[Federal Register Volume 78, Number 149 (Friday, August 2, 2013)]
[Notices]
[Pages 47041-47045]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-18592]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70059; File No. SR-ISE-2013-42]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing of Proposed Rule Change To List Options on the
Nations VolDex Index
July 29, 2013.
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 17, 2013, the International Securities Exchange, LLC
(``Exchange'' or ``ISE'') 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 self-
regulatory organization. The Commission is publishing this notice to
solicit
[[Page 47042]]
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
The Exchange proposes to amend its rules for the listing and
trading on the Exchange of options on the Nations VolDex index, a new
index that measures changes in implied volatility of the SPDR[supreg]
S&P[supreg] ETF. The Exchange also proposes to list and trade long-term
options on the Nations VolDex index. Options on the Nations VolDex
index will be cash-settled and will have European-style exercise
provisions. The text of the proposed rule change is available on the
Exchange's Web site www.ise.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The self-regulatory organization has prepared summaries,
set forth in Sections A, B and C below, of the most significant aspects
of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend its rules to provide for the listing
and trading on the Exchange of options on a new index that measures
changes in implied volatility of the SPDR[supreg] S&P[supreg] Exchange
Traded Fund (ETF) (commonly known and referred to by its ticker symbol,
SPY). Options on the Nations VolDex index (the ``Index'') will be cash-
settled and will have European-style exercise provisions. In addition
to regular options, the Exchange proposes to also list long-term
options on the Index. The Index is calculated using published real-time
bid/ask quotes of SPY options. The Index represents annualized implied
volatility and is quoted in percentage points.
Index Design and Composition
The calculation of the Index is based on the methodology developed
by NationsShares, a firm that develops proprietary derivatives-based
indexes and options-enhanced indexes. The Index will be calculated and
maintained by a calculation agent acting on behalf of NationsShares.
The Index reflects changes in implied volatility of SPY, historically
the largest and most actively traded ETF in the United States as
measured by its assets under management and the value of shares traded.
The Index measures the implied volatility of a hypothetical 30-day
at-the-money (ATM) SPY put option, by interpolating the prices of
synthetic put options that are precisely ATM.\3\ The options used in
the calculation of the Index are the published first in-the-money (ITM)
and the first out-of-the-money (OTM) put options in the front month
(i.e., nearest monthly expiration) and second month expirations (i.e.,
second nearest monthly expiration). Front month options must have at
least one week to expiration. On the open of trading on the first
business day of a regular option expiration week (i.e., for standard
monthly expirations), the options used for the Index will ``roll'' to
the next regular expiration month and the following expiration month.
The prices used in the calculation of the Index will be the mid-point
of the published consolidated bid/ask quote (i.e., the NBBO) in SPY
options.
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\3\ For the purpose of this rule filing, the term ``precisely
at-the-money'' refers to a hypothetical option and strike price.
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The generalized formula for the Index is:
[GRAPHIC] [TIFF OMITTED] TN02AU13.000
Where:
43,200 is the number of minutes in 30 days;
T1 is time to expiration of the Front Month
options in minutes;
T2 is time to expiration of the Second Month
options in minutes;
IV1 is the implied volatility of the Front
Month precisely ATM SPY put option;
IV2 is the implied volatility of the Second
Month precisely ATM SPY put option.
The implied volatilities of the precisely ATM SPY put options are
derived using a three-step process. The first step is to calculate the
forward prices for both the front and second month expirations. This is
accomplished by evaluating the absolute difference between the call and
put option premium at each strike price and identifying the strike
price where that absolute difference is the smallest. The forward price
is calculated by adding the strike price to the present value of the
published call price minus the published put price. The second step is
to interpolate the precisely ATM put option price for both the front
month and second month expirations. This is accomplished by using each
respective month's forward price, the first ITM strike, the first OTM
strike, the first ITM put price, and the first OTM put price. The final
step is to calculate the implied volatility for the precisely ATM put
option for each respective month using the forward price and the
precisely ATM put option for that month.
