

[Federal Register: October 16, 2007 (Volume 72, Number 199)]
[Notices]               
[Page 58694-58696]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16oc07-121]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56632; File No. SR-CBOE-2007-82]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change as Modified by 
Amendment No. 1 Thereto To Allow the Exchange To List Up to Seven 
Expiration Months for Broad-Based Security Index Options Upon Which the 
Exchange Calculates a Constant Three-Month Volatility Index

October 9, 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 July 17, 2007, the Chicago Board Options Exchange, Incorporated ( 
``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III below, which Items have been substantially 
prepared by the Exchange. On September 19, 2007, CBOE filed Amendment 
No. 1 to the proposed rule change. The Commission is publishing this 
notice to solicit comments on the proposed rule change, as amended, 
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

    The Exchange proposes to amend Rule 24.9(a)(2), Terms of Index 
Option Contracts, to allow the Exchange to list up to seven expiration 
months for broad-based security index options upon which the Exchange 
calculates a constant three-month volatility index. The Exchange also 
proposes to remove outdated rule text from Rule 24.9(a)(2). 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, 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. 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 amend Rule 24.9(a)(2), Terms 
of Index Options, to allow the Exchange to list up to seven expiration 
months for broad-based security index options upon which the Exchange 
calculates a constant three-month volatility index. Currently, Rule 
24.9(a)(2) permits the Exchange to list only six expiration months in 
any index options at any one time.
    Volatility products offer investors a unique set of tools for 
speculating and hedging. For example, CBOE Volatility Index (``VIX'') 
options, first introduced in February 2006, have proven to be one of 
the Exchange's most successful new products ever listed, currently 
averaging over 90,000 contracts traded per day. The Exchange plans to 
introduce new volatility products and new volatility indexes in the 
near future. One such index is the CBOE S&P 500 Three-Month Volatility 
Index (``VXV'').\3\
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    \3\ The Exchange calculates volatility indexes on other broad-
based security indexes, such as the Dow Jones Industrial Average 
index (``DJX''), the Nasdaq-100 index (``NDX''), and the Russell 
2000 index (``RUT''). The Exchange may calculate a constant three-
month volatility index on DJX, NDX or RUT in the future.
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    Similar to the VIX, the VXV is a measure of S&P 500 implied 
volatility--the volatility implied by S&P option prices--but instead of 
reflecting a constant 1-month implied volatility period, VXV is 
designed to reflect the implied volatility of an option with a constant 
3 months to expiration. Since there is only one day on which an option 
has exactly 3 months to expiration, VXV is calculated as a weighted 
average of options expiring immediately before and immediately after 
the three-month standard. Accordingly, the Exchange would need to use 
four consecutive expiration months in order to calculate a constant 
three-month volatility index.
    Under the current application of CBOE Rule 24.9(a)(2), the Exchange 
generally lists three consecutive near term months and three months on 
a quarterly expiration cycle. One of the three consecutive near term 
months is always a quarterly month; however, that near term contract 
month (which is also a quarterly month) is not included as part of the 
three months listed on a quarterly expiration cycle. Therefore, in 
order to permit the addition of four consecutive near term months under 
current Rule 24.9(a)(2), the Exchange would only be able to list two 
months on a quarterly expiration cycle. Because of customer demand and 
other investment strategy reasons for having three months on a 
quarterly expiration cycle, the Exchange is seeking to increase, from 
six to seven, the number of expiration months for broad-based security 
index options upon which the Exchange calculates a constant three-month 
volatility index.
    Without this proposed rule change, if the Exchange calculated a 
three-month volatility using only three consecutive near term months, 
this would result in the VXV being calculated with options expiring 
three months apart about one-third of the time. Another one-third of 
the time, VXV would be calculated with options expiring two months 
apart. And the final one-third of the time, VXV

[[Page 58695]]

would be calculated with options expiring one month apart. As a result, 
the calculation of the three-month VXV under current Rule 24.9(a)(2) 
would render the VXV subject to inconsistencies that may make the index 
unattractive as an underlying for volatility products.
    The proposed rule change will permit the Exchange, eight times a 
year, to add an additional seventh month in order to maintain four 
consecutive near term contract months. The following examples 
illustrate the need for a seventh month in order to maintain four 
consecutive near term contract months. In the following examples, ``X'' 
represents RUT contract months that will be listed under the current 
application of Rule 24.9(a)(2).

    Example 1: After September 2007 expiration, under the proposed 
rule change, the Exchange will list January 2008 RUT contracts in 
order to have four consecutive near term contract months.

----------------------------------------------------------------------------------------------------------------
               Consecutive near term months                                                 March quarterly
----------------------------------------------------------                                  expiration cycle
                                                                    7th Month         --------------------------
                 Oct 07                   Nov 07   Dec 07                               Mar 08  June 08  Sept 08
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X......................................        X        X  Jan 08....................        X        X        X
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    Example 2: After October 2007 expiration, under the proposed 
rule change, the Exchange will list February 2008 RUT contracts in 
order to have four consecutive near term contract months.

----------------------------------------------------------------------------------------------------------------
               Consecutive near term months                                                 March quarterly
----------------------------------------------------------                                  expiration cycle
                                                                    7th Month         --------------------------
                 Nov 07                   Dec 07   Jan 07                               Mar 08  June 08  Sept 08
----------------------------------------------------------------------------------------------------------------
X......................................        X        X  Feb 08....................        X        X        X
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    Example 3: After November 2007 expiration, the Exchange will not 
have to add a seventh RUT contract month because there will already 
be four consecutive near term contract months.

----------------------------------------------------------------------------------------------------------------
               Consecutive near term months                                                 March quarterly
----------------------------------------------------------                                  expiration cycle
                                                                    7th Month         --------------------------
                 Dec 07                   Jan 08   Feb 08                               Mar 08  June 08  Sept 08
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X......................................        X        X  N/A.......................        X        X        X
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    Example 4: After December 2007 expiration, under the proposed 
rule change, the Exchange will list April 2008 RUT contracts in 
order to have four consecutive near term contract months, and to 
maintain three contract months on the March quarterly expiration 
cycle, the Exchange will list December 2008 RUT contracts.

----------------------------------------------------------------------------------------------------------------
               Consecutive near term months                                                 March quarterly
----------------------------------------------------------                                  expiration cycle
                                                                    7th Month         --------------------------
                 Jan 08                   Feb 08   Mar 08                              June 08  Sept 08   Dec 08
----------------------------------------------------------------------------------------------------------------
X......................................        X        X  April 08..................        X        X        X
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    Therefore, the Exchange believes that the addition of a fourth 
consecutive near-term month for broad-based security index options upon 
which the Exchange calculates a constant three-month volatility index 
will result in a consistent calculation in which the option series that 
bracket three months to expiration will always expire one month apart. 
In order to accommodate the listing of a fourth consecutive near-term 
month and to maintain the listing of three months on a quarterly 
expiration cycle, the Exchange proposes the increase, from six to 
seven, the number of expiration months for broad-based security indexes 
on which the Exchange calculates a constant three-month volatility 
index.
    The Exchange also proposes to remove outdated rule text from Rule 
24.9(a)(2). Specifically, the Exchange proposes to delete the provision 
that permitted the Exchange to list up to seven expiration months at 
anyone time for the SPX, MNX and DJX index option contracts, provided 
that one of those expiration months is November 2004.\4\ This allowