[Federal Register Volume 76, Number 60 (Tuesday, March 29, 2011)]
[Notices]
[Pages 17463-17466]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-7264]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64110; File No. SR-CBOE-2011-024]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change To Extend Pilot Programs Relating to FLEX Exercise
Settlement Values and Minimum Value Sizes
March 23, 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 March 14, 2011, the Chicago Board Options Exchange,
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and
Exchange Commission (the ``Commission'') the proposed rule change as
described in Items I and II below, which Items have been prepared by
the Exchange. The Exchange has designated the proposal as a ``non-
controversial'' proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing to extend the operation of its pilot
programs regarding permissible exercise settlement values and the
elimination of minimum value sizes for Flexible Exchange Options
(``FLEX Options''),\5\ which pilot programs are currently set to expire
on March 28, 2011, through March 30, 2012. The text of the proposed
rule change is available on the Exchange's Web site (http://www.cboe.org/Legal), at the Exchange's Office of the Secretary and at
the Commission's Public Reference Room.
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\5\ FLEX Options provide investors with the ability to customize
basic option features including size, expiration date, exercise
style, and certain exercise prices. FLEX Options can be FLEX Index
Options or FLEX Equity Options. In addition, other products are
permitted to be traded pursuant to the FLEX trading procedures. For
example, credit options are eligible for trading as FLEX Options
pursuant to the FLEX rules in Chapters XXIVA and XXIVB. See CBOE
Rules 24A.1(e) and (f), 24A.4(b)(1) and (c)(1), 24B.1(f) and (g),
24B.4(b)(1) and (c)(1), and 28.17. The rules governing the trading
of FLEX Options on the FLEX Request for Quote (``RFQ'') System
platform are contained in Chapter XXIVA. The rules governing the
trading of FLEX Options on the FLEX Hybrid Trading System platform
are contained in Chapter XXIVB.
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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
Statutory Basis for, the Proposed Rule Change
1. Purpose
On January 28, 2010, the Exchange received approval of a rule
change that established two pilot programs regarding permissible
exercise settlement values and the elimination of minimum value sizes
for FLEX Options.
[[Page 17464]]
The pilot programs are currently set to expire on March 28, 2011,
unless otherwise extended or made permanent.\6\ The purpose of this
rule change filing is to extend the two pilot programs through March
30, 2012. This filing does not propose any substantive changes to the
pilot programs and contemplates that all other terms of FLEX Options
will remain the same.
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\6\ Securities Exchange Act Release Nos. 61439 (January 28,
2010), 75 FR 5831 (February 4, 2010) (SR-CBOE-2009-087) (``Approval
Order'') and 61676 (March 9, 2010), 75 FR 13191 (March 18, 2010)
(SR-CBOE-2010-026).
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Background on the Pilots
Exercise Settlement Values Pilot for FLEX Index Options
Under Rules 24A.4, Terms of FLEX Options, and 24B.4, Terms of FLEX
Options, FLEX Options may expire on any business day specified as to
day, month and year, not to exceed a maximum term of fifteen years. In
addition, the exercise settlement value for FLEX Index Options can be
specified as the index value determined by reference to the reported
level of the index as derived from the opening or closing prices of the
component securities (``a.m. settlement'' or ``p.m. settlement,''
respectively) or as a specified average, provided that the average
index value must conform to the averaging parameters established by the
Exchange.\7\ However, prior to the initiation of the exercise
settlement values pilot, only a.m. settlements were permitted if a FLEX
Index Option expires on, or within two business days of, a third-
Friday-of-the-month expiration (``Expiration Friday'').\8\
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\7\ See Rules 24A.4(b)(3) and 24B.4(b)(3); see also Securities
Exchange Act Release No. 31920 (February 24, 1993), 58 FR 12280
(March 3, 1993) (SR-CBOE-92-17). The Exchange has determined to
limit the averaging parameters to three alternatives: the average of
the opening and closing index values; the average of the intra-day
high and low index values; and the average of the opening, closing,
and intra-day high and low index values. Any changes to the
averaging parameters established by the Exchange would be announced
to Trading Permit Holders via circular.
\8\ For example, prior to the pilot, the exercise settlement
value of a FLEX Index Option that expires on the Tuesday before
Expiration Friday could have an a.m., p.m. or specified average
settlement. However, the exercise settlement value of a FLEX Index
Option that expires on the Wednesday before Expiration Friday could
only have an a.m. settlement.
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Under the exercise settlement values pilot, this restriction on
p.m. and specified average price settlements in FLEX Index Options was
eliminated.\9\ The exercise settlement values pilot is operating for a
period of fourteen months and is currently set to expire on March 28,
2011.
