[Federal Register Volume 76, Number 71 (Wednesday, April 13, 2011)]
[Notices]
[Pages 20784-20788]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-8793]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64245; File No. SR-CBOE-2011-026]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change To Trade
Options on Individual Stock Based Volatility Indexes and Certain
Exchange-Traded Fund Based Volatility Indexes
April 7, 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 29, 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 Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CBOE proposes to amend its rules to list and trade options on
individual stock based volatility indexes and certain exchange-traded
fund based volatility indexes. CBOE will list a total of 40 combined
individual stock and exchange-traded fund based volatility indexes.
These are in addition to options on the CBOE Gold ETF Volatility Index
(``GVZ''), which has already been approved for trading by the
Commission. Such volatility index options must be based on an
individual stock option or exchange-traded fund option that already
trades on CBOE. The proposed options will be cash-settled and will have
European-style exercise. The text of the rule proposal is available on
the Exchange's Web site (http://www.cboe.org/legal), at the Exchange's
[[Page 20785]]
Office of the Secretary 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this proposed rule change is to permit the Exchange
to list and trade cash-settled, European-style options on individual
stock-based volatility indexes and select exchange-traded fund based
volatility indexes (collectively, ``Vol Indexes''). CBOE proposes to
list a total of 40 combined Vol Indexes. Initially, CBOE proposes to
list options on Vol Indexes comprised of options on the following
individual stocks: Apple Computer, Amazon, IBM, Google, and Goldman
Sachs. In addition, CBOE will list Vol Indexes comprised of options on
the following exchange-traded funds (``ETFs''): The US Oil Fund, LP
(``USO''), the iShares MSCI Emerging Markets Index Fund (``EEM''), the
iShares FTSE China 25 Index Fund (``FXI''), the iShares MSCI Brazil
Index Fund (``EWZ''), the Market Vectors Gold Miners ETF (``GDX''), and
the Energy Select Sector SPDR ETF (``XLE''). These are in addition to
options on the CBOE Gold ETF Volatility Index (``GVZ''), which has
already been approved for trading by the Commission.\3\ From time to
time, CBOE will announce the remaining Vol Indexes options it will
trade.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 62139 (May 19, 2010)
75 FR 29597 (May 26, 2010) (order approving proposal to list and
trade GVZ options on the CBOE).
---------------------------------------------------------------------------
In addition to GVZ, CBOE currently has approval to trade options on
other volatility indexes that measure the volatility of broad-based
indexes.\4\ The Exchange now wants to add volatility index options
based on individual stock options that are very actively traded and on
certain ETF options. This proposal would permit the Exchange to trade a
Vol Index using any ETF option currently trading and eligible for
options trading under Interpretations and Policies .06 and .07 to Rule
5.3 other than those ETFs specifically identified in Interpretation and
Policy .06(iv). CBOE will continue to trade GVZ options under the prior
approval issued by the Commission. The calculation of any Vol Index
will use the same methodology, as described below, as is currently used
for CBOE Volatility Index (``VIX'') and GVZ options.
---------------------------------------------------------------------------
\4\ See Rule 24.9(a)(4) which identifies, inter alia, CBOE
Volatility Index, CBOE Nasdaq 100 Volatility Index, CBOE Dow Jones
Industrial Average Volatility Index and CBOE Russell 2000 Volatility
Index as A.M.-settled index options eligible for options trading on
CBOE.
---------------------------------------------------------------------------
Index Design and Calculation
The calculation of a Vol Index will be based on the VIX and GVZ
methodology applied to options on the individual stock or exchange-
traded fund that is the subject of the particular Vol Index. A Vol
Index is an up-to-the-minute market estimate of the expected volatility
of the underlying individual stock or exchange-traded fund calculated
by using real-time bid/ask quotes of CBOE listed options on the
underlying instruments. A Vol Index uses nearby and second nearby
options with at least 8 days left to expiration and then weights them
to yield a constant, 30-day measure of the expected (implied)
volatility.\5\
---------------------------------------------------------------------------
\5\ See proposed new definitions of ``Exchange-Traded Fund and
Individual Stock Based Volatility Index'' set forth in Rule
24.1(bb).
---------------------------------------------------------------------------
For each contract month, CBOE will determine the at-the-money
strike price. The Exchange will then select the at-the-money and out-
of-the money series with non-zero bid prices and determine the midpoint
of the bid-ask quote for each of these series. The midpoint quote of
each series is then weighted so that the further away that series is
from the at-the-money strike, the less weight that is accorded to the
quote. Then, to compute the index level, CBOE will calculate a
volatility measure for the nearby options and then for the second
nearby options. This is done using the weighted mid-point of the
prevailing bid-ask quotes for all included option series with the same
expiration date. These volatility measures are then interpolated to
arrive at a single, constant 30-day measure of volatility.\6\
---------------------------------------------------------------------------
\6\ CBOE will be the reporting authority for any Vol Index.
