[Federal Register Volume 81, Number 49 (Monday, March 14, 2016)]
[Notices]
[Pages 13429-13433]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-05587]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77319; File No. SR-CBOE-2016-016]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Order Granting Accelerated Approval
of a Proposed Rule Change Related to Options That Overlie the MSCI EAFE
Index and the MSCI Emerging Markets Index
March 8, 2016.
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 February 29, 2016, Chicago Board Options Exchange,
Incorporated (the ``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 and, for
the
[[Page 13430]]
reasons discussed below, is approving the proposal on an accelerated
basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange seeks to amend the listing criteria for options that
overlie the MSCI EAFE Index and the MSCI Emerging Markets Index (``EAFE
options'' and ``EM options''). The text of the proposed rule change is
available on the Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's 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 Exchange 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 these statements may be examined at the places specified in
Item III below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
On April 8, 2015, the Commission approved CBOE's proposal to list
and trade options on the MSCI EAFE Index (``EAFE Index'') and the MSCI
Emerging Markets Index (``EM Index'').\3\ Rule 24.2.01(a) sets forth
the initial listing standards for EAFE and EM options. Rule 24.2.01(b)
sets forth the maintenance listing standards for EAFE and EM options.
All of the maintenance listing requirements set forth in Rule
24.2.01(b) are met except for the requirement that the initial listing
standard of Rule 24.2.01(a)(7) continues to be met. Rule 24.2.01(a)(7)
currently states that Non-U.S. component securities (stocks or ADRs)
that are not subject to comprehensive surveillance agreements
(``CSAs'') do not, in the aggregate, represent more than: (i) Twenty
percent (20%) of the weight of the EAFE Index, and (ii) twenty-two and
a half percent (22.5%) of the weight of the EM Index. Due to unforeseen
circumstances, as described below, the EAFE and EM Indexes no longer
meet this requirement; thus, the Exchange is seeking to amend Rule
24.2.01(a)(7) (criteria ``No. 7'') to raise the CSA percentage for the
EAFE and EM Indexes by five percent (5%).
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\3\ See Securities Exchange Act Release No. 74681 (April 8,
2015), 80 FR 20032 (April 14, 2015) (approving SR-CBOE-2015-023).
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EAFE Index
The EAFE Index consists of the following 21 developed market
country indexes: Australia, Austria, Belgium, Denmark, Finland, France,
Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New
Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and
the United Kingdom. The EAFE Index consists of large and midcap
components, has 928 constituents and ``covers approximately 85% of the
free float-adjusted market capitalization in each country.'' \4\
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\4\ See EAFE Index fact sheet (dated January 29, 2016) located
at: http://www.msci.com/resources/factsheets/index_fact_sheet/msci-eafe-index-usd-price.pdf.
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In order for EAFE options to meet listing criteria No. 7, the
Exchange relied on Intermarket Surveillance Group (``ISG'') \5\
membership \6\ as well as several CSAs \7\ that the Exchange has
entered into with relevant stock exchanges. One of the CSAs that the
Exchange relied upon was the CSA with the Association of Swiss
Exchanges (the ``Association''), which is the predecessor to SIX Swiss
Exchange (``SIX Swiss''). However, CBOE was recently informed by SIX
Swiss that the Association's activities have ceased and that SIX Swiss
was unable to find evidence of a transfer of the CSA to SIX Swiss. The
Exchange has been in contact with SIX Swiss in an attempt to enter into
a new CSA, but the Exchange has thus far been unable to execute a new
CSA with SIX Swiss. The component securities of the EAFE Index that
trade on SIX Swiss represent approximately 9.5% of the weight of the
EAFE Index. When relying on the CSA with the Association, the non-U.S.
component securities (stocks or ADRs) that are not subject to CSAs do
not, in the aggregate, represent more than 20% of the weight of the
EAFE Index. Currently, without relying on the CSA with the Association,
the non-U.S. component securities (stocks or ADRs) that are not subject
to CSAs do not, in the aggregate, represent more than approximately
24.5% of the weight of the EAFE Index. Thus, the Exchange is seeking to
amend listing criteria No. 7 for EAFE options to raise the percentage
of non-U.S. component securities that do not need to be subject to CSAs
from twenty percent (20%) to twenty-five percent (25%).
