[Federal Register Volume 75, Number 178 (Wednesday, September 15, 2010)]
[Notices]
[Pages 56147-56150]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-22947]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62870; File No. SR-CBOE-2010-078]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change To Permit Certain FLEX Options To Trade Under the FLEX
Trading Procedures for a Limited Time on a Closing Only Basis
September 8, 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 30, 2010, the Chicago Board Options Exchange,
Incorporated (``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. The Commission is publishing this notice to solicit
comments on the proposed rule change 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
The Exchange is proposing to amend certain CBOE rules pertaining to
[[Page 56148]]
Flexible Exchange (``FLEX'') Options to permit certain FLEX Options to
continue to trade under the FLEX trading procedures for a limited time.
The text of the proposed rule change is available on the Exchange's Web
site (http://www.cboe.org/Legal), on the Commission's Web site at
http://www.sec.gov; at the Exchange's Office of the Secretary and at
the Commission's Public Reference Room.
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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this filing is to allow certain FLEX Options, which
are identical in all terms to a Non-FLEX Option, to continue to trade
using the FLEX trading procedures for the balance of the trading day on
which the Non-FLEX Option is added as an intra-day add.
The Exchange recently adopted rule changes to allow FLEX Options to
expire on or within two business days of a third-Friday-of-the-month
expiration (``Expiration FLEX Options'').\3\ Such FLEX Options could
have either an American-, European-, or European-Capped-style exercise.
Among other things, the rule change also provided that Expiration FLEX
Options will be permitted before (but not after) Non-FLEX Options with
identical terms are listed. Once and if an option series is listed for
trading as a Non-FLEX Option series, (i) all existing open positions
established under the FLEX trading procedures shall be fully fungible
with transactions in the respective Non-FLEX Option series, and (ii)
any further trading in the series would be as Non-FLEX Options subject
to the Non-FLEX trading procedures and rules.
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\3\ See Securities Exchange Act Release No. 59417 (February 18,
2009), 74 FR 8591 (February 25, 2009) (SR-CBOE-2008-115).
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The Options Clearing Corporation (``OCC'') became concerned that,
in certain circumstances, in the event a Non-FLEX Option is listed with
identical terms to an existing FLEX Option, OCC could not net the
positions in the contracts until the next business day. If the Non-FLEX
Option were listed intra-day, and an investor with a position in the
FLEX Option attempted to close the position using the Non-FLEX Option,
the investor would be technically long in one contract and short in the
other contract. This would expose the investor to assignment risk until
the next day despite having offsetting positions.
The limited circumstances are:
The Non-FLEX Option is listed intra-day.
The FLEX contract is for American-style exercise.
All other terms are identical and the contracts are
otherwise fungible.
The risk does not occur in expiration Friday FLEX Option positions
during the five days prior to expiration, as no new Non-FLEX Option
series may be listed within five days of expiration. It also does not
exist for FLEX Option positions that will be identical to Non-FLEX
series to be added after expiration, as those new series are added
``overnight'' and OCC will convert the FLEX position to the Non-FLEX
Option series at the time the Non-FLEX series is created. In addition,
it does not exist for FLEX Options positions that have a European-
Capped-style exercise, as there are no Non-FLEX European-Capped-style
options currently traded on CBOE. Further, it does not exist for most
FLEX Index Options listed on CBOE, as most Non-FLEX Index options
currently traded on CBOE are European-style exercise, and thus the Non-
FLEX Index Options cannot be exercised on the day the series is listed.
The only exception is Non-FLEX, American-style options on the S&P 100
(OEX).
As an example, suppose underlying issue XYZ, trading around $25 per
share, has options listed on the March cycle, and in February an
investor wishes to buy just-out-of-the-money call options that expire
in May. Since the Non-FLEX May Options will not be listed until after
the March expiration, the investor enters a FLEX Option order in
February to buy 250 Call 30 options expiring on the third Friday of
May. If, as expected, the Non-FLEX May 30 call options are listed on
the Monday after March expiration, the investor's open FLEX position
will be converted by OCC over the weekend following March expiration to
the Non-FLEX series.
However, if XYZ stock should decline between the time of the FLEX
transaction and March expiration, the May 30 calls may not be added
after March expiration. If that were to occur, the May 30 calls may be
added sometime later. Suppose the Exchange receives a request to add
the May 30 calls on the morning of the Wednesday after expiration, and
the Exchange lists them immediately. The investor with the FLEX
position may then decide it is an opportune time to close his position.
Under the current rules, the investor would be required to close
the position by entering a sell order in the new Non-FLEX Option
series. However, when the Non-FLEX transaction is reported to OCC, the
investor is considered short in the Non-FLEX Option series, and is
still long in the FLEX Option. OCC cannot aggregate the FLEX positions
into the Non-FLEX series until after exercise and assignment
processing. If a buyer in the new Non-FLEX series were to exercise the
options, the original investor who had attempted to close the FLEX
position with an offsetting Non-FLEX trade would be at risk of being
assigned on the technically short Non-FLEX position.
Because of this risk, OCC will not clear an American-style
expiration Friday FLEX option. The Exchange has spoken with OCC and OCC
has agreed that allowing an option position in a FLEX contract to be
closed using a FLEX Option in such circumstances will mitigate the
risk.
The assignment risk does not exist if the Non-FLEX Option is to be
added the next trading day. In situations where OCC is aware that a
series will be added overnight, they can convert the FLEX position to a
Non-FLEX position before the next trading day. However, OCC cannot
guarantee that an identical Non-FLEX series will not be added intra-
day, and thus will not clear such American-style FLEX Options.