---------------------------------------------------------------------------
CBOE will compute values for Vol Index underlying option series on
a real-time basis throughout each trading day, from 8:30 a.m. until 3
p.m. (Chicago time) (or until 3:15 p.m. (Chicago time) as applicable
for certain Exchange-Traded Fund Based Volatility Index options). Vol
Index levels will be calculated by CBOE and disseminated at 15-second
intervals to major market data vendors.
Options Trading
Vol Index options will be quoted in index points and fractions and
one point will equal $100. The minimum tick size for series trading
below $3 will be 0.05 ($5.00) and above $3 will be 0.10 ($10).00).
Initially, the Exchange will list in-, at- and out-of-the-money strike
prices and the procedures for adding additional series are provided in
Rule 5.5.\7\ Dollar strikes (or greater) will be permitted for Vol
Index options where the strike price is $200 or less and $5 or greater
where the strike price is greater than $200.
---------------------------------------------------------------------------
\7\ See Rule 5.5(c). ``Additional series of options of the same
class may be opened for trading on the Exchange when the Exchange
deems it necessary to maintain an orderly market, to meet customer
demand or when the market price of the underlying * * * moves
substantially from the initial exercise price or prices.'' For
purposes of this rule, ``market price'' shall mean the implied
forward level based on any corresponding futures price or the
calculated forward value of the respective Vol index.
---------------------------------------------------------------------------
Transactions in Vol Index options may be effected on the Exchange
between the hours of 8:30 a.m. Chicago time and 3:15 p.m. (Chicago
time), except (for Exchange-Trade Fund Based Volatility Index options)
if the closing time for traditional options on the exchange-traded fund
is earlier than 3:15 p.m. (Chicago time), the earlier closing time
shall apply. The Exchange is proposing to permit different closing
times for Exchange-Traded Fund Based Volatility Index options because
the trading hours for traditional options on ETFs vary.
Exercise and Settlement
The proposed options will typically expire on the Wednesday that is
30 days prior to the third Friday of the calendar month immediately
following the expiration month (the expiration date of the options used
in the calculation of the index). If the third Friday of the calendar
month immediately following the expiring month is a CBOE holiday, the
expiration date will be 30 days prior to the CBOE business day
immediately preceding that Friday. For example, November 2011 Vol Index
options would expire on Wednesday, November 16, 2011, exactly 30 days
prior to the third Friday of the calendar month immediately following
the expiring month.
Trading in the expiring contract month will normally cease at 3:00
pm (Chicago time) (or at 3:15 p.m. (Chicago
[[Page 20786]]
time) as applicable for Exchange-Traded Fund Based Volatility Index
options) on the business day immediately preceding the expiration
date.\8\ Exercise will result in delivery of cash on the business day
following expiration. Vol Index options will be A.M.-settled.\9\ The
exercise settlement value will be determined by a Special Opening
Quotations (``SOQ'') of a Vol Index calculated from the sequence of
opening prices of a single strip of options expiring 30 days after the
settlement date. The opening price for any series in which there are is
no trade shall be the average of that options' bid price and ask price
as determined at the opening of trading.\10\
---------------------------------------------------------------------------
\8\ See proposed amendment to Rule 24.6, Days and Hours of
Business.
\9\ See proposed amendment to Rule 24.9(a)(4) (adding Exchange-
traded fund volatility indexes and Individual stock volatility
indexes to the list of A.M.-settled index options approved for
trading on the Exchange).
\10\ See proposed amendment to Rule 24.9(a)(5) (revising rule to
make ``Volatility Index'' options generic for purposes of this
provision, which sets forth the method of determining the day that
the exercise settlement value is calculated and of determining the
expiration date and the last trading day for CBOE Volatility Index
Options). The Exchange is also proposing to make technical changes
to this rule provision as well.
---------------------------------------------------------------------------
The exercise-settlement amount will be equal to the difference
between the exercise-settlement value and the exercise price of the
option, multiplied by $100. When the last trading day is moved because
of a CBOE holiday, the last trading day for expiring options will be
the day immediately preceding the last regularly-scheduled trading day.
