[Federal Register Volume 78, Number 151 (Tuesday, August 6, 2013)]
[Notices]
[Pages 47809-47813]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-18900]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70087; File No. SR-CBOE-2013-055]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment No. 1, to List and Trade a P.M.-settled Mini-SPX Index Option
Product
July 31, 2013.
I. Introduction
On May 14, 2013, Chicago Board Options Exchange, Incorporated (the
``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to permit the listing and trading
of P.M.-settled, cash-settled options on the Mini-SPX Index
(``XSP'').\3\ The proposed rule change was published for comment in
theFederal Register on May 30, 2013.\4\ The Commission received no
comment letters on the proposal. On July 31, 2013, the Exchange filed
Amendment No. 1 to the proposed rule change.\5\ 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ XSP options have 1/10th the value of S&P 500 Index options.
\4\ See Securities Exchange Act Release No. 69638 (May 24,
2013), 78 FR 32524 (May 30, 2013) (``Notice'').
\5\ In Amendment No. 1, the Exchange provided more details
regarding the volume, open interest, and trading patterns data that
the Exchange proposes to include in the report that it will submit
to the Commission at least two months before the expiration of the
pilot program. The Exchange noted that the analysis would examine
trading in the proposed option product as well as trading in the
securities that comprise the underlying index. The Exchange also
described the interim reports that would be submitted to the
Commission pursuant to the pilot program. In addition, the Exchange
clarified its proposed amendment to Rule 6.42, Interpretation and
Policy .03 to state that for so long as SPY options participate in
the Penny Pilot program, the minimum increments for XSP options
shall be the same as SPY for all option series (including LEAPS).
Further, the Exchange proposed to amend its originally proposed
change to Rule 24.9, Interpretation and Policy .11, to lower from
$300 to $200 the maximum strike price for which the strike price
interval for series of XSP options may be $1. The Exchange also
proposed to lower from $5 to $1 the minimum strike price interval
for LEAPS and reduced-value LEAPS on XSP options. In addition, the
Exchange represented that it has enhanced surveillance and reporting
procedures in place that are intended to allow the Exchange to
detect and deter possible trading abuses that could otherwise occur
in the absence of position limits, and described the Exchange's
requirements for opening for trading additional series of P.M.-
settled XSP options. The Exchange further represented that it and
the Options Price Reporting Authority have the necessary systems
capacity to handle any potential additional traffic associated with
trading of P.M.-settled XSP options. Finally, the Exchange provided
a more detailed description of its procedures relating to the
changeover from A.M.-settled XSP options.
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II. Description of the Proposal
The Exchange is proposing to amend its rules to permit it to list
and trade, on a pilot basis, cash-settled XSP options with third-
Friday-of-the-month (``Expiration Friday'') expiration dates, for which
the exercise settlement value will be based on the index value derived
from the closing prices of the component securities (``P.M.-settled'').
CBOE proposes to add P.M.-settled XSP options to the existing SPXPM
pilot program on CBOE. SPXPM options, which are P.M.-settled options on
the S&P 500 Index,\6\ are currently listed and traded on CBOE on a 12-
month pilot set to end on February 8, 2014. CBOE has proposed to add
P.M.-settled XSP options to that pilot so that the end of the pilot
period for P.M.-settled XSP options will also be February 8, 2014.
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\6\ SPXPM options were initially traded on a 14-month pilot
basis on C2 Options Exchange, Incorporated (``C2''), an exchange
that is wholly owned by CBOE Holdings, Inc., the same corporation
that owns CBOE. See Securities Exchange Act Release No. 65256
(September 2, 2011), 76 FR 55969 (September 9, 2011) (``C2 SPXPM
Approval Order''). The pilot to list and trade SPXPM was
subsequently transferred from C2 to CBOE and reset to a new 12-month
pilot period. See Securities Exchange Act Release No. 68888
(February 8, 2013), 78 FR 10668 (February 14, 2013) (``CBOE SPXPM
Approval Order'').
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CBOE proposes to abide by the same reporting requirements for the
trading of P.M.-settled XSP options that it does for the trading of
SPXPM options.\7\ The Exchange proposes to include data regarding P.M.-
settled XSP options in a pilot program report that it will submit to
the Commission at least two months prior to the expiration date of the
pilot program (the ``annual report''). The annual report will contain
an analysis of volume, open interest, and trading patterns; and will
examine trading in the proposed option product as well as trading in
the securities that comprise the underlying index. In addition, for
series that exceed certain minimum open interest parameters, the annual
report will provide analysis of index price volatility and share
trading
[[Page 47810]]
activity. In addition to the annual report, the Exchange will provide
the Commission with periodic interim reports while the pilot is in
effect that contain some, but not all, of the information contained in
the annual report (``interim reports'').
