[Federal Register Volume 75, Number 101 (Wednesday, May 26, 2010)]
[Notices]
[Pages 29597-29599]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-12553]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62139; File No. SR-CBOE-2010-018]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving Proposed Rule Change, as Modified by
Amendment No. 1 Thereto, To List and Trade CBOE Gold ETF Volatility
Index Options
May 19, 2010.
I. Introduction
On March 18, 2010, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``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 options on the
CBOE Gold ETF Volatility Index (``GVZ''). On March 22, 2010, CBOE filed
Amendment No. 1 to the proposed rule change.\3\ The proposed rule
change was published for comment in the Federal Register on April 14,
2010.\4\ The Commission received no comment letters on the proposal.
This order approves the proposed rule change, as modified by Amendment
No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, CBOE made technical corrections to the
rule text.
\4\ See Securities Exchange Act Release No. 61859 (April 7,
2010), 75 FR 19439.
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II. Description
CBOE proposes to amend certain of its rules to allow the listing
and trading of cash-settled, European-style options on GVZ.
Index Design and Calculation
The calculation of GVZ is based on the VIX methodology applied to
options on the SPDR Gold Trust (``GLD''). GVZ is an up-to-the-minute
market estimate of the expected volatility of GLD calculated by using
real-time bid/ask quotes of CBOE listed GLD options. GVZ uses nearby
and second nearby options with at least 8 days left to expiration and
then weights them to yield a constant, 30-day measure of the expected
(implied) volatility.
For each contract month, CBOE will determine the at-the-money
strike price. The Exchange will then select the at-the-money and out-
of-the money series with non-zero bid prices and determine the midpoint
of the bid-ask quote for each of these series. The midpoint quote of
each series is then weighted so that the further away that series is
from the at-the-money strike, the less weight that is accorded to the
quote. To compute the index level, CBOE will calculate a volatility
measure for the nearby options and then for the second nearby options,
using the weighted mid-point of the prevailing bid-ask quotes for all
included option series with the same expiration date. These volatility
measures are then interpolated to arrive at a single, constant 30-day
measure of volatility.
CBOE will compute values for GVZ underlying option series on a
real-time basis throughout each trading day, from 8:30 a.m. until 3
p.m. (CT). GVZ levels will be calculated by CBOE and disseminated at
15-second intervals to major market data vendors.
[[Page 29598]]
Options Trading
Options on GVZ (``GVZ Options'') will be quoted in index points and
fractions, and one point will equal $100. The minimum tick size for
series trading below $3 will be 0.05 ($5.00) and above $3 will be 0.10
($10.00).
The Exchange is proposing to permit 1 point or greater strike price
intervals on GVZ Options. Initially, the Exchange will list in-, at-
and out-of-the-money strike prices and may open for trading up to five
series above and five series below the price of the calculated forward
value of GVZ, and LEAPS series. As for additional series, either in
response to customer demand or as the calculated forward value of GVZ
moves from the initial exercise prices of option series that have been
open for trading, the Exchange may open for trading up to five series
above and five series below the calculated forward value of GVZ, and
LEAPS series. The Exchange will not open for trading series with 1
point strike price intervals within 0.50 point of an existing 2.5 point
strike price with the same expiration month. The Exchange will not list
LEAPS on GVZ Options at strike price intervals less than 1 point.
Exercise and Settlement
The proposed options will typically expire on the Wednesday that is
thirty days prior to the third Friday of the calendar month immediately
following the expiration month (the expiration date of the options used
in the calculation of the index). If the third Friday of the calendar
month immediately following the expiring month is a CBOE holiday, the
expiration date will be thirty days prior to the CBOE business day
immediately preceding that Friday. Trading in the expiring contract
month will normally cease at 3 p.m. (CT) on the business day
immediately preceding the expiration date. Exercise will result in
delivery of cash on the business day following expiration. GVZ Options
will be A.M.-settled. The exercise settlement value will be determined
by a Special Opening Quotation (``SOQ'') of GVZ calculated from the
sequence of opening prices of a single strip of options expiring 30
days after the settlement date. The opening price for any series in
which there is no trade shall be the average of that options' bid price
and ask price as determined at the opening of trading.