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\9\ No change was necessary or requested with respect to FLEX
Equity Options. Regardless of the expiration date, FLEX Equity
Options are settled by physical delivery of the underlying.
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Minimum Value Size Pilot for All FLEX Options
Prior to the initiation of the pilot eliminating the minimum value
size requirements, the minimum value size requirements under Rules
24A.4 and 24B.4 were as follows:
For opening transactions in any FLEX series in which there
is no open interest at the time a FLEX RFQ or FLEX Order, as
applicable, is submitted, the minimum value size was (i) for FLEX
Equity Options, the lesser of 250 contracts or the number of contracts
overlying $1 million in the underlying securities; and (ii) for FLEX
Index Options, $10 million Underlying Equivalent Value. Under a prior
pilot program (which was superseded by the minimum value size pilot
program), the ``250 contracts'' component above had been reduced to
``150 contracts.'' \10\
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\10\ See Securities Exchange Act Release No. 57249 (March 4,
2008), 73 FR 13058 (March 11, 2008) (SR-CBOE-2006-36) (approval of
rule change that, among other things, established a one-and-a-half
year pilot program that reduced the minimum number contracts
required for a FLEX Equity Option opening transaction in a new
series).
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For a transaction in any currently-opened FLEX series
resulting from an RFQ or from trading against the electronic book
(other than FLEX Quotes responsive to a FLEX Request for Quotes and
FLEX Orders submitted to rest in the electronic book), the minimum
value size was (i) for FLEX Equity Options, the lesser of 100 contracts
or the number of contracts overlying $1 million in the underlying
securities in the case of opening transactions, and 25 contracts in the
case of closing transactions; and (ii) for FLEX Index Options, $1
million Underlying Equivalent Value in the case of both opening and
closing transactions; or (iii) in either case the remaining underlying
size or Underlying Equivalent Value on a closing transaction, whichever
is less.
The minimum value size for FLEX Quotes responsive to an
RFQ and FLEX Orders (undecremented size) submitted to rest in the
electronic book was 25 contracts in the case of FLEX Equity Options,
and $1 million Underlying Equivalent Value in the case of FLEX Index
Options, or in either case the remaining underlying size or Underlying
Equivalent Value on a closing transaction, whichever is less. In
addition, with respect to FLEX Index Appointed Market-Makers, FLEX
Quotes and FLEX Orders (undecremented size) must have been for at least
$10 million Underlying Equivalent Value or the dollar amount indicated
in the Request for Quote (if applicable), whichever is less.
Under the minimum value size pilot, these minimum value size
requirements were eliminated. Like the exercise settlement values pilot
mentioned above, the minimum value size pilot is operating for a period
of fourteen months and is currently set to expire on March 28, 2011.
Proposal
CBOE is proposing to extend the two pilot programs through March
30, 2012. CBOE believes the pilot programs have been successful and
well received by its membership and the investing public for the period
that they have been in operation as pilots.
In support of the proposed extension of the pilot programs, and as
required by the pilot programs' Approval Order, the Exchange has
submitted to the Commission pilot program reports regarding the two
pilots, which detail the Exchange's experience with the two programs.
Specifically, for the expiration settlement values pilot, the Exchange
provided the Commission an annual report analyzing volume and open
interest for each broad-based FLEX Index Options class overlying an
Expiration Friday, p.m.-settled FLEX Index Options series.\11\ The
annual report also contained information and analysis of FLEX Options
trading patterns. The Exchange also provided the Commission, on a
periodic basis, interim reports of volume and open interest. For the
minimum value size pilot, the Exchange provided the Commission an
annual report containing data and analysis of open interest and trading
volume, and analysis of the types of investors that initiated opening
FLEX Equity and Index Options transactions (i.e., institutional, high
net worth, or retail). The reports were provided to the Commission on a
confidential basis.
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\11\ The annual report also contained pilot period and pre-pilot
period analyses of volume and open interest for Expiration Friday,
a.m.-settled FLEX Index series and Expiration Friday Non-FLEX Index
series overlying the same index as an Expiration Friday, p.m.-
settled FLEX Index option.
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The Exchange believes there is sufficient investor interest and
demand in the pilot programs to warrant their extensions. The Exchange
believes that the programs have provided investors with additional
means of managing their risk exposures and carrying out their
investment objectives. Furthermore, the Exchange has not experienced
any adverse market effects with respect to the pilot programs.
