[Federal Register Volume 80, Number 90 (Monday, May 11, 2015)]
[Notices]
[Pages 26966-26970]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-11275]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74876; File No. SR-BOX-2015-06]
Self-Regulatory Organizations; BOX Options Exchange LLC; Notice
of Filing of Amendment No. 1 and Order Granting Accelerated Approval of
a Proposed Rule Change To Establish a Pilot Program, as Modified by
Amendment No. 1, To List and Trade Options Settling to the
RealVolTM SPY Index
May 5, 2015.
I. Introduction
On January 21, 2015, the BOX Options Exchange LLC (the
``Exchange'') 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 list and trade P.M.-settled options settling to
the RealVolTM SPY Index (``Index''). The proposed rule
change was published for comment in the Federal Register on February 5,
[[Page 26967]]
2015.\3\ On March 18, 2015, pursuant to Section 19(b)(2) of the Act,\4\
the Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\5\ On April 9, 2015, the Exchange filed Amendment No. 1 to the
proposed rule change.\6\ The Commission received one comment letter on
the proposed rule change.\7\ This Order grants approval of the proposed
rule change, as modified by Amendment No. 1, on an accelerated basis
for a twelve-month pilot period.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 74178 (January 30,
2015), 80 FR 6558 (February 5, 2015) (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 74526 (March 18,
2015), 80 FR 15653 (March 24, 2015). The Commission designated a
longer period within which to take action on the proposed rule
change and designated May 6, 2015, as the date by which it should
approve, disapprove, or institute proceedings to determine whether
to disapprove the proposed rule change.
\6\ See Amendment No. 1; see also infra notes 14-18 and
accompanying text.
\7\ See letter from John O'Connell, Financial Integration, to
Commission, dated February 8, 2015 (``O'Connell Letter'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The Exchange proposes to list and trade, on a pilot basis, P.M.-
settled, cash-settled, European-style options settling to the Index
(proposed symbol VOLS \8\), for a pilot period of twelve months
(``Pilot Program''). The Index measures the daily realized volatility
\9\ of the SPDR S&P 500 Exchange-Traded Fund (``SPY''),\10\ based on a
21-trading day rolling realized volatility of the daily closing price
of SPY.
---------------------------------------------------------------------------
\8\ Options settling to the Index are hereafter referred to as
VOLS.
\9\ The Exchange states that realized volatility is the ``actual
volatility,'' ``statistical volatility,'' or ``asset volatility''
that the underlying asset has displayed over a specific period. See
Notice, supra note 3, at 6559.
\10\ According to the Exchange, SPY has historically been the
largest and most actively-traded exchange-traded fund in the United
States as measured by its assets under management and the value of
shares traded. See id.
---------------------------------------------------------------------------
The Index is calculated using a methodology developed by The VolX
Group Corporation (``VolX''),\11\ and will be calculated and maintained
by a third party calculation agent acting on behalf of VolX. The Index
will be updated on each trading day after the close of trading of
SPY.\12\ Although the Index is based only on daily closing values of
SPY, a real-time version of the Index that is based on the current SPY
price will be calculated during the trading day and disseminated at
least every 15 seconds during the trading day to market data vendors.
This real-time version will provide an estimate of the Index at the
close.\13\ The Exchange states that values of the Index also will be
disseminated to market information vendors such as Bloomberg and
Thomson Reuters. In the event the Index ceases to be maintained or
calculated, 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.
---------------------------------------------------------------------------
\11\ See id. (describing in more detail the calculation
methodology for the Index).
\12\ According to the Exchange, if the current published value
of SPY is not available, because of a market disruption event where
the market cannot open and there is no closing price for SPY, for
example, the Index will continue to be calculated and disseminated.
The calculation of the Index will compensate for the missing day's
returns by lowering the value of ``n'' in the formula by the number
of days that there is no closing price for SPY. See id.
\13\ The Exchange represents that after the market close, the
real-time formula and the formula used calculate to the Index will
have exactly the same value. See id. at 6559-6560 (describing in
more detail the calculation of the real-time version of the Index).
---------------------------------------------------------------------------
The Exchange proposes that its standard trading hours for index
options (9:30 a.m. to 4:15 p.m., Eastern time) will apply to VOLS.
Standard VOLS will expire on the third Friday of each month. Trading in
expiring VOLS will normally cease at 4:15 p.m. (Eastern time) on the
business day of expiration, or, in the case of an option contract
expiring on a day that is not a business day, on the last business day
before its expiration. The exercise and settlement value will be
calculated based on the Index value at the close of the last business
day of trading, which is ultimately based on the closing price of SPY
on the last business day of trading, for its final input value. 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.
