[Federal Register Volume 80, Number 136 (Thursday, July 16, 2015)]
[Notices]
[Pages 42152-42156]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-17398]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-75425; File No. SR-CBOE-2015-044]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed Rule, as Modified by Amendment No.
1, To Introduce Asian Style Settlement and Cliquet Style Settlement for
FLexible Exchange Broad-Based Index Options
July 10, 2015.
I. Introduction
On May 6, 2015, the Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission''), pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to permit Asian style settlement
and Cliquet style settlement for FLexible Exchange (``FLEX'') Broad-
Based Index options. The proposed rule change was published for comment
in the Federal Register on May 13, 2015.\3\ CBOE filed Amendment No. 1
to the proposed rule change on June 18, 2015.\4\ The Commission
received no comments regarding the proposal. 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\ See Securities Exchange Act Release No. 74914 (May 8, 2015),
80 FR 27408.
\4\ Amendment No. 1 replaces the original filing in its
entirety. Amendment No. 1 removes proposed amendments to the
strategy-based customer margin requirements in CBOE Rule 12.3 and
modifies Form 19b-4, and Exhibits 1, 3, and 5 to clarify that the
Exchange would apply the Exchange's existing strategy-based customer
margin requirements for broad-based index options, which are set
forth in Rule 12.3. Amendment No. 1 also deletes references to
portfolio margining from Form 19b-4 and Exhibits 1 and 3.
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II. Description of the Proposal
The Exchange proposes to amend CBOE Rules 24A.1 (Definitions),
24A.4 (Terms of FLEX Options), 24B.1 (Definitions) and 24B.4 (Terms of
FLEX Options) to permit Asian style settlement and Cliquet style
settlement for FLEX Broad-Based Index options.\5\
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\5\ Chapter XXIVA sets forth Flexible Exchange Options rules and
chapter XXIVB sets forth FLEX Hybrid Trading System rules.
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Asian Style Settlement
FLEX Broad-Based Index options with Asian style settlement will be
cash-settled call \6\ option contracts for which the final payout will
be based on an arithmetic average of specified closing values of the
underlying broad-based index (``Asian option''). Exercise (strike)
prices and premium quotations for Asian options will be expressed and
governed as provided for in CBOE Rules 24A.4(b)(2) and 24B.(b)(2).
Asian options will have a term of approximately one year and would
expire anytime from 350 to 371 days (which is approximately 50 to 53
calendar weeks) from the date of initial listing. The contract
multiplier for an Asian option will be $100.\7\
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\6\ Puts will not be permitted.
\7\ See Rules 24A.1(i) and 24B.1(m). ``The Index Multiplier for
FLEX Index Options is $100.''
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The parties to an Asian option contract will designate a set of
monthly observation dates and an expiration date for each contract. The
monthly observation date will be the date each month on which the price
of the underlying broad-based index will be observed for the purpose of
calculating the exercise settlement value for Asian options. Each Asian
option will have 12 consecutive monthly observation dates (which
includes an observation on the expiration date) and each observation
will be based on the closing price of the underlying broad-based index.
The specific monthly observation dates will be determined by working
backward from the farthest out observation date prior to the expiration
date. If a given monthly observation date falls on a non CBOE business
day (e.g., holiday or weekend), the monthly observation will be on the
immediately preceding business day (``preceding business day
convention''). The parties may not designate a subsequent business day
convention for Asian options.
Asian options will have European-style exercise and may not be
exercised prior to the expiration date. The exercise settlement value
for Asian options will be the arithmetic average of the closing values
of the underlying broad-based index on the 12 consecutive monthly
observation dates, which include the expiration date of the option.
Mathematically this is expressed as:
[GRAPHIC] [TIFF OMITTED] TN16JY15.001
[[Page 42153]]
Where Si is the closing price of the underlying broad-based index on
monthly observation date on the ith monthly observation date.
The exercise settlement amount for Asian options will be calculated
similarly to other options, i.e., the difference between the strike
price and the averaged settlement value will determine the value, or
``moneyness'' of the contract at expiration.
An example of an Asian FLEX call option expiring in-the-money
follows. On January 21, 2015, an investor hedging the value of the S&P
500 Index over a year purchases a call option expiring on January 22,
2016 with a strike price of 2000 and a contract multiplier of $100. The
option has monthly observation dates occurring on the 23rd of each
month.