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\7\ For the details of SPXPM's reporting requirements, see
Securities Exchange Act Release No. 68457 (December 18, 2012), 77 FR
76135 (December 26, 2012).
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Further, the Exchange proposes to make a number of corresponding
amendments to its rules in conjunction with the proposed trading of XSP
options on a P.M.-settled basis. Interpretation and Policy .04 to CBOE
Rule 24.6 states that on the last trading day, transactions in expiring
P.M.-settled SPXPM options may be effected on the Exchange between 8:30
a.m. and 3:00 p.m. (Chicago time) (as opposed to the normal trading
hours for non-expiring SPXPM options, which are from 8:30 a.m. until
3:15 p.m. (Chicago time)). CBOE proposes to amend this Interpretation
and Policy to include P.M.-settled XSP options.\8\
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\8\ See Notice, supra note 4, at 32525.
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CBOE proposes to amend Interpretation and Policy .03 to CBOE Rule
6.42 regarding minimum increments for bids and offers for XSP options.
Currently, the minimum increments for bids and offers for XSP options
are $0.01 for all option series quoted below $3 (including LEAPS) and
$0.05 for all option series $3 and above (including LEAPS). However,
the minimum increments for bids and offers for SPDR options (``SPY''),
an exchange-traded fund that also tracks the performance of 1/10th the
value of the S&P 500 Index, is $0.01, regardless of whether the options
series is quoted above, at, or below $3. Since the prices of both XSP
options and SPY options are based, in a similar manner, on 1/10th the
size of the S&P 500 Index, CBOE proposes to amend Interpretation and
Policy .03 to Rule 6.42 to state that for so long as SPY options
participate in the Penny Pilot program, the minimum increments for XSP
options shall be the same as SPY for all options series (including
LEAPS).
CBOE also proposes to amend Interpretation and Policy .11 to CBOE
Rule 24.9 regarding strike price intervals for XSP options. Currently,
Interpretation and Policy .11 to Rule 24.9 states that
``[n]otwithstanding Interpretation and Policy .01(a) to Rule 24.9, the
interval between strike prices of series of Mini-SPX options will be $1
or greater,'' subject to a number of conditions. In Amendment No. 1,
the Exchange proposes to simplify this provision by deleting conditions
(a) through (c) of Interpretation and Policy .11 to CBOE Rule 24.9 and
providing instead that the interval between strike prices of series of
XSP options will be $1 or greater where the strike price is $200 or
less and $5.00 or greater where the strike price is greater than
$200.\9\ The Exchange proposes to keep in Interpretation and Policy .11
to CBOE Rule 24.9 the language currently in condition (d), which states
that the Exchange shall not list LEAPS or reduced-value LEAPS on Mini-
SPX options at intervals less than $5. However, CBOE proposes to reduce
the threshold from $5 to $1. Because the minimum strike price interval
for standard XSP options is proposed to be at least $1 (up to a strike
price of $200), the Exchange proposes to reduce the LEAPS minimum
strike price interval to be $1 as well in order to correspond to the
regular, non-LEAPS minimum strike price interval.
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\9\ Under CBOE's current rules, minimum strike price intervals
on XSP options depend on the percentage by which strike prices vary
from one-tenth of the current value of the S&P 500 Index. CBOE may
list series at $1 or greater strike price intervals on XSP options
with strike prices that are no more than 20% away from one-tenth of
the current value of the S&P 500 Index. CBOE may list series at $3
or greater strike price intervals on XSP options with strike prices
that are no more than 25% away from one-tenth of the current value
of the S&P 500 Index. CBOE may list series at $5 or greater strike
price intervals on XSP options with strike prices that are more than
25% away from one-tenth of the current value of the S&P 500 Index.
See Notice, supra note 4, at 32526.