Position and Exercise Limits
For regular options trading, the Exchange is proposing to establish
position limits for Vol Index options at 50,000 contracts on either
side of the market and no more than 30,000 contracts in the nearest
expiration month. CBOE believes that a 50,000 contract position limit
is appropriate due to the fact that the options which are the
underlying components for a Vol Index are among the most actively
traded option classes currently listed. In determining compliance with
these proposed position limits, Vol Index options will not be
aggregated with the underlying exchange-traded fund or individual stock
options. Exercise limits will be the equivalent to the proposed
position limits.\11\ Vol Index options will be subject to the same
reporting requirements triggered for other options dealt in on the
Exchange.
---------------------------------------------------------------------------
\11\ See proposed amendment to rule 24.5 and proposed new
Interpretations and Policy .04 to rule 24.5.
---------------------------------------------------------------------------
For FLEX options trading, the Exchange is proposing that the
position limits for FLEX Vol Index Options will be equal to the
position limits for Non-FLEX Options on the same Vol Index. Similarly,
the Exchange is proposing that the exercise limits for FLEX Vol Index
Options will be equivalent to the position limits established pursuant
to Rule 24.4. The proposed position and exercise limits for FLEX Vol
Index Options are consistent with the treatment of position and
exercise limits for Flex GVZ and other Flex Index Options. The Exchange
is also proposing to amend subparagraph (4) to Rules 24A.7(d) and
24B.7(d) to provide that as long as the options positions remain open,
positions in FLEX Vol Index Options that expire on the same day as Non-
FLEX Vol Index Options, as determined pursuant to Rule 24.9(a)(5),
shall be aggregated with positions in Non-FLEX Vol Index Options and
shall be subject to the position limits set forth in Rules 4.11, 24.4,
24.4A and 24.4B, and the exercise limits set forth in Rules 4.12 and
24.5.
The Exchange is proposing to establish a Vol Index Hedge Exemption,
which would be in addition to the standard limit and other exemptions
available under Exchange rules, interpretations and policies. The
Exchange proposes to establish the following procedures and criteria
which must be satisfied to qualify for a Vol Index hedge exemption:
The account in which the exempt option positions are held
(``hedge exemption account'') has received prior Exchange approval for
the hedge exemption specifying the maximum number of contracts which
may be exempt under the proposed new Interpretation. The hedge
exemption account has provided all information required on Exchange-
approved forms and has kept such information current. Exchange approval
may be granted on the basis of verbal representations, in which event
the hedge exemption account shall within two (2) business days or such
other time period designated by the Department of Market Regulation
furnish the Department of Market Regulation with appropriate forms and
documentation substantiating the basis for the exemption. The hedge
exemption account may apply from time to time for an increase in the
maximum number of contracts exempt from the position limits.
A hedge exemption account that is not carried by a CBOE
member organization must be carried by a member of a self-regulatory
organization participating in the Intermarket Surveillance Group.
The hedge exemption account maintains a qualified
portfolio, or will effect transactions necessary to obtain a qualified
portfolio concurrent with or at or about the same time as the execution
of the exempt options positions, of a net long or short position in
Equity-Based Volatility Index futures contracts or in options on Vol
Index futures contracts, or long or short positions in Vol Index
options, for which the underlying Vol Index is included in the same
margin or cross-margin product group cleared at the Clearing
Corporation as the Vol Index option class to which the hedge exemption
applies. To remain qualified, a portfolio must at all times meet these
standards notwithstanding trading activity.
The exemption applies to positions in Vol Index options
dealt in on the Exchange and is applicable to the unhedged value of the
qualified portfolio. The unhedged value will be determined as follows:
(1) The values of the net long or short positions of all qualifying
products in the portfolio are totaled; (2) for positions in excess of
the standard limit, the underlying market value (a) of any economically
equivalent opposite side of the market calls and puts in broad-based
index options, and (b) of any opposite side of the market positions in
Vol Index futures, options on Vol Index futures, and any economically
equivalent opposite side of the market positions, assuming no other
hedges for these contracts exist, is subtracted from the qualified
portfolio; and (3) the market value of the resulting unhedged portfolio
is equated to the appropriate number of exempt contracts as follows--
the unhedged qualified portfolio is divided by the correspondent
closing index value and the quotient is then divided by the index
multiplier or 100.
Only the following qualified hedging transactions and
positions will be eligible for purposes of hedging a qualified
portfolio (i.e. futures and options) pursuant to the proposed new
Interpretation .01:
[cir] Long put(s) used to hedge the holdings of a qualified
portfolio;
[cir] Long call(s) used to hedge a short position in a qualified
portfolio;
[cir] Short call(s) used to hedge the holdings of a qualified
portfolio; and
[cir] Short put(s) used to hedge a short position in a qualified
portfolio.