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S&P 500 Index
Monthly observation date closing value
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23-Feb-15............................................ 2025.36
23-Mar-15............................................ 2049.34
23-Apr-15............................................ 2019.77
22-May-15 *.......................................... 1989.65
23-Jun-15............................................ 2005.64
23-Jul-15............................................ 2035.10
21-Aug-15 *.......................................... 2032.15
23-Sep-15............................................ 2076.18
23-Oct-15............................................ 2099.01
23-Nov-15............................................ 2109.32
23-Dec-15............................................ 2085.42
22-Jan-16............................................ 2084.81
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Exercise (Averaged) Settlement Value................. 24,611.75/12 =
2050.98
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* Because Asian FLEX options use the ``preceding business day
convention,'' the dates of May 23, 2015 and August 23, 2015, were not
used in the above example because those dates will fall on a weekend
or a holiday. Instead the business days immediately preceding those
dates were used as the monthly observation date.
The exercise settlement amount for this 2000 Asian FLEX call option
would be equal to $5,098. This amount would be determined by adding the
12 observed closing values for the S&P 500 Index and dividing that
amount by 12 (24,611.75/12), which is equal to 2050.98 (when rounded).
As a result, this 2000 call option would be $5,098 in-the-money (50.98
x $100).
If, in the above example, the strike price for the Asian FLEX call
option was 2060, that contract would have expired out-of-the-money.
This is because the exercise settlement value for this 2060 call option
is equal to 2050.98 (when rounded). Since the strike price of 2060 is
more than the 2050.98 exercise settlement value, this option would not
be exercised and would expire worthless.
Cliquet Style Settlement
FLEX Broad-Based Index options with Cliquet style settlement will
be cash-settled call \8\ option contracts for which the final payout
will be based on the sum of monthly returns (i.e., percent changes in
the closing value of the underlying broad-based index from one monthly
observation date to the next monthly observation date), subject to a
monthly return ``cap'' (e.g., 2%) applied over 12 monthly observation
dates (``Cliquet option''). Premium quotations for Cliquet options will
be expressed and governed as provided for in CBOE Rules 24A.4(b)(2) and
24B.(b)(2). Cliquet options will have a term of approximately one year
and will expire anytime from 350 to 371 days (which is approximately 50
to 53 calendar weeks) from the date of initial listing. The contract
multiplier for a Cliquet option will be $100.\9\
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\8\ Puts will not be permitted.
\9\ See CBOE Rules 24A.1(i) and 24B.1(m).
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The parties to a Cliquet option will designate a set of monthly
observation dates for each contract and an expiration date for each
contract. The monthly observation date will be the date each month on
which the price of the underlying broad-based index will be observed
for the purpose of calculating the exercise settlement value for
Cliquet FLEX options. Each Cliquet FLEX option will have 12 consecutive
monthly observation dates (which includes an observation on the
expiration date) and each observation will be based on the closing
price of the underlying broad-based index. The specific monthly
observation dates will be determined working backward from the farther
out observation date prior to the expiration date. If a given monthly
observation date falls on a non CBOE business day (e.g., holiday or
weekend), the monthly observation will be on the immediately preceding
business day (``preceding business day convention''). The parties may
not designate a subsequent business day convention for Cliquet options.
The parties to a Cliquet option will designate a capped monthly
return (percent change in the closing values of the underlying broad-
based index from one month to the next month) for the contract, which
will be the maximum monthly return that will be included in the
calculation of the exercise settlement value for the contract. On each
monthly observation date, the Exchange will determine the actual
monthly return (the percent change of the underlying broad-based index)
using the closing value of the broad-based index on the current monthly
observation date and the closing value of the broad-based index on the
previous monthly observation date. The Exchange will then compare the
actual monthly return to the capped monthly return. The value to be
included as the monthly return for a Cliquet option will be the lesser
of the actual monthly return or the capped monthly return.
For example, if the actual monthly return of the underlying broad-
based index was 1.75% and the designated capped monthly return for a
Cliquet option was 2%, the 1.75% value would be included (and not the
2%) as the value for the observation date to determine the exercise
settlement value. Using this same example, if the actual monthly return
of the underlying broad-based index was 3.30%, the 2% value would be
included (and not the 3.30%) as the value of the observation date to
determine the exercise settlement value. This latter example
illustrates that Cliquet options have a capped upside. Cliquet options
do not, however, have a capped downside for the monthly return that
would be included in determining the exercise settlement value. Drawing
on this same example, if the actual monthly return of the underlying
broad-based index was -4.07%, the -4.07% value would be included as the
value for the observation date to determine the exercise settlement
value. There would be, however, be a global floor for Cliquet options
so that if the sum of the monthly returns is negative, a Cliquet option
would expire worthless.
