[Federal Register Volume 79, Number 140 (Tuesday, July 22, 2014)]
[Notices]
[Pages 42616-42619]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-17145]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72621; File No. SR-CBOE-2014-057]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Relating to the Customized Option Pricing Service
July 16, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on July 3, 2014, Chicago Board Options Exchange, Incorporated (the
``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I, II, and III 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
Chicago Board Options Exchange, Incorporated (the ``Exchange'' or
``CBOE'') proposes various changes to the Customized Option Pricing
Service (``COPS''). The text of the proposed rule change is available
on the Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the 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 Exchange 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 purpose of the proposed rule change is to describe various
changes to COPS\3\. The Exchange is not proposing to change the fees
for COPS data.
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\3\ See Securities Exchange Act Release No. 67813 (September 10,
2012), 77 FR 56903 (September 14, 2012) (SR-CBOE-2012-083),
Securities Exchange Act Release No. 67928 (September 26, 2012), 77
FR 60161 (October 2, 2012) (SR-CBOE-2012-090), Securities Exchange
Act Release No. 70705 (October 17, 2013), 78 FR 63265 (October 23,
2013) (SR-CBOE-2013-097), and Securities Exchange Act Release No.
70845 (November 12, 2013), 78 FR 69168 (November 18, 2013) (SR-CBOE-
2013-104).
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Background
COPS provides market participants with an ``end-of-day'' \4\ file
and ``historical'' \5\ files of valuations for Flexible Exchange
(``FLEX'')\6\ options and certain over-the-counter (``OTC'') options
(collectively, ``COPS Data''). Market Data Express, LLC (``MDX''), an
affiliate of CBOE, offers COPS Data for sale to all market
participants. COPS Data is available to ``Subscribers'' for internal
use and internal distribution only, and to ``Customers'' who, pursuant
to a written vendor agreement between MDX and a Customer, may
distribute the Data externally (i.e., act as a vendor) and/or use and
distribute the Data internally.
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\4\ ``End of day'' refers to data that is distributed prior to
the opening of the next trading day.
\5\ ``Historical'' COPS data consists of COPS data that is over
one month old (i.e., copies of the ``end-of-day'' COPS file that are
over one month old).
\6\ FLEX options are exchange traded options that provide
investors with the ability to customize basic option features
including size, expiration date, exercise style, and certain
exercise prices.
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COPS Data consists of indicative \7\ values for three categories of
``customized'' options. The first category of options is all open
series of FLEX options listed on any exchange that offers FLEX options
for trading.\8\ The second category is OTC options that have the same
degree of customization as FLEX options. The third category includes
options with strike prices expressed in percentage terms. Values for
such options are expressed in percentage terms and are theoretical
values.\9\
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\7\ ``Indicative'' values are indications of potential market
prices only and as such are neither firm nor the basis for a
transaction.
\8\ Current FLEX options open interest spans over 2,000 series
on over 300 different underlying securities.
\9\ These values are theoretical in that they are indications of
potential market prices for options that have not traded (i.e. do
not yet exist). Market participants sometimes express option values
in percentage terms rather than in dollar terms because they find it
is easier to assess the change, or lack of change, in the
marketplace from one day to the next when values are expressed in
percentage terms.
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[[Page 42617]]
The Exchange uses values produced by CBOE registered market-makers
to produce COPS Data. Participating CBOE market-makers submit values to
MDX on options series specified by MDX on a daily basis. These values
are generated by the market-maker's internal pricing models. The
valuations that MDX ultimately publishes are an average of multiple
contributions of values from participating CBOE market-makers. For each
value provided by MDX through COPS, MDX includes a corresponding
indication of the number of market-maker contributors that factored
into that value.
