[Federal Register Volume 69, Number 98 (Thursday, May 20, 2004)]
[Notices]
[Pages 29152-29155]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11375]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49698; File No. SR-CBOE-2004-09]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change by the Chicago 
Board Options Exchange, Incorporated Relating to Options on Certain 
CBOE Volatility Indexes

May 13, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 17, 2004, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange''), filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III 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 and to approve the 
proposal on an accelerated basis.
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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 CBOE hereby proposes to amend certain of its rules to provide 
for the listing and trading of options on three separate volatility 
indexes; specifically: the CBOE Increased-Value Volatility Index 
(``Increased-Value VIX''); the CBOE Increased-Value Nasdaq 100[reg] 
Volatility Index (``Increased-Value VXN''); and the CBOE Increased-
Value Dow Jones Industrial Average[reg] Volatility Index (``Increased-
Value VXD'') (collectively, ``Increased-Value Volatility Indexes''). 
Options on each index would be cash-settled and would have European-
style expiration. The text of the proposed rule change is set forth 
below. Proposed new language is in italics; proposed deletions are in 
[brackets].
* * * * *

CHAPTER XXIV--Index Options

* * * * *

Rule 24.1 Definitions

    (a)-(x) No change.
    * * * Interpretations and Policies:
    .01 The reporting authorities designated by the Exchange in respect 
of each index underlying an index option contract traded on the 
Exchange are as follows:

[Add the following to the current
 list:]
    CBOE Increased-Value Volatility      Chicago Board Options Exchange
     Index[reg].
    CBOE Increased-Value Nasdaq          Chicago Board Options
     100[reg] Volatility Index.
Exchange
    CBOE Increased-Value Dow Jones       Chicago Board Options Exchange
     Industrial Average[reg] Volatility
     Index.
 


[[Page 29153]]

* * * * *

Rule 24.9 Terms of Index Option Contracts

    (a) General.
    (1)-(2) No change.
    (3) European-Style Exercise. The following European-style index 
options, some of which are A.M.-settled as provided in paragraph 
(a)(4), are approved for trading on the Exchange:
[Add the following to the end of the current list]
    CBOE Increased-Value Volatility Index[reg]
    CBOE Increased-Value Nasdaq 100[reg] Volatility Index
    CBOE Increased-Value Dow Jones Industrial Average[reg] Volatility 
Index
    (4) A.M. Settled Index Options. The last day of trading for A.M.-
settled index options shall be the business day preceding the last day 
of trading in the underlying securities prior to expiration. The 
current index value at the expiration of an A.M.-settled index option 
shall be determined, for all purposes under these Rules and the Rules 
of the Clearing Corporation, on the last day of trading in the 
underlying securities prior to expiration, by reference to the reported 
level of such index as derived from first reported sale (opening) 
prices of the underlying securities on such day, except that in the 
event that the primary market for an underlying security does not open 
for trading, halts trading prematurely, or otherwise experiences a 
disruption of normal trading on that day, or in the event that the 
primary market for an underlying security is open for trading on that 
day, but that particular security does not open for trading, halts 
trading prematurely, or otherwise experiences a disruption of normal 
trading on that day, the price of that security shall be determined, 
for the purposes of calculating the current index value at expiration, 
as set forth in Rule 24.7(e).
    The following A.M.-settled index options are approved for trading 
on the Exchange:
[Add the following to the end of the current list]
    CBOE Increased-Value Volatility Index[reg]
    CBOE Increased-Value Nasdaq 100[reg] Volatility Index
    CBOE Increased-Value Dow Jones Industrial Average[reg] Volatility 
Index
    (5) Other Methods of Determining Exercise Settlement Value. 
Exercise settlement values for the following index options are 
determined as specified in this paragraph:
    (i)-(iii) No Change.
    (iv) CBOE Volatility Indexes and CBOE Increased-Value Volatility 
Indexes. The current index value at expiration shall be determined, for 
all purposes under these Rules and the Rules of the Clearing 
Corporation, on the last day of trading in the underlying securities 
prior to expiration. The current index value for such purposes shall be 
calculated by the Chicago Board Options Exchange as a Special Opening 
Quotation (SOQ) of each respective Volatility or Increased-Value 
Volatility Index using the sequence of opening prices of the options 
that comprise each Index. The opening price for any series in which 
there is no trade shall be the average of that option's bid price and 
ask price as determined at the opening of trading.
    (b)-(c) No change.
    * * * Interpretations and Policies:
    .01 The procedures for adding and deleting strike prices for index 
options are provided in Rule 5.5 and Interpretations and Policies 
related thereto, as otherwise generally provided by Rule 24.9, and 
include the following:
    (a) The interval between strike prices will be no less than $5.00; 
provided, that in the case of the following classes of index options, 
the interval between strike prices will be no less than $2.50:
[Add the following to the end of the current list]
    CBOE Increased-Value Volatility Index[reg]
    CBOE Increased-Value Nasdaq 100[reg] Volatility Index
    CBOE Increased-Value Dow Jones Industrial Average[reg] Volatility 
Index
    (b)-(d) No change.
    .02-.11 No change.
* * * * *

