[Federal Register Volume 77, Number 109 (Wednesday, June 6, 2012)]
[Notices]
[Pages 33541-33543]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-13641]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67084; File No. SR-CBOE-2012-042]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change To List and 
Trade CBOE S&P 500 AM/PM Basis Options

May 31, 2012.
    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 May 23, 2012, 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

    Chicago Board Options Exchange, Incorporated (``CBOE'' or 
``Exchange'') proposes to amend certain of its rules to provide for the 
listing and trading of cash-settled CBOE S&P 500 AM/PM Basis 
(``SPBAS'') options that will be P.M.-settled and 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 Office of the 
Secretary and at the Commission.

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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to permit the Exchange 
to list and trade cash-settled CBOE S&P 500 AM/PM Basis (``SPBAS'') 
options, that will be P.M.-settled and will have European-style 
exercise.\3\
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    \3\ See proposed addition of SPBAS options to the list of 
European-style index options approved for trading on the Exchange 
contained in Rule 24.9(a)(3) (Terms of Index Options Contracts).
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Design of the Product
    SPBAS options reflect the difference between the Special Opening 
Quotation (``SOQ'') of the S&P 500 Index \4\ and the closing level of 
the S&P 500 Index on the last trading day (which is typically the third 
Friday of the month) for SPBAS options. The options will allow 
investors to gain exposure to or hedge the basis risk between A.M.-
Settled S&P 500 Index (``SPX'') options traded on CBOE and P.M.-Settled 
S&P 500 Index (``SPXPM'') options traded on the C2 Options Exchange, 
Incorporated (``C2'').\5\
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    \4\ The SOQ is calculated per normal index calculation 
procedures and uses the opening (first) reported sales price in the 
primary market of each component stock in the index on the last 
business day (usually a Friday) before the expiration date. If a 
stock in the index does not open on the day on which the exercise-
settlement value is determined, the last reported sales price in the 
primary market is used to calculate the exercise-settlement value.
    \5\ See Securities Exchange Act Release No. 65256 (September 2, 
2011), 76 FR 55969 (September 9, 2011) (SR-C2-2011-008) (order 
approving listing and trading of SPXPM options on C2 on a pilot 
basis).
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    At expiration, SPBAS options will settle against the following 
index calculation:

SPBAS = MAX (100 + (SOQ of S&P 500)--(Closing Value of S&P 500), 0)

    In other words, SPBAS is the greater of (1) the SOQ of SPX minus 
the closing value of SPX plus 100 and (2) zero. This formulation 
ensures that the settlement value for SPBAS options can never be less 
than zero.
    Due to the nature of SPBAS options (e.g., settlement to the 
difference between the SOQ of the S&P 500 Index and the closing level 
of the S&P 500 Index on the third Friday of each month) an intraday 
value will not be disseminated. Rather, prior to the open on all 
trading days, other than the last trading day (which is typically the 
third Friday of the month) CBOE will disseminate a single value of 100 
for SPBAS options through the Options Price Reporting Authority 
(``OPRA''), the Consolidated Tape Association (``CTA'') tape and/or the 
Market Data Index (``MDI'') feed. After the close of trading on the 
last trading day (e.g., third Friday of the month), CBOE will 
disseminate the exercise settlement value (calculated as described 
above) for the expiring contract.
Options Trading
    SPBAS options will be quoted in points and fractions and one point 
will equal $100. The contract multiplier will be $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). Exhibit 3 presents contract specifications for SPBAS 
options.
    The Exchange is proposing to list series at $1 or greater where the 
strike price is $200 or less and $5 or greater where the strike price 
is greater than $200.\6\ The Exchange believes that a

[[Page 33542]]

