[Federal Register Volume 76, Number 45 (Tuesday, March 8, 2011)]
[Pages 12775-12778]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-5190]



[Release No. 34-64011; File No. SR-C2-2011-008]

Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing of a Proposed Rule Change To Allow the Listing and 
Trading of a P.M.-Settled S&P 500 Index Option Product

March 2, 2011.
    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 February 28, 2011, C2 Options Exchange, Incorporated (the 
``Exchange'' or ``C2'') 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 

[[Page 12776]]

The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to permit the listing and trading of P.M.-
settled S&P 500 Index options on C2. The text of the proposed rule 
change is available on the Exchange's Web site (http://www.c2exchange.com), at the Exchange's Office of the Secretary, and at 
the Commission.

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 those 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 parts of such 

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this rule filing is to permit the listing and 
trading on C2 of Standard & Poor's 500 Index (``S&P 500'') options with 
third-Friday-of-the-month (``Expiration Friday'') expiration dates for 
which the exercise settlement value will be based on the index value 
derived from the closing prices of component securities (``P.M.-
    To effect the above described change, the Exchange is proposing to 
add new supplemental provision (a) to C2 Chapter 24 to expressly 
provide that P.M.-settled S&P 500 options may be listed for trading on 
C2. Existing C2 rules governing the trading of index options would 
apply to this new product (e.g. trading rules, sales practice rules, 
margin requirements, and strike price interval requirements).
    The S&P 500 is a capitalization-weighted index of 500 stocks from a 
broad range of industries. The component stocks are weighted according 
to the total market value of their outstanding shares. The impact of a 
component's price change is proportional to the issue's total market 
share value, which is the share price times the number of shares 
outstanding. These are summed for all 500 stocks and divided by a 
predetermined base value. The base value for the S&P 500 is adjusted to 
reflect changes in capitalization resulting from, among other things, 
mergers, acquisitions, stock rights, and substitutions.
    The proposed contract would use a $100 multiplier, and the minimum 
trading increment would be $0.05 for options trading below $3.00 and 
$0.10 for all other series. Strike price intervals would be set no less 
than 5 points apart. Consistent with existing rules for index options, 
the Exchange would allow up to twelve near-term expiration months, as 
well as LEAPS.\3\ Expiration processing would occur on Saturday 
following the Expiration Friday. The product would have European-style 
exercise, and because it is based on the S&P 500 index, there would be 
no position limits.\4\

    \3\ Pursuant to CBOE Rule 24.9(b), index LEAPS may expire from 
12-60 months from the date of issuance.
    \4\ There would be reporting requirements pursuant to Rule 4.13, 
Reports Related to Position Limits, and Interpretation and Policy 
.03 to Rule 24.4, Position Limits for Broad-Based Index Options, 
which sets forth the reporting requirements for certain broad-based 
indexes that do not have position limits.

    C2 notes that ample precedent exists for P.M. settlement of broad-
based index options. For example, OEX (an index option contract based 
on the Standard & Poor's 100 index) has been P.M.-settled since 
1983.\5\ Also, FLEX Options have P.M. settlements on any expiration day 
(pursuant to a pilot program).\6\ Similarly, CBOE recently established 
a pilot program that permits P.M.-settled options on broad-based 
indexes expiring on any Friday of the month, other than the third 
Friday of the month, as well as the last trading day of the month.\7\ 
CBOE also trades Quarterly Option Series \8\ that overlie exchange 
traded funds or indexes, and Quarterly Index Expirations \9\ that are 
cash-settled options on certain broad-based indexes, both of which 
expire at the close of business on the last business day of a calendar 
quarter and are P.M.-settled. CBOE has experience with these special 
dated options and has not observed any market disruptions resulting 
from the P.M.-settlement feature of these options.

    \5\ The Exchange notes that there are no futures or options on 
futures traded on the S&P 100 at this time.
    \6\ See Securities Exchange Act Release No. 61439 (January 28, 
2010), 75 FR 5831 (February 4, 2010) (SR-CBOE-2009-087) (order 
approving rule change to establish a pilot program to modify FLEX 
option exercise settlement values and minimum value sizes). This 
pilot expires on March 28, 2011.
    \7\ See Rule 24.9(e) and Securities Exchange Act Release No. 
62911 (September 14, 2010), 75 FR 57539 (September 21, 2010) (SR-
    \8\ See Rules 5.5(e) and 24.9(a)(2)(B).
    \9\ See Rule 24.9(c).

    In addition, the Exchange believes that the reasons supporting the 
preponderance of A.M.-settlement index options, which date back to the 
late 1980s/early 1990s for Non-FLEX Options and revolve around a 
concern about expiration pressure on stock exchanges (more specifically 
on specialists) at the close, are no longer relevant in today's market. 
For one, there are multiple primary listing and unlisted trading 
privilege (UTP) markets for the stocks underlying the index, and 
trading is widely dispersed among several stock exchanges and 
alternative trading systems. Many of these markets use closing cross 
procedures and employ closing order types to facilitate orderly 
closings.\10\ Moreover, today stock order flow is predominantly 
electronic and the ability to smooth out openings and closings is 
greatly enhanced and market-on-close procedures work just as well as 
opening procedures. Thus, the Exchange does not believe that any market 
disruptions will be encountered with the introduction of P.M.-settled 
S&P 500 index options.

    \10\ For example, see Nasdaq Rule 4754 (Nasdaq Closing Cross).

