

[Federal Register: August 27, 2007 (Volume 72, Number 165)]
[Notices]               
[Page 49029-49030]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27au07-88]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56287; File No. SR-CBOE-2007-41]

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

 August 20, 2007.
    On May 1, 2007, the Chicago Board Options Exchange, Incorporated 
(``CBOE'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposal 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 CBOE Volatility Index options and CBOE Increased-
Value Volatility Index options (collectively,''Volatility Index 
options'') is calculated and 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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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The Exchange submitted Amendment No. 1 to the proposed rule change 
on June 7, 2007. The proposed rule change was published for comment in 
the Federal Register on July 16, 2007.\3\ The Commission received no 
comments on the proposal. This order approves the proposed rule change 
as modified by Amendment No. 1.
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    \3\ Securities Exchange Act Release No. 56036 (July 10, 2007), 
72 FR 38850 (July 16, 2007).
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    In this proposal, CBOE proposed 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 proposed 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); 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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    According to the CBOE, 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 and reflects CBOE's belief 
that the settlement process works best if underlying option series with 
a single expiration month are used to calculate a Volatility Index. 
According to CBOE, 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. Consequently, in this filing the Exchange 
proposed to amend the existing text of Rule 24.9, relating to the 
current methodology, to codify its pre-existing practice.
    The Exchange further proposed 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 proposed 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

[[Page 49030]]

business day immediately preceding that Friday.\6\ This would also be 
the expiration date for that Volatility Index option.
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    \6\ The Exchange represented that it was also proposing a 
similar change relating to the final settlement date for futures 
contracts on volatility indexes.
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    After carefully considering the proposal, 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.\7\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\8\ 
which requires that an exchange have rules designed, among other 
things, 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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    \7\ In approving this rule change, the Commission notes that it 
has considered the proposal's impact on efficiency, competition, and 
capital formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that codifying CBOE's pre-existing 
methodology used for determining the day on which the exercise 
settlement value of Volatility Index options is calculated in Rule 24.9 
will provide certainty and predictability for CBOE members and other 
market participants engaged in the trading of Volatility Index options. 
The Commission further believes that the Exchange's new procedure 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 due to an Exchange 
holiday is an appropriate supplement to the existing methodology.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (File No. SR-CBOE-2007-41) be, 
and hereby is, approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-16833 Filed 8-24-07; 8:45 am]

BILLING CODE 8010-01-P