CBOE is proposing a limited exception to the requirement that the
trading in such options be under the Non-FLEX trading procedures. The
Exchange proposes that, in the event a Non-FLEX Option is listed intra-
day, a FLEX Option position with identical terms could be closed under
the FLEX trading procedures, but only for the balance of the trading
day on which the series is added. Under the proposed rule change, both
sides of the FLEX transaction would have to be closing only positions.
This change will allow a FLEX Option to be traded in such a manner
to mitigate assignment risk.
A FLEX Post Official (also referred to in the rules as simply a
``FLEX
[[Page 56149]]
Official'') \4\ has the regulatory responsibility for reviewing the
conformity of FLEX trades to the terms and specifications contained in
Rule 24A.4 or 24B.4, as applicable. In the event a Non-FLEX series,
having the same terms as an existing expiration Friday FLEX Option, is
listed intra-day, the FLEX Official will review any subsequent FLEX
transactions in that series and verify that the transaction is being
executed for the purpose of closing out an existing FLEX position. In
addition:
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\4\ FLEX Officials are Exchange employees or independent
contractors designated pursuant to Rule 24A.12 or 24B.14.
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With respect to FLEX trades occurring on the Chapter XXIVA
FLEX trading platform, should such trading platform be used by the
Exchange,\5\ the FLEX Official will not disseminate a FLEX Request for
Quote for any order representing a FLEX series having the same terms as
a Non-FLEX series, unless such FLEX Order is a closing order (and it is
the day the Non-FLEX series has been added). Additionally, if the FLEX
Official were to disseminate a FLEX Request for Quotes for a closing
order representing a FLEX series having the same terms as a Non-FLEX
series, the FLEX Official would only accept response quotes and orders
that were closing out an existing FLEX position.
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\5\ Currently CBOE's Chapter XXIVA FLEX trading platform is not
utilized by the Exchange. Instead, all FLEX Options are currently
traded on CBOE's Chapter XXIVB FLEX trading platform.
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With respect to FLEX trades occurring on the Chapter XXIVB
FLEX trading platform, the FLEX Official will make an announcement that
the FLEX series is now restricted to closing transactions; a FLEX
Request for Quotes may not be disseminated for any order representing a
FLEX series having the same terms as a Non-FLEX series, unless such
FLEX Order is a closing order (and it is the day the Non-FLEX series
has been added); and only responses that were closing out an existing
FLEX position would be permitted. Any transactions that occur that do
not conform to these requirements would be nullified by the FLEX
Official pursuant to Rule 24B.14.
The CBOE Department of Regulation reviews FLEX trading activity,
and, in the event a Non-FLEX series with the same terms as an
expiration Friday FLEX option is listed intra-day, will review any
subsequent FLEX transactions in the series to verify that they are
closing a position.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act \6\ and the rules and regulations thereunder and, in
particular, the requirements of Section 6(b) of the Act.\7\
Specifically, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \8\ in that it is designed to
promote just and equitable principles of trade, to prevent fraudulent
and manipulative acts, 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, by giving
CBOE Trading Permit Holders and investors additional tools to trade
customized options in an exchange environment while allowing a FLEX
position to be traded in such a manner as to mitigate inadvertent
assignment risk.
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\6\ 15 U.S.C. 78s(b)(1).
\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
Because the foregoing rule does not (i) significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate if consistent with the protection of investors
and the public interest, provided that the self-regulatory organization
has given the Commission written notice of its intent to file the
proposed rule change at least five business days prior to the date of
filing of the proposed rule change or such shorter time as designated
by the Commission, the proposed rule change has become effective
pursuant to Section 19(b)(3)(A) of the Act \9\ and Rule 19b-4(f)(6)
thereunder.\10\
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\9\ 15 U.S.C. 78s(b)(3)(A).
\10\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires that a self-regulatory organization submit to the
Commission written notice of its intent to file the proposed rule
change, along with a brief description and text of the proposed rule
change, at least five business days prior to the filing of the
proposed rule change, or such shorter time as designated by the
Commission. The Commission notes that the Exchange has satisfied
this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative prior to 30 days after the date of the filing.
However, pursuant to Rule 19b-4(f)(6)(iii),\11\ the Commission may
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposal
may become operative immediately upon filing.
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\11\ 17 CFR 240.19b-4(f)(6)(iii).
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The Commission notes that the proposed rule change is substantially
similar to a proposed rule change previously submitted by NYSE Arca
which was published for notice and comment in the Federal Register.\12\
The Commission notes that it did not receive any comments on the NYSE
Arca proposal, and does not believe the CBOE's proposal raises any new
or novel issues. Further, as noted above, because of the inadvertent
assignment risk, market participants could not trade previously
approved American style FLEX Options expiring on Expiration Friday.\13\
The proposal seeks to mitigate such assignment risks by limiting
certain FLEX transactions to closing only, thereby allowing the trading
of previously approved FLEX Options. For these reasons, the Commission
believes that waiver of the 30-day operative delay is consistent with
the protection of investors and the public interest and therefore,
designates the proposed rule change operative upon filing.\14\
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\12\ See Securities Exchange Act Release No. 62321 (June 17,
2010), 75 FR 36130 (June 24, 2010) (SR-NYSEArca-2010-46).
\13\ See supra note 5.
\14\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
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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-2010-078 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-2010-078. 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 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 No. SR-CBOE-2010-078 and should be
submitted on or before October 6, 2010
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-22947 Filed 9-14-10; 8:45 am]
BILLING CODE 8010-01-P