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Other than the changes described above, trading in P.M.-settled XSP
options will operate in the same manner as trading currently operates
in A.M.-settled XSP options. XSP options will continue to use a $100
multiplier. P.M.-settled XSP options will have European-style exercise,
will not be subject to position or exercise limits, and the same
position reporting and margin requirements that apply to A.M.-settled
XSP options will apply to P.M.-settled XSP options.\10\ As with A.M.-
settled XSP options, the Exchange may list up to six expiration months
of P.M.-settled XSP options at one time \11\ and the Exchange may open
for trading additional series of P.M.-settled XSP options whose
exercise price is within 30% of the current XSP value. The Exchange
also may open for trading additional series of P.M.-settled XSP options
that are more than 30% away from the current index value, provided that
demonstrated customer interest exists for such series, as expressed by
institutional, corporate, or individual customers or their brokers.\12\
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\10\ See Notice, supra note 4, at 32526. The Exchange represents
that it has enhanced surveillance and reporting procedures in place
that are intended to allow CBOE to detect and deter possible trading
abuses that could otherwise occur in the absence of position limits.
See Amendment No. 1, supra note 5.
\11\ See CBOE Rule 24.9(a)(2).
\12\ See CBOE Rule 24.9, Interpretation and Policy .04.
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With regard to the impact of this proposal on system capacity, the
Exchange has analyzed its capacity and represents that it and the
Options Price Reporting Authority have the necessary systems capacity
to handle any potential additional traffic associated with trading of
P.M.-settled XSP options.\13\ The Exchange believes that its Trading
Permit Holders (``TPHs'') will not experience a capacity issue as a
result of this proposal.\14\ CBOE represents that it will monitor the
trading volume associated with any possible additional options series
listed as a result of this proposal and the effect (if any) of these
additional series on market fragmentation and on the capacity of the
Exchange's automated systems.\15\
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\13\ See Amendment No. 1, supra note 5.
\14\ See id.
\15\ See id.
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CBOE will notify TPHs in advance via Regulatory Circular of all
plans associated with the adoption of P.M.-settled XSP options, and
will set a date for the changeover from A.M.-settled XSP options. On
that date, P.M.-settled XSP options series will be introduced using the
trading symbol XSP, and all remaining A.M.-settled XSP options series
will be moved to the trading symbol XSPAM. Beginning with that date,
the Exchange will cease issuing new A.M.-settled XSP options series,
and on that date, the Exchange will de-list any open A.M.-settled XSP
options series that do not have any open interest. From that date going
forward, the only new XSP options series that will be opened will be
P.M.-settled. Regarding any remaining A.M.-settled XSP options series,
the Exchange will wait and allow the series to trade until expiration,
or if, due to trading, any XSPAM series cease to have open interest,
such series will be de-listed. Once all remaining XSPAM series have
either expired or been de-listed due to a lack of open interest, the
Exchange will have no more A.M.-settled XSP options series, and going
forward, all XSP options series will be P.M.-settled for the duration
of the pilot.
III. Discussion and Commission Findings
After careful consideration of the proposal, 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
[[Page 47811]]
exchange,\16\ and, in particular, the requirements of Section 6 of the
Act.\17\ Specifically, the Commission finds that the proposed rule
change is consistent with Section 6(b)(5) of the Act,\18\ which
provides that an exchange have rules designed to remove impediments to
and perfect the mechanism of a free and open market to protect
investors and the public interest.
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\16\ 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).
\17\ 15 U.S.C. 78f.
\18\ 15 U.S.C. 78f(b)(5).
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As the Commission noted in its orders approving the listing and
trading of SPXPM on C2 and on CBOE, the Commission has historically had
concerns about the potential impact on the market at expiration for the
underlying component stocks for P.M.-settled, cash-settled index
options.\19\ The Commission recognizes that these risks may be
mitigated today by the enhanced closing procedures that are now in use
at the primary equity markets. However, the extent of that mitigation
is unclear.
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\19\ See C2 SPXPM Approval Order, supra note 6, at 55972, 55974-
75; see also CBOE SPXPM Approval Order, supra note 6, at 10669.
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To assist the Commission in assessing any potential impact of a
P.M.-settled XSP option product on the options markets as well as the
underlying cash equities markets, CBOE has obligated itself to submit
data to the Commission in connection with the pilot program in the same
scope and format as CBOE is required to submit as a condition of the
SPXPM pilot.\20\ The Commission believes that the data and analysis
that CBOE will provide to the Commission in connection with adding XSP
options to the SPXPM twelve-month pilot, will allow CBOE and the
Commission to monitor for and assess any potential for adverse market
effects. Specifically, the data and analysis will assist the Commission
in evaluating the effect of allowing P.M. settlement for XSP options on
the underlying component stocks.
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\20\ See CBOE SPXPM Approval Order, supra note 6, at 10669.