The SPDR[supreg] S&P[supreg] ETF is the largest and most actively
traded ETF in the U.S.\4\ According to State Street Global Advisor, the
Trustee of SPY, as of June 20, 2013, the net assets under management in
SPY was approximately $106.8 billion; the weighted average market
capitalization of the portfolio components was approximately $106
billion; the smallest market capitalization was approximately $2.1
billion (Apollo Group Inc., ticker: APOL), and the largest was
approximately $395.9 billion (ExxonMobil, ticker: XOM).\5\
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\4\ The SPDR[supreg] S&P[supreg] ETF holds up to 500 securities
listed on U.S. securities exchanges.
\5\ See https://www.spdrs.com/product/fund.seam?ticker=SPY.
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For the three months ending June 20, 2013, the average daily volume
in SPY shares was 137 million, and the average value of shares traded
was $22.1 billion.\6\ For the same period, the average daily volume in
SPY options was approximately 2.8 million contracts.\7\ Open interest
in SPY options was approximately 25.2 million contracts.\8\
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\6\ Calculated using data from Bloomberg as of June 20, 2013.
\7\ Calculated using data from The Options Clearing Corp. as of
June 20, 2013.
\8\ Calculated using data from Bloomberg as of June 20, 2013.
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[[Page 47043]]
As set forth in Exhibit 3-1, following are the characteristics of
the Index: (i) The initial index value was 11.49 on January 31, 2005;
(ii) the index value on June 20, 2013 was 18.73; (iii) the lowest index
value since inception was 8.83 and occurred on January 24, 2007; and
(iv) the highest index value since inception was 77.98 and occurred on
October 10, 2008.
Index Calculation and Maintenance
As noted above, the Index will be maintained and calculated by a
calculation agent acting on behalf of NationsShares. The level of the
Index will reflect the current implied volatility of SPY. The Index
will be updated on a real-time basis on each trading day beginning at
9:30 a.m. and ending at 4:15 p.m. (New York time). If the current
published value of a component is not available, the last published
value will be used in the calculation.
Values of the Index will be disseminated every 15 seconds during
the Exchange's regular trading hours to market information vendors such
as Bloomberg and ThomsonReuters. In the event the Index ceases to be
maintained or calculated, or its values are not disseminated every 15
seconds by a widely available source, the Exchange will not list any
additional series for trading and will limit all transactions in such
options to closing transactions only for the purpose of maintaining a
fair and orderly market and protecting investors.
Exercise and Settlement Value
Options on the Index will expire on the Wednesday that is thirty
days prior to the third Friday of the calendar month immediately
following the expiring month. Trading in expiring options on the Index
will normally cease at 4:15 p.m. (New York time) on the Tuesday
preceding an expiration Wednesday. The exercise and settlement value
will be calculated on Wednesday at 9:30 a.m. (New York time) using the
mid-point of the NBBO for the SPY options used in the calculation of
the Index at that time. The exercise-settlement amount is equal to the
difference between the settlement value and the exercise price of the
option, multiplied by $100. Exercise will result in the delivery of
cash on the business day following expiration.
Contract Specifications
The contract specifications for options on the Index are set forth
in Exhibit 3-2. The Index is a broad-based index, as defined in Rule
2001(k). Options on the Index are European-style and cash-settled. The
Exchange's standard trading hours for index options (9:30 a.m. to 4:15
p.m., New York time) will apply to the Index. The Exchange proposes to
apply margin requirements for the purchase and sale of options on the
Index that are identical to those applied for its other broad-based
index options.
The trading of options on the Index will be subject to the trading
halt procedures applicable to other index options traded on the
Exchange.\9\ Options on the Index will be quoted and traded in U.S.
dollars.\10\ Accordingly, all Exchange and Options Clearing Corporation
members shall be able to accommodate trading, clearance and settlement
of the Index without alteration.
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\9\ See ISE Rule 2008(c).
\10\ See ISE Rule 2009(a)(1).
