[Federal Register Volume 75, Number 212 (Wednesday, November 3, 2010)]
[Notices]
[Pages 67794-67796]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-27768]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63202; File No. SR-CBOE-2010-080]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Granting Approval of a 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''
October 28, 2010.
I. Introduction
On August 31, 2010, the Chicago Board Options Exchange (``CBOE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities
Exchange Act of 1934 (``Act''), and Rule 19b-4 thereunder,\2\ a
proposed rule change to: (a) Permit the trading of options on leveraged
(multiple or inverse) exchange-traded notes (``ETNs''), and (b) broaden
the definition of ``Futures-Linked Securities.'' On September 9, 2010,
the Exchange filed Amendment No. 1 to the proposed rule change. The
proposed rule change, as modified by Amendment No. 1, was published for
comment in the Federal Register on September 16, 2010.\3\ The
Commission received no comment letters on the proposed rule change.
This order approves the proposed rule change as modified by Amendment
No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Release No. 62880 (September 9,
2010), 75 FR 56628.
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II. Description of the Proposal
The purpose of CBOE's proposed rule change is to amend
Interpretation and Policy .13 to Rule 5.3 to: (a) Permit the trading of
options on leveraged (multiple or inverse) ETNs,\4\ and (b) broaden the
definition of ``Futures-Linked Securities.''
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\4\ 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 non-convertible debt of an issuer that have a term of
at least one year but not greater than thirty years. Index-Linked
Securities are traded as a single, exchange-listed security. As
such, rules pertaining to the listing and trading of standard equity
options apply to Index-Linked Securities.
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Leveraged ETN Options
Multiple leveraged ETNs seek to provide investment results that
correspond to a specified multiple of the percentage performance of a
particular Reference Asset on a given day. Inverse leveraged ETNs seek
to provide investment results that correspond to the inverse (opposite)
of the percentage performance of a particular Reference Asset by a
specified multiple on a given day. 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.
Currently, Interpretation and Policy .13 to Rule 5.3 provides that
securities deemed appropriate for options trading
[[Page 67795]]
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 Assets, Currency Reference
Assets, Fixed Income Reference Assets, Futures Reference Assets
together with 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'' stocks 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 makes 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 \5\ or
margin.\6\
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\5\ See Rules 4.11, Position Limits, and 4.12, Exercise Limits.
\6\ See Rule 12.3, Margin Requirements.
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The Exchange has represented 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.
Definition of ``Futures-Linked Securities''
The second change being proposed by the Exchange's filing is to
amend the definition of ``Futures-Linked Securities'' set forth in Rule
5.3.13(1)(E). Rule 5.3 sets forth generic listing criteria for
securities that may serve as underlyings for listed options. 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
[[Page 67796]]
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. The Exchange is proposing to revise the definition of
``Futures-Linked Securities'' to provide that they are securities that
pay at maturity 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''). All ETNs eligible for options trading must still be
principally traded on a national securities exchange and an ``NMS
Stock.''
III. Commission Findings
After careful consideration, the Commission finds that the proposed
rule changes are consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange,\7\ and in particular, the requirements of Section 6(b) of the
Act.\8\ Specifically, the Commission finds that the proposed rule
changes are consistent with Section 6(b)(5) of the Act,\9\ which
requires, among other things, that the rules of a national securities
exchange be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and in general, to protect investors and the
public interest.
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\7\ 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).
\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(5).
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Leveraged ETN Options
The Commission notes that the Exchange has represented that,
similar to its imposition of higher margin requirements for options on
leveraged ETFs,\10\ the Exchange will impose higher margin requirements
for leveraged ETNs, as allowed under CBOE Rules 12.3(h) and 12.10. The
Exchange will also issue a Regulatory Circular announcing the new
margin requirements prior to listing and trading options on leveraged
ETNs.
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\10\ See CBOE Regulatory Circulars RG09-97 (August 31, 2009),
RG09-132 (November 20, 2009). See also FINRA Regulatory Notices 09-
53 (August 2009), 09-65 (November 2009).
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In addition, pursuant to the proposed rule change, the Exchange
represented that the current listing standards for ETN options will
continue to apply. The Exchange has also represented that its existing
surveillance procedures applicable to trading options are adequate to
properly monitor trading of options on leveraged ETNs.
The Commission believes that these representations are adequate to
protect investors. Furthermore, the Commission believes that the
ability to trade options on leveraged ETNs will provide investors with
additional risk management tools. Therefore, the Commission believes
that this proposed rule change is appropriate.
Broaden the Definition of ``Futures-Linked Securities''
The Commission believes that this proposal will provide a more
efficient process for the Exchange to list and trade options on ETNs.
The Exchange will be able to list and trade options overlying newly
introduced ETNs that do not fall within the current definition of
``Futures-Linked Securities,'' without first filing a rule change
proposal with the Commission to change the definition of ``Futures-
Linked Securities'' to include each specific new product. The
Commission notes that all ETNs that underlie options traded on the
Exchange must still be principally traded on a national securities
exchange and must be an ``NMS stock.'' In addition, pursuant to the
proposed rule change, the Exchange represented that the current listing
standards for options on ETNs will continue to apply to options on ETNs
that fall within the proposed definition of ``Futures-Linked
Securities.'' The Exchange has also represented that its existing
surveillance procedures applicable to trading options are adequate to
properly monitor trading of options on ETNs. Therefore, the Commission
believes that this proposed rule change is appropriate.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the propose rule change (SR-CBOE-2010-080), as modified
by Amendment No. 1, be, and is hereby, approved.
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\11\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
Florence E. Harmon,
Deputy Secretary.
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\12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2010-27768 Filed 11-2-10; 8:45 am]
BILLING CODE 8011-01-P