[Federal Register Volume 75, Number 182 (Tuesday, September 21, 2010)]
[Notices]
[Pages 57539-57540]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-23455]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62911; File No. SR-CBOE-2009-075]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving Notice of Proposed Rule Change, as
Modified by Amendment Nos. 1 and 2, To Establish a Pilot Program To
List P.M.-Settled End of Week and End of Month Expirations for Options
on Broad-Based Indexes
September 14, 2010.
On October 14, 2009, the Chicago Board Options Exchange,
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and
Exchange Commission (the ``Commission''), pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934 (``Act''),\1\ a proposed rule
change to establish a pilot program that would permit 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. On May 3, 2010, the Exchange filed Amendment 1 to the
proposed rule change, and on July 30, 2010, the Exchange filed
Amendment 2 to the proposed rule change.\2\ The proposed rule change
was published for comment in the Federal Register on August 12,
2010.\3\ The Commission received no comment letters on the
[[Page 57540]]
proposed rule change. This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Amendment 2 replaced Amendment 1 and the original filing in
their entireties. The purpose of Amendment 2 is to broaden the
definition of End of Week Expirations to include any Friday of the
month, other than the third Friday of the month.
\3\ See Securities Exchange Act Release No. 62658 (August 5,
2010), 75 FR 49009 (``Notice'').
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The Exchange is proposing to establish a pilot program that would
permit p.m.-settled options on broad-based indexes to expire on (a) any
Friday of the month, other than the third Friday of the month \4\
(``End of Week Expirations'' or ``EOWs''), and (b) the last trading day
of the month (``End of Month Expirations'' or ``EOMs'').\5\ Under the
End of Week/End of Month Expirations Pilot Program (``Pilot''), EOWs
and EOMs will be permitted on any broad-based index that is eligible
for regular options trading. EOWs and EOMs will be cash-settled and
have European-style exercise, and will be subject to the same rules
that currently govern the trading of traditional index options,
including sales practice rules, margin requirements, and floor trading
procedures. Contract terms for EOWs and EOMs will be similar to regular
index options, except the exercise settlement value will be based on
the index value derived from the closing prices of component stocks.
EOWs and EOMs on the same broad-based index (e.g., of the same class)
shall be aggregated for position limits (if any) and any applicable
reporting and other requirements.\6\ The duration of the Pilot will be
effective for a period of fourteen months from the next full month from
approval.\7\
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\4\ A third Friday of the month expiration is generally referred
to as ``Expiration Friday.''
\5\ For example, if EOWs and EOMs were currently listed, the
expiration dates for October 2010 would be: October 1 (EOW), October
8 (EOW), October 15 (standard), October 22 (EOW) and October 29
(EOM). If the last trading day of the month is a Friday, the
Exchange will list an End of Month expiration series and not an End
of Week expiration. See Rule 24.9(a)(2) for specific rule governing
the expiration months that may be listed for index options. CBOE
does not intend to list EOWs or EOMs that would expire on Exchange
holidays.
\6\ See e.g., CBOE Rule 4.13, Reports Related to Position Limits
and Interpretation and Policy .03 to Rule 24.4 which sets forth the
reporting requirements for certain broad-based indexes that do not
have position limits.
\7\ Any positions established under the Pilot would not be
impacted by the expiration of the Pilot. If an EOW or EOM expiration
expires after the Pilot expires, then those positions would continue
to exist; however, any further trading in those series would be
restricted to transactions where at least one side of the trade is a
closing transaction. The Exchange would address this point in a
circular to members. See Notice, supra note 3, 75 FR 49011.
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Currently, the vast majority of options in the standardized options
markets are a.m.-settled.\8\ In light of historic Commission concerns
about expanding p.m. settlement, CBOE has represented that, at least
two months prior to the expiration of the Pilot, it will provide the
Commission with an annual report analyzing EOW and EOM volume, open
interest, and trading patterns.\9\ In addition, for series that exceed
specific minimum open interest parameters, the annual report will
provide an analysis of index price volatility and, if needed,
underlying share trading volume.\10\ The annual report will be provided
to the Commission on a confidential basis.\11\
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\8\ In the 1980s, the options and futures markets began moving
from closing-price to opening price settlement procedures for stock
index options and futures as a result of increased market and price
volatility in underlying component stocks due to the unwinding of
arbitrage-related positions at the close on expiration Friday.
\9\ The annual report would also contain information and
analyses of standard Expiration Friday, a.m.-settled series, if
applicable, for the period covered in the pilot report as well as
for the six-month period prior to the initiation of the pilot. See
Notice, supra note 3, 75 FR at 49011.
\10\ For each EOW and EOM Expiration that has open interest that
exceeds certain minimum thresholds, the annual report will contain a
comparison of index price changes at the close of trading on a given
expiration date with comparable price changes from a control sample;
and if needed, 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 EOW and EOM
expirations.
\11\ CBOE will also provide to the Commission upon request a
data file containing (1) EOW and EOM option volume data aggregated
by series, and (2) EOW week-ending open interest for expiring series
and EOM month-end open interest for expiring series.
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The Commission has carefully reviewed CBOE's proposed rule change
and finds that it is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange,\12\ and, in particular, Section 6(b)(5) of the
Act,\13\ which requires that an exchange have rules designed to promote
just and equitable principles of trade, remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and to protect investors and the public interest, to allow CBOE
to conduct limited, and carefully monitored, pilots as proposed.
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\12\ 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).
\13\ 15 U.S.C. 78f(b)(5).
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The Commission has had concerns about the adverse effects and
impact of p.m. settlement upon market volatility and the operation of
fair and orderly markets on the underlying cash market at or near the
close of trading. Only in limited instances has the Commission
previously approved p.m. settlement for cash-settled options. In 1993,
the Commission approved CBOE's listing of p.m.-settled, cash-settled
options on certain broad-based indexes expiring on the first business
day of the month following the end of each calendar quarter
(``Quarterly Index Expirations'').\14\ In 2006, the Commission
approved, on a pilot basis, CBOE's listing of p.m.-settled index
options expiring on the last business day of a calendar quarter
(``Quarterly Options Series'').\15\ In 2010, the Commission approved
CBOE's listing of p.m.-settled FLEX options on a pilot basis.\16\
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\14\ See Securities Exchange Act Release No. 31800 (February 1,
1993), 58 FR 7274 (February 5, 1993).
\15\ See Securities Exchange Act Release No. 54123 (July 11,
2006), 71 FR 40558 (July 17, 2006).
\16\ 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).
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The Commission believes that it is appropriate to approve the
proposal on a pilot basis. CBOE's proposed fourteen month Pilot will
allow for both the Exchange and the Commission to monitor the potential
for adverse market effects. In particular, the Commission notes that
CBOE will provide the Commission with the annual report analyzing
volume and open interest of EOWs and EOMs, will also contain
information and analysis of EOW and EOM trading patterns, and index
price volatility and share trading activity for series that exceed
minimum parameters. This information will enable the Commission to
evaluate whether allowing p.m. settlement for EOW and EOMs will result
in increased market and price volatility in the underlying component
stocks.
The p.m. settlement Pilot information should help the Commission
assess the impact on the markets and determine whether other changes
are necessary. Furthermore, the Exchange's ongoing analysis of the
Pilot should help it monitor any potential risks from large p.m.-
settled positions and take appropriate action if warranted.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\17\ that the proposed rule change (SR-CBOE-2009-075), as modified
by Amendment Nos. 1 and 2, be, and hereby is, approved.
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\17\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-23455 Filed 9-20-10; 8:45 am]
BILLING CODE 8010-01-P