

[Federal Register: February 28, 2006 (Volume 71, Number 39)]
[Notices]               
[Page 10086-10088]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28fe06-130]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53342; File No. SR-CBOE-2006-08]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Order Granting Accelerated Approval 
of Proposed Rule Change Relating to Volatility Indexes

February 21, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 20, 2006, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or

[[Page 10087]]

``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the CBOE. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to revise the manner in which the expiration dates 
for each volatility-based index is determined. The description of this 
proposed rule filing is available for viewing on CBOE's Web site 
(http://www.cboe.com), at the CBOE'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 CBOE 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 IV below. The CBOE 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
    The purpose of this rule filing is to revise the methodology for 
determining the expiration dates for options on certain volatility-
based indexes that are approved for listing and trading on the 
Exchange. The Commission previously approved for the Exchange to list 
and trade options and increased-value options on certain volatility-
based securities indexes; specifically, the CBOE Volatility Index 
(``VIX''), the CBOE Nasdaq 100[supreg] Volatility Index (``VXN''), and 
the CBOE Dow Jones Industrial Average[supreg] Volatility Index 
(``VXD'') (collectively ``volatility indexes).\3\ Each volatility 
index, generally, uses the quotes of certain index option series (such 
as the S&P 500 index) to derive a measure of the volatility of the U.S. 
equity market. The volatility indexes provide investors with up-to-the-
minute market estimates of expected volatility by extracting implied 
volatilities from real-time index option quotes.
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    \3\ See Securities Exchange Act Release No. 49563 (April 14, 
2004); 69 FR 21589 (April 21, 2004) (order approving SR-CBOE-2003-
40, which allowed CBOE to trade options on the VIX, VXN, and VXD); 
see also Securities Exchange Act Release No. 49698 (May 13, 2004); 
69 FR 29152 (May 20, 2004) (order approving SR-CBOE-2004-09, which 
allowed CBOE to trade increased-value options on the VIX, VXN, and 
VXD).
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    All volatility index options contracts were originally designed to 
expire on the Wednesday immediately prior to the third Friday of the 
month that immediately precedes the month in which the options used in 
the calculation of that index expire. This method was chosen to provide 
an exercise schedule that is similar to the manner in which most other 
option contracts expire (i.e., the third Friday of the month). Under 
this method, during any rolling twelve month period, in four of those 
twelve months, options on any volatility index would not expire exactly 
thirty days prior to the expiration of the options on the index on 
which that volatility index is based. To illustrate, under the current 
methodology, an option on the March 2006 VXN would expire on Wednesday, 
March 16, 2006 because that is the Wednesday immediately prior to the 
third Friday of March 2006. However, March 16, 2006 is 37 days prior to 
the date on which options on the Nasdaq 100 Index (``NDX'') expire.
    CBOE proposes to revise the methodology by having all volatility 
index options expire on the ``Wednesday that is thirty days prior to 
the third Friday of the calendar month immediately following the 
expiring month.'' This revised approach will provide consistency in the 
expiration of options on all volatility indexes by ensuring that every 
volatility index option will expire exactly thirty days prior to the 
date on which the index that the volatility index is based.\4\ To 
illustrate how this new methodology will work using the March 2006 VXN 
example above, the April 2006 NDX option will expire on Friday, April 
21, 2006 and the March 2006 VXN option would expire on Wednesday March 
22, 2006, which is exactly 30 days prior to the expiration of the NDX 
April options. Even though the March 2006 VXN option does not expire 
during the normal expiration week for all other options, the Exchange 
believes it is more important that the volatility index options expire 
consistent with the 30-day volatility measurement period.
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    \4\ CBOE states that the revised expiration date calculation 
methodology for options on certain volatility indexes is consistent 
with the way in which expiration dates for futures on volatility 
indexes are calculated. Telephone conversation between James Flynn, 
Attorney, CBOE, and Florence Harmon, Senior Special Counsel, and 
Geoffrey Pemble, Special Counsel, Division of Market Regulation, 
Commission, on February 9, 2006.
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    The Exchange represents that it will provide public disclosures and 
notifications to its members and the investing public of this 
change.\5\ The Exchange states that this proposal does not affect the 
rule text of any existing Exchange rule.\6\
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    \5\ CBOE will issue an information circular to its members to 
notify them of the changes to the options expiration date 
calculation methodology contained in this proposed rule change. 
Telephone conversation between James Flynn, Attorney, CBOE, and 
Florence Harmon, Senior Special Counsel, and Geoffrey Pemble, 
Special Counsel, Division of Market Regulation, Commission, on 
February 9, 2006.
    \6\ The original rule filing that allowed CBOE to list 
volatility-based index options included an exhibit attached to the 
rule filing, which provided, among other contract characteristics, a 
description of how the expiration date would be determined. That 
description was not included in the rule text. See note 1, supra.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act \7\ and the rules and regulations under the Act applicable to a 
national securities exchange and, in particular, the requirements of 
Section 6(b) of the Act.\8\ Specifically, the Exchange believes the 
proposed rule change is consistent with the requirements of Section 
6(b)(5) of Act \9\ that the rules of an exchange be designed to promote 
just and equitable principles of trade, to prevent fraudulent and 
manipulative acts and, in general, to protect investors and the public 
interest.
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    \7\ 15 U.S.C. 78a et seq.
    \8\ 15 U.S.C. 78(f)(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither received nor solicited written comments on the 
proposal.

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:

[[Page 10088]]

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-CBOE-2006-08 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2006-08. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the CBOE. 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-2006-08 and should be submitted on or before March 
21, 2006.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the 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.\10\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\11\ 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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    \10\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that CBOE's proposal to revise the 
methodology for determining the expiration dates for options on certain 
volatility-based indexes so that such options expire on the ``Wednesday 
that is thirty days prior to the third Friday of the calendar month 
immediately following the expiring month'' is appropriate. As noted by 
CBOE above, this revised approach will provide consistency in the 
expiration of options on all volatility indexes by ensuring that every 
volatility index option will expire exactly thirty days prior to the 
date on which the index that the volatility index is based, rather than 
the prior approach under which such options would not expire exactly 
thirty days prior to the expiration of the options on the index on 
which that volatility index is based in four of the months in any 
rolling twelve-month period.
    The Exchange has requested accelerated approval of the proposed 
rule change.\12\ The Commission finds good cause for approving the 
proposed rule change prior to the 30th day after the date of 
publication of the notice of filing in the Federal Register. The 
proposal is intended to ensure consistency in expiration dates for 
options on all volatility indexes approved for listing and trading on 
CBOE with the expiration of the options on the underlying indexes. The 
Commission does not believe that the Exchange's proposal raises any 
novel regulatory issues. Therefore, the Commission finds good cause, 
consistent with Section 19(b)(2) of the Act,\13\ to approve the 
proposed rule change, as amended, on an accelerated basis.
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    \12\ Telephone conversation between James Flynn, Attorney, CBOE, 
and Florence Harmon, Senior Special Counsel, and Geoffrey Pemble, 
Special Counsel, Division of Market Regulation, Commission, on 
February 9, 2006.
    \13\ 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,\14\ that the proposed rule change (SR-CBOE-2006-08) is hereby 
approved on an accelerated basis.
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    \14\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-2767 Filed 2-27-06; 8:45 am]

BILLING CODE 8010-01-P