Unlike other options, Cliquet options will not have a traditional
exercise (strike) price. Rather, the exercise (strike) price field for
a Cliquet option will represent the designated capped monthly return
for the contract and would be expressed in dollars and cents. For
example, a capped monthly return of 2.25% would be represented by the
dollar amount of $2.25. The ``strike'' price for a Cliquet option may
only be expressed in a dollar and cents amount and the ``strike'' price
for a Cliquet option may only span a range between $0.05 and $25.95. In
addition, the ``strike'' price for a Cliquet option may only be
designated in $0.05 increments, e.g., $1.75, $2.50, $4.15. Increments
of $0.01 in the ``strike'' price field (representing the capped monthly
return) will not be permitted.
The first ``monthly'' return for a Cliquet option will be based on
the initial reference value, which will be the closing value of the
underlying broad-based index on the date a new Cliquet option is
listed. The time period measured for the first ``monthly'' return will
be between the initial listing date
[[Page 42154]]
and the first monthly observation date. For example, if a Cliquet
option was opened on January 1 and the parties designated the 31st of
each month as the monthly observation date, the measurement period for
the first monthly return would span the time period from January 1 to
January 31. The time period measured for the second monthly return, and
all subsequent monthly returns, would run from the 31st of one month to
the 31st of the next month (or the last CBOE business day of each month
depending on the actual number of calendar days in each month covered
by the contract).
Cliquet options will have European-style exercise and may not be
exercised prior to the expiration date. The exercise settlement value
for Cliquet options will be equal to the initial reference price of the
underlying broad-based index multiplied by the sum of the monthly
returns (with the cap applied) on the 12 consecutive monthly
observation dates, which include the expiration date of the option,
provided that the sum is greater than 0. If the sum of the monthly
returns (with the applied cap) is 0 or a less, the option will expire
worthless.\10\ Mathematically this is expressed as:
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\10\ Prior to expiration, it is possible that the accumulated
monthly returns could become negative to a point at which it is
known that the value of the contract at expiration would be zero.
The holder or writer of such a position may choose to exit the
position prior to expiration for a negligible credit or debit
amount, respectively.
[GRAPHIC] [TIFF OMITTED] TN16JY15.002
An example of a Cliquet option follows. On January 21, 2015, an
investor hedging the value of the S&P 500 Index over a year purchases a
Cliquet FLEX call option expiring on January 22, 2016 with a capped
monthly return of 2% and a contract multiplier of $100. The initial
reference price of the S&P 500 Index (closing value) on January 21,
2015 is 2000. The option has monthly observation dates occurring on the
23rd of each month.
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S&P 500 Index
Monthly observation date closing value Actual monthly Capped monthly Sum of monthly
(Si) return (%) return (CMRi) (%) returns (%)
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23-Feb-15........................... 2025.36 1.27 1.27 1.27
23-Mar-15........................... 2049.34 1.18 1.18 2.45
23-Apr-15........................... 2019.77 -1.44 -1.44 1.01
22-May-15*.......................... 1989.65 -1.49 -1.49 -0.48
23-Jun-15........................... 2005.64 0.80 0.80 0.32
23-Jul-15........................... 2035.10 1.47 1.47 1.79
21-Aug-15 *......................... 2032.15 -0.14 -0.14 1.65
23-Sep-15........................... 2076.18 2.17 ** 2.00 3.65
23-Oct-15........................... 2099.01 1.10 1.10 4.75
23-Nov-15........................... 2109.32 0.49 0.49 5.24
23-Dec-15........................... 2085.42 -1.13 -1.13 4.11
22-Jan-16........................... 2084.81 -0.03 -0.03 4.08
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Exercise Settlement Value........... [(4.08% * 2000.00)] + 2 = 83.60
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* Because Cliquet FLEX options use the ``preceding business day convention,'' the dates of May 23, 2015, and
August 23, 2015, were not used in the above example because those dates will fall on a weekend or a holiday.
Instead the business days immediately preceding those dates were used as the monthly observation dates.
** Monthly capped return applied.
[[Page 42155]]
The exercise settlement amount for this January 22, 2016 Cliquet
option, with a capped monthly 2% return (``strike price'') and a
contract multiplier of $100 would be equal to $8,360. This value would
be calculated by summing the monthly capped returns (equal to 4.08%)
and multiplying that amount by the initial reference price (equal to
2000), which equals 81.60. The ``strike price'' (2%) amount would then
be added to that amount (81.60) to arrive at an exercise settlement
value of 83.60. Because the ``strike price'' field for a Cliquet option
would be the manner in which the designated capped monthly return would
be identified for the contract and because the designated monthly
return for the contract would have been already substantively applied
to determine the exercise settlement value, the ``strike price'' of 2.0
would be subtracted from the exercise settlement value before the
contract multiplier ($100) would be applied [(83.60-2) * 100].
