[Federal Register Volume 80, Number 22 (Tuesday, February 3, 2015)]
[Notices]
[Pages 5863-5865]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-02012]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74159; File No. SR-CBOE-2015-007]
Self-Regulatory Organizations: Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Adopt a Box Spread Strategy Rebate for Users of
the Exchange's Customized Options Pricing Service
January 28, 2015.
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 January 15, 2015, 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
The Exchange proposes to adopt a box spread strategy rebate for
users of the Exchange's Customized Options 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 Exchange proposes to adopt a box spread strategy rebate for
users of the Exchange's COPS.\3\ 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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\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), Securities Exchange Act Release No. 70845
(November 12, 2013), 78 FR 69168 (November 18, 2013) (SR-CBOE-2013-
104), and Securities Exchange Act Release No. 72621 (July 16, 2014),
79 FR 42616 (July 22, 2014) (SR-CBOE-2014-057).
\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\ and implied volatility values
for four 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\ The fourth category includes ``exotic''
options.\10\
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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.
\10\ Exotic options are options which are generally traded OTC
and are more complex than standard options, usually relating to
determination of payoff. An exotic option may also include a non-
standard underlying instrument, developed for a particular client or
for a particular market.
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The Exchange uses values produced by CBOE Trading Permit Holders
(``TPHs'') to produce COPS Data. Participating CBOE TPHs submit values
to MDX on options series specified by MDX on a daily basis. These
values are generated by the TPH's internal pricing models. The
valuations that MDX ultimately publishes are an average of multiple
contributions of values from participating CBOE TPHs. 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 TPHs that meet the following objective qualification criteria
are allowed to contribute values to MDX for purposes of producing COPS
Data. Interested CBOE TPHs must be approved by the Exchange, have the
[[Page 5864]]
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 TPHs must also have the ability to provide both
indicative and implied volatility 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, (iv) customized options where
the strike price is expressed in percentage terms (the valuations
provided to MDX must also be expressed in percentage terms), and (v)
exotic options. In addition, interested CBOE TPHs must participate in a
testing phase with MDX. The values submitted by a TPH 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.
Any TPH that meets the COPS qualification criteria may contribute to
COPS. 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 TPHs
on a consistent basis, MDX shares revenue from the sale of COPS Data
with participating CBOE TPHs.\11\ 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 valuations purchased.
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\11\ See Securities Exchange Act Release No. 72621 (July 16,
2014), 79 FR 42616 (July 22, 2014) (SR-CBOE-2014-057) for a detailed
description of the Exchange's COPS Data revenue-sharing plan.
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Interpretation .02 to CBOE Rule 6.42 defines a ``box spread'' as
``an aggregation of positions in a long call option and short put
option with the same exercise price (``buy side'') coupled with a long
put option and short call option with the same exercise price (``sell
side'') all of which have the same aggregate current underlying value,
and are structured as either: (A) A ``long box spread'' in which the
sell side exercise price exceeds the buy side exercise price or (B) a
``short box spread'' in which the buy side exercise price exceeds the
sell side exercise price.'' Essentially, for our purposes, a box spread
involves being synthetically long an underlying product at one price
and synthetically short the underlying product at a higher price. It is
constructed through the combination of four options. All options have
the same underlying product and same expiration date. The synthetic
long position is achieved through the purchase of a call option and the
sale of a put option at the same strike price and expiration date. The
synthetic short position, conversely, is achieved through the purchase
of a put and the sale of a call at the same strike price (the strike
price of the synthetic short is higher than the strike price of the
synthetic long).
For example, one could construct a 1000/2000 box spread in option
XYZ expiring January 16, 2015. To establish the synthetic long, you
would buy one XYZ call with a strike price of 1000 and sell one XYZ put
with a strike price of 1000. Then, to establish the synthetic short,
you would buy one XYZ put with a strike price at 2000 and sell one XYZ
call with a strike price at 2000.
The payoff at expiration of a box spread is the difference between
the higher-struck synthetic short minus the lower-struck synthetic
long. Therefore, the value of the box spread employed in the example
above would be 1000. The price of a box spread is the present value of
the payoff, and therefore, box spreads provide useful information about
interest rate assumptions within the options markets. If the box spread
in the example above was being quoted in the market at 999.50, this
would imply an interest rate of 0.05%.
COPS users (and potential COPS users) are usually interested in a
number of series (aside from just the one included in the box spread).
As such, it is useful for them to know the implied interest rate in the
options market. The current COPS fee structure would require these
customers to purchase not only the four series in the box spread, but
also the other series in which their primary interest lies. Charging
the box spread by series makes COPS cost-prohibitive for some
customers. Indeed, the Exchange believes that a number of potential
COPS customers are not using COPS because the current fee structure
(charging for all four valuations of a box spread) is deterring these
potential COPS customers from becoming COPS users.