    The Exchange also notes that P.M.-settled options predominate in 
the OTC market, and C2 is not aware of any adverse effects in the stock 
market attributable to the P.M.-settlement feature. C2 is merely 
proposing to offer a P.M.-settled product in an exchange environment 
which offers the benefit of added transparency, price discovery, and 
    In response to any potential concerns that disruptive trading 
conduct could occur as a result of the concurrent listing and trading 
of two index option products based on the same index but for which 
different settlement methodologies exist (i.e., one is A.M.-settled and 
one is P.M.-settled), the Exchange notes that for roughly five years 
(1987 to 1992) CBOE listed and traded an A.M.-settled S&P 500 index 
option called NSX at the same time it listed and traded a P.M.-settled 
S&P 500 index option called SPX and CBOE did not observe any market 
disruptions as a result of offering both products.
    As proposed, the proposal would become effective on a pilot program 
basis for a period of fourteen months. If the Exchange were to propose 
an extension of the program or should the Exchange propose to make the 
program permanent, then the Exchange would submit a filing proposing 
such amendments to the program. The

[[Page 12777]]

Exchange notes that any positions established under the pilot would not 
be impacted by the expiration of the pilot. For example, a position in 
a P.M.-settled series that expires beyond the conclusion of the pilot 
period could be established during the 14-month pilot. If the pilot 
program were not extended, then the position could continue to exist. 
However, the Exchange notes that any further trading in the series 
would be restricted to transactions where at least one side of the 
trade is a closing transaction.
    As part of the pilot program, the Exchange would also submit a 
pilot program report to the Commission at least two months prior to the 
expiration date of the program (the ``annual report''). As described 
below, the annual report would contain an analysis of volume, open 
interest and trading patterns. The analysis would examine trading in 
the proposed option product as well as trading in the securities that 
comprise the S&P 500 index. In addition, for series that exceed certain 
minimum open interest parameters, the annual report would provide 
analysis of index price volatility and share trading activity. The 
annual report would be provided to the Commission on a confidential 
    The annual report would contain the following volume and open 
interest data:
    (1) Monthly volume aggregated for all trades;
    (2) Monthly volume aggregated by expiration date;
    (3) Monthly volume for each individual series;
    (4) Month-end open interest aggregated for all series;
    (5) Month-end open interest for all series aggregated by expiration 
date; and
    (6) Month-end open interest for each individual series.

In addition to the annual report, the Exchange would provide the 
Commission with interim reports of the information listed in Items (1) 
through (6) above periodically as required by the Commission while the 
pilot is in effect. These interim reports would also be provided on a 
confidential basis. The annual report would also contain the 
information noted in Items (1) through (6) above for Expiration Friday, 
A.M.-settled S&P 500 index options traded on CBOE.
    In addition, the annual report would contain the following analysis 
of trading patterns in Expiration Friday, P.M.-settled S&P 500 Index 
option series in the pilot:
    (1) A time series analysis of open interest; and
    (2) An analysis of the distribution of trade sizes.

Also, for series that exceed certain minimum parameters, the annual 
report would contain the following analysis related to index price 
changes and underlying share trading volume at the close on Expiration 
    (1) A comparison of index price changes at the close of trading on 
a given Expiration Friday with comparable price changes from a control 
sample. The data would include a calculation of percentage price 
changes for various time intervals and compare that information to the 
respective control sample. Raw percentage price change data as well as 
percentage price change data normalized for prevailing market 
volatility, as measured by the CBOE Volatility Index (VIX), would be 
provided; and
    (2) A calculation of share volume for a sample set of the component 
securities representing an upper limit on share trading that could be 
attributable to expiring in-the-money series. The data would include a 
comparison of the calculated share volume for securities in the sample 
set to the average daily trading volumes of those securities over a 
sample period. The minimum open interest parameters, control sample, 
time intervals, method for randomly selecting the component securities, 
and sample periods would be determined by the Exchange and the 
    The Exchange represents that it has sufficient capacity to handle 
additional traffic associated with this new listing, and that it has in 
place adequate surveillance procedures to monitor trading in these 
options thereby helping to ensure the maintenance of a fair and orderly 
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act \11\ and the rules and regulations thereunder and, in 
particular, the requirements of Section 6(b) of the Act.\12\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \13\ requirements that the rules of 
an exchange be designed to promote just and equitable principles of 
trade, to remove impediments to and to perfect the mechanism for a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest. The Exchange believes that 
the introduction of P.M. settlement for the subject index option in the 
manner proposed does not raise any meaningful regulatory concerns. 
Further, the Exchange believes that the proposal will not adversely 
impact fair and orderly markets on expiration Fridays for the 
underlying stocks comprising the S&P 500 index. As discussed in section 
(a) of Item 2 of this filing (the purpose section), the handling of 
orders at the close on the stock markets has matured considerably since 
concerns were initially raised in the late 1980s. Additionally, the 
proposed rule change would provide permit holders and investors with 
additional opportunities to trade S&P 500 options with a P.M. 
settlement feature in an exchange environment and subject to 
transparent exchange-based rules, and that investors would also benefit 
from the opportunity to trade in association with this product on 
Expiration Fridays thereby removing impediments to a free and open 
market consistent with the Act.

    \11\ 15 U.S.C. 78a et seq.
    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).

B. Self-Regulatory Organization's Statement on Burden on Competition

    C2 does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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:

[[Page 12778]]

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-C2-2011-008 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-C2-2011-008. This file 
number should be included on the subject line if e-mail 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 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of C2. 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-C2-2011-008 and should be 
submitted on or before March 29, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\

    \14\ 17 CFR 200.30-3(a)(12).

Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-5190 Filed 3-7-11; 8:45 am]