The Exchange proposes to adopt minimum trading increments for VOLS
to be $0.05 for series trading below $3, and $0.10 for series trading
at or above $3. The Exchange also proposes to set the minimum strike
price interval at $0.50 strike price (or greater) intervals for VOLS
where the strike price is less than $75; $1 strike price (or greater)
intervals where the strike price is $200 or less; and $5 strike price
(or greater) intervals where the strike price is greater than $200.
Amendment No. 1 corrects an inaccurate statement in the Notice
regarding the exercise price range limitations for new series of index
options.\14\ Under the Exchange's rules, when new series of index
options with a new expiration date are opened for trading, or when
additional series of index options in an existing expiration date are
opened for trading, as the current value of the underlying 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 underlying index at the time such
series are first opened for trading.\15\ The term ``reasonably related
to the current index value of the underlying index'' means that the
exercise price is within 30% of the current index value, as defined in
BOX Rule 6090(c)(4).\16\ In the Notice, the Exchange stated that it
proposed to eliminate, for VOLS, the range limitation in BOX Rule
6090(c)(3) requiring the exercise prices of new or additional series of
index options to be reasonably related to the current value of the
underlying index at the time such series are first opened for trading.
The Notice erroneously stated that the Exchange's proposal to permit
exercise prices without a range limitation would be identical to those
adopted by the Chicago Board Options Exchange, Incorporated (``CBOE'')
for options on the CBOE Volatility Index (``VIX'').\17\ Amendment No. 1
provides that the exercise price ranges for VOLS will be subject to the
exercise price range limitations under BOX Rule 6090(c)(3).\18\
---------------------------------------------------------------------------
\14\ See Amendment No. 1.
\15\ See BOX Rule 6090(c)(3).
\16\ See Notice, supra note 3, at 6560.
\17\ See id.
\18\ Amendment No. 1 also modifies Exhibit 5 by striking from
the proposed text of BOX Rule 6090(c)(7) an erroneous reference to
BOX Rules 6090(c)(3) and (c)(4). See Amendment No. 1.
---------------------------------------------------------------------------
The Exchange states that its rules provide that index option
contracts may expire at three-month intervals or in consecutive
months.\19\ The Exchange proposes to list VOLS in six consecutive
expiration months.\20\ In addition, long-term option series having up
to 180 months to expiration \21\ and Short Term Option Series \22\ in
VOLS may also be
[[Page 26968]]
listed and traded.\23\ VOLS will be quoted and traded in U.S.
dollars.\24\
---------------------------------------------------------------------------
\19\ See Notice, supra, note 3, at 6560; BOX Rule 6090(a)(3).
\20\ For example, the Exchange states that six monthly
expirations from January through June may be listed. This is
consistent with BOX Rule 6090(a)(3), which permits the Exchange to
list up to six expiration months at any one time. See Notice, supra
note 3, at 6560.
\21\ See BOX Rule 6090(b)(1).
\22\ See IM-6090-2 to BOX Rule 6090. The Exchange states that it
may open Short Term Option Series for trading on any Thursday or
Friday that is a business day and that expire on each of the next
five Fridays that are business days and are not Fridays in which
monthly options series or quarterly options series expire. See
Notice, supra note 3, at 6561; see also IM-6090-2(a) to BOX Rule
6090. The Exchange states that the interval between strike prices on
Short Term Options Series may be $0.50 or greater where the strike
price is less than $75, and $1 or greater where the strike price is
between $75 and $150. During the month prior to expiration of an
index option class that is selected for the Short Term Option Series
Program, the strike price intervals for the related non-Short Term
Option shall be the same as the strike price intervals for the Short
Term Option. See Notice, supra note 3, at 6561; see also IM-6090-
2(b)(5) to BOX Rule 6090.
\23\ See Notice, supra note 3, at 6559.
\24\ See BOX Rule 6090(a)(1).
---------------------------------------------------------------------------
The Exchange believes that the Index is a broad-based index, as
that term is defined in BOX Rule 6010(j).\25\ The Exchange proposes
that there shall be no position or exercise limits for VOLS, and also
proposes to apply margin requirements for the purchase and sale of VOLS
that are identical to the margin requirements adopted by CBOE for
options on the VIX.\26\
---------------------------------------------------------------------------
\25\ BOX Rule 6010(j) defines the term ``broad-based index'' as
an index designed to be representative of a stock market as a whole
or a range of companies in unrelated industries.
\26\ The Exchange has proposed to amend BOX Rule 10120 (Margin
Requirements) to make clear that the margin requirements for VOLS
will be identical to those adopted by CBOE for options on the VIX.
See CBOE Rule 12.3.