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\5\ The ISG ``is comprised of an international group of
exchanges, market centers, and market regulators.'' See Intermarket
Surveillance Group Web site, available at https://www.isgportal.org/home.html. The purpose of the ISG is to provide a framework for the
sharing of information and the coordination of regulatory efforts
among exchanges trading securities and related products to address
potential intermarket manipulations and trading abuses. The ISG
plays a crucial role in information sharing among markets that trade
securities, options on securities, security futures products, and
futures and options on broad-based security indexes. A list
identifying the current ISG members is available at: https://www.isgportal.org/home.html.
\6\ The component securities that represent a majority of the
weight of the EAFE and EM Indexes are traded on exchanges that are
members of ISG.
\7\ For the EAFE and EM Indexes, the CSAs are in the form of
Memorandum of Understanding (``MOUs'') or information sharing
agreements.
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The Exchange represents that raising the percent will not have an
adverse impact on the Exchange's surveillance program. The Exchange
represents that it will still have an adequate surveillance program in
place for EAFE options and will continue to use the same surveillance
procedures currently utilized for each of the Exchange's other index
options to monitor trading in EAFE options.
Furthermore, the EAFE Index is a broad-based index with 928
constituents. The component stocks of the EAFE Index have a market
capitalization of 11,444,154.78 (USD Millions) with an average market
capitalization per constituent of 12,332.06 (USD Millions).
Additionally, the component stocks have an average daily volume of over
5 billion with an average daily volume per constituent of over 5
million. Also, the largest constituent in the EAFE Index currently only
accounts for 2.04% of the weight of the EAFE Index. Given the high
number of constituents and capitalization of the EAFE Index and the
deep and liquid markets for the securities underlying these indexes,
the concerns for market manipulation and/or disruption in the
underlying markets are greatly reduced.
EM Index
The EM Index consists of the following 23 emerging market country
indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece,
Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines,
Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and
United Arab Emirates. The EM Index consists of large and midcap
components, has 837 constituents and ``covers approximately 85% of the
free float-adjusted market capitalization in each country.'' \8\
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\8\ See EM Index fact sheet (dated January 29, 2016) located at:
http://www.msci.com/resources/factsheets/index_fact_sheet/msci-emerging-markets-index-usd-price.pdf.
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[[Page 13431]]
In order for EM options to meet listing criteria No. 7, the
Exchange relied on ISG membership as well as several CSAs that have
been entered into with relevant stock exchanges. One of the CSAs that
the Exchange relied upon was the CSA with Bolsa de Valores de Sao Paulo
(``BOVESPA''), which is the predecessor to Bolsa de Valores Mercadorias
e Futuros (``BM&FBOVESPA''). However, CBOE was recently informed by
BM&FBOVESPA that a Brazilian law prevents BM&FBOVESPA from providing
information to CBOE under the CSA. The component securities of the EM
Index that trade on BM&FBOVESPA represent approximately 5.5% of the
weight of the EM Index. When relying on the CSA with BOVESPA the non-
U.S. component securities (stocks or ADRs) that are not subject to CSAs
do not, in the aggregate, represent more than approximately 22.5% of
the weight of the EM Index. Currently, without relying on the CSA with
BOVESPA, the non-U.S. component securities (stocks or ADRs) that are
not subject to CSAs do not, in the aggregate, represent more than
approximately 24.5% of the weight of the EM Index. Thus, the Exchange
is seeking to amend listing criteria No. 7 for EM options to raise the
percentage of non-U.S. component securities that do not need to be
subject to CSAs from twenty-two and a half percent (22.5%) to twenty-
seven and a half percent (27.5%).\9\
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\9\ The Exchange notes that the iShares MSCI Emerging Markets
ETF (``EEM''), which is also based on the EM Index, is only required
to have 50% of the component securities subject to CSAs. See
Securities Exchange Act Release No. 53824 (May 17, 2006), 71 FR
30003 (May 24, 2006) (SR-Amex-2006-43).