The following strategies may be effected only in
conjunction with a qualified stock portfolio:
[cir] A short call position accompanied by long put(s), where the
short call(s) expires with the long put(s), and the strike price of the
short call(s) equals or exceeds the strike price of the long put(s) (a
``collar''). Neither side of the collar transaction can be in-the-money
[[Page 20787]]
at the time the position is established. For purposes of determining
compliance with Rules 4.11 and proposed Rule 24.4C, a collar position
will be treated as one (1) contract;
[cir] A long put position coupled with a short put position
overlying the same Vol Index and having an equivalent underlying
aggregate index value, where the short put(s) expires with the long
put(s), and the strike price of the long put(s) exceeds the strike
price of the short put(s) (a ``debit put spread position''); and
[cir] A short call position accompanied by a debit put spread
position, where the short call(s) expires with the puts and the strike
price of the short call(s) equals or exceeds the strike price of the
long put(s). Neither side of the short call, long put transaction can
be in-the-money at the time the position is established. For purposes
of determining compliance with Rules 4.11 and proposed Rule 24.4C, the
short call and long put positions will be treated as one (1) contract.
The hedge exemption account shall:
[cir] Liquidate and establish options, their equivalent or other
qualified portfolio products in an orderly fashion; not initiate or
liquidate positions in a manner calculated to cause unreasonable price
fluctuations or unwarranted price changes.
[cir] Liquidate any options prior to or contemporaneously with a
decrease in the hedged value of the qualified portfolio which options
would thereby be rendered excessive.
[cir] Promptly notify the Exchange of any material change in the
qualified portfolio which materially affects the unhedged value of the
qualified portfolio.
If an exemption is granted, it will be effective at the
time the decision is communicated. Retroactive exemptions will not be
granted.
Exchange Rules Applicable
Except as modified herein, the rules in Chapters I through XIX,
XXIV, XXIVA, and XXIVB will equally apply to Vol Index options.
The Exchange is proposing that the margin requirements for Vol
Index options be set at the same levels that apply to equity options
under Exchange Rule 12.3. Margin of up to 100% of the current market
value of the option, plus 20% of the underlying volatility index value
must be deposited and maintained. The pertinent provisions of Rule
12.3, Margin Requirements, have been amended to reflect these proposed
revisions. Additional margin may be required pursuant to Exchange Rule
12.10.
The Exchange hereby designates Vol Index options as eligible for
trading as Flexible Exchange Options as provided for in Chapters XXIVA
(Flexible Exchange Options) and XXIVB (FLEX Hybrid Trading System). The
Exchange notes that Vol Index FLEX Options will only expire on business
days that non-FLEX options on Vol Indexes expire. This is because the
term ``exercise settlement value'' in Rules 24A.4(b)(3) and
24B.4(b)(3), Special Terms for FLEX Index Options, has the same meaning
set forth in Rule 24.9(5). As is described earlier, the Exchange is
proposing to amend Rule 24.9(a)(5) to provide that the exercise
settlement value of Vol Index options for all purposes under CBOE Rules
will be calculated as the Wednesday that is thirty days prior to the
third Friday of the calendar month immediately following the month in
which a Vol Index options expire.
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
listing of new series that would result from the introduction of Vol
Index options.
Surveillance
The Exchange will use the same surveillance procedures currently
utilized for each of the Exchange's other index options to monitor
trading in Vol Index options. The Exchange further represents that
these surveillance procedures shall be adequate to monitor trading in
options on these volatility indexes. For surveillance purposes, the
Exchange will have complete access to information regarding trading
activity in the pertinent underlying securities.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act \12\ and the rules and regulations thereunder and, in
particular, the requirements of Section 6(b) of the Act.\13\
Specifically, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \14\ requirements that the rules of
an exchange be designed to promote just and equitable principles of
trade, to prevent fraudulent and manipulative acts, 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 Vol
Index options will attract order flow to the Exchange, increase the
variety of listed options to investors, and provide a valuable hedging
tool to investors.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78s(b)(1).
\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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 up to 90 days (i) as the
Commission may designate 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 the 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-2011-026 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-2011-026. This file
number should be included on the
[[Page 20788]]
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 publicly available. All submissions should refer to
File Number SR-CBOE-2011-026 and should be submitted on or before May
4, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
---------------------------------------------------------------------------
\15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-8793 Filed 4-12-11; 8:45 am]
BILLING CODE 8011-01-P