[Federal Register Volume 76, Number 45 (Tuesday, March 8, 2011)]
[Notices]
[Pages 12775-12778]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-5190]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64011; File No. SR-C2-2011-008]
Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Notice of Filing of a Proposed Rule Change To Allow the Listing and
Trading of a P.M.-Settled S&P 500 Index Option Product
March 2, 2011.
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 February 28, 2011, C2 Options Exchange, Incorporated (the
``Exchange'' or ``C2'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I, II, and III below, which Items have been prepared by the
Exchange.
[[Page 12776]]
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
The Exchange proposes to permit the listing and trading of P.M.-
settled S&P 500 Index options on C2. The text of the proposed rule
change is available on the Exchange's Web site (http://www.c2exchange.com), 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 Exchange 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this rule filing is to permit the listing and
trading on C2 of Standard & Poor's 500 Index (``S&P 500'') options with
third-Friday-of-the-month (``Expiration Friday'') expiration dates for
which the exercise settlement value will be based on the index value
derived from the closing prices of component securities (``P.M.-
settled'').
To effect the above described change, the Exchange is proposing to
add new supplemental provision (a) to C2 Chapter 24 to expressly
provide that P.M.-settled S&P 500 options may be listed for trading on
C2. Existing C2 rules governing the trading of index options would
apply to this new product (e.g. trading rules, sales practice rules,
margin requirements, and strike price interval requirements).
The S&P 500 is a capitalization-weighted index of 500 stocks from a
broad range of industries. The component stocks are weighted according
to the total market value of their outstanding shares. The impact of a
component's price change is proportional to the issue's total market
share value, which is the share price times the number of shares
outstanding. These are summed for all 500 stocks and divided by a
predetermined base value. The base value for the S&P 500 is adjusted to
reflect changes in capitalization resulting from, among other things,
mergers, acquisitions, stock rights, and substitutions.
The proposed contract would use a $100 multiplier, and the minimum
trading increment would be $0.05 for options trading below $3.00 and
$0.10 for all other series. Strike price intervals would be set no less
than 5 points apart. Consistent with existing rules for index options,
the Exchange would allow up to twelve near-term expiration months, as
well as LEAPS.\3\ Expiration processing would occur on Saturday
following the Expiration Friday. The product would have European-style
exercise, and because it is based on the S&P 500 index, there would be
no position limits.\4\
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\3\ Pursuant to CBOE Rule 24.9(b), index LEAPS may expire from
12-60 months from the date of issuance.
\4\ There would be reporting requirements pursuant to Rule 4.13,
Reports Related to Position Limits, and Interpretation and Policy
.03 to Rule 24.4, Position Limits for Broad-Based Index Options,
which sets forth the reporting requirements for certain broad-based
indexes that do not have position limits.
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C2 notes that ample precedent exists for P.M. settlement of broad-
based index options. For example, OEX (an index option contract based
on the Standard & Poor's 100 index) has been P.M.-settled since
1983.\5\ Also, FLEX Options have P.M. settlements on any expiration day
(pursuant to a pilot program).\6\ Similarly, CBOE recently established
a pilot program that permits 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.\7\
CBOE also trades Quarterly Option Series \8\ that overlie exchange
traded funds or indexes, and Quarterly Index Expirations \9\ that are
cash-settled options on certain broad-based indexes, both of which
expire at the close of business on the last business day of a calendar
quarter and are P.M.-settled. CBOE has experience with these special
dated options and has not observed any market disruptions resulting
from the P.M.-settlement feature of these options.
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\5\ The Exchange notes that there are no futures or options on
futures traded on the S&P 100 at this time.
\6\ 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). This
pilot expires on March 28, 2011.
\7\ See Rule 24.9(e) and Securities Exchange Act Release No.
62911 (September 14, 2010), 75 FR 57539 (September 21, 2010) (SR-
CBOE-2009-075).
\8\ See Rules 5.5(e) and 24.9(a)(2)(B).
\9\ See Rule 24.9(c).
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In addition, the Exchange believes that the reasons supporting the
preponderance of A.M.-settlement index options, which date back to the
late 1980s/early 1990s for Non-FLEX Options and revolve around a
concern about expiration pressure on stock exchanges (more specifically
on specialists) at the close, are no longer relevant in today's market.
For one, there are multiple primary listing and unlisted trading
privilege (UTP) markets for the stocks underlying the index, and
trading is widely dispersed among several stock exchanges and
alternative trading systems. Many of these markets use closing cross
procedures and employ closing order types to facilitate orderly
closings.\10\ Moreover, today stock order flow is predominantly
electronic and the ability to smooth out openings and closings is
greatly enhanced and market-on-close procedures work just as well as
opening procedures. Thus, the Exchange does not believe that any market
disruptions will be encountered with the introduction of P.M.-settled
S&P 500 index options.
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\10\ For example, see Nasdaq Rule 4754 (Nasdaq Closing Cross).
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The Exchange also notes that P.M.-settled options predominate in
the OTC market, and C2 is not aware of any adverse effects in the stock
market attributable to the P.M.-settlement feature. C2 is merely
proposing to offer a P.M.-settled product in an exchange environment
which offers the benefit of added transparency, price discovery, and
stability.