CBOE market-makers that meet the following objective qualification
criteria are allowed to contribute values to MDX for purposes of
producing COPS Data. Interested CBOE market-makers must be approved by
the Exchange, have the ability to provide valuations to MDX in a timely
manner each day after the close of trading, and sign a services
agreement with CBOE. Interested CBOE market-makers must also have the
ability to provide valuations on several different types of options,
including (i) options on all open FLEX series traded on any exchange
that offers FLEX options for trading, (ii) options on any potential new
FLEX options series, (iii) OTC options that have the same degree of
customization as FLEX options, and (iv) customized options where the
strike price is expressed in percentage terms (the valuations provided
to MDX must also be expressed in percentage terms). In addition,
interested CBOE market-makers must participate in a testing phase with
MDX. The values submitted by a market-maker during the testing phase
and in live production must meet MDX's quality control standards
designed to ensure the integrity and accuracy of COPS Data. MDX has
implemented procedures including monthly performance reviews to help
ensure the integrity and accuracy of COPS Data.
To help ensure that MDX receives numerous values from multiple
market-makers on a consistent basis, MDX shares revenue from the sale
of COPS Data with participating CBOE market-makers. The amount of
revenue that MDX shares with participating market-makers does not
exceed thirty percent (30%) of the total revenue received by MDX from
the sale of COPS Data. The revenue sharing is based on the following
table:
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Number of participating market- Total revenue Rev. share per market-
makers share (percent) maker
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3............................. 21 7%
4............................. 24 6%
5 or more..................... 30 30% divided by the
number of
participating market-
makers
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If only three market-makers participate, MDX shares 21% of total
revenue with each market-maker receiving a 7% share. If four market-
makers participate, MDX shares 24% of total revenue with each market-
maker receiving a 6% share. If five or more market-makers participate,
MDX shares 30% of total revenue divided equally among the market-
makers. There are currently three participating market-makers.\10\
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\10\ In order to help ensure that participating market-makers
submit values to MDX on 100% of the series to be valued, a market-
maker's revenue share is reduced as follows:
There is one ``grace day'' per month, i.e., if a market-maker
does not submit values for 100% of the series on just one day within
a given month, that market-maker will not lose any portion of its
revenue share for that month.
If a market-maker submits values for less than 100% of the
series on any two days within a month, that market-maker will
forfeit 10% of its revenue share for that month.
If a market-maker submits values for less than 100% of the
series on any three days within a month, that market-maker will
forfeit 25% of its revenue share for that month.
If a market-maker submits values for less than 100% of the
series on any four days within a month, that market-maker will
forfeit 50% of its revenue share for that month.
If a market-maker submits values for less than 100% of the
series on any five days within a month, that market-maker will
forfeit 75% of its revenue share for that month.
If a market-maker submits values for less than 100% of the
series on any six or more days within a month, that market-maker
will forfeit 100% of its revenue share for that month.
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The fees that MDX charges for COPS Data are set forth on the Price
List on the MDX Web site (www.marketdataexpress.com) (``MDX Web
site''). MDX currently charges a fee per option per day for ``end-of-
day'' COPS data. The amount of the fee is reduced based on the number
of options purchased. MDX charges Customers and Subscribers $1.25 per
option per day for each option purchased up to 50 options, $1.00 per
option per day for each option purchased from 51 to 100 options, $0.75
per option per day for each option purchased from 101 to 500 options,
and $0.50 per option per day for each option purchased over 500
options. MDX charges Customers and Subscribers $75 per day for
``historical'' COPS data. Customers are not currently charged any fees
for their external distribution of COPS Data.
Proposal
The Exchange proposes a number of changes to COPS for the purpose
of improving COPS to potentially make it more appealing to a wider
group of users. First, the Exchange proposes to provide additional data
through COPS. Specifically, COPS would also provide indicative values
for ``exotic'' options. Exotic options are options which are generally
traded OTC and are more complex than standard options, usually relating
to determination of payoff.\11\ An exotic option may also include a
non-standard underlying instrument, developed for a particular client
or for a particular market. In addition to exotic option values, the
Exchange also proposes to provide an implied volatility value with each
option value provided by COPS.
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\11\ For example, the payoff at expiration of an exotic option
may depend not just on the value of the underlying instrument at
expiration, but at its value at several times during the contract's
life.
