[Federal Register Volume 76, Number 159 (Wednesday, August 17, 2011)]
[Notices]
[Pages 51099-51103]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-20912]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65116; File No. SR-CBOE-2011-055]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Granting Approval of Proposed Rule Change to Trade
Options on the CBOE Silver ETF Volatility Index
August 11, 2011.
I. Introduction
On June 15, 2011, Chicago Board Options Exchange, Incorporated (the
``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the ``Act''),\1\ a proposed rule
change to trade options on the CBOE Silver ETF Volatility Index
(``VXSLV''). The proposed rule change was published for comment in the
Federal Register on June 28, 2011.\2\ The Commission received no
comment letters on the proposed rule change. This order approves the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ See Securities Exchange Act Release No. 64722 (June 22,
2011), 76 FR 37868.
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II. Description
The Exchange proposes to amend certain of its rules to allow the
listing and trading of cash-settled, European-style options on VXSLV.
The Exchange has previously received approval orders to trade
options on other volatility indexes that are calculated using certain
individual stock and exchange-traded fund (``ETF'') options listed on
CBOE.\3\ In the most recent approval order, the Exchange genericized
certain of its rules to collectively refer to these indexes as
``Individual Stock Based Volatility Indexes,'' ``ETF Based Volatility
Indexes,'' and ``Volatility Indexes,'' as applicable.\4\ The specific
Individual Stock Based Volatility Indexes and ETF Based Volatility
Indexes that have been approved for options trading are listed in Rule
24.1(bb). This filing layers VXSLV into CBOE's existing rule framework
for ``ETF Based Volatility
[[Page 51100]]
Indexes'' and ``Volatility Indexes,'' since VXSLV is comprised of ETF
options.
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\3\ See Securities Exchange Act Release Nos. 62139 (May 19,
2010), 75 FR 29597 (May 26, 2010) (order approving proposal to list
and trade CBOE Gold ETF Volatility Index (``GVZ'') options on CBOE)
and 64551 (May 26, 2011), 76 FR 32000 (June 2, 2011) (order
approving proposal to list and trade options on certain individual
stock based volatility indexes and ETF based volatility indexes).
\4\ See Rules 12.3, 24.1(bb), 24.4C, 24.5.04, 24.6, 24.9, 24A.7,
24A.8, 24B.7 and 24B.8.
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Index Design and Calculation
The calculation of VXSLV is based on the VIX methodology applied to
options on the iShares Silver Trust (``SLV''). The VXSLV index was
introduced by CBOE on March 16, 2011 and has been disseminated in real-
time on every trading day since that time.\5\
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\5\ CBOE maintains a micro-site for VXSLV: http://www.cboe.com/micro/VIXETF/VXSLV/.
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VXSLV is an up-to-the-minute market estimate of the expected
volatility of SLV calculated by using real-time bid/ask quotes of CBOE
listed SLV options. VXSLV 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.
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\ See proposed amendment to Interpretation and Policy .01 to
Rule 24.1 (designating CBOE as the reporting authority for VXSLV).
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CBOE will compute values for VXSLV underlying option series on a
real-time basis throughout each trading day, from 8:30 a.m. until 3
p.m. (Chicago time).\7\ VXSLV levels will be calculated by CBOE and
disseminated at 15-second intervals to major market data vendors.
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\7\ Trading in SLV options (the index components of VXSLV) on
CBOE closes at 3 p.m. (Chicago time). See Rule 24.6.02. The Exchange
proposes to make non-substantive changes to this rule.
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Options Trading
VXSLV options will trade pursuant to the existing trading rules for
other Volatility Index options. VXSLV 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.\8\ Dollar strikes (or greater) will be
permitted for VXSLV options where the strike price is $200 or less and
$5 or greater strikes will be permitted where the strike price is
greater than $200. The Exchange will not be permitted to list LEAPS on
VXSLV options at strike price intervals less than $1.\9\
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\8\ 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 VXSLV.
\9\ See Rule 24.9.01(l). The Exchange proposes to amend Rule
24.9.01(l) by expressly providing that ``[t]he Exchange shall not
list LEAPS on Volatility Index options at strike price intervals
less than $1.'' The Exchange notes that when GVZ options were
approved for trading, a substantially similar provision regarding
the strike price intervals for LEAPS was adopted. See Securities
Exchange Act Release No. 62139 (May 19, 2010) 75 FR 29597 (May 26,
2010). However, when the Exchange filed to list options on certain
individual stock based volatility indexes and ETF based volatility
indexes, the Exchange revised the strike setting parameters for
Volatility Index options to permit $1 strikes where the strike price
is $200 or less. The LEAPS strike setting provision was
inadvertently not carried forward at the time Rule 24.9.01(l) was
adopted, but should have been.
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Transactions in VXSLV may be effected on the Exchange between the
hours of 8:30 a.m. (Chicago time) and 3 p.m. (Chicago time). The
Exchange proposes to close trading at 3 p.m. (Chicago time) for VXSLV
options because trading in SLV options on CBOE closes at 3 p.m.