The exercise-settlement amount will be equal to the difference
between the exercise-settlement value and the exercise price of the
option, multiplied by $100. When the last trading day is moved because
of a CBOE holiday, the last trading day for expiring options will be
the day immediately preceding the last regularly-scheduled trading day.
Position and Exercise Limits
For regular options trading, the Exchange is proposing to establish
position limits for GVZ Options at 50,000 contracts on either side of
the market and no more than 30,000 contracts in the nearest expiration
month. Positions in Short Term Option Series, Quarterly Options Series,
and Delayed Start Option Series would be aggregated with positions in
options contracts in the same GVZ class. Exercise limits would be the
equivalent to the proposed position limits.\5\ GVZ Options would be
subject to the same reporting requirements triggered for other options
dealt in on the Exchange.\6\
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\5\ See Rule 24.5, Exercise Limits, which provides that exercise
limits are equivalent to position limits.
\6\ See Rule 4.13, Reports Related to Position Limits.
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For FLEX Options trading, the Exchange proposes that the position
limits for FLEX GVZ Options will be equal to the position limits for
Non-FLEX GVZ Options established pursuant to Rule 24.4. Similarly, the
Exchange is proposing that the exercise limits for FLEX GVZ Options
will be equivalent to the position limits established pursuant to Rule
24.4. The proposed position and exercise limits for FLEX GVZ Options
are consistent with the treatment of position and exercise limits for
other FLEX Index Options. The Exchange is also proposing to provide
that as long as the options positions remain open, positions in FLEX
GVZ Options that expire on the same day as Non-FLEX GVZ Options, as
determined pursuant to Rule 24.9(a)(5), shall be aggregated with
positions in Non-FLEX GVZ Options and shall be subject to the position
limits set forth in Rules 4.11, 24.4, 24.4A and 24.4B, and the exercise
limits set forth in Rules 4.12 and 24.5.
Exchange Rules Applicable
Except as modified herein, the rules in Chapters I through XIX,
XXIV, XXIVA, and XXIVB will equally apply to GVZ Options.
The Exchange is proposing that the margin requirements for GVZ
Options be set at the same levels that apply to equity options under
Exchange Rule 12.3. Margin of up to 100% of the current market value of
the option, plus 20% of the underlying volatility index value must be
deposited and maintained. Additional margin may be required pursuant to
Exchange Rule 12.10.
The Exchange proposes to designate GVZ Options as eligible for
trading as flexible exchange options (``GVZ FLEX Options'') as provided
for in Chapters XXIVA (Flexible Exchange Options) and XXIVB (FLEX
Hybrid Trading System). GVZ FLEX Options will only expire on business
days that non-FLEX options on Volatility Indexes expire. As is
described earlier, the Exchange is proposing to amend Rule 24.9(a)(5)
to provide that the exercise settlement value of GVZ Options for all
purposes under CBOE Rules will be calculated as the Wednesday that is
thirty days prior to the third Friday of the calendar month immediately
following the month in which GVZ Options expire.
Capacity
CBOE represents that it believes the Exchange and the Options Price
Reporting Authority have the necessary systems capacity to handle the
additional traffic associated with the listing of new series that would
result from the introduction of GVZ Options.
Surveillance
The Exchange proposes to use the same surveillance procedures
currently utilized for each of the Exchange's other index options to
monitor trading in GVZ Options. The Exchange represents that these
surveillance procedures shall be adequate to monitor trading in options
on these volatility indexes. For surveillance purposes, the Exchange
states that it will have complete access to information regarding
trading activity in the pertinent underlying securities.
III. Discussion
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.\7\
Specifically, the Commission finds that the proposal is consistent with
Section 6(b)(5) of the Act,\8\ 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
accordance with the Memorandum of Understanding entered into between
the Commodity Futures
[[Page 29599]]
Trading Commission (``CFTC'') and the Commission on March 11, 2008, and
in particular the addendum thereto concerning Principles Governing the
Review of Novel Derivative Products, the Commission believes that novel
derivative products that implicate areas of overlapping regulatory
concern should be permitted to trade in either or both a CFTC- or
Commission-regulated environment, in a manner consistent with laws and
regulations (including the appropriate use of all available exemptive
and interpretive authority).
