[Federal Register Volume 77, Number 144 (Thursday, July 26, 2012)]
[Notices]
[Pages 43881-43883]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-18243]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67482; File No. SR-CBOE-2012-042]


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

July 20, 2012.

I. Introduction

    On May 23, 2012, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change relating to the listing and 
trading of cash-settled CBOE S&P 500 AM/PM Basis (``SPBAS'') options. 
The proposed rule change was published for comment in the Federal 
Register on June 6, 2012.\3\ The Commission received no comments on the 
proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 67084 (May 31, 
2012), 77 FR 33541 (June 6, 2012) (``Notice'').
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II. Description of the Proposal

    CBOE proposes to list and trade SPBAS options that 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 for SPBAS options (typically the third Friday of the 
month).
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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.
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Design of the Product

    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 
a.m.-settled S&P 500 Index (``SPX'') options minus the closing value of 
SPX plus 100 and (2) zero. The Exchange notes that this formulation 
ensures that the settlement value for SPBAS options can never be less 
than zero.
    Because SPBAS options settle 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 for SPBAS options will 
not be disseminated. Rather, prior to the open on all trading days 
other than the last trading day (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, 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). The Exchange also proposes 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.\5\
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    \5\ 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.
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    Initially, the Exchange proposes to 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.\6\ 
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. Rules 24.9.01(d) and 24.9.04 will apply to the listing of 
additional series for SPBAS options. However, for purposes of those 
provisions, the Exchange proposes that the ``current index value'' will 
be 100, since that is the single value for SPBAS option that CBOE will 
disseminate during the life of an option. Rule 24.9.04 will generally 
bound the listing of additional series to within 30% of the current 
index value.\7\ The Exchange also proposes to list LEAPS.
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    \6\ See proposed amendment to Rule 24.9(a)(2) (Terms of Index 
Options Contracts).
    \7\ The rule also provides the Exchange with the ability to add 
additional strikes in response to customer demand.
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    The Exchange states that it currently intends to trade SPBAS 
options electronically on the Hybrid Platform with a Designated Market 
Maker appointed to the class. Prior to the product launch, the Exchange 
represents that it 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 and be cash-settled, P.M.-settled, 
and European-style. 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

[[Page 43882]]

their last trading day.\8\ 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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    \8\ 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 notes that it 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, the Exchange asserts that 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

    CBOE has represented that it 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 has represented that it will have access to 
information regarding trading activity in the pertinent underlying 
securities (i.e., S&P 500 Index component securities).

Position Limits

    The Exchange does not propose to establish any position or exercise 
limits for SPBAS options.\9\ CBOE represents that SPBAS options will be 
subject to the same reporting and other requirements triggered for 
other options dealt in on the Exchange.\10\
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    \9\ See proposed amendments to Rules 24.4 (Position Limits for 
Broad-Based Index Options) and 24.5 (Exercise Limits).
    \10\ 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, 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.
    CBOE proposes to designate 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).\11\
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    \11\ 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 represents that it has analyzed its capacity and believes that 
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

    In addition to proposing to introduce SPBAS options, 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.\12\ 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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    \12\ See Securities Exchange Act Release No. 54000 (June 15, 
2006), 71 FR 35961 (June 22, 2006) (SR-CBOE-2006-41).
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III. Discussion and Commission Findings

    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.\13\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\14\ which requires, among other things, 
that the rules of a national securities exchange be designed 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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    \13\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the Exchange has stated that SPBAS 
options are designed to enable investors to gain exposure to or hedge 
the basis risk between SPX options traded on CBOE and p.m.-settled S&P 
500 Index (``SPXPM'') options traded on C2 Options Exchange. As such, 
the Commission believes that CBOE's proposal gives options investors 
the ability to make an additional investment choice in a manner 
consistent with the requirements of Section 6(b)(5) of the Act.\15\ 
Further, the Commission believes that the listing rules proposed by 
CBOE for SPBAS options are reasonable and consistent with the Act, as 
discussed below.
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    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that permitting $1.00 strike price 
intervals if the strike price is equal to or less than $200 will 
provide investors with added flexibility in the trading of these 
options and will further the public interest by allowing investors to 
establish positions that are better tailored to meet their investment 
objectives. As CBOE explained, because the underlying interest for 
SPBAS options reflects the difference between the opening and closing 
values of the S&P 500 on the last trading day for SPBAS options, the 
exercise settlement value will generally be limited to a relatively 
narrow band of possible values. Specifically, the Exchange asserts that 
this difference has typically stayed within a ten-index-point 
range.\16\ Because of this