(Chicago time).\10\
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\10\ See Rule 24.6.02.
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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.\11\ For example, November 2011 Vol
VXSLV 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.
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\11\ See Rule 24.9(a)(5).
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Trading in the expiring contract month will normally cease at 3
p.m. (Chicago time) on the business day immediately preceding the
expiration date. Exercise will result in delivery of cash on the
business day following expiration. VXSLV options will be A.M.-
settled.\12\ The exercise settlement value will be determined by a
Special Opening Quotations (``SOQ'') of VXSLV 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 is no trade shall be the average of that options' bid price
and ask price as determined at the opening of trading.\13\
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\12\ See proposed amendment to Rule 24.9(a)(4) (adding VXSLV to
the list of A.M.-settled index options approved for trading on the
Exchange).
\13\ See Rule 24.9(a)(5).
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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
The Exchange proposes that the existing position limits for ETF
Based Volatility Index options apply to VXSLV options.\14\ For regular
options trading, the position limit for VXSLV options will be 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 SLV
options, which are the underlying components for VXSLV, are among the
most actively traded option classes currently listed. In determining
compliance with these proposed position limits, VXSLV options will not
be aggregated with the SLV options.\15\ Positions in Short Term Options
Series, Quarterly Options Series, and Delayed Start Options Series will
be aggregated with position in options contracts in the same VXSLV
class.\16\ Exercise limits will be
[[Page 51101]]
equivalent to the proposed position limits.\17\ VXSLV options will be
subject to the same reporting requirements triggered for other options
dealt in on the Exchange.
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\14\ See Rule 24.4C (Position Limits for Individual Stock or ETF
Based Volatility Index Options).
\15\ See Rule 24.4C(b).
\16\ See proposed new subparagraph (c) to Rule 24.4C. The
Exchange proposes to add new subparagraph (c) regarding aggregation
to Rule 24.4C. The Exchange notes that when GVZ options were
approved for trading, the position limits for GVZ options were
layered into existing Rule 24.4 (Position Limits for Broad-Based
Index Options). Rule 24.4(e) sets forth an aggregation requirement
substantially similar to proposed new subparagraph (c) to Rule
24.4C. See Securities Exchange Act Release No. 62139 (May 19, 2010),
75 FR 29597 (May 26, 2010). When the Exchange filed to list options
on certain individual stock based volatility indexes and ETF based
volatility indexes, the Exchange removed GVZ from Rule 24.4 and
proposed a new rule setting forth positions limits for these
products. The aggregation requirement from Rule 24.4(e) was
inadvertently not carried forward at the time Rule 24.4C was
adopted, but should have been.
\17\ See Rule 24.5.
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The Exchange proposes that the existing position limits for FLEX
ETF Based Volatility Index options apply to VXSLV options.
Specifically, the position limits for FLEX VXSLV options will be equal
to the position limits for Non-FLEX VXSLV options.\18\ Similarly, the
exercise limits for FLEX VXSLV options will be equivalent to the
position limits set forth in Rule 24.4C. As provided for in Rules
24A.7(d) and 24B.7(d), as long as the options positions remain open,
positions in FLEX VXSLV options that expire on the same day as Non-FLEX
VXSLV Index options, as determined pursuant to Rule 24.9(a)(5), shall
be aggregated with positions in Non-FLEX VXSLV options and shall be
subject to the position limits set forth in Rules 4.11, 24.4, 24.4A,
24.4B, and 24.4C, and the exercise limits set forth in Rules 4.12 and
24.5.
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\18\ See Rules 24A.7(a)(5) and 24B.7(a)(5).
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The Exchange proposes that the existing Hedge Exemption for ETF
Based Volatility Index options apply to VXSLV options, which would be
in addition to the standard limit and other exemptions available under
Exchange rules, interpretations and policies. The following procedures
and criteria must be satisfied to qualify for an ETF Based Volatility
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. 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 ETF
Based Volatility Index futures contracts or in options on ETF Based
Volatility Index futures contracts, or long or short positions in ETF
Based Volatility Index options, for which the underlying ETF Based
Volatility Index is included in the same margin or cross-margin product
group cleared at the Clearing Corporation as the ETF Based Volatility
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 ETF Based Volatility
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 ETF Based Volatility Index futures,
options on ETF Based Volatility 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 Interpretation .01 to
Rule 24.4C:
[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
at the time the position is established. For purposes of determining
compliance with Rule 4.11 and 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 ETF Based Volatility 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 put(s) 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 Rule 4.11 and 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 VXSLV options.
The Exchange proposes that the margin requirements for VXSLV
options be set at the same levels that apply to ETF Based Volatility
Index options
[[Page 51102]]
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. Additional margin may be required
pursuant to Exchange Rule 12.10.
As with other ETF Based Volatility Index options, the Exchange
designates VXSLV 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 FLEX
VXSLV options will only expire on business days that non-FLEX VXSLV
options 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(a)(5). As is
described earlier, Rule 24.9(a)(5) provides that the exercise
settlement value of VXSLV 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 VXSLV option expires.