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\7\ 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).
\8\ 15 U.S.C. 78f(b)(5).
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As a national securities exchange, the CBOE is required under
Section 6(b)(1) of the Act\9\ 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
addition, brokers that trade GVZ Options will also be subject to best
execution obligations and FINRA rules.\10\ Applicable exchange rules
also require that customers receive appropriate disclosure before
trading GVZ Options.\11\ Further, brokers opening accounts and
recommending options transactions must comply with relevant customer
suitability standards.\12\
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\9\ 15 U.S.C. 78f(b)(1).
\10\ See NASD Rule 2320.
\11\ See CBOE Rule 9.15.
\12\ See FINRA Rule 2360(b) and CBOE Rules 9.7 and 9.9.
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GVZ Options will trade as options under the trading rules of the
CBOE.\13\ The Commission believes that the listing rules proposed by
CBOE for GVZ Options are consistent with the Act. One point or greater
strike price intervals for GVZ Options should provide investors with
greater flexibility in the trading of GVZ Options and further the
public interest by allowing investors to establish positions that are
better tailored to meet their investment objectives.
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\13\ See, also, discussion of listing and trading rules for GLD
options. (Securities Exchange Act Release No. 57894 (May 30, 2008),
73 FR 32061 (June 5, 2008) (SR-Amex-2008-15; SR-CBOE-2005-11; SR-
ISE-2008-12; SR-NYSEArca-2008-52; and SR-Phlx-2008-17) (order
approving the listing and trading of options on GLD).
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The Commission notes that CBOE will compute values for GVZ
underlying option series on a real-time basis throughout each trading
day, and that GVZ levels will be calculated by CBOE and disseminated at
15-second intervals to major market data vendors.
The Commission believes that the Exchange's proposed position
limits and exercise limits for GVZ Options are appropriate and
consistent with the Act. The Commission notes that GLD options
comprising the underlying components of GVZ rank among the most
actively traded options classes. Specifically, the Exchange has
represented that in 2009, GLD ranked as the thirteenth most actively
traded option class industry-wide, averaging 136,000 contracts per day,
and the twelfth most actively traded options class on CBOE, averaging
over 50,000 contracts per day. In addition, the Commission notes that
the position and exercise limits for FLEX GVZ Options will be equal to
the position and exercise limits for non-FLEX GVZ Options. Further,
positions in FLEX GVZ Options that expire on the same day as non-FLEX
GVZ Options will be aggregated with positions in Non-FLEX GVZ Options.
The Commission also notes that the margin requirements for equity
options will also apply to options on GVZ. The Commission finds this to
be reasonable and consistent with the Act.
The Commission also believes that the Exchange's proposal to allow
GVZ Options to be eligible for trading as FLEX Options is consistent
with the Act. The Commission previously approved rules relating to the
listing and trading of FLEX Options on CBOE, which give investors and
other market participants the ability to individually tailor, within
specified limits, certain terms of those options.\14\ The current
proposal incorporates GVZ Options that trade as FLEX Options into these
existing rules and regulatory framework.
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\14\ See Securities Exchange Act Release No. 31910 (February 23,
1993), 58 FR 12056 (March 2, 1993).
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The Commission notes that CBOE represented that it has an adequate
surveillance program to monitor trading of GVZ Options and intends to
apply its existing surveillance program to support the trading of these
options. Finally, the proposed rule change, the Commission has also
relied upon the Exchange's representation that it has the necessary
systems capacity to support new options series that will result from
this proposal.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\15\ that the proposed rule change (SR-CBOE-2010-018), as modified
by Amendment No. 1, be, and hereby is, approved.
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\15\ 15 U.S.C. 78s(b)(2).
\16\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-12553 Filed 5-25-10; 8:45 am]
BILLING CODE 8010-01-P