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Second, the Exchange proposes to allow any CBOE Trading Permit
Holder (``TPH'') that meets the COPS qualification criteria to
contribute values to MDX for purposes of producing COPS Data. Third,
the Exchange proposes to amend the COPS qualification criteria to add
new criteria. Specifically, interested CBOE TPHs must also have the
ability to provide valuations on exotic options and an implied
volatility value with each option value provided.
Fourth, the Exchange proposes to specify a daily deadline for COPS
customers to submit requests for new options series to be priced by
COPS that day. Currently, COPS customers may request pricing for
options that are not already priced by COPS by submitting an email
request to MDX. The request must be submitted by a specified time each
day in order for the requested option to be priced by COPS that day
(currently, this deadline is 11:00 a.m.
[[Page 42618]]
CT). The Exchange proposes that MDX may change this deadline from time
to time by publishing the deadline and notice of changes to the
deadline on the MDX Web site.
Finally, in order to attract new TPH contributors to COPS, and in
light of significantly increased responsibilities such as pricing
exotic options, the Exchange proposes to amend the compensation paid to
COPS contributors. The Exchange proposes to temporarily change COPS
contributor compensation from the revenue sharing plan described above
to a fixed payment structure.\12\ MDX would pay a maximum of five
contributing TPHs a monthly fixed amount for the first six months of
the enhanced COPS program, or until annual COPS revenue exceeds
$1,000,000, whichever comes first. MDX would pay each of the three
current COPS contributors $12,000 per month and each of two new
contributors $7,000 per month. The purpose of the fixed monthly fee
would be to help contributors offset the cost of development work they
would likely need to complete in order to price exotic options. The
three current contributors would receive a higher monthly payment than
the new contributors because the current contributors have been a part
of the COPS program since its inception and have been working with MDX
to build the program. The Exchange proposes to limit the number of COPS
contributors to five during this initial period because the Exchange
believes five contributors is an ideal number to provide significant
price discovery yet not too dilutive as to diminish interest among TPHs
in participating in COPS.
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\12\ The Exchange is not proposing to eliminate the revenue
share plan, only to suspend it temporarily as described herein.
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The three current contributors would be ``grandfathered'' into the
enhanced COPS program and the new compensation structure. The two new
contributor positions would be open to all TPHs (announced via
regulatory circular) and filled during a trial period. Of all the TPHs
that try out for the two new positions, the top two TPHs that have the
highest weighted average \13\ contributions over the course of the
trial period would be added to the program, assuming continued
adherence to COPS quality control standards.
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\13\ MDX would publish on its Web site a description of the
methodology used for averaging the values submitted by TPHs to
produce a single publishable value (which methodology may change
from time to time). MDX intends to use a weighted average
methodology. A weighted average is an average in which each quantity
to be averaged (in this case each value submitted by a contributor)
is assigned a weight. These weightings determine the relative
importance of each quantity on the average.
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MDX would transition back to the original revenue share plan
described above after this initial six month period (or until annual
COPS revenue exceeds $1,000,000, whichever comes first), unless annual
COPS revenue exceeds $2,000,000, in which case the percentage of total
COPS revenue shared with contributors would increase from 30% to 32% if
a new contributor is added to COPS.\14\ In subsequent years, if the
previous year's COPS revenue increases by $1,000,000 or more, the
percentage of total COPS revenue shared with contributors would
increase by 2% if an additional contributor is added to COPS. The total
number of COPS contributors would ultimately be limited to fifteen. The
Exchange believes limiting the number of contributors to fifteen would
help keep the revenue share of each TPH at a level sufficient to
maintain TPH interest in participating in COPS and incent them to
produce high quality valuations. The Exchange further believes that the
value of additional contributor prices beyond fifteen would be very
limited.
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\14\ The addition of new contributors would be accomplished
through the same try out mechanism described above. This try out
mechanism would also be used if a contributor is removed from COPS,
or voluntarily leaves the program.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\15\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \16\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \17\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
\17\ Id.