granular strike price increment will provide investors with greater 
flexibility by allowing them to establish positions that are better 
tailored to meet their investment objectives.
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    \6\ See proposed amendment to Rule 24.9.01(e) (Terms of Index 
Options Contracts). The Exchange also proposes to add new 
Interpretation and Policy .21 to Rule 5.5 (Series of Option 
Contracts Open for Trading), which will be an internal cross 
reference stating that the intervals between strike prices for SPBAS 
option series will be determined in accordance with Interpretation 
and Policy .01(e) to Rule 24.9.
    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 and trading of $1 strikes (where the 
strike price is less than $200) for SPBAS options.
    Similar $1 strike price setting provisions currently exist for 
options on: Units (exchange-traded notes) (Rule 5.5.08), Index 
Linked Securities (exchange-traded notes) (Rule 5.5.09), HOLDRS 
(Rule 5.5.17) and Volatility Indexes (Rule 24.9.01(l)).
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    As noted previously, the underlying interest for SPBAS options 
reflects the difference between the SOQ of the S&P 500 Index and the 
closing level of the S&P 500 Index on the last trading day for SPBAS 
options. As such, the Exchange believes that the exercise settlement 
value for SPBAS options will be constrained to a relatively narrow band 
of possible values. In fact, from January 1993 though [sic] February 
2012, there have been 230 third-Friday expiration dates on which 
Standard & Poor's has reported a SOQ of the S&P 500 Index. The Exchange 
notes that on 131 of those dates (57%) the exercise settlement values 
for SPBAS options would have ranged between 95 and 105. On 187 of those 
dates (82%) the exercise settlement values for SPBAS options would have 
ranged between 90 and 110. The highest value during the sample period 
would have been 139.19, and the lowest value would have been 62.46. 
Accordingly, the Exchange believes that the proposed strike setting 
parameters (and demand for strikes) will be naturally bounded because 
of the limited range of settlement values.
    Initially, the Exchange will list in-, at- and out-of-the-money 
strike prices (where the ``at-the-money'' strike price is 100) and may 
open for trading up to twelve near term expiration months.\7\ New 
series will be added in accordance with Rule 29.4.01(d), which requires 
exercise prices to be reasonably related to the current value of the 
underlying index at the time new series are first opened for trading.
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    \7\ See proposed amendment to Rule 24.9(a)(2) (Terms of Index 
Options Contracts).
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    As to additional series, Rules 24.9.01(d) and 24.9.04 shall apply 
to the listing of additional series for SPBAS options; however, for 
purposes of those provisions the ``current index value'' shall be 100, 
since that is the single value for SPBAS option that CBOE will 
disseminate during the life of an option. Generally, Rule 24.9.04 
bounds the listing of additional series to within 30% of the current 
index value. At this time, CBOE believes that this strike setting 
parameter will be sufficient to meet demand since the difference 
between the opening value of the S&P 500 and the closing value of the 
S&P 500 on third Fridays has typically fluctuated around 10 index 
points. Larger spreads between the opening and closing S&P 500 values 
have occurred in the past, for example in February 2000 (39 points), 
November 2008 (36.5 points) and May 2010 (37.5 points). In the event 
customer demand exists for strikes below 70 and above 130 exists [sic], 
Rule 24.9.04 provides CBOE with the flexibility to add strikes that 
would be more than 30% away from the current index value of 100 for 
SPBAS options. LEAPS may also be listed.\8\
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    \8\ While the Exchange does not anticipate listing LEAPS 
routinely, the Exchange believes that permitting LEAPS creates 
flexibility in the event the Exchange receives a customer request to 
list a LEAP. See Rule 24.9(b) (Long-Term Index Options Series 
(``LEAPS'')).
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    As of the date of this filing, the Exchange intends to trade SPBAS 
options electronically on the Hybrid Platform with a Designated Market 
Maker appointed to the class. After receipt of Commission approval and 
prior to the product launch, the Exchange will issue a circular 
announcing the specific trading platform and other relevant trading 
information concerning SPBAS options.
Trading Hours, Exercise and Settlement
    The proposed options will expire on the Saturday following the 
third Friday of the expiring month. The trading hours for SPBAS options 
will be from 8:30 a.m. (Chicago time) to 3:15 p.m. (Chicago time), 
except that trading in expiring SPBAS options will close at 3:00 p.m. 
(Chicago time) on their last trading day.\9\ When the last trading day 
is moved because of an Exchange holiday (such as when CBOE is closed on 
the Friday before expiration), the last trading day for expiring 
options will be Thursday.
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    \9\ See proposed Interpretation and Policy .03 to Rule 24.6 
(Days and Hours of Business). Trading in expiring SPXPM options 
closes at 3:00 p.m. (Chicago time) on their last day of trading. The 
Exchange is proposing to match the trading hours of SPBAS options 
with SPXPM options. See Securities and Exchange Act Release No. 
65630 (October 26, 2011), 76 FR 67510 (November 1, 2011) (SR-C2-
2011-030) (notice of filing and immediate effectiveness of proposed 
rule change to close trading at 3 p.m. Chicago time on the last day 
of trading of expiring SPXPM options).
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    Exercise will result in delivery of cash on the business day 
following expiration. The exercise-settlement amount will be equal to 
the difference between the exercise-settlement value and the exercise 
price of the option, multiplied by the contract multiplier ($100). 
SPBAS options will be P.M.-settled. The Exchange is proposing P.M.-
settlement for SPBAS options because the exercise settlement value is 
based on the difference between the SOQ of the S&P 500 Index on the 
third Friday of the month and the closing value of the S&P 500 Index on 
the third Friday of the month. Since, one of the values needed to 
determine the exercise settlement value for SPBAS options will not be 
determined until the close of trading on the third Friday of the month, 
SPBAS options necessarily must be P.M.-settled.
    If the exercise settlement value is not available or the normal 
settlement procedure cannot be utilized due to a trading disruption or 
other unusual circumstance, the settlement value will be determined in 
accordance with the rules and bylaws of the OCC.
Surveillance
    The Exchange will use the same surveillance procedures currently 
utilized for each of the Exchange's other index options to monitor 
trading in SPBAS options. The Exchange further represents that these 
surveillance procedures shall be adequate to monitor trading in options 
on these option products. For surveillance purposes, the Exchange will 
have access to information regarding trading activity in the pertinent 
underlying securities (i.e., S&P 500 Index component securities). The 
Exchange accomplishes regulatory information sharing under the auspices 
of the Intermarket Surveillance Group Agreement.
Position Limits
    The Exchange is not proposing to establish any position or exercise 
limits for SPBAS options.\10\ Because the SPBAS value measures the 
difference between the opening and closing values of the S&P 500 Index 
on the third Friday of the month, the Exchange believes that the 
position and exercise limits for this new product (which is based on 
the S&P 500 Index) should be the same as those for SPX and SPXPM 
options, for which there are no position limits. SPBAS options will be 
subject to the same reporting and other requirements triggered for 
other options dealt in on the Exchange.\11\
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    \10\ See proposed amendments to Rules 24.4 (Position Limits for 
Broad-Based Index Options) and 24.5 (Exercise Limits).
    \11\ See Rule 4.13 (Reports Related to Position Limits).
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Exchange Rules Applicable
    Except as modified herein, the rules in Chapters I through XIX, 
XXIV,