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The Exchange proposes to set the minimum strike price interval for
options on the Index at $1 or greater, as long as the strike price is
below $200, in accordance with proposed ISE Rule 2009(c)(7). The
Exchange believes that $1 strike price intervals will provide investors
with greater flexibility by allowing them to establish positions that
are better tailored to meet their investment objectives. Further, as
proposed, when new series of options on the Index with a new expiration
date are opened for trading, or when additional series of options on
the Index in an existing expiration date are opened for trading as the
current value of the Index moves substantially from the exercise prices
of series already opened, the exercise prices of such new or additional
series shall be reasonably related to the current value of the Index at
the time such series are first opened for trading.\11\ The Exchange,
however, proposes to eliminate this range limitation that will limit
the number of $1 strikes that may be listed in options on the Index.
The Exchange's proposal to set minimum strike price intervals without a
range limitation is identical to strike price intervals adopted by CBOE
for the CBOE Volatility Index.\12\
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\11\ See ISE Rule 2009(c)(3). The term ``reasonably related to
the current index value of the underlying index'' means that the
exercise price is within thirty percent (30%) of the current index
value, as defined in ISE Rule 2009(c)(4).
\12\ See Securities Exchange Act Release No. 63155 (October 21,
2010), 75 FR 66402 (October 28, 2010) (SR-CBOE-2010-096).
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The Exchange proposes to adopt minimum trading increments for
options on the Index to be $0.05 for series trading below $3, and $0.10
for series trading at or above $3.
The Exchange proposes to list options on the Index in the three
consecutive near-term expiration months plus up to three successive
expiration months in the March cycle. For example, consecutive
expirations of January, February, March, plus June, September, and
December expirations would be listed.\13\
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\13\ See Rule 2009(a)(3).
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The Exchange proposes that there shall be no position or exercise
limits for options on the Index. As noted above, the Index will settle
using published quotes from its corresponding option, specifically SPY
options. Given that there are currently no position limits for SPY
options,\14\ the Exchange believes it is appropriate for there to be no
position or exercise limits for options on the Index. Because the size
of the market underlying SPY options is so large, ISE believes that
this should dispel any concerns regarding market manipulation. By
extension, ISE believes that the same reasoning applies to options on
the Index since the value of options on the Index is derived from the
volatility of SPY as implied by its options. The Exchange notes that
options on CBOE's Volatility Index are also not subject to any position
or exercise limits.\15\
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\14\ See Securities Exchange Act Release No. 68000 (October 5,
2012), 77 FR 62300 (October 12, 2012) (SR-ISE-2012-81).
\15\ See Securities Exchange Act Release No. 54019 (June 20,
2006), 71 FR 36569 (June 27, 2006) (SR-CBOE-2006-55). Additionally,
the Exchange notes there are currently a number of actively-traded
broad-based index options, i.e., DJX, NDX, SPX, that are also not
subject to any position or exercise limits.
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The trading of options on the Index shall be subject to the same
rules that presently govern the trading of Exchange index options,
including sales practice rules, margin requirements, and trading rules.
In addition, long-term option series having up to sixty months to
expiration may be traded.\16\ The trading of long-term options on the
Index shall also be subject to the same rules that govern the trading
of all the Exchange's index options, including sales practice rules,
margin requirements, and trading rules. Further, pursuant to
Supplementary Material .01 and .02 to ISE Rule 2009, the Exchange may
also list Short Term Option Series and Quarterly Options Series,
respectively, on the Index.
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\16\ See Rule 2009(b)(1).
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Chapter 6 of the Exchange's rules is designed to protect public
customer trading and shall apply to trading in options on the Index.
Specifically, ISE Rules 608(a) and (b) prohibit Members from accepting
a customer order to purchase or write an option, including options on
the Index, unless such customer's account has been approved in writing
by a designated Options
[[Page 47044]]
Principal of the Member.\17\ Additionally, ISE's Rule 610 regarding
suitability is designed to ensure that options, including options on
the Index, are only sold to customers capable of evaluating and bearing
the risks associated with trading in this instrument. Further, ISE Rule
611 permits members to exercise discretionary power with respect to
trading options, including options on the Index, in a customer's
account only if the Member has received prior written authorization
from the customer and the account had been accepted in writing by a
designated Options Principal. ISE Rule 611 also requires designated
Options Principals or Representatives of a Member to approve and
initial each discretionary order, including discretionary orders for
options on the Index, on the day the discretionary order is entered.