As such, the Exchange proposes to institute a COPS Box Strategy
Rebate (the ``Rebate'').\12\ Under the proposed rebate, the Exchange
would ultimately treat the four orders involved in creating the box
spread as one series for fee purposes. Because Exchange systems are not
currently configured to recognize four separate orders as being part of
one box spread, the Exchange would make available a COPS Box Strategy
Rebate Request Form (the ``Form''). This Form will be very similar to
the Exchange's current ``Strategies Rebate Form'' and would involve
listing the relevant trade details necessary to denote the four series
as part of one box spread.\13\ Once the rebate form has been submitted
and verified by CBOE as having described a box spread,\14\ the TPH will
be rebated three series' worth of transaction fees. In sum, COPS users
purchasing four options valuations for a box spread can be rebated the
cost of three of the valuations by submitting the COPS Box Strategy
Rebate Request Form within three days of the end of the month in which
the box spread valuations were purchased.
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\12\ The Exchange initially filed the proposed fee change on
January 2, 2015 (SR-CBOE-2015-001). On January 15, 2015, the
Exchange withdrew that filing and submitted this filing.
\13\ These details would include the execution date, option
symbol, put/call, and strike price for each of the four options
purported to compose the box spread.
\14\ The Exchange will verify that the purported box spread was
composed of four options, all with the same underlying product and
expiration date, that create a synthetic long and synthetic short
position.
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So, for example, if a COPS user purchased four valuations that made
up a box spread, he would be charged $5.00.\15\ Upon completing the
Form, he would then be rebated $3.75. The Exchange currently institutes
a similar rebate process for transaction fees assessed to multi-class
spread orders, short stock interest, reversal, conversion (reversals
and conversions are components of a box spread), and jelly roll
strategy orders.\16\
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\15\ This assumes that the COPS user purchased 0-50 valuations
per day. The Exchange offers lower per-valuation prices based on the
number of valuations purchased per day (See the COPS Price List on
the MDX Web site).
\16\ See CBOE Fees Schedule, Footnote 13.
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From a practical standpoint for the users, the purpose of COPS is
to get end-of-day valuations. COPS users want to know the inputs into
an option's price. There are five major inputs into an option's price:
(1) Underlying price, (2) time to expiration, (3) strike price, (4)
implied volatility, and (5) interest rates. The proposed box spread
rebate would allow the Exchange to provide COPS users with a cost
effective method to extract implied interest rates.
The proposed change is to take effect on January 2, 2015.\17\
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\17\ The Commission notes that CBOE's proposal was filed on
January 15, 2015, but a prior proposed rule change containing the
same fee change was filed on January 2, 2015 and withdrawn by CBOE
on January 15, 2015. See infra footnote 12.
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[[Page 5865]]
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\18\ Specifically, the Exchange believes the proposed rule change
is consistent with Section 6(b)(4) of the Act,\19\ which requires that
Exchange rules provide for the equitable allocation of reasonable dues,
fees, and other charges among its Trading Permit Holders and other
persons using its facilities. The Exchange believes the Rebate is
reasonable because it will allow COPS users who purchase four
valuations that make up a box spread to only be ultimately charged for
one of those valuations (thereby saving three valuations' worth of
fees).
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(4).
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The Exchange believes the Rebate is equitable and not unfairly
discriminatory because it will apply to all COPS users who purchase
four valuations that make up a box spread. While receiving end-of-day
valuations via COPS is extremely different than, and not really
comparable to, trading on CBOE, it should be noted that the components
of a box spread trade, reversals and conversions, are also subject to
rebates.\20\ From a practical standpoint for the users, the purpose of
COPS is to get end-of-day valuations. COPS users want to know the
inputs into an option's price. There are five major inputs into an
option's price: (1) Underlying price, (2) time to expiration, (3)
strike price, (4) implied volatility, and (5) interest rates. The
proposed Rebate simply allows the Exchange to provide COPS users with a
cost effective method to extract implied interest rates. While the
Exchange cannot conceive of any purpose for COPS users to request
pricing on a box spread (other than those described herein), the Rebate
will be available to all COPS users.
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\20\ See CBOE Fees Schedule, Footnote 13.
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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. CBOE does not believe that the
proposed rule change will impose any burden on intramarket competition
that is not necessary or appropriate in furtherance of the purposes of
the Act because the Rebate will be available to all COPS users. CBOE
does not believe that the proposed rule change will impose any burden
on intermarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act because the Rebate only applies
to CBOE COPS users, and does not affect pricing or fees on other
exchanges. To the extent the Rebate makes CBOE a more attractive
marketplace for market participants on other exchanges, such market
participants may become CBOE market participants (and COPS users).
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
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \21\ and paragraph (f) of Rule 19b-4 \22\
thereunder. 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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\21\ 15 U.S.C. 78s(b)(3)(A).
\22\ 17 CFR 240.19b-4(f).
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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-2015-007 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2015-007. 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-2015-007 and
should be submitted on or before February 24, 2015.
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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-02012 Filed 2-2-15; 8:45 am]
BILLING CODE 8011-01-P