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 CBOE included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received regarding the proposed rule change. 
The text of these statements may be examined at the places specified in 
Item III below. The CBOE has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The proposed rule change would permit the Exchange to list and 
trade cash-settled, European-style options on increased-value versions 
of existing volatility indexes, specifically, the CBOE Volatility Index 
(``VIX''); the CBOE Nasdaq 100[reg] Volatility Index (``VXN''); and the 
CBOE Dow Jones Industrial Average[reg] Volatility Index (``VXD'').\3\ 
According to the CBOE, each of the existing volatility indexes--VIX, 
VXN, and VXD--is calculated using real-time quotes of out-of-the-money 
nearby and second nearby index puts and calls of the S&P 500[reg] Index 
(``SPX[reg]''), the Nasdaq 100[reg] Index (NDX[reg]) and the Dow Jones 
Industrial Average[reg] Index (``DJX[reg]''), respectively. Generally, 
volatility indexes provide investors with up-to-the-minute market 
estimates of expected volatility of the corresponding securities index 
that each particular volatility index tracks. For example, the VIX 
tracks the expected volatility of the SPX[reg]. The VIX, VXN, and the 
VXD are each calculated by extracting implied volatilities from real-
time index option bid/ask quotes of the underlying securities indexes.
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    \3\ The Commission recently granted approval for the CBOE to 
list options on the VIX, VXN, and VXD indexes. See Securities 
Exchange Act Release No. 49563 (April 14, 2004), 69 FR 21589 (April 
21, 2004) (SR-CBOE-2003-40). Index description and option contract 
specifications related to options on VIX, VXN, and VXD are set forth 
in the related notice of the proposed rule change. See Securities 
Exchange Act Release No. 48807 (November 19, 2003), 68 FR 66516 
(November 26, 2003) (SR-CBOE-2003-40).
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    VIX, VXN, and VXD are all quoted in absolute numbers that represent 
the underlying stock index volatility in percentage points per annum. 
For example, an index level of 14.34 (the closing value of the VIX as 
of January 21, 2004) represents an annualized volatility of 14.34%. The 
Increased-Value Volatility Indexes would be calculated by simply 
multiplying the corresponding value of the VIX, VXN, and VXD, 
respectively, by ten. To illustrate, where the index level of the VIX 
would be 14.34 on January 21, 2004, the Increased-Value VIX would have 
an index value of 143.40 (ten times 14.34). Similarly, the index level 
of the increased-value versions of the VXN and the VXD always would be 
ten times the index level of the VXN and the VXD, respectively. Each of 
the Increased-Value Volatility Indexes would be listed and traded under 
a unique symbol, to be determined at a later date by the

[[Page 29154]]

Exchange. The CBOE would notify the Commission and The Options Clearing 
Corporation of these symbols. In addition, the Exchange would 
disseminate prices for Increased-Value Volatility Indexes every 15 
seconds through the Option Price Reporting Authority.
    The purpose of calculating and maintaining increased-value versions 
of CBOE's volatility indexes would be to offer additional investment 
and risk management alternatives to institutional customers. Based on 
past experience, CBOE believes that institutional customers would 
prefer a larger-sized contract that would be more sensitive to changes 
in the underlying index. Such a contract would be more consistent with 
customers' hedging needs. CBOE believes that having the flexibility to 
offer both sized volatility index products would permit the Exchange to 
better meet the needs of both institutional and retail investors

Index Design, Calculation, and Option Trading

    Again, the Increased-Value Volatility Indexes would be designed and 
calculated by simply multiplying the index levels of the VIX, VXN, and 
VXD indexes by ten. The contract specifications for options on the 
Increased-Value Volatility Indexes would be the same as that of the 
VIX, VXN, and VXD. Strike prices would be set to bracket the index in 
2\1/2\ point increments for strikes below 200 and in 5-point increments 
above 200. The minimum tick size for series trading below $3 will be 
0.05 and for series trading above $3 the minimum tick would be 0.10. 
The trading hours for options on the Increased-Value Volatility Indexes 
would be from 8:30 AM to 3:15 PM CST.