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In adopting Regulation NMS, the Commission granted self-regulatory
organizations and broker-dealers increased authority and flexibility to
offer new and unique market data to the public. It was believed that
this authority would expand the amount of data available to consumers,
and also spur innovation and competition for the provision of market
data. The Exchange believes the proposal to provide exotic option and
implied volatility values through COPS is in keeping with those
principles by promoting increased transparency through the
dissemination of useful data and also by clarifying its availability to
market participants.
The Exchange believes the proposed rule change is not designed to
permit unfair discrimination between CBOE TPHs because it would allow
any CBOE TPH that meets the COPS qualification criteria to participate
in COPS (assuming continued adherence to COPS quality control
standards). Expanding eligibility for COPS to all CBOE TPHs may result
in more contributors, which should help improve the quality of COPS
Data.
The Exchange believes the proposal to add new COPS qualification
criteria is consistent with the protection of investors and the public
interest in that it would help ensure that only TPHs who are able to
produce quality valuations for all categories of COPS Data are allowed
to participate in the program.
The Exchange believes the proposal to specify a daily deadline for
customers to submit requests for new options series to be priced by
COPS is consistent with just and equitable principles of trade because
it would provide MDX and contributors with enough time to price the new
options series the same day.
The Exchange believes the proposal to grandfather the three current
contributors into the enhanced COPS program and pay them a higher fixed
monthly fee than new contributors for a limited period of time is not
unfairly discriminatory because the current contributors have been a
part of COPS since its inception and have helped MDX build the program.
For example, in advance of the COPS launch in January 2013, the current
contributors participated in trial runs with MDX to help ensure their
values were in line with MDX's expectations. The current contributors
also helped MDX work out the flow of the daily file transfer process
(MDX delivers to contributors a file of options series to be priced,
the contributors return the file including their option values). In
addition,
[[Page 42619]]
contributors have assisted MDX with promotion of COPS. Through these
efforts, the current contributors have helped MDX lay the ground work
for new contributors to join COPS. The Exchange believes limiting the
number of COPS contributors to five initially, and ultimately to
fifteen, is not unfairly discriminatory because all TPHs would be
eligible to try out for the limited COPS contributor positions and to
be selected if they perform best during a trial period.
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. The proposed rule change would
allow the Exchange, through MDX, to disseminate COPS Data on a
voluntary basis. COPS is voluntary on the part of the Exchange, which
is not required to offer such services, and voluntary on the part of
prospective customers who are not required to use it. The Exchange
notes there are at least a small number of market data vendors that
produce option value data that is similar to COPS Data and market data
users may elect to buy these other products if they choose.\18\ The
Options Clearing Corporation (``OCC'') also produces FLEX option value
data that is similar to the FLEX option value data that is included in
COPS.\19\ The Exchange believes the proposed COPS enhancements may help
attract new customers to COPS and new order flow to the Exchange,
thereby improving the Exchange's ability to compete in the market for
options order flow and executions.
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\18\ These vendors include SuperDerivatives, Markit, Prism, and
Bloomberg's BVAL service.
\19\ The OCC makes this data available on its Web site at http://www.theocc.com/webapps/flex-reports.
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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
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing rule does not (i) significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate if consistent with the protection of investors
and the public interest, provided that the self-regulatory organization
has given the Commission written notice of its intent to file 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,\20\ the proposed rule change has become effective
pursuant to Section 19(b)(3)(A) of the Act \21\ and Rule 19b-4(f)(6)
thereunder.\22\ 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. If
the Commission takes such action, the Commission will institute
proceedings to determine whether the proposed rule change should be
approved or disapproved.
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\20\ The Exchange has fulfilled this requirement.
\21\ 15 U.S.C. 78s(b)(3)(A).
\22\ 17 CFR 240.19b-4(f)(6).
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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-2014-057 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2014-057. 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-2014-057 and should be
submitted on or before August 12, 2014.
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. 2014-17145 Filed 7-21-14; 8:45 am]
BILLING CODE 8011-01-P