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The Exchange represents that raising the percent will not have an
adverse impact on the Exchange's surveillance program. The Exchange
represents that it will still have an adequate surveillance program in
place for EM options and will continue to use the same surveillance
procedures currently utilized for each of the Exchange's other index
options to monitor trading in EM options.
Furthermore, the EM Index is a broad-based index with 837
constituents. The component stocks of the EM Index have a market
capitalization of 3,219,779.13 (USD Millions) and average market
capitalization per constituent of 3,846.81 (USD Millions).
Additionally, the component stocks have an average daily volume of over
25 billion with an average daily volume per constituent of over 30
million. Also, the largest constituent in the EM Index currently only
accounts for 3.29% of the weight of the EM Index. Given the high number
of constituents and capitalization of the EM Index and the deep and
liquid markets for the securities underlying these indexes, the
concerns for market manipulation and/or disruption in the underlying
markets are greatly reduced.
Conclusion
EAFE and EM options are currently listed for trading on CBOE. The
Exchange generally adds new series after an expiration, which allows
trading to commence in the new series on the first trading day after
the expiration date. The Exchange currently lists EAFE and EM options
that expire in February, March, April, June, September, and December.
Additional series, specifically EAFE and EM options that expire in May,
are scheduled to be added after expiration on March 18, 2016, which
will allow trading to commence in the additional series on the next
trading day of March 21, 2016. Without this amendment, EAFE and EM
options cannot meet the continuing listing criteria of Rule 24.2.01(b),
specifically criteria No. 7, which will prevent the Exchange from
adding the EAFE and EM options that expire in May.\10\ The inability to
add the EAFE and EM options that expire in May would be a detriment to
market participants seeking to hedge positions in exchange-traded funds
(``ETFs'') based on the EAFE and EM indexes (``EFA'' and ``EEM,''
respectively), options on EFA and EEM, EAFE and EM futures, and
European-traded derivatives on the EAFE and EM Indexes. Additionally,
to the extent market participants want to roll a position in EAFE and
EM options that expire in April to a position that expires in May, they
will be prevented from doing so without this amendment.
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\10\ Rule 24.2.01(b)(2) states that ``[i]n the event a class of
index options listed on the Exchange fails to satisfy the
maintenance listing standards set forth herein, the Exchange shall
not open for trading any additional series of options of that class
unless the continued listing of that class of index options has been
approved by the Commission under Section 19(b)(2) of the Exchange
Act.''
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder, including the
requirements of Section 6(b) of the Act.\11\ In particular, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \12\ requirements that the rules of an exchange be
designed to promote just and equitable principles of trade, to prevent
fraudulent and manipulative acts, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, 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.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
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In particular, the Exchange believes that both the EAFE Index and
the EM Index are not easily susceptible to manipulation. Both indexes
are broad-based indexes and have high market capitalizations. The EAFE
Index is comprised of 928 component stocks, the component stocks have a
market capitalization of 11,444,154.78 (USD Millions) and average daily
volume of over 5 billion, and no single component comprises more than
3.5% [sic] of the index, making it not easily subject to market
manipulation. Similarly, the EM Index is comprised of 837 component
stocks, the component stocks have a market capitalization of
3,219,779.13 (USD Millions) and average daily volume of over 25
billion, and no single component comprises more than 3.5% of the index,
making it not easily subject to market manipulation. The purpose of a
CSA is to allow the Exchange to investigate manipulation if it were to
occur on a foreign exchange at which one of the component securities
trades. However, as described above, the EAFE and EM Indexes are
unlikely to be susceptible to manipulation; thus, raising the CSA
percentage for the EAFE and EM Indexes by only five percent (5%) is
unlikely to affect the Exchange's ability to investigate manipulation.
Additionally, the iShares MSCI EAFE and iShares MSCI Emerging
Markets ETFs are actively traded products, as are options on those
ETFs. Because both indexes have large numbers of component securities,
are representative of many countries and trade a large volume with
respect to ETFs and options on those ETFs, the Exchange believes that
the revised listing requirements are appropriate to trade options on
these indexes. The Exchange also represents that it has an adequate
surveillance program in place for EAFE and EM options.