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The data collected from the pilot program will help inform the
Commission's consideration of whether the pilot program, which will
include P.M.-settled XSP options, should be modified, discontinued,
extended, or permanently approved. The P.M. settlement pilot
information should help the Commission assess the impact on the markets
and determine whether other changes are necessary. Furthermore, the
Exchange's ongoing analysis of the pilot should help it monitor any
potential risks from large P.M.-settled positions and take appropriate
action on a timely basis if warranted.\21\
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\21\ See C2 SPXPM Approval Order, supra note 6, at 55975-76;
CBOE SPXPM Approval Order, supra note 6, at 10669.
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As the Commission noted when it approved C2's and CBOE's proposals
to list and trade SPXPM, approval of CBOE's proposal to add XSP options
to the SPXPM pilot program could benefit investors and the public
interest to the extent it attracts trading in P.M.-settled XSP options
from the opaque OTC market to the more transparent exchange-listed
markets, where trading in the product will be subject to exchange
trading rules and surveillance.\22\
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\22\ See C2 SPXPM Approval Order, supra note 6, at 55976; CBOE
SPXPM Approval Order, supra note 6, at 10669.
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CBOE has represented that it has adequate surveillance and
reporting procedures to monitor trading in these options, thereby
helping to ensure the maintenance of a fair and orderly market, and has
represented that it has sufficient capacity to handle additional
traffic associated with this new listing.\23\ In addition, CBOE has
represented that it will give its TPHs advance notice of the changeover
from A.M. settlement to P.M. settlement for XSP options through a
Regulatory Circular and will utilize a clear and unambiguous process to
phase out all remaining A.M.-settled XSP options series.\24\
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\23\ See Amendment No. 1, supra note 5.
\24\ See id.
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The Commission believes that CBOE's proposal to amend
Interpretation and Policy .04 to Rule 24.6 to close trading in expiring
P.M.-settled XSP options at 3:00 p.m. (Chicago time) (as opposed to the
normal closing time of 3:15 p.m. for non-expiring options) is designed
to reduce potential investor confusion. The primary listing markets for
the component securities that comprise the S&P 500 Index close trading
in those securities at 3:00 p.m. (Chicago time). If trading in expiring
P.M.-settled XSP options was allowed to continue until 3:15 p.m., a
potential pricing divergence could occur between 3:00 p.m. and 3:15
p.m. on the final trading day in expiring P.M.-settled XSP options. The
Commission therefore believes that CBOE's proposal to close trading in
expiring P.M.-settled options at 3:00 p.m. (Chicago time) is designed
to protect investors by avoid the potential disparities in pricing that
could result past 3:00 p.m.
In addition, the Commission believes that CBOE's proposal to amend
Interpretation and Policy .03 to Rule 6.42 to provide that minimum
increments for bids and offers for XSP options be the same as those for
SPY, regardless of the value at which the option series is quoted, may
promote competition and benefit investors. The Commission believes that
the proposal to align the minimum increments for XSP options with those
for SPY options in order to allow market participants in options series
quoted at or above $3 to quote in minimum increments of $0.01 rather
than $0.05 is consistent with the Act because allowing participants to
quote in smaller increments may provide the opportunity for reduced
spreads, thereby lowering costs to investors.\25\ In addition, because
both XSP options and SPY options are based on 1/10th the price of the
S&P 500 Index, it may be reasonable for the minimum increments of bids
and offers to be the same for both types of options.
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\25\ See Securities Exchange Act Release No. 34-61061 (November
24, 2009), 74 FR 62857, 62859 (December 1, 2009).
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CBOE's proposal to simplify Interpretation and Policy .11 to Rule
24.9 to allow strike price intervals of as little as $1 for series of
XSP options where the strike price is $200 or less and $5 where the
strike price is greater than $200 may help protect investors by
providing an easily understandable bright line threshold under which
CBOE will offer an increased number of more granular price points. In
addition, this proposed provision would harmonize the strike price
intervals of XSP to match that of SPY, which may facilitate competition
between the two products by allowing investors to trade XSP with the
same level of granularity afforded to options on SPY. Further, CBOE's
proposal to reduce the minimum strike price intervals of LEAPS on P.M.-
settled XSP options from $5 to $1 allows the strike price intervals of
LEAPS on P.M.-settled XSP options to match the non-LEAPS strike price
intervals where the strike price is $200 or less. Together, these
changes will simplify CBOE's XSP option strike price intervals rules
and thereby reduce the potential for investor confusion.
