Permit Holder shall report
to the Exchange, the name, address, and social security or tax
identification number of any customer who, acting alone, or in
concert with others, on the previous business day maintained
aggregate long or short positions on the same side of the market of
200 or more contracts of any single class of option contracts dealt
in on the Exchange. The report shall indicate for each such class of
options, the number of option contracts comprising each such
position and, in the case of short positions, whether covered or
uncovered.'' For purposes of this Rule, the term ``customer'' in
respect of any Trading Permit Holder includes ``the Trading Permit
Holder, any general or special partner of the Trading Permit Holder,
any officer or director of the Trading Permit Holder, or any
participant, as such, in any joint, group or syndicate account with
the Trading Permit Holder or with any partner, officer or director
thereof.'' Rule 4.13(d).
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CBOE is also cognizant of the OTC market, in which similar
restrictions on exercise settlement values do not apply. CBOE continues
to believe that the pilot program is appropriate and reasonable and
provides market participants with additional flexibility in determining
whether to execute their customized options in an exchange environment
or in the OTC market. CBOE continues to believe that market
participants benefit from being able to trade these customized options
in an exchange environment in several ways, including, but not limited
to, enhanced efficiency in initiating and closing out positions,
increased market transparency, and heightened contra-party
creditworthiness due to the role of OCC as issuer and guarantor of FLEX
Options.
If, in the future, the Exchange proposes an additional extension of
the pilot program, or should the Exchange propose to make the pilot
program permanent (which the Exchange currently intends to do), the
Exchange will submit, along with any filing proposing such amendments
to the pilot program, an additional pilot program report covering the
extended period during which the pilot program was in effect and
including the details referenced above and consistent with the pilot
program's Approval Order. The pilot program report would be submitted
to the Commission at least two months prior to the new expiration date
of the pilot program. The Exchange will also continue, on a periodic
basis, to submit interim reports of volume and open interest consistent
with the terms of the exercise settlement values pilot program as
described in the pilot program's Approval Order. All such pilot reports
would continue to be provided on a confidential basis.\14\ As noted in
the pilot program's Approval Order, any positions established under the
pilot program would not be impacted by the expiration of the pilot
program.\15\
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\14\ If the Exchange seeks permanent approval of the pilot
program, the Exchange recognizes that certain information in the
pilot reports may need to be made available on a public basis. The
Commission notes that although CBOE requested confidential treatment
of the pilot reports under FOIA, such confidentiality is subject to
the provisions of FOIA. 5 U.S.C. 552.
\15\ For example, a position in a pm-settled FLEX Index Option
series that expires on Expiration Friday in January 2015 could be
established during the exercise settlement values pilot. If the
pilot program were not extended (or made permanent), then the
position could continue to exist. However, the Exchange notes that
any further trading in the series would be restricted to
transactions where at least one side of the trade is a closing
transaction. See Approval Order, supra note 6, footnotes 9 and 10.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) of the Act \16\ in general and furthers the objectives of
Section 6(b)(5) of the Act \17\ in particular in that it should promote
just and equitable principles of trade, serve to remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and protect investors and the public interest.
Specifically, the Exchange believes that the proposed extension of the
pilot program, which permits additional exercise settlement values,
would provide greater opportunities for investors to manage risk
through the use of FLEX Options. Further, the Exchange believes that it
has not experienced any adverse effects from the operation of the pilot
program, including any adverse market volatility effects that might
occur as a result of large FLEX exercises in FLEX Option series that
expire near Non-FLEX expirations and use a p.m. settlement. The
Exchange also believes that the extension of the exercise settlement
values pilot does not raise any unique regulatory concerns. In
particular, although p.m. settlements may raise questions with the
Commission, the Exchange believes that, based on the Exchange's
experience in trading FLEX Options to date and over the pilot period,
market impact and investor protection concerns will not be raised by
this rule change. The Exchange also believes that the proposed rule
change would continue to provide Trading Permit Holders and investors
with additional opportunities to trade customized options in an
exchange
[[Page 67047]]
environment (which offers the added benefits of transparency, price
discovery, liquidity, and financial stability as compared to the over-
the-counter market) and subject to exchange-based rules, and investors
would benefit as a result.
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\16\ 15 U.S.C. 78f(b).
\17\ 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 that is 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
The Exchange neither solicited nor received comments on the
proposal.
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 prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, 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\
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\18\ 15 U.S.C. 78s(b)(3)(A).
\19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and 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.
The Exchange has satisfied this requirement.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \20\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6) \21\ permits the Commission to
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange requested
that the Commission waive the 30-day operative delay so that the
proposed rule change may become operative upon filing. The Commission
believes that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest. The Commission notes
that waiving the 30-day operative delay would prevent the expiration of
the pilot programs on November 2, 2012, prior to the extension of the
pilot program becoming operative. Therefore, the Commission hereby
waives the 30-day operative delay and designates the proposal operative
upon filing.\22\
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\20\ 17 CFR 240.19b-4(f)(6).
\21\ 17 CFR 240.19b-4(f)(6).
\22\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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-2012-102 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-2012-102. 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-2012-102 and should be
submitted on or before November 29, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-27290 Filed 11-7-12; 8:45 am]
BILLING CODE 8011-01-P