B. Self-Regulatory Organization's Statement on Burden on Competition
This proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act. Specifically, CBOE believes the proposed rule change will
allow the continued listing and trading of EAFE
[[Page 13432]]
and EM options, which enhances competition among market participants
and provides different types of options to compete with domestic
products such as EFA and EMM [sic], which seek to track the EAFE and EM
Indexes, respectively, EFA and EEM options, EAFE and EM futures and
European-traded derivatives on the EAFE Index and the EM Index to the
benefit of investors and the marketplace. For all the reasons stated
above, the Exchange 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, and believes the proposed
change will enhance competition among similar products.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2016-016 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2016-016. 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 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 available publicly. All
submissions should refer to File Number SR-CBOE-2016-016, and should be
submitted on or before April 4, 2016.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
After careful review, 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\ In particular, the Commission finds that the proposed
rule change 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 prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, 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\ 15 U.S.C. 78f(b). 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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In order to list options on the EAFE and EM indexes, CBOE Rule
24.2.01(a)(7) requires that any non-U.S. component securities that are
not subject to CSAs must not, in the aggregate, represent more than:
(i) Twenty percent (20%) of the weight of the EAFE Index, and (ii)
twenty-two and a half percent (22.5%) of the weight of the EM Index.
The Exchange proposes to raise the percentage of non-U.S. component
securities that do not need to be subject to CSAs to twenty-five
percent (25%) for the EAFE Index and twenty-seven and a half percent
(27.5%) for the EM Index. The Exchange stated that both indexes are
broad-based indexes, have high market capitalizations, and have
components with high trading volume. Given the high number of
constituents and the overall high capitalization of the EAFE and EM
Indexes and the deep and liquid markets for the securities underlying
these indexes, the Exchange believes that the concerns for market
manipulation or disruption in the underlying markets are greatly
reduced. Therefore, the Exchange believes that a five percent increase
would not likely impact its ability to investigate manipulation in
these products. Additionally, in its filing, the Exchange represented
that it will maintain an adequate surveillance program for EAFE and EM
options and will continue to use the same surveillance procedures
currently utilized for each of the Exchange's other index options to
monitor trading in these products. Based on these representations, the
Commission believes the modest increase in the applicable percentages
of non-U.S. component securities that do not need to be subject to CSA
requirements is not likely to have a material effect on CBOE's ability
to surveil for potential manipulation in EAFE and EM options.
Therefore, the Commission believes that approval of this proposal is
appropriate.
The Exchange has requested that the Commission find good cause for
approving the proposed rule change prior to the 30th day after
publication of the notice thereof in the Federal Register. The Exchange
stated that accelerated approval of its proposal will allow CBOE to add
new series of EAFE and EM options that expire in May (which would be
listed after the March expiration). The Exchange believes that the
inability to add additional series in EAFE and EM options would be a
detriment to market participants seeking to hedge positions in EFA and
EEM, options on EFA and EEM, EAFE and EM futures, and European-traded
derivatives on the EAFE and EM Indexes. Additionally, the Exchange
stated that, without accelerated approval of its proposal, market
participants would be unable to roll a position in EAFE and EM options
that expires in April to a position that expires in May. The Commission
believes that good cause exists for accelerated approval of the
proposed rule change because it raises no novel issues and the modest
increase in the applicable percentages of non-U.S. component securities
that do not need to be subject to CSA requirements is not likely to
impose a material change in
[[Page 13433]]
CBOE's ability to surveil for potential manipulation in EAFE and EM
options or adversely affect market participants. The Commission further
believes that approval of this proposal on an accelerated basis should
benefit investors by creating, without undue delay, additional
competition in the market for these and similar products. Accordingly,
the Commission finds good cause, pursuant to Section 19(b)(2) of the
Act,\15\ to approve the proposed rule change prior to the 30th day
after the date of publication of the notice of filing thereof in the
Federal Register.
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\15\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the proposed rule change (SR-CBOE-2016-016) be, and
hereby is, approved on an accelerated basis.
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\16\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-05587 Filed 3-11-16; 8:45 am]
BILLING CODE 8011-01-P