Under CBOE's proposal, position limits would not apply to XSP
options. In 2001, the Commission permanently approved a CBOE rule
(which had been in place for a two-year pilot period) to eliminate
position limits on SPX (as well as options on the Dow Jones Industrial
Average and the S&P 100 Index).\26\ The Commission found that
[[Page 47812]]
because the S&P 500 Index is a broad-based index with considerable
capitalization, manipulation of the 500 component stocks underlying the
index would require extraordinarily large positions that would be
readily detectable by enhanced surveillance procedures. In its approval
order, the Commission relied in part on CBOE's enhanced surveillance
and reporting procedures that are intended to allow CBOE to detect and
deter trading abuses in the absence of position limits.
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\26\ See Securities Exchange Act Release No. 44994 (October 26,
2001), 66 FR 55722 (November 2, 2001).
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The Exchange has represented in this filing that it has enhanced
surveillance and reporting procedures in place that are intended to
allow CBOE to detect and deter possible trading abuses that could
otherwise occur in the absence of position limits.\27\ Accordingly, the
Commission believes that position limits would not be necessary for XSP
options as long as CBOE has in place and enforces effective enhanced
surveillance and reporting requirements. These enhanced procedures will
allow the Exchange to see, with considerable advance notice, the
accumulation of large positions, which it can then monitor more closely
as necessary and take additional action if appropriate.\28\
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\27\ See Amendment No. 1, supra note 5.
\28\ In addition, the Commission notes that CBOE would have
access to information through its membership in the Intermarket
Surveillance Group with respect to the trading of the securities
underlying the S&P 500 index, as well as tools such as large options
positions reports to assist its surveillance of XSP options.
In approving the proposed rule change, the Commission also has
relied upon the Exchange's representation that it has the necessary
systems capacity to support new options series that will result from
this proposal.
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For the reasons discussed above, the Commission finds that CBOE's
proposal is consistent with the Act, including Section 6(b)(5) thereof,
in that it is designed to remove impediments to and perfect the
mechanism of a free and open market, and, in general, to protect
investors and the public interest. In light of the enhanced closing
procedures at the underlying markets and the potential benefits to
investors discussed above, the Commission finds that it is appropriate
and consistent with the Act to add XSP options to the SPXPM pilot
program. The collection of data during the pilot and CBOE's active
monitoring of any effects of P.M.-settled XSP options on the markets
should help CBOE and the Commission assess any impact of P.M.
settlement for XSP options during the pilot program.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 1
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-2013-055 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-2013-055. 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 such 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-2013-055, and should be
submitted on or before August 27, 2013.
V. Accelerated Approval of a Proposed Rule Change As Modified by
Amendment No.1
As discussed above, the Exchange submitted Amendment No. 1 to make
additional representations regarding: data to include in the pilot
program report and interim reports to the Commission; minimum
increments for XSP bids and offers; XSP strike price intervals; strike
price intervals for LEAPS and reduced-value LEAPS on XSP options; the
Exchange's enhanced surveillance and reporting procedures in place to
detect and deter possible trading abuses; systems capacity to handle
potential additional traffic associated with trading of P.M.-settled
XSP options; and the Exchange's procedures relating to the changeover
from A.M.-settled XSP options.\29\ The Commission believes these
additional representations are useful to, among other things: (1)
Provide greater transparency with respect to the data that the Exchange
must submit to the Commission regarding the pilot program; (2) clarify
the Exchange's proposal by providing: that minimum increments for bids
and offers on XSP options will be the same as those for SPY options,
further detail on the minimum strike price intervals for XSP options,
and the minimum strike price interval for LEAPS and reduced-value LEAPS
on XSP options; (3) assure investors and the public of the Exchange's
ability to detect and deter trading abuses; (4) provide assurance that
the Exchange has sufficient capacity to handle the additional traffic
resulting from the trading of P.M.-settled XSP options; and (5) provide
greater detail regarding how the changeover from A.M.-settled XSP
options will proceed. The content of Amendment No. 1, which does not
raise any novel issues, provides additional clarifying information to
support CBOE's analysis of how its proposal is consistent with the Act
and thus facilitates the Commission's ability to herein approve the
proposal on a pilot basis. Accordingly, the Commission finds good
cause, pursuant to Section 19(b)(2) of the Act,\30\ 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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\29\ See Amendment No. 1, supra note 5.
\30\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\31\ that the proposed rule change (SR-CBOE-2013-055), as modified
by Amendment No. 1, be, and hereby is, approved on an accelerated basis
for a pilot period that is set to expire on February 8, 2014.
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\31\ 15 U.S.C. 78s(b)(2).
[[Page 47813]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-18900 Filed 8-5-13; 8:45 am]
BILLING CODE 8011-01-P