[Federal Register Volume 75, Number 175 (Friday, September 10, 2010)]
[Notices]
[Pages 55383-55385]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-22599]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62847; File No. SR-CBOE-2010-077]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Proposed Rule Change, as Modified by Amendment
No. 1, To List Series With Up to 12 Expiration Months for Broad-Based
Security Index Options Upon Which the Exchange Calculates a Volatility
Index
September 3, 2010.
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 August 24, 2010, the 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 and II below, which Items have been prepared by
the Exchange. On September 2, 2010, the Exchange filed Amendment No. 1,
which replaced the original filing in its entirety. The Commission is
publishing this notice to solicit comments on the proposed rule change,
as amended, 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
CBOE proposes to amend Rule 24.9(a)(2), Terms of Index Option
Contracts, to allow the Exchange to list up to twelve expiration months
for options that overlie broad-based security indexes for which options
are used by the Exchange to calculate a volatility index. The text of
the rule proposal is available on the Exchange's Web site (http://www.cboe.org/legal), at the Exchange's principal office, and at the
Commission's Public Reference Room.
[[Page 55384]]
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 self-regulatory organization
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 statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Amendment 1 replaces the original filing in its entirety. The
purpose of Amendment 1 is to provide additional reasoning for the
proposed rule text change and to make a technical change to Rule
24.9(a)(2) by deleting an unnecessary word from the text of the rule.
The purpose of this rule filing is to amend Rule 24.9(a)(2), Terms
of Index Options, to allow the Exchange to list up to twelve expiration
months for broad-based security index options upon which the Exchange
calculates a volatility index. Currently, Rule 24.9(a)(2) permits the
Exchange to list only seven expiration months in any index options upon
which the Exchange calculates a constant three-month volatility index.
Since 2009, volatility trading has experienced significant growth
in terms of both trading volume and in the variety of products offered.
For example, through the first six months in 2010, CBOE Volatility
Index (``VIX'') options averaged close to 250,000 contracts traded per
day, a 150% increase compared to the same period in 2009. VIX futures
volume increased 440%, averaging 13,500 contracts per day compared to
2,500 contracts per day during the same period in 2009.
Similarly, since 2009, three exchange-traded notes (``ETNs'')
linked to the performance of VIX futures have been issued, two of which
overlie listed options.\3\ In addition, Jefferies & Co. recently
announced plans to issue an exchange-traded fund (``ETF'') \4\ that
holds VIX futures or an economically equivalent position and Bank of
America Merrill Lynch recently announced plans to issue an ETN based on
forward implied volatility of S&P 500 Index options. Additionally, the
Exchange is aware of other issuers that are engaged in similar
volatility product initiatives.
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\3\ ETNs are referred to ``Index-Linked Securities'' in CBOE's
Rules. See Interpretation and Policy .13 to Rule 5.3. The ETNs
linked to the performance of VIX futures are the (1) iPath S&P 500
VIX Short-Term Futures ETN (``VXX''), (2) iPath S&P 500 VIX Mid-Term
Futures ETN (``VXZ''), and (3) Barclays ETN+ Inverse S&P 500 VIX
Short-Term Futures ETN (``XXV'').
\4\ ETFs are referred to as ``Units'' in CBOE's Rules. See
Interpretation and Policy .06 to Rule 5.3.
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The Exchange was previously granted approval to list a seventh
expiration in broad-based index classes on which the Exchange
calculates a 3-month volatility index.\5\ In order to satisfy growing
demand for a wider variety of volatility investment strategies, the
Exchange is seeking to increase, from seven to twelve, the number of
expiration months for broad-based security index options upon which the
Exchange calculates a volatility index.
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\5\ See Securities Exchange Act Release No. 56821 (November 20,
2007), 72 FR 66210 (November 27, 2007) (SR-CBOE-2007-082).
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Rule 24.9(a)(2) currently permits the Exchange to list up to seven
expiration months at any one time for any broad-based security index
option contracts, including reduced-value and jumbo option contracts,
(e.g., DJX, NDX, RUT and SPX) upon which the Exchange calculates a
constant three-month volatility index. When the Exchange proposed the
allowance of a seventh expiration month for broad-based security index
option contracts on which CBOE calculates a constant three-month
volatility index, the Commission noted that the change ``will result in
a more consistent and predictable calculation in which the option
series that bracket three months to expiration will always expire one
month apart * * *'' \6\ In this current proposal, the Exchange is
seeking to create flexibility that would enable it to create volatility
indexes of varying lengths in response to demand for a wider variety of
volatility investment strategies. As a result, the Exchange is not
proposing to tie the number of expiration months permitted to a
specific volatility calculation period and is proposing to delete the
phrase ``constant three-month'' from the existing text of Rule
24.9(a)(2).
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\6\ See id.
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The Exchange believes that the additional expirations, which will
be listed in monthly intervals over a one-year time frame, will provide
the Exchange with the flexibility to create indexes that represent
unique volatility exposures, and enable the Exchange to respond quickly
to investor demand for new volatility-based products.
Capacity
CBOE has analyzed its capacity and 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
ability to list up to twelve expiration months for broad-based security
index options upon which the Exchange calculates a volatility index.
2. Statutory Basis
Because the increase in the number of expiration months is limited
to options overlying broad based security indexes upon which the
Exchange calculates a volatility index and because the series could be
added without presenting capacity problems, the Exchange believes the
rule proposal is consistent with the Act and the rules and regulations
under the Act applicable to a national securities exchange and, in
particular, the requirements of Section 6(b) of the Act.\7\
Specifically, the Exchange believes that the proposed rule change is
consistent with the Section 6(b)(5) Act \8\ requirements that the rules
of an exchange be designed to promote just and equitable principles of
trade, to prevent fraudulent and manipulative acts and, in general, to
protect investors and the public interest.
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\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
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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 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
The Exchange neither solicited nor received comments on the
proposal.
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:
[[Page 55385]]
(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:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-CBOE-2010-077 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2010-077. 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 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-2010-077 and should be
submitted on or before October 1, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-22599 Filed 9-9-10; 8:45 am]
BILLING CODE 8010-01-P