Accordingly, resulting payout for this contract would be $8,160.
If the sum of the monthly capped returns had been negative, this
option would have expired worthless.
Margin
The Exchange will margin Asian and Cliquet FLEX Broad-Based Index
options as ``broad-based index'' options under CBOE's existing
rules.\11\ Thus, under current Rule 12.3(c)(5)(A), the margin
requirement for a short call will be 100% of the current market value
of the contract plus up to 15% of the ``product of the current index
group value and the applicable index multiplier.'' Additional margin
may be required pursuant to Rules 12.3(h) and 12.10.
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\11\ See Exhibit 3 to Amendment No. 1.
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Exchange Rules Applicable
Except as modified by this proposal, the rules in chapters I
through XIX, XXIV, XXIVA and XXIVB will equally apply to Asian and
Cliquet options. For example, per CBOE Rule 6.1A (Extended Trading
Hours), Asian and Cliquet options will not be eligible for trading
during Extended Trading Hours. Also, for example, CBOE Rules 24A.7 and
24A.8 set forth the position limits and reporting requirements
applicable to FLEX Broad-Based Index options and Rules 24A.7 and 24B.7
set forth the exercise limits applicable to FLEX Broad-Based Index
options. Respecting positions and exercise limits, these provisions set
forth general rules and carve-outs for certain broad-based FLEX Broad-
Based Index options, which will apply with equal force to Asian and
Cliquet options.
Surveillance
The Exchange will use the same surveillance procedures currently
utilized for the Exchange's other FLEX Broad-Based Index options to
monitor trading in Asian and Cliquet options. The Exchange further
represents that these surveillance procedures shall be adequate to
monitor trading in options on these option products. For surveillance
purposes, the Exchange will have complete access to information
regarding trading activity in the pertinent underlying securities.
III. Discussion and Commission Findings
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.\12\
Specifically, the Commission finds that the proposed rule change is
consistent with section 6(b)(5) of the Act,\13\ 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. The Commission believes that the Asian and Cliquet settlement
styles for FLEX Broad-Based Index options may provide investors with
additional trading and hedging tools. The Commission also believes that
CBOE's proposal to allow Asian and Cliquet style settlement for FLEX
Broad-Based Index options may give investors and other market
participants the ability to individually tailor, within specified
limits, certain terms of those options. Further, the Commission
believes that the Exchange's proposal with respect to Asian and Cliquet
style settlement, contract specifications, margin, and other aspects of
the proposed rule are appropriate and consistent with the Act.
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\12\ 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).
\13\ 15 U.S.C. 78f(b)(5).
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The Exchange has represented that the launch of Asian and Cliquet
style settlement would be permitted subject to the Commission's
approval of an Options Clearing Corporation (``OCC'') rule filing to
make risk model changes necessary to accommodate the clearance and
settlement of the proposed options. The Exchange will issue a circular
to Trading Permit Holders to announce a specific launch date for the
proposed options.
The Commission notes that the Exchange would use the same
surveillance procedures currently utilized for the Exchange's other
FLEX Broad-Based Index options to monitor trading in those options with
Asian and Cliquet style settlement. The Exchange has represented that
these surveillance procedures shall be adequate to monitor trading in
options on these option products. The Exchange has also stated that for
surveillance purposes, the Exchange will have complete access to
information regarding trading activity in the pertinent underlying
securities.
IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 1
to 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-2015-044 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-2015-044. 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
[[Page 42156]]
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 CBOE. 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-2015-044 and should be submitted on or before
August 6, 2015.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of notice of the amendment in the Federal
Register. Amendment No. 1 modifies the proposed rule change by removing
proposed amendments to the strategy-based customer margin requirements
in CBOE Rule 12.3 and removing references to portfolio margining. The
Commission believes that the removal of the proposed margin
requirements for Asian and Cliquet FLEX Broad-Based Index options, set
forth in Amendment No. 1, simply clarify that the Exchange would apply
the existing strategy-based customer margin requirements for broad-
based index options to Asian and Cliquet options. In addition, the
Commission notes that the Exchange has represented that it will monitor
trading in the proposed products and would continue to evaluate the
strategy-based customer margin levels.\14\ Accordingly, the Commission
finds good cause, pursuant to section 19(b)(2) of the Act,\15\ to
approve the proposed rule change, as modified by Amendment No. 1, on an
accelerated basis.
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\14\ See Amendment No. 1.
\15\ 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,\16\ that the proposed rule change (SR-CBOE-2015-044), as modified
by Amendment No. 1, be, and it hereby is, approved on an accelerated
basis.
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\16\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-17398 Filed 7-15-15; 8:45 am]
BILLING CODE 8011-01-P