[[Page 43883]]

characteristic, the Commission believes that the implementation of $1 
strike price intervals for SPBAS options, within the parameters of CBOE 
Rule 24.9, is appropriate.\17\
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    \16\ See Notice, supra note 3 (providing data on the historical 
spreads between the opening and closing values of the S&P 500).
    \17\ In addition, the Commission notes that CBOE has represented 
that it has analyzed its capacity and believes the Exchange and OPRA 
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.
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    The Commission notes that the Exchange proposes to apply its 
existing index rules regarding the listing of new series and additional 
series to SPBAS options. Specifically, exercise prices will be required 
to be reasonably related to the value of the underlying index and 
generally must be within 30% of the current index value. The Exchange 
has clarified that for purposes of SPBAS options, ``current index 
value'' will be 100 because that is the single value that will be 
disseminated for SPBAS options during the life of an option, as 
discussed further below. Given the design of this product, the 
Commission believes that this is appropriate and consistent with the 
Act.
    The Commission notes that an intraday value for SPBAS options will 
not be disseminated and that, prior to the open on all trading days 
other than the last trading day, CBOE will disseminate a single value 
of 100 for SPBAS options through OPRA, the CTA and/or the MDI feed. The 
Commission notes further that, after the close of trading on the last 
trading day, CBOE will disseminate the exercise settlement value for 
the expiring SPBAS contract. The value of the index may vary from 100 
only on the last trading day and would remain 100 on all other trading 
days. Moreover, because the closing value of the S&P 500 on the last 
trading day is a necessary component of the SBPAS option settlement 
value calculation, that value cannot be calculated until the end of the 
day on the last trading day.
    The Exchange has also proposed that SPBAS options be p.m.-settled. 
As discussed above, the Exchange asserts that p.m.-settlement is 
necessary because the closing settlement value of the S&P 500 on the 
third Friday of the month (a necessary component of the SPBAS option 
settlement value) cannot be determined until the close of trading. The 
Commission believes that the historic concerns regarding p.m.-
settlement should not be raised by the introduction of SPBAS 
options.\18\
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    \18\ For a detailed discussion of the Commission's traditional 
concerns and policies regarding p.m.-settlement, see Securities 
Exchange Act Release No. 65256 (September 2, 2011), 76 FR 55969 
(September 9, 2011) (SR-C2-2011-008) (``SPXPM Filing'').
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    The Exchange has proposed not to impose position or exercise limits 
on SPBAS options on the basis that SPBAS options should be treated 
similarly to SPX and SPXPM options, which are not subject to position 
or exercise limits. The Commission notes that the SPBAS exercise 
settlement value is based on the difference between the opening and 
closing values of the S&P 500 Index on expiration Fridays, and that SPX 
and SPXPM are based on the S&P 500 Index opening and closing values, 
respectively. Furthermore, as noted above, SPBAS options could be used 
to gain exposure to or hedge the basis risk between SPX and SPXPM 
options. As such, the Commission believes that CBOE's proposal not to 
apply position or exercise limits to SPBAS options is appropriate and 
consistent with the Act.
    CBOE also proposes to margin SPBAS options as broad-based index 
options. The Commission believes that CBOE's proposed rules relating to 
margin requirements are appropriate. The Commission also believes that 
CBOE's proposal to allow SPBAS 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.\19\
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    \19\ See Securities Exchange Act Release No. 31910 (February 23, 
1993), 58 FR 12056 (March 2, 1993).
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    The Commission notes that CBOE has represented that it has an 
adequate surveillance program to monitor trading of SPBAS options and 
intends to apply its existing surveillance program for index options to 
support the trading of these options. Further, CBOE is a member of the 
ISG and can obtain trading activity in information in the underlying 
securities (i.e., S&P 500 component securities).
    In approving the proposed listing and trading of SPBAS options, the 
Commission has also relied upon CBOE's representation that it has the 
necessary systems capacity to support the new options series that will 
result from this proposal.
    Lastly, the Commission believes that CBOE's proposal to update CBOE 
Rule 24.9.01(d) with the correct cross-reference to Interpretation and 
Policy .04 to Rule 24.9 is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-CBOE-2012-042) be, and it 
hereby is, approved.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-18243 Filed 7-25-12; 8:45 am]
BILLING CODE 8011-01-P