[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]


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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.
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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

    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.
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    \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).
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    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.
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    \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.
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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\
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    \5\ See proposed new definitions of ``Exchange-Traded Fund and 
Individual Stock Based Volatility Index'' set forth in Rule 
24.1(bb).
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    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\
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    \6\ CBOE will be the reporting authority for any Vol Index.
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    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.
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    \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.
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    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\
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    \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.
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    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.
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    \11\ See proposed amendment to rule 24.5 and proposed new 
Interpretations and Policy .04 to rule 24.5.
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    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.
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    \12\ 15 U.S.C. 78s(b)(1).
    \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 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

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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\
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    \15\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-8793 Filed 4-12-11; 8:45 am]
BILLING CODE 8011-01-P