[Federal Register Volume 75, Number 194 (Thursday, October 7, 2010)]
[Notices]
[Pages 62167-62169]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-25251]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63026; File No. SR-CBOE-2010-046]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change To Amend
Certain Rules Pertaining to Credit Options
October 1, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 20, 2010, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or the ``Exchange'') filed with the Securities and Exchange
Commission (``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
CBOE proposes to amend certain rules pertaining to Credit Options.
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.
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 Exchange received approval to list and trade Credit Default
Options and Credit Default Basket Options (collectively ``Credit
Options'') in 2007, and is planning to re-launch these products.\3\ In
connection with the Exchange's planned re-launching of Credit Options,
the Exchange will be introducing contracts that have a payout that is
less than $100,000.\4\ In addition, the Exchange would like to: (1)
Change the quoting convention for Credit Default Options, (2) change
the minimum price variation for Credit Option, and (3) designate a
single applicable Credit Event for Credit Options.
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\3\ See Securities Exchange Act Release Nos. 55871(June 6,
2007), 72 FR 32372 (June 12, 2007) (SR-CBOE-2006-84); 56275 (August
17, 2007), 72 FR 47097 (August 22, 2007).
\4\ See Securities Exchange Act Release No. 56380 (September 10,
2007), 72 FR 52948 (September 17, 2007) (SR-CBOE-2007-105)
(immediately effective filing pertaining to contract multiplier for
Credit Default Options).
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Quoting Convention and Minimum Price Variation Changes
When CBOE launched Credit Default Options, the Exchange designated
the cash settlement amount to be $100,000, which was equal to an
exercise settlement value of $100 multiplied by a contract multiplier
of 1,000 (which was specified by the Exchange at listing).\5\ Because
the exercise settlement value is currently fixed by rule at $100,\6\
bids and offers for contracts are expressed in amounts ranging from $0
(no bid) to $100. The range of bids and offers is not hard coded into
CBOE's rules and is a function of pricing options that have a fixed
payout.\7\ To arrive at the total amount a bid or offer represents per
contract, the bid or offer is multiplied by the contract multiplier.
For example, if a Credit Default Option has a cash settlement amount of
$100,000 ($100 x 1,000), bids of $0.05, $45.15 and $67.50 equate to
premium amounts of $50, $45,150 and $67,500, respectively.
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\5\ The Exchange may vary the particular contract multiplier on
a class-by-class basis within a range of 1 to 1,000. See 29.1(a).
\6\ See Rule 29.1(a)(i).
\7\ The Exchange notes that with a fixed exercise settlement
value of $100, any quote above $100 (e.g., $150) would not make
economic sense since it would represent a premium cost ($150 x 1,000
= $150,000) that exceeds than [sic] the exercise settlement amount
of the contract ($100 x 1,000 = $100,000).
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CBOE proposes to change the quoting conventions for Credit Default
Options by permitting the exercise settlement value to be an amount
determined by the Exchange on a class-by-class basis and that would be
equal to $1 or $100, or a value between those values. By permitting the
Exchange to vary the exercise settlement value, the range of bids and
offers would vary in tandem. For example, if the Exchange sets the
exercise settlement value at $10, bids and offers for that contract
would range from $0 (no bid) to $10, and the total premium amount would
be determined by multiplying the bid or offer by the contract
multiplier.
In addition, by permitting the Exchange to set the exercise
settlement value on a class-by-class basis, the Exchange would be able
to list a contract having a cash settlement amount that could be
arrived at in different ways. For example, for a Credit Default Option
with a cash settlement amount of $1,000, the Exchange could: (1) Set
the exercise settlement value at $1 with a contract multiplier of
$1,000, (2) set the exercise settlement value at $10 with a contract
multiplier of 100, (3) set the exercise settlement value at $100 with a
contract multiplier of 10, or (4) set the exercise settlement value at
$1,000 with a contract multiplier of 1. The Exchange notes that it will
not list more than one Credit Default Option contract with a cash
settlement amount
[[Page 62168]]
arrived at in difference [sic] ways.\8\ The Exchange notes that it has
the discretion to set the exercise settlement value for binary options
on a class-by-class and is seeking to introduce that same flexibility
to Credit Default Options.\9\
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\8\ See e-mail from Jennifer L. Klebes, Senior Attorney, CBOE,
to Jennifer Dodd, Special Counsel, and Andrew Madar, Special
Counsel, Commission, dated September 27, 2010.
\9\ See Rule 22.1(e).
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The Exchange is also proposing to change the minimum price
variation (``MPV'') for Credit Default Options. Currently, the MPV for
bids and offers on both simple and complex orders for Credit Options is
fixed at $0.05.\10\ Similar to binary options, the Exchange would like
to build in the flexibility to establish the MPV on a class-by-class
basis at an increment not less then $0.01.\11\ The ability to designate
$0.01 as the MPV would permit more pricing points than is currently
allowed and would allow for more granular pricing points when lower
exercise settlement values are designated. The Exchange believes that
the introduction of more pricing points creates tighter spreads between
quotes, which in turn benefits investors. For example, if the Exchange
designates the exercise settlement value as $1 bids and offers for that
contract would range from $0 (no bid) to $1 and only 20 price points
would be available since the MPV is $0.05 ($0.05, $0.10, etc.). If the
MPV is $0.01 and the designated exercise settlement value is $1, there
would be 100 price points available for quoting. The Exchange notes
that it has the discretion to establish the MPV on a class-by-class
basis for binary options and believes that permitting more price points
for options having a lower exercise settlement value will benefit
market participants.
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\10\ See Rule 29.14(b).
\11\ See Rule 22.13(b).
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Designation of Single Credit Event Change
Currently, CBOE Rules 29.2, Designation of Credit Default Options,
and 29.2A, Designation of Credit Default Basket Option Contracts,
provide that a failure-to-pay default will always be a designated
Credit Event for Credit Options. In addition, the Exchange may
designate other event(s) of default and/or restructuring as Credit
Events. The Exchange believes that there may be a market for Credit
Options that specify a single Credit Event (e.g., bankruptcy as defined
in accordance with the terms of the Relevant Obligation(s)) and is
therefore proposing to provide the Exchange with the ability to
designate a single Credit Event. To make this change, the Exchange is
proposing revisions to Rules 29.2(a) and 29.2A(a)(6) respectively.
Technical Change
The Exchange is also proposing to make a technical, non-substantive
change to Rule 29.3.
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 designate $0.01 as the MPV for Credit Options. The Exchange
does not believe that this change will lead to a proliferation of
quotes and notes that the change will affect one series [sic] a product
and not multiple series (i.e., various strikes) since Credit Options do
not have strikes.
2. Statutory Basis
The Exchange believes this 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.\12\ Specifically, the Exchange believes that the
proposed rule change is consistent with the Section 6(b)(5) Act \13\
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, and thereby will provide investors with additional tools to
hedge risk and tailor their investment needs.
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\12\ 15 U.S.C. 78f(b).
\13\ 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
No written comments were solicited or received with respect to the
proposed rule change.
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:
(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-2010-046 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2010-046. 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
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identifying information from submissions. You should submit only
information that you wish to make publicly available. All submissions
should refer to File Number SR-CBOE-2010-046 and should be submitted on
or before October 28, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-25251 Filed 10-6-10; 8:45 am]
BILLING CODE 8011-01-P