

[Federal Register: July 16, 2007 (Volume 72, Number 135)]
[Notices]               
[Page 38850-38851]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16jy07-60]                         


[[Page 38850]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56036; File No. SR-CBOE-2007-41]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change as Modified by 
Amendment No. 1 Thereto To Codify Pre-Existing Practices and To Amend 
and Supplement Rule 24.9

July 10, 2007.
    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 May 1, 2007, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been substantially prepared 
by the Exchange. The Exchange submitted Amendment No. 1 to the proposed 
rule change on June 7, 2007.\3\ The Commission is publishing this 
notice and order to solicit comments on the proposal, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to codify in its rulebook its pre-existing 
methodology used for determining the day on which the exercise 
settlement value of CBOE Volatility Index options and CBOE Increased-
Value Volatility Index options (collectively, ``Volatility Index 
options'') is calculated. The Exchange also proposes to set forth in 
its rulebook the manner in which the expiration date and last trading 
day for a Volatility Index option are determined and to supplement the 
manner in which the day on which the exercise settlement value of a 
Volatility Index option is calculated is determined. 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 Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change. The 
text of these 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this rule filing is to amend Rule 24.9, Terms of 
Index Options, to codify the pre-existing methodology used for 
determining the day on which the exercise settlement value of 
Volatility Index options is calculated.\4\ This day is also the 
expiration date for Volatility Index options and the business day 
immediately before the expiration date is the last trading day for 
Volatility Index options. The Exchange also proposes to supplement the 
manner for determining the day on which the exercise settlement value 
of Volatility Index options is calculated in the event of an Exchange 
holiday.
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    \4\ See Securities Exchange Act Release No. 53342 (February 21, 
2006), 71 FR 10086 (February 28, 2006) (SR-CBOE-2006-008). This 
filing set forth the current methodology for determining the date on 
which the exercise settlement value of a Volatility Index option is 
calculated and the expiration date of a Volatility Index option, 
replacing prior methodology under which options would not expire 
exactly thirty days prior to the expiration of the options on the 
index on which the Volatility Index is based in four of the months 
in any rolling twelve-month period. See also CBOE Regulatory 
Circular 2006-23 (describing methodology for determining date of 
calculation of exercise settlement value and expiration date).
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    In general, each Volatility Index is calculated using the quotes of 
certain index option series (e.g., S&P 500 Index (``SPX'') options) to 
derive a measure of volatility of the U.S. equity market. Under CBOE's 
current methodology, the day on which the exercise settlement value of 
a Volatility Index option is calculated and the expiration date of a 
Volatility Index option is the Wednesday that is thirty days prior to 
the third Friday of the calendar month immediately following the 
expiring month of the Volatility Index option.\5\ Additionally, the 
Tuesday immediately before that Wednesday is the last trading day for 
Volatility Index options.
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    \5\ The options used to calculate the Volatility Indexes are 
traded on CBOE and generally expire on the third Friday of any given 
calendar month.
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    This methodology was chosen because it provides consistency by 
ensuring that Volatility Index options expire exactly thirty days 
before the expiration date of the options that are used to calculate 
the Volatility Indexes.\6\ Additionally, the Exchange believes that the 
settlement process works best if underlying option series with a single 
expiration month are used to calculate a Volatility Index. If 
underlying options series in two expiration months are used, the number 
of options series used in the settlement process is markedly increased 
and the settlement process becomes more complex and cumbersome. The 
above methodology and the proposed revision to that methodology 
described below with respect to Exchange holidays ensures that 
underlying option series in a single expiration month will always be 
used to calculate the underlying Volatility Index at settlement.
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    \6\ See supra note 4.
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    The Exchange also represents that this methodology is consistent 
with the way in which the final settlement dates for futures contracts 
on Volatility Indexes are calculated. The Exchange is proposing to 
amend the existing text of Rule 24.9, relating to the current 
methodology, to codify its pre-existing practice.
    In order to maintain the desired consistency described above, the 
Exchange also proposes to supplement the current methodology by 
providing a framework for determining the day on which the exercise 
settlement value for Volatility Index options will be calculated and 
the expiration date for Volatility Index options when the Exchange is 
closed on the third Friday of any given calendar month. Specifically, 
the Exchange proposes to amend Rule 24.9 to provide that if the third 
Friday of the month subsequent to the expiration of a Volatility Index 
option is an Exchange holiday, the exercise settlement value of the 
Volatility Index option will be calculated on the business day that is 
thirty days prior to the Exchange business day immediately preceding 
that Friday.\7\ This would also be the expiration date for that 
Volatility Index option.
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    \7\ The Exchange represents that it is also proposing a similar 
change relating to the final settlement date for futures contracts 
on volatility indexes.
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    The following example is meant to illustrate how this revised 
methodology will work. February 2008 CBOE Volatility Index (``VIX'') 
options would generally expire on the Wednesday (February 20, 2008) 
that is thirty days prior to the third Friday in the succeeding month 
(March 21, 2008) (This would be the expiration date of the SPX options 
used to calculate the VIX). However, the Exchange will be

[[Page 38851]]

closed on Friday, March 21, 2008 in observance of Good Friday; 
therefore, the SPX options will expire on the immediately preceding 
business day, which is Thursday, March 20, 2008. Accordingly, to ensure 
that a thirty-day volatility measurement period is used for February 
2008 VIX options, the exercise settlement value of those options would 
be calculated on Tuesday, February 19, 2008 and the expiration date of 
February 2008 VIX options would also be Tuesday, February 19, 2008. 
Further, the last trading day for February 2008 VIX options would be 
Monday, February 18, 2008.
    Because February 2008 VIX options are currently traded, the 
Exchange proposes that this rule change apply to those contracts, as 
well as to any Volatility Index options that are subsequently traded by 
the Exchange. The Exchange represents that it will provide public 
disclosure and notifications to its members and the investing public of 
this change.
2. Statutory Basis
    Because this rule proposal will codify the Exchange's pre-existing 
practices and improve the settlement procedures for Volatility Index 
options, the Exchange believes the rule proposal is consistent with the 
Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to a national securities exchange. 
Specifically, the Exchange believes that the proposed rule change is 
consistent with the Section 6(b)(5) Act \8\ requirements 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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    \8\ 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 solicited nor received comments on the 
proposal.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 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 the 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, 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-2007-41 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-2007-41. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal offices 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-2007-41 and should be 
submitted on or before August 6, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-13694 Filed 7-13-07; 8:45 am]

BILLING CODE 8010-01-P
