[Federal Register Volume 75, Number 179 (Thursday, September 16, 2010)]
[Notices]
[Pages 56628-56631]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-23107]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62880; File No. SR-CBOE-2010-080]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of Proposed Rule Change, as Modified by
Amendment No. 1, To Trade Options on Leveraged Exchange-Traded Notes
and To Broaden the Definition of ``Futures-Linked Securities''
September 9, 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 31, 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. On September 9, 2010, the Exchange filed Amendment No. 1
to the proposed rule change. The Commission is publishing this notice
to solicit comments on the proposed rule change, as modified by
Amendment No. 1, 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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[[Page 56629]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CBOE proposes to amend Interpretation and Policy .13 to Rule 5.3
to: (a) permit trading options on leveraged (multiple or inverse)
exchange-traded notes, and (b) broaden the definition of ``Futures-
Linked Securities.'' The text of the rule proposal is available on the
Exchange's Web site (http://www.cboe.org/legal), 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 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
Amendment 1 replaces the original filing in its entirety. The
purpose of Amendment 1 is to make technical corrections to rule
references in Item 1 and Item 3. No changes to the proposed rule text
that was submitted in the original filing are being proposed by this
Amendment 1.
The Exchange proposes to amend Interpretation and Policy .13 to
Rule 5.3 to: (a) Permit trading options on leveraged (multiple or
inverse) exchange-traded notes (``ETNs''), and (b) broaden the
definition of ``Futures-Linked Securities.'' ETNs are also known as
``Index-Linked Securities,'' which are designed for investors who
desire to participate in a specific market segment by providing
exposure to one or more identifiable underlying securities,
commodities, currencies, derivative instruments or market indexes of
the foregoing. Index-Linked Securities are the non-convertible debt of
an issuer that have a term of at least one (1) year but not greater
than thirty (30) years. Despite the fact that Index-Linked Securities
are linked to an underlying index, each trade as a single, exchange-
listed security. Accordingly, rules pertaining to the listing and
trading of standard equity options apply to Index-Linked Securities.
Leveraged ETN Options
The Exchange proposes to amend Rule 5.3.13 to permit the listing of
options on leveraged (multiple or inverse) ETNs. Multiple leveraged
ETNs seek to provide investment results that correspond to a specified
multiple of the percentage performance on a given day of a particular
Reference Asset. Inverse leveraged ETNs seek to provide investment
results that correspond to the inverse (opposite) of the percentage
performance on a given day of a particular Reference Asset by a
specified multiple. Multiple leveraged ETNs and inverse leveraged ETNs
differ from traditional ETNs in that they do not merely correspond to
the performance of a given Reference Asset, but rather attempt to match
a multiple or inverse of a Reference Asset's performance.
The Barclays Long B Leveraged S&P 500 TR ETN (``BXUB''), the
Barclays Long C Leveraged S&P 500 TR ETN (``BXUC'') and the UBS AG 2x
Monthly Leveraged Long Exchange Traded Access Securities (``E-TRACS'')
linked to the Alerian MLP Infrastructure Index due July 9, 2040
(``MLPL'') currently trade on the NYSE Arca Stock Exchange and are
examples of multiple leveraged ETNs. In addition, the Barclays ETN +
Inverse S&P 500 VIX Short-Term Futures ETN (``XXV'') currently trades
on the NYSE Arca Stock Exchange and is an example of an inverse
leveraged ETN. The NYSE Arca Stock Exchange also lists several other
inverse leveraged ETNs for trading.\3\
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\3\ These ETNs include: the Barclays Short B Leveraged Inverse
S&P 500 TR ETN (``BXDB''), the Barclays Short C Leveraged Inverse
S&P 500 TR ETN (``BXDC'') and the Barclays Short D Leveraged Inverse
S&P 500 TR ETN (``BXDD'').