[[Page 33543]]

XXIVA, and XXIVB will equally apply to SPBAS options.
    SPBAS options will be margined as ``broad-based index'' options, 
and under CBOE rules, especially, Rule 12.3(c)(5)(A), the margin 
requirement for a short put or call shall be 100% of the current market 
value of the contract plus up to 15% of the aggregate contract value. 
Additional margin may be required pursuant to Exchange Rule 12.10.
    The Exchange hereby designates SPBAS options as eligible for 
trading as Flexible Exchange Options as provided for in Chapters XXIVA 
(Flexible Exchange Options) and XXIVB (FLEX Hybrid Trading System).\12\
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    \12\ See proposed amendments to Rules 24A.7 (Position Limits and 
Reporting Requirements), 24A.8 (Exercise Limits), 24B.7 (Position 
Limits and Reporting Requirements) and 24B.8 (Exercise Limits).
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Capacity
    CBOE has analyzed its capacity and represents that it believes the 
Exchange and OPRA have the necessary systems capacity to handle the 
additional traffic associated with the listing of new series that will 
result from the introduction of SPBAS options.
Technical Change
    CBOE proposes to correct an erroneous cross-reference in Rule 
24.9.01(d) that was unintentionally created. In SR-CBOE-2006-41, among 
other things, obsolete Interpretations and Policies to Rule 24.9 were 
deleted and renumbering changes were made.\13\ Specifically, current 
Interpretation and Policy .04 to Rule 24.9 was formerly Interpretation 
and Policy .05 to Rule 24.9. A cross-reference in Rule 24.9.01(d) to 
former Interpretation and Policy .05 in Rule 24.9.01(d) should have 
been similarly renumbered (from .05 to .04) in SR-CBOE-2006-41; 
however, it was not. CBOE now proposes to update Rule 24.9.01(d) with 
the correct cross-reference to Interpretation and Policy .04 to Rule 
24.9.
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    \13\ See Securities Exchange Act Release No. 54000 (June 15, 
2006), 71 FR 35961 (June 22, 2006) (Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change and Amendment No. 1 Thereto 
to Amend Obsolete, Outdated and/or Unnecessary Rules) (SR-CBOE-2006-
41).
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
in general and furthers the objectives of Section 6(b)(5) in particular 
in that it will permit trading in options based on the index pursuant 
to rules designed to prevent fraudulent and manipulative acts and 
practices and to promote just and equitable principles of trade, and 
thereby will provide investors with the ability to gain exposure to or 
hedge the basis risk between SPX options traded on CBOE and SPXPM 
options traded on C2.

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 (i) as the Commission may 
designate up to 90 days of such date 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 such 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 email to [email protected]. Please include 
File Number SR-CBOE-2012-042 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-2012-042. This file 
number should be included on the subject line if email 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 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2012-042 and should be 
submitted on or before June 27, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-13641 Filed 6-5-12; 8:45 am]
BILLING CODE 8011-01-P