Finally, ISE Rule 609, Supervision of Accounts, Rule 612, Confirmation
to Customers, and Rule 616, Delivery of Current Options Disclosure
Documents and Prospectus, will also apply to trading in options on the
Index.
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\17\ Pursuant to ISE Rule 602, Representatives of a Member may
solicit or accept customer orders for options on the Index.
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Finally, a trading license issued by the Exchange will be required
for all market makers to effect transactions as a market maker in the
Index in accordance with ISE Rule 2013.
Surveillance and Capacity
The Exchange has an adequate surveillance program in place for
options traded on the Index and intends to apply those same program
procedures that it applies to the Exchange's other options products.
Further, the ISE Market Surveillance Department conducts routine
surveillance in approximately 30 discrete areas. Index products and
their respective symbols are integrated into the Exchange's existing
surveillance system architecture and are thus subject to the relevant
surveillance processes. This is true for both surveillance system
processing and manual processes that support the ISE's surveillance
program. Additionally, the Exchange is also a member of the Intermarket
Surveillance Group (ISG) under the Intermarket Surveillance Group
Agreement, dated June 20, 1994. The members of the ISG include all of
the U.S. registered stock and options markets: NYSE MKT LLC, NYSE Arca,
Inc., BATS Exchange, Inc., NASDAQ OMX BX, Chicago Board Options
Exchange, Inc., Chicago Stock Exchange, Inc., Financial Industry
Regulatory Authority, NASDAQ Stock Market LLC, National Stock Exchange,
Inc., the New York Stock Exchange LLC, and NASDAQ OMX PHLX, Inc. The
ISG members work together to coordinate surveillance and investigative
information sharing in the stock and options markets.
The Exchange represents that it has the necessary system capacity
to support additional quotations and messages that will result from the
listing and trading of options on the Index.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Securities Exchange Act of 1934 (the ``Act'')
\18\ in general, and furthers the objectives of Section 6(b)(5) of the
Act \19\ in particular in that it will permit options trading in the
Index pursuant to rules designed to prevent fraudulent and manipulative
acts and practices and promote just and equitable principles of trade.
In particular, the Exchange believes the proposed rule change will
further the Exchange's goal of introducing new and innovative products
to the marketplace. The Exchange believes that listing options on the
Index will provide an opportunity for investors to hedge, or speculate
on, the market risk associated with changes in implied volatility.
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
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Volatility-focused products have become more prominent over the
past few years, and in a number of different formats and types,
including ETFs, exchange-traded notes, exchange-traded options, and
exchange-traded futures. Such products offer investors the opportunity
to manage their volatility risks associated with an underlying asset
class. Currently, most of the products focus on underlying equity
indexes or equity-based portfolios. The Exchange proposes to introduce
a cash-settled options contract on a new volatility index, which
focuses on equity exposure using options on the SPDR[supreg]
S&P[supreg] ETF (SPY). SPY is the largest and most liquid ETF in the
United Sates, and the most actively traded equity option product. The
Exchange believes that because the Index is derived from published SPY
options prices, and given the immense liquidity found in the individual
portfolio components of SPY, the concern that the Index will be subject
to market manipulation is greatly reduced. Therefore, the Exchange
believes that the proposed rule change to list options on the Index is
appropriate.
The Exchange further notes that ISE Rules that apply to the trading
of other index options currently traded on the Exchange would also
apply to the trading of options on the Index. Additionally, the trading
of options on the Index would be subject to, among others, Exchange
Rules governing margin requirements and trading halt procedures.
Finally, the Exchange represents that it has an adequate
surveillance program in place to detect manipulative trading in options
on the Index. The Exchange also represents that it has the necessary
systems capacity to support the new options series. And as stated in
the filing, the Exchange has rules in place designed to protect public
customer trading.
B. Self-Regulatory Organization's Statement on Burden on Competition
This proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act. The Exchange notes that the proposed rule change will
facilitate the listing and trading of a novel index option product that
will enhance competition among market participants, to the benefit of
investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
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 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.
[[Page 47045]]
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-ISE-2013-42 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-ISE-2013-42. 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-ISE-2013-42 and should be
submitted on or before August 23, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-18592 Filed 8-1-13; 8:45 am]
BILLING CODE 8011-01-P