

[Federal Register: March 15, 2007 (Volume 72, Number 50)]
[Notices]               
[Page 12238-12239]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15mr07-113]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55425; File No. SR-CBOE-2006-73]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Amendment No. 2 and Order Granting 
Accelerated Approval of Proposed Rule Change as amended, to Amend 
Certain of its Rules to Provide for the Listing and Trading of Options 
on the CBOE Russell 2000 Volatility Index\sm\ (``RVX\sm\'')

    March 8, 2007.

I. Introduction

    On August 31, 2006, the Chicago Board Options Exchange, 
Incorporated (``CBOE'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission'') a proposed rule change, pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ to amend certain of its rules to 
provide for the listing and trading of options on the CBOE Russell 2000 
Volatility Index\sm\ (``RVXsm''). On October 20, 2006, CBOE 
filed Amendment No. 1 to the proposed rule change. The proposed rule 
change, as modified by Amendment No. 1, was published for comment in 
the Federal Register on October 30, 2006.\3\ The Commission received no 
comments on the proposal. On February 26, 2007, CBOE filed Amendment 
No. 2 to the proposed rule change.\4\ This order provides notice of 
Amendment No. 2 to the proposed rule change and approves the proposed 
rule change as amended.
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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. 54643 (October 23, 
2006), 71 FR 63367 (``Notice'').
    \4\ In Amendment No. 2, the Exchange represented that CBOE 
Futures Exchange, LLC (``CFE'') does not currently list and trade 
RVX futures. The Exchange further represented that it will not list 
for trading RVX options until RVX futures have begun trading on CFE.
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II. Description of the Proposal

    The Exchange seeks to list and trade cash-settled, European-style 
options on the RVX. The index is calculated using real-time Russell 
2000 Index (``RUT'') option bid/ask quotes. RVX uses nearby and second 
nearby RUT options with at least 8 days left to expiration and then 
weights them to yield a constant, 30-day measure of the expected 
volatility of the RUT.
    For each contract month, CBOE will determine the at-the-money 
strike price. It 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.\5\
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    \5\ The Exchange represented in its filing that the RVX is 
calculated in the same manner as other volatility indexes (e.g., the 
CBOE Volatility Index (``VIX'')), upon which options have been based 
and previously approved by the Commission. A more detailed 
explanation of the method used to calculate VIX may be found on 
CBOE's Web site at the following internet address: http://www.cboe.com/micro/vix/vixwhite.pdf
.

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    CBOE will compute the index on a real-time basis throughout each 
trading day, from 8:30 a.m. until 3:15 p.m. CST. Volatility index 
levels will be calculated by CBOE and disseminated at 15-second 
intervals to market information vendors via the Options Price Reporting 
Authority (``OPRA'').
    Because of the generally limited range in which RVX has fluctuated, 
the Exchange proposes to list series at $1.00 or greater strike price 
intervals for each expiration on up to 5 RVX option series above and 5 
RVX option series below the current index level. Additional series at 
$1.00 or greater strike price intervals could be listed for each 
expiration as the current index level of RVX moves from the exercise 
price of the RVX options series that already have been opened for 
trading on the Exchange in order to maintain at least 5 RVX option 
series above and 5 RVX option series below the current index level.

[[Page 12239]]

    Additionally, the Exchange proposes that it would not list series 
with $1.00 intervals within $0.50 of an existing $2.50 strike price 
with the same expiration month (e.g., if there is an existing $12.50 
strike, the Exchange would not list a $12.00 or $13.00 strike). The 
interval between strike prices for RVX long-term option series 
(``LEAPs(r)'') will continue to be no less than $2.50.

III. Discussion

    After careful review, the Commission finds that CBOE's proposal to 
permit trading in options based on the RVX is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange \6\ and, in particular, 
the requirements of Section 6 of the Act \7\ and the rules and 
regulations thereunder. 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.\8\ The Commission further believes that trading options on 
this volatility index provides investors with an important trading and 
hedging mechanism.
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    \6\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that it is consistent with the Act for CBOE to 
apply its rules for trading of broad-based index options to RVX. The 
Commission believes that because this volatility index is composed of 
options on an index which the Commission has previously determined is 
appropriate to treat as broad-based for purposes of CBOE's rules,\9\ it 
is appropriate to apply to the RVX options the position limits, 
exercise limits and margin requirements that apply to CBOE's component 
index options.
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    \9\ See Securities Exchange Act Release No. 31382 (October 30, 
1992), 57 FR 52802 (November 5, 1992) (SR-CBOE-92-02).
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    The Commission also notes CBOE's representation that it has 
adequate surveillance procedures in place to monitor for manipulation 
of the RVX options. In addition, the Commission notes that the Exchange 
will use the same surveillance procedures currently utilized for each 
of the Exchange's other index options to monitor trading in options on 
the RVX and that CBOE believes that these surveillance procedures are 
adequate to monitor the trading of options on the RVX. For surveillance 
purposes, the Exchange will have complete access to information 
regarding trading activity in the pertinent underlying securities.
    As explained by CBOE, the RVX fluctuates in a narrow range, and the 
Commission believes that the implementation of $1 strike price 
intervals in the RVX option product, within the parameters detailed in 
CBOE's proposal, is appropriate. The Commission also finds that CBOE's 
trading rules and other product specifications are consistent with the 
Act. Because the exercise of these options will be cash-settled, RVX 
options will be A.M.-settled on the business day following expiration, 
in a manner that will deter manipulation.
    The Commission also notes CBOE's representations that it possesses 
the necessary systems capacity to support new series that would result 
from the introduction of RVX options and that CBOE also has been 
informed that OPRA has the capacity to support such new series.
    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment Nos. 1 and 2 before the 30th day after 
the date of publication of notice of filing of Amendment No. 2 in the 
Federal Register. In Amendment No. 2, the Exchange represented that 
CBOE Futures Exchange, LLC (``CFE'') does not currently list and trade 
RVX futures and that the Exchange will not list for trading RVX options 
until RVX futures have begun trading on CFE. The Commission believes 
that this clarifying language is necessary because the Exchange plans 
to use RVX futures prices as a proxy for ``implied forward'' RVX 
levels.\10\
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    \10\ See Notice supra note 3.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change as amended 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 e-mail to rule-comments@sec.gov. Please include 

File Number SR-CBOE-2006-73 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2006-73. 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 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-2006-73 and should be submitted on or before April 
5, 2007.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-CBOE-2006-73), as amended, 
be, and hereby is, approved on an accelerated basis.
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    \11\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).

Nancy M. Morris,
Secretary.
 [FR Doc. E7-4758 Filed 3-14-07; 8:45 am]

BILLING CODE 8010-01-P