---------------------------------------------------------------------------
In addition, the Exchange proposes that the trading of options on
the Index will be subject to the same rules that currently govern the
trading of Exchange index options, including sales practice rules and
trading rules.\27\ Trading of VOLS will also be subject to the trading
halt procedures applicable to other index options traded on the
Exchange.\28\ Further, Section 4000 of the Exchange's rules, which is
designed to protect public customer trading, will apply to trading in
VOLS.
---------------------------------------------------------------------------
\27\ See Notice, supra note 3, at 6561.
\28\ Id. at 6560; see also BOX Rule 6080(c).
---------------------------------------------------------------------------
The Exchange believes that because the Index will settle using
published quotes for SPY and there are currently no position limits for
SPY options, it is appropriate not to impose position or exercise
limits for VOLS. The Exchange notes that because the size of the market
underlying SPY options is so large, it should dispel concerns regarding
market manipulation. The Exchange believes that the same reasoning
applies to VOLS since the value of VOLS is derived from the realized
volatility of SPY. The Exchange also notes that VIX options are not
subject to any position or exercise limits.\29\ The Exchange represents
that it has an adequate surveillance program in place for the VOLS
product and intends to apply to it the same program procedures that it
applies to the Exchange's other options products.\30\ The Exchange
states that its surveillance procedures will allow the Exchange to
adequately surveil for any potential manipulation in the trading of
VOLS. The Exchange states that, in its normal course of surveillance,
it will monitor for any potential manipulation of the Index settlement
value according to the Exchange's current procedures. In addition, the
Exchange notes that it is a member of the Intermarket Surveillance
Group, through which it can coordinate surveillance and investigative
information sharing in the stock and options markets with all of the
U.S. registered stock and options markets. The Exchange also represents
that it has the necessary system capacity to support additional
quotations and messages that will result from the listing and trading
of VOLS.\31\
---------------------------------------------------------------------------
\29\ See Notice, supra note 3, at 6560-6561.
\30\ See id. at 6561.
\31\ Id.
---------------------------------------------------------------------------
The Exchange proposes that proposed rule change to list and trade
VOLS be approved on a pilot basis for a period of twelve months. As
part of the Pilot Program, the Exchange committed to submit a pilot
program report to the Commission two months prior to the expiration
date of the pilot program (the ``annual report'').\32\ The annual
report would include an analysis of volume, open interest, and trading
patterns. The analysis would examine trading in VOLS as well as trading
in SPY. In addition, for series that exceed certain minimum open
interest parameters, the annual report would provide an analysis of
index price volatility and SPY trading activity. In addition to the
annual report, the Exchange committed to provide the Commission with
periodic interim reports while the pilot is in effect that would
contain some, but not all, of the information contained in the annual
report (``interim reports''). In its filing, BOX notes that it would
provide the annual and interim reports to the Commission on a
confidential basis.\33\
---------------------------------------------------------------------------
\32\ Id. at 6561-6562.
\33\ Id. at 6562.
---------------------------------------------------------------------------
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 exchange,\34\ and, in particular, the requirements
of Section 6 of the Act.\35\ Specifically, the Commission finds that
the proposed rule change is consistent with Section 6(b)(5) of the
Act,\36\ which requires, among other things, that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, 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. In particular, the
Commission believes that the proposed VOLS options product provides
investors with an additional trading and hedging mechanism. Further, as
noted above, the Commission received one comment letter in support of
the proposal and endorsed the usefulness of the VOLS products for these
purposes. The comment letter stated, ``[t]hese options will be
extremely helpful for hedging index option exposure, equity portfolios,
and as a risk-management tool for hedge fund managers.'' \37\ In
addition, the Commission believes that the proposal will allow BOX to
conduct a limited and carefully monitored pilot for the listing and
trading of VOLS, as proposed.
---------------------------------------------------------------------------
\34\ 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).
\35\ 15 U.S.C. 78f.
\36\ 15 U.S.C. 78f(b)(5).
\37\ See O'Connell Letter, supra note 7, at 1.
---------------------------------------------------------------------------
The Commission believes that the Exchange's proposal to impose no
position or exercise limits on VOLS is appropriate and consistent with
the Act. The Commission also believes that the proposed strike price
intervals are consistent with the Act. $0.50 or greater strikes for
VOLS where the strike price is less than $75, $1 or greater strike
price intervals for VOLS where the strike price is $200 or less, and $5
or greater strike price intervals for VOLS when the strike price is
greater than $200 should provide investors with added flexibility in
the trading of VOLS options and will further the public interest by
allowing investors to establish positions that are better tailored to
meet their investment objectives. Moreover, the Commission notes that,
under the Exchange's rules, the strike prices of new or additional
series of VOLs shall be reasonably related to--i.e., within 30% of--the
current value of the underlying index at the time such series are first
opened for trading.\38\ The Commission also notes that the Exchange has
represented that it has the necessary system capacity to
[[Page 26969]]
handle the additional quotations and messages associated with the
listing and trading of VOLS.\39\
---------------------------------------------------------------------------
\38\ See BOX Rule 6090(c)(3) and (c)(4).