Exercise and Settlement

    Similarly, exercise and settlement on the Increased-Value 
Volatility Indexes would be identical to the existing volatility 
indexes. The proposed options on each Increased-Value Volatility Index 
would expire on the Wednesday immediately prior to the third Friday of 
each month. For example, February 2004 Increased-Value VIX options 
would expire on Wednesday, February 18, 2004. Increased-Value 
Volatility Index options would be A.M.-settled. The exercise settlement 
value would be determined by a Special Opening Quotation (``SOQ'') of 
each respective Increased-Value Volatility Index calculated from the 
sequence of opening prices of the options that comprise that index. The 
opening price for any series in which there is no trade would be the 
average of that option's bid price and ask price as determined at the 
opening of trading.
    The exercise-settlement amount would 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 falls on an 
Exchange holiday, the last trading day for expiring options would be 
the day immediately preceding the last regularly-scheduled trading day. 
When the date on which the exercise settlement value is to be 
determined would fall on an Exchange holiday, the exercise settlement 
value would be determined on the day immediately preceding the 
regularly-scheduled settlement date.

Surveillance

    The Exchange would use the same surveillance procedures currently 
utilized for each of the Exchange's other index options, including 
options on the VIX, VXN, and VXD,\4\ to monitor trading in options on 
each Increased-Value Volatility Index. The Exchange further represents 
that these surveillance procedures shall be adequate to monitor trading 
in options on these indexes. For surveillance purposes, the Exchange 
would have complete access to information regarding trading activity in 
the pertinent underlying securities.
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    \4\ Id.
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Position Limits

    The Exchange proposes to establish position limits for options on 
each Increased-Value Volatility Index at 25,000 contracts on either 
side of the market and no more than 15,000 of such contracts would be 
able to be in series in the nearest expiration month. This would be 
consistent with CBOE Rule 24.4 (Position Limits for Broad-Based Index 
Options).

Exchange Rules Applicable

    Except as modified herein, the Rules in Chapter XXIV would be 
applicable to the Increased-Value Volatility Index options. Each 
Increased-Value Volatility Index would be classified as a ``broad-based 
index'' and, under CBOE margin rules, specifically, Rule 12.3(c)(5)(A), 
the margin requirement for a short put or call on each respective index 
would be 100% of the current market value of the contract plus up to 
15% of the respective underlying index value.
    In accordance with CBOE Rule 24A.4(b) (Special Terms for FLEX Index 
Options), CBOE reserves the right to approve and open for trading FLEX 
options on the Increased-Value Volatility Indexes.
    Additionally, CBOE affirms that it possesses the necessary systems 
capacity to support new series that would result from the introduction 
of Increased-Value Volatility Index options. CBOE also has been 
informed that OPRA has the capacity to support such new series.
    The Exchange intends to issue a circular detailing index and option 
contract specifications to CBOE membership prior to the listing of 
options series on the Increased-Value Volatility Indexes.
2. Statutory Basis
    CBOE believes that the proposed rule change is consistent with 
section 6(b) of the Act,\5\ in general, and furthers the objectives of 
section 6(b)(5) of the Act,\6\ in particular, in that it would permit 
trading in options based on the Increased-Value Volatility Indexes 
pursuant to rules designed to prevent fraudulent and manipulative acts 
and practices and to promote just and equitable principles of trade, 
and thereby would provide investors with the ability to invest in 
options based on an additional index.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 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.

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. 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-2004-09 on the subject line.
    Paper comments:
    Send paper comments in triplicate to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609.

[[Page 29155]]

    All submissions should refer to File Number SR-CBOE-2004-09. 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 inspection 
and copying in the Commission's Public Reference Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
CBOE. 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-
CBOE-2004-09 and should be submitted on or before June 10, 2004.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    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. In particular, 
the Commission finds that the proposed rule change is consistent with 
section 6(b)(5) of the Act.\7\ Specifically, The Commission believes 
that the proposed change does not raise any significant regulatory 
issues that were not addressed in the Commission's prior approval order 
regarding the listing and trading of options on the VIX, VXN and VXD on 
the CBOE.\8\ The proposed rule change would merely expand upon the 
existing list of indexes underlying index option contracts traded on 
the Exchange to include increased-value versions of existing volatility 
indexes, i.e. the Increased-Value VIX, Increased-Value VXN, and 
Increased-Value VXD.
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    \7\ Id.
    \8\ See supra note 3.
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    The CBOE has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after 
publication of notice thereof in the Federal Register to accommodate 
the listing and trading of options on the Increased-Value VIX, 
Increased-Value VXN, and Increased-Value VXD. Accordingly, the 
Commission finds good cause, pursuant to section 19(b)(2) of the 
Act,\9\ for approving the proposed rule change prior to the thirtieth 
day after the date of publication of notice thereof in the Federal 
Register because these products are similar to other products currently 
trading on the CBOE.
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    \9\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-CBOE-2004-09), is hereby 
approved on an accelerated basis.
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    \10\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-11375 Filed 5-19-04; 8:45 am]
BILLING CODE 8010-01-P