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Currently, Interpretation and Policy .13 to Rule 5.3 provides that
securities deemed appropriate for options trading shall include shares
or other securities (``Equity Index-Linked Securities,'' ``Commodity-
Linked Securities,'' ``Currency-Linked Securities,'' ``Fixed Income
Index-Linked Securities,'' ``Futures-Linked Securities,'' and
``Multifactor Index-Linked Securities,'' collectively known as ``Index-
Linked Securities'') that are principally traded on a national
securities exchange and an ``NMS Stock'' (as defined in Rule 600 of
Regulation NMS under the Securities Exchange Act of 1934), and
represent ownership of a security that provides for the payment at
maturity, as described below:
Equity Index-Linked Securities are securities that provide
for the payment at maturity of a cash amount based on the performance
of an underlying index or indexes of equity securities (``Equity
Reference Asset'');
Commodity-Linked Securities are securities that provide
for the payment at maturity of a cash amount based on the performance
of one or more physical commodities or commodity futures, options on
commodities, or other commodity derivatives or Commodity-Based Trust
Shares or a basket or index of any of the foregoing (``Commodity
Reference Asset'');
Currency-Linked Securities are securities that provide for
the payment at maturity of a cash amount based on the performance of
one or more currencies, or options on currencies or currency futures or
other currency derivatives or Currency Trust Shares (as defined in
Interpretation and Policy .06 to this Rule 5.3), or a basket or index
of any of the foregoing (``Currency Reference Asset'');
Fixed Income Index-Linked Securities are securities that
provide for the payment at maturity of a cash amount based on the
performance of one or more notes, bonds, debentures or evidence of
indebtedness that include, but are not limited to, U.S. Department of
Treasury securities (``Treasury Securities''), government-sponsored
entity securities (``GSE Securities''), municipal securities, trust
preferred securities, supranational debt and debt of a foreign country
or a subdivision thereof or a basket or index of any of the foregoing
(``Fixed Income Reference Asset'');
Futures-Linked Securities are securities that provide for
the payment at maturity of a cash amount based on the performance of an
index of (a) futures on Treasury Securities, GSE Securities,
supranational debt and debt of a foreign country or a subdivision
thereof, or options or other derivatives on any of the foregoing; or
(b) interest rate futures or options or derivatives on the foregoing in
this subparagraph (b); or (c) CBOE Volatility Index (VIX) futures
(``Futures Reference Asset''); and
Multifactor Index-Linked Securities are securities that
provide for the payment at maturity of a cash amount based on the
performance of any combination of two or more Equity Reference Assets,
Commodity Reference Assets, Currency Reference Assets, Fixed Income
References Assets, or Futures Reference Assets (``Multifactor Reference
Asset'').
For purposes of Interpretation and Policy .13 to this Rule 5.3,
Equity Reference Assets, Commodity Reference Asset, Currency Reference
Assets, Fixed Income Reference Assets, Futures Reference Assets
together with
[[Page 56630]]
Multifactor Reference Assets, collectively are referred to as
``Reference Assets.''
In addition, Index-Linked Securities must meet the criteria and
guidelines for underlying Securities set forth in Interpretation and
Policy .01 to this Rule 5.3.; or the Index-Linked Securities must be
redeemable at the option of the holder at least on a weekly basis
through the issuer at a price related to the applicable underlying
Reference Asset. In addition, the issuing company is obligated to issue
or repurchase the securities in aggregation units for cash, or cash
equivalents, satisfactory to the issuer of Index-Linked Securities
which underlie the option as described in the Index-Linked Securities
prospectus.
The Exchange proposes to amend Interpretation and Policy .13 to
Rule 5.3 to expand the type of Index-Linked Securities that may
underlie options to include leveraged (multiple or inverse) ETNs. To
affect this change, the Exchange proposes to amend Rule 5.3.13 by
adding the phrase, ``or the leveraged (multiple or inverse)
performance'' to each of the subparagraphs ((A) through (F)) in that
section which set forth the different eligible Reference Assets.
