[Federal Register Volume 75, Number 228 (Monday, November 29, 2010)]
[Notices]
[Pages 73155-73156]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29893]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63352; File No. SR-CBOE-2010-046]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Granting Approval of Proposed Rule Change To Amend
Certain Rules Pertaining to Credit Options
November 19, 2010.
I. Introduction
On September 20, 2010, the Chicago Board Options Exchange,
Incorporated (``CBOE'' or ``Exchange'') filed with the Securities and
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend its rules relating to
Credit Options. The proposed rule change was published for comment in
the Federal Register on October 7, 2010.\3\ The Commission received no
comments on the proposal. This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 63026 (October 1,
2010), 75 FR 62167 (``Notice'').
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II. Description of the Proposal
The Exchange proposes to amend its rules governing Credit Options
\4\ to make three substantive changes. First, CBOE proposes to permit
the Exchange to fix the exercise settlement value for Credit Default
Options, on a class-by-class basis, at $1 or $100, or at a value
between those two points. Currently, the exercise settlement value is
fixed at $100. Since the cash settlement amount for Credit Default
Options is the product of the exercise settlement value multiplied by a
contract multiplier that may be fixed by the Exchange on a class-by-
class basis within a range of 1 to 1,000, this change will enable the
Exchange to list a Credit Default Option contact with a cash settlement
amount that could be arrived at in different ways.\5\ Second, the
proposal would permit the Exchange to establish the minimum price
variation (``MPV'') for all Credit Options, which is currently $0.05,
on a class-by-class basis, at an increment no less than $0.01, which
would permit more pricing points, such as when lower exercise
settlement values are designated. Third, the proposal would give the
Exchange authority to list Credit Options that contemplate only a
single credit event. Currently, CBOE rules for Credit Options enumerate
several potential credit events, the occurrence of any one of which
could allow the Credit Option to be exercised. For example, a failure-
to-pay default will always be a designated credit event for each class,
and the Exchange may, on a class-by-class basis, specify other events
of default or a restructuring.\6\ The Exchange proposes to amend its
rules to permit it to list Credit Options designating a single credit
event, such as a failure-to-pay default, another event of default, or a
restructuring. The Exchange also proposes to make a technical, non-
substantive change to one of its rules governing Credit Options, Rule
29.3.
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\4\ Credit Options include Credit Default Options and Credit
Default Basket Options. Credit Default Options are cash-settled
binary options that are automatically exercised upon the occurrence
of specified credit events or expire worthless. See CBOE Rule
29.1(b); Securities Exchange Act Release No. 55871 (June 6, 2007),
72 FR 32372 (June 12, 2007) (SR-CBOE-2006-84) (order approving
CBOE's proposed rules to list and trade Credit Default Options).
Credit Default Basket Options are cash-settled binary options based
on a basket of at least two reference entities. See CBOE Rule
29.1(h); Securities Exchange Act Release No. 56275 (August 17,
2007), 72 FR 47097 (August 22, 2007) (SR-CBOE-2007-26) (order
approving CBOE's proposed rules to list and trade Credit Default
Basket Options).
\5\ The Exchange has represented that it will not list more than
one Credit Default Option contract with a cash settlement amount
arrived at in different ways. See Notice at note 8 and accompanying
text.
\6\ See CBOE Rules 29.2 and 29.2A.
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III. Discussion and Commission's Findings
After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange.\7\ In particular, the Commission finds that the proposed rule
change is consistent with the requirements of Section 6(b)(5) of the
Act,\8\ which requires, among other things, that the Exchange's rules
be 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 regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities; 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 notes
that it 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)(5).
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The Commission believes that the proposal to authorize the Exchange
to list Credit Options that contemplate only a single credit event is
consistent with the Act. In addition, the Commission believes that the
proposal to allow the Exchange flexibility to fix the exercise
settlement value for Credit Default Options within a range of $1 to
$100 is consistent with the Act. With this change, the Exchange could
list a contract with a cash settlement value of $10,000 with a
multiplier of 1,000 and an exercise settlement amount of $10, or with a
multiplier of 100 and an exercise settlement amount of $100. There
could be concerns if the Exchange were to seek to list Credit Default
Options having the same cash settlement value but with different
combinations of multiplier and cash settlement amount.
[[Page 73156]]
This could fragment the market and dilute the liquidity of economically
identical products. The Exchange has represented, however, that it will
not list more than one Credit Default Option contract with a cash
settlement value that has been arrived at in multiple ways.\9\ The
Commission's approval of this aspect of the proposal incorporates that
representation.\10\
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\9\ See supra note 5.
\10\ The Commission also notes that the CBOE currently has the
flexibility to set the exercise settlement value for binary options
listed on the Exchange on a class-by-class basis. See CBOE Rule
22.1(e). See also Notice at note 9 and accompanying text.
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Finally, the Commission believes that the proposal to use an MPV of
as little as $0.01 for all Credit Options is consistent with the Act.
With exercise settlement values as low as $1, the ability to set the
MPV at $0.01 would make available 100 price points for quoting bids and
offers in the range of $0 to $1, as opposed to only 20 price points
under the current MPV of $0.05. The CBOE has represented that it has
analyzed its capacity and believes that it 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; and that the Exchange believes that the
change will not lead to a proliferation of quotes and thus do not have
multiple series with different strike prices, because Credit Options do
not have strike prices.\11\
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\11\ See Notice. The Commission also notes that the Exchange has
the discretion to establish the MPV on a class-by-class basis for
binary options at an increment no less than $0.01. See CBOE Rule
22.13(b).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-CBOE-2010-046), be, and it
hereby is, approved.
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\12\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-29893 Filed 11-26-10; 8:45 am]
BILLING CODE 8011-01-P