[[Page 17465]]
If, in the future, the Exchange proposes an additional extension of
the pilot programs, or should the Exchange propose to make the pilot
programs permanent (which the Exchange currently intends to do), the
Exchange will submit, along with any filing proposing such amendments
to the pilot programs, additional pilot program reports covering the
extended period during which the pilot programs was in effect and
including the details referenced above and consistent with the pilot
programs' Approval Order. In addition, with respect to the minimum
value size pilot report in particular, the Exchange will include
information on the underlying equivalent values. These pilot program
reports would be submitted to the Commission at least two months prior
to the new expiration date of the pilot programs. The Exchange will
also continue, on a periodic basis, to submit interim reports of volume
and open interest consistent with the terms of the exercise settlement
values pilot program as described in the pilot programs' Approval
Order. All such pilot reports would continue to be provided on a
confidential basis. As noted in the pilot programs' Approval Order, any
positions established under the respective pilot programs would not be
impacted by the expiration of the pilot programs.\12\
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\12\ For example, a position in a p.m.-settled FLEX Index Option
series that expires on Expiration Friday in January 2015 could be
established during the exercise settlement values pilot. If the
pilot program were not extended (or made permanent), 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 another example, a 10-contract FLEX Equity Option
opening position that overlies less than $1 million in the
underlying security and expires in January 2015 could be established
during the minimum value size pilot. If the pilot program were not
extended (or made permanent), then the position could continue to
exist and any further trading in the series would be subject to the
minimum value size requirements for continued trading in that
series. See Approval Order, supra note 6, footnotes 9 and 10.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) of the Act,\13\ in general, and furthers the objectives of
Section 6(b)(5) of the Act,\14\ in particular, in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaging in facilitating transactions in
securities, and to remove impediments to and perfect the mechanism of a
free and open market and a national market system. Specifically, the
Exchange believes that the proposed extension of the pilot programs,
which permit additional exercise settlement values and eliminate
minimum value size requirements, would provide greater opportunities
for investors to manage risk through the use of FLEX Options. Further,
the Exchange notes that it has not experienced any adverse effects from
the operation of the pilot programs.
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\13\ 15 U.S.C. 78f(b).
\14\ 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 that is 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
The Exchange neither solicited nor received comments on the
proposal.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \15\ and Rule 19b-4(f)(6) thereunder.\16\
Because the proposed rule change does not (i) significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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\15\ 15 U.S.C. 78s(b)(3)(A)(iii).
\16\ 17 CFR 240.19b-4(f)(6).
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A proposed rule change filed under Rule 19b-4(f)(6) \17\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\18\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has
requested that the Commission waive the 30-day operative delay to
permit the current pilot to continue uninterrupted. In support of this,
CBOE notes, among other things, that it is only proposing to extend the
existing pilots and is not proposing any substantive changes to the
pilot programs.
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\17\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires that a self-regulatory organization submit to the
Commission written notice of its intent to file the proposed rule
change, along with a brief description and text of the proposed rule
change, at least five business days prior to the filing of the
proposed rule change, or such shorter time as designated by the
Commission. The Commission notes that the Exchange has satisfied
this requirement.
\18\ 17 CFR 240.19b-4(f)(6)(iii).
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The Commission finds that waiver of the operative delay is
consistent with the protection of investors and the public interest.
The Commission notes in waiving the 30-day operative delay that CBOE's
original pilot was published for comment in the Federal Register and
the Commission only received comments in support of the pilots.\19\
Further, CBOE is proposing to extend the existing pilots on the same
terms and conditions as they were originally approved by the
Commission. This includes, as described in more detail above, a
representation that CBOE will continue to monitor the pilots and submit
certain interim reports during the extended pilot period, as well as a
final report covering the pilot period should the Exchange decide to
extend or file for permanent approval of the pilots. Finally, the
Commission notes that the Exchange has represented that it has not
experienced any adverse market effects with respect to the pilot
programs. Based on the above, the Commission finds that it is
consistent with investor protection and the public interest to waive
the 30-day operative delay in accordance with Rule 19b-4(f)(6)(iii) so
that the pilots can continue on an uninterrupted bases, and therefore
designates the proposal operative upon filing.\20\
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\19\ See Securities Exchange Act Release Nos. 61439 (January 28,
2010), 75 FR 5831 (February 4, 2010) (SR-CBOE-2009-087) and 61183
(December 16, 2009), 74 FR 68435 (December 24, 2009) (SR-CBOE-2009-
087).
\20\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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.
[[Page 17466]]
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-2011-024 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2011-024. 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 identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File No. SR-CBOE-2011-024 and should be
submitted on or before April 19, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-7264 Filed 3-28-11; 8:45 am]
BILLING CODE 8011-01-P