In response to any potential concerns that disruptive trading
conduct could occur as a result of the concurrent listing and trading
of two index option products based on the same index but for which
different settlement methodologies exist (i.e., one is A.M.-settled and
one is P.M.-settled), the Exchange notes that for roughly five years
(1987 to 1992) CBOE listed and traded an A.M.-settled S&P 500 index
option called NSX at the same time it listed and traded a P.M.-settled
S&P 500 index option called SPX and CBOE did not observe any market
disruptions as a result of offering both products.
As proposed, the proposal would become effective on a pilot program
basis for a period of fourteen months. If the Exchange were to propose
an extension of the program or should the Exchange propose to make the
program permanent, then the Exchange would submit a filing proposing
such amendments to the program. The
[[Page 12777]]
Exchange notes that any positions established under the pilot would not
be impacted by the expiration of the pilot. For example, a position in
a P.M.-settled series that expires beyond the conclusion of the pilot
period could be established during the 14-month pilot. If the pilot
program were not extended, then the position could continue to exist.
However, the Exchange notes that any further trading in the series
would be restricted to transactions where at least one side of the
trade is a closing transaction.
As part of the pilot program, the Exchange would also submit a
pilot program report to the Commission at least two months prior to the
expiration date of the program (the ``annual report''). As described
below, the annual report would contain an analysis of volume, open
interest and trading patterns. The analysis would examine trading in
the proposed option product as well as trading in the securities that
comprise the S&P 500 index. In addition, for series that exceed certain
minimum open interest parameters, the annual report would provide
analysis of index price volatility and share trading activity. The
annual report would be provided to the Commission on a confidential
basis.
The annual report would contain the following volume and open
interest data:
(1) Monthly volume aggregated for all trades;
(2) Monthly volume aggregated by expiration date;
(3) Monthly volume for each individual series;
(4) Month-end open interest aggregated for all series;
(5) Month-end open interest for all series aggregated by expiration
date; and
(6) Month-end open interest for each individual series.
In addition to the annual report, the Exchange would provide the
Commission with interim reports of the information listed in Items (1)
through (6) above periodically as required by the Commission while the
pilot is in effect. These interim reports would also be provided on a
confidential basis. The annual report would also contain the
information noted in Items (1) through (6) above for Expiration Friday,
A.M.-settled S&P 500 index options traded on CBOE.
In addition, the annual report would contain the following analysis
of trading patterns in Expiration Friday, P.M.-settled S&P 500 Index
option series in the pilot:
(1) A time series analysis of open interest; and
(2) An analysis of the distribution of trade sizes.
Also, for series that exceed certain minimum parameters, the annual
report would contain the following analysis related to index price
changes and underlying share trading volume at the close on Expiration
Fridays:
(1) A comparison of index price changes at the close of trading on
a given Expiration Friday with comparable price changes from a control
sample. The data would include a calculation of percentage price
changes for various time intervals and compare that information to the
respective control sample. Raw percentage price change data as well as
percentage price change data normalized for prevailing market
volatility, as measured by the CBOE Volatility Index (VIX), would be
provided; and
(2) 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 series. The data would include a
comparison of the calculated share volume for securities in the sample
set to the average daily trading volumes of those securities over a
sample period. The minimum open interest parameters, control sample,
time intervals, method for randomly selecting the component securities,
and sample periods would be determined by the Exchange and the
Commission.
The Exchange represents that it has sufficient capacity to handle
additional traffic associated with this new listing, and that it has in
place adequate surveillance procedures to monitor trading in these
options thereby helping to ensure the maintenance of a fair and orderly
market.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act \11\ and the rules and regulations thereunder and, in
particular, the requirements of Section 6(b) of the Act.\12\
Specifically, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \13\ requirements that the rules of
an exchange be designed to promote just and equitable principles of
trade, to remove impediments to and to perfect the mechanism for 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 introduction of P.M. settlement for the subject index option in the
manner proposed does not raise any meaningful regulatory concerns.
Further, the Exchange believes that the proposal will not adversely
impact fair and orderly markets on expiration Fridays for the
underlying stocks comprising the S&P 500 index. As discussed in section
(a) of Item 2 of this filing (the purpose section), the handling of
orders at the close on the stock markets has matured considerably since
concerns were initially raised in the late 1980s. Additionally, the
proposed rule change would provide permit holders and investors with
additional opportunities to trade S&P 500 options with a P.M.
settlement feature in an exchange environment and subject to
transparent exchange-based rules, and that investors would also benefit
from the opportunity to trade in association with this product on
Expiration Fridays thereby removing impediments to a free and open
market consistent with the Act.
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\11\ 15 U.S.C. 78a et seq.
\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
C2 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:
[[Page 12778]]
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-C2-2011-008 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-C2-2011-008. 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 C2. 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-C2-2011-008 and should be
submitted on or before March 29, 2011.
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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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-5190 Filed 3-7-11; 8:45 am]
BILLING CODE 8011-01-P