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 VXSLV
options.
Surveillance
The Exchange will use the same surveillance procedures currently
utilized for each of the Exchange's other Volatility Index and index
options to monitor trading in VXSLV options. The Exchange further
represents that these surveillance procedures shall be adequate to
monitor trading in VXSLV options. For surveillance purposes, the
Exchange will have complete access to information regarding trading
activity in the pertinent underlying securities.
III. Discussion
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.\19\
Specifically, the Commission finds that the proposal is consistent with
Section 6(b)(5) of the Act,\20\ which requires, among other things,
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market and a national market system and,
in general, to protect investors and the public interest.
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\19\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation.
\20\ 15 U.S.C. 78f(b)(5).
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The Commission notes that it has previously approved the listing
and trading of options on volatility indexes that are calculated using
certain individual stock and ETF options listed on CBOE, and CBOE has
genericized certain of its rules to collectively refer to these indexes
as ``Individual Stock Based Volatility Indexes,'' ``ETF Volatility
Based Indexes,'' and ``Volatility Indexes.'' \21\ The Commission notes
that this filing layers VXSLV into CBOE's existing framework for ``ETF
Volatility Based Indexes'' and ``Volatility Indexes,'' since VXSLV is
comprised of ETF options.
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\21\ See supra note 3.
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As a national securities exchange, CBOE is required under Section
6(b)(1) of the Act \22\ to enforce compliance by its members, and
persons associated with its members, with the provisions of the Act,
Commission rules and regulations thereunder, and its own rules. In
addition, brokers that trade VXSLV options will also be subject to best
execution obligations and FINRA rules.\23\ Applicable Exchange rules
also require that customers receive appropriate disclosure before
trading VXSLV options.\24\ Furthermore, brokers opening accounts and
recommending options transactions must comply with relevant customer
suitability standards.\25\
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\22\ 15 U.S.C. 78f(b)(1).
\23\ See NASD Rule 2320.
\24\ See CBOE Rule 9.15.
\25\ See FINRA Rule 2360(b) and CBOE Rules 9.7 and 9.9.
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VXSLV options will trade pursuant to the existing rules for other
Volatility Index options. The Commission believes that the listing
rules proposed by CBOE for VXSLV options are consistent with the Act.
Dollar or greater strikes for VXSLV options where the strike price is
$200 or less and $5 or greater strikes when the strike price is greater
than $200 should provide investors with greater flexibility in the
trading of VXSLV options and further the public interest by allowing
investors to establish positions that are better tailored to meet their
investment objectives.
The Commission notes that CBOE will compute values for VXSLV
underlying option series on a real-time basis throughout each trading
day, and that VXSLV levels will be calculated by CBOE and disseminated
at 15-second intervals to major market data vendors.
The Commission believes that the Exchange's proposed position
limits and exercise limits for VXSLV options are appropriate and
consistent with the Act. The Commission notes that the Exchange
proposed that the existing position limits for ETF Based Volatility
Index options will apply to VXSLV options. The Commission also notes
the Exchange stated that SLV options, which are the underlying
components for VXSLV, are among the most actively traded option classes
currently listed. In addition, the Commission notes that the existing
position limits for FLEX ETF Based Volatility Index options will apply
to VXSLV options, and the position and exercise limits for FLEX VXSLV
options will be equal to the position and exercise limits for Non-FLEX
VXSLV options. Further, positions in FLEX VXSLV options that expire on
the same day as Non-FLEX VXSLV options will be aggregated with
positions in Non-FLEX VXSLV options.
The Commission also notes that the margin requirements for ETF
Based Volatility Index options will apply to options on VXSLV. The
Commission finds this to be reasonable and consistent with the Act.
Further, the Commission believes that the Exchange's proposal to
allow VXSLV options to be eligible for trading as FLEX options is
consistent with the Act. The Commission previously approved rules
relating to the listing and trading of FLEX options on CBOE, which give
investors and other market participants the ability to individually
tailor, within specified limits, certain terms of those options.\26\
The Commission has also previously approved the listing and trading of
FLEX options on ETF Based Volatility Indexes. The current proposal
incorporates VXSLV options that trade as FLEX options into these
existing rules and regulatory framework.
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\26\ See Securities Exchange Act Release No. 31920 (February 24,
1993), 58 FR 12280 (March 3, 1993).
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The Commission notes that CBOE represented that it has an adequate
surveillance program to monitor trading of VXSLV options and intends to
apply its existing surveillance program to support the trading of these
options. Finally, in approving the proposed rule change, the Commission
has relied upon the Exchange's representation that it has the necessary
systems capacity to
[[Page 51103]]
support new options series that will result from this proposal.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\27\ that the proposed rule change (SR-CBOE-2011-055) be, and
hereby is, approved.
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\27\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20912 Filed 8-16-11; 8:45 am]
BILLING CODE 8011-01-P