The Exchange's current continuing listing standards for ETN options
will continue to apply. Specifically, under Interpretation and Policy
.16 to Rule 5.4, ETN options shall not be deemed to meet the Exchange's
requirements for continued approval, and the Exchange shall not open
for trading any additional series or option contracts of the class
covering such Securities whenever the underlying Securities are
delisted and trading in the Securities is suspended on a national
securities exchange, or the Securities are no longer an ``NMS Stock''
(as defined in Rule 600 of Regulation NMS under the Securities Exchange
Act of 1934). In addition, the Exchange shall consider the suspension
of opening transactions in any series of options of the class covering
Index-Linked Securities in any of the following circumstances: (1) The
underlying Index-Linked Security fails to comply with the terms of
Interpretation and Policy .13 to Rule 5.3; (2) in accordance with the
terms of Interpretation and Policy .01 to Rule 5.4, in the case of
options covering Index-Linked Securities when such options were
approved pursuant to Interpretation and Policy .13 to Rule 5.3, except
that, in the case of options covering Index-Linked Securities approved
pursuant to Interpretation and Policy .13(3)(B) to Rule 5.3 that are
redeemable at the option of the holder at least on a weekly basis, then
option contracts of the class covering such Securities may only
continue to be open for trading as long as the Securities are listed on
a national securities exchange and are ``NMS'' stock as defined in Rule
600 of Regulation NMS; (3) in the case of any Index-Linked Security
trading pursuant to Interpretation and Policy .13 to Rule 5.3, the
value of the Reference Asset is no longer calculated; or (4) such other
event shall occur or condition exist that in the opinion of the
Exchange make further dealing in such options on the Exchange
inadvisable. Expanding the eligible types of ETNs for options trading
under Interpretation and Policy .13 to Rule 5.3 will not have any
effect on the rules pertaining to position and exercise limits \4\ or
margin.\5\
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\4\ See Rules 4.11, Position Limits, and 4.12, Exercise Limits.
\5\ See Rule 12.3, Margin Requirements.
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This proposal is necessary to enable the Exchange to list and trade
options on shares of the BXUB, BXUC, XXV, BXDB, BXDC, BXDD and the
MLPL. The Exchange believes the ability to trade options on leveraged
(multiple or inverse) ETNs will provide investors with greater risk
management tools. The proposed amendment to the Exchange's listing
criteria for options on ETNs is necessary to ensure that the Exchange
will be able to list options on the above listed leveraged (multiple
and inverse) ETNs as well as other leveraged (multiple and inverse)
ETNs that may be introduced in the future.
The Exchange represents that its existing surveillance procedures
applicable to trading in options are adequate to properly monitor the
trading in leveraged (multiple and inverse) ETN options.
It is expected that The Options Clearing Corporation will seek to
revise the Options Disclosure Document (``ODD'') to accommodate the
listing and trading of leveraged (multiple and inverse) ETN options.
Broaden the Definition of ``Futures-Linked Securities''
The second change being proposed by this filing is to amend the
definition of ``Future [sic]-Linked Securities'' set forth in Rule
5.3.13(1)(E). Currently, the definition of ``Futures-Linked
Securities'' is limited to securities that provide for the payment at
maturity of a cash amount based on the performance of an index of (a)
futures on Treasury Securities, GSE Securities, supranational debt and
debt of a foreign country or a subdivision thereof, or options or other
derivatives on any of the foregoing; or (b) interest rate futures or
options or derivatives on the foregoing in this subparagraph (b); or
(c) CBOE Volatility Index (VIX) futures.
Rule 5.3 sets forth generic listing criteria for securities that
may serve as underlyings for listed options trading. The Exchange
believes that the current definition of ``Futures-Linked Securities''
is unnecessarily restrictive and requires the Exchange to submit a
filing to amend the definition each time a new ETN is issued that
tracks the performance of an index of futures/options on futures that
is not enumerated in the existing rule. To address this issue, the
Exchange is proposing to revise the definition of ``Futures- Linked
Securities'' to provide that they are securities that for the payment
at maturity of a cash amount based on the performance or the leveraged
(multiple or inverse) performance of an index or indexes of futures
contracts or options or derivatives on futures contracts (``Futures
Reference Asset''). The Exchange notes that all ETNs eligible for
options trading must [sic] principally traded on a national securities
exchange and an ``NMS Stock.'' As a result, the Exchange believes that
broadening the definition of ``Futures-Linked Securities'' by no longer
specifically listing the types of futures and options on futures
contracts that may be tracked by an ETN is appropriate.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) \6\ of the Act, in general, and furthers the
objectives of Section 6(b)(5),\7\ in particular, in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, and to remove impediments to and perfect the mechanisms of
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 proposed rules applicable to trading pursuant to generic
listing and trading criteria serve to foster investor protection.
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\6\ 15 U.S.C. 78f(b).
\7\ 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.
[[Page 56631]]
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 up to 90 days (i) as the
Commission may designate 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:
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-2010-080 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-2010-080. 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-2010-080 and should be submitted on or before October 7, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\8\
Elizabeth M. Murphy,
Secretary.
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\8\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2010-23107 Filed 9-15-10; 8:45 am]
BILLING CODE 8010-01-P