\39\ See Notice, supra note 3, at 6561.
---------------------------------------------------------------------------
The Commission also believes that it is consistent with the Act to
apply margin requirements to the proposed VOLS product that are
identical to the margin requirements adopted by the CBOE for options on
the VIX. The Exchange has represented that BOX options participants and
their associated persons are bound by the initial and maintenance
margin requirements of either the CBOE or the New York Stock Exchange,
pursuant to BOX Rule 10120.\40\ As the CBOE VIX measures the expected
volatility of the S&P 500 Index, the Commission believes it is
acceptable to apply the same margin requirements applying to VIX
options to VOLS, which are options on an index measuring the realized
volatility of SPY. The Commission further believes that the Exchange's
proposed minimum trading increment, series openings, and other aspects
of the proposed rule change are appropriate and consistent with the
Act.
---------------------------------------------------------------------------
\40\ Id. at 6560.
---------------------------------------------------------------------------
In the Commission's order approving the listing and trading of
P.M.-settled options on the S&P 500 Index on CBOE,\41\ the Commission
noted that the potential impact on the market at expiration for the
underlying component stocks for a P.M.-settled, cash-settled index
option remained unclear, given past experience with the impact of P.M.
settlement of cash-settled index derivatives on the underlying cash
markets and the enhanced closing procedures that are now in use at the
primary equity markets.\42\ To assist the Commission in assessing any
potential impact of a P.M.-settled VOLS product on the options markets
as well as the underlying cash equities markets, BOX will be required
to submit data to the Commission as a condition of Commission approval
of the VOLS product on a pilot basis. The Commission believes that
BOX's proposed twelve-month pilot, together with the data and analysis
that BOX should provide to the Commission, should allow BOX and the
Commission to monitor for and assess any potential for adverse market
effects. Specifically, the data and analysis should assist the
Commission in evaluating the effect of allowing P.M. settlement for
VOLS on SPY.
---------------------------------------------------------------------------
\41\ See Securities Exchange Act Release No. 68888 (February 8,
2013), 78 FR 10668 (February 14, 2013).
\42\ Id. at 10669.
---------------------------------------------------------------------------
BOX's proposed twelve-month pilot will enable the Commission to
collect current data to assess and monitor for any potential for impact
on the markets. In particular, the data collected from BOX's Pilot
Program will help inform the Commission's consideration of whether the
pilot should be modified, discontinued, extended, or permanently
approved. The Pilot Program 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.
As a national securities exchange, the Exchange is required, under
Section 6(b)(1) of the Act,\43\ to enforce compliance by its members
and persons associated with its members with the provisions of the Act,
Commission rules and regulations thereunder, and its own rules. In this
regard, the Commission notes that trading of VOLS will be subject to
the same rules that currently govern the trading of other index options
on the Exchange.\44\ In addition, as noted above, the Exchange has
asserted that the Index settlement value is not susceptible to
manipulation.\45\ Moreover, the Exchange has represented that it has an
adequate surveillance program in place for options traded on the Index,
and will monitor for any potential manipulation of the Index settlement
value according to its current surveillance procedures.\46\ In
approving the proposed listing and trading of the Index options, the
Commission has also relied on BOX's representation that it has the
necessary system capacity to support the new options series that will
result from this proposal.\47\
---------------------------------------------------------------------------
\43\ 15 U.S.C. 78f(b)(1).
\44\ See supra note 27 and accompanying text.
\45\ See Notice, supra note 3, at 6561.
\46\ Id.
\47\ Id.
---------------------------------------------------------------------------
Accordingly, for the reasons stated above, the Commission finds
good cause, pursuant to Section 19(b)(2) \48\ of the Act, for approving
the Exchange's proposal, as modified by Amendment No. 1, prior to the
30th day after the date of publication of the notice in the Federal
Register.
---------------------------------------------------------------------------
\48\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
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-BOX-2015-06 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-BOX-2015-06. 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 will also 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-BOX-2015-06 and should be
submitted on or before June 1, 2015.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\49\ that the proposed rule change (SR-BOX-2015-06), as modified by
Amendment No. 1, be, and hereby is, approved on an accelerated basis
for a twelve-month pilot period set to expire on May 6, 2016.
---------------------------------------------------------------------------
\49\ 15 U.S.C. 78s(b)(2).
[[Page 26970]]
---------------------------------------------------------------------------
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\50\
---------------------------------------------------------------------------
\50\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-11275 Filed 5-8-15; 8:45 am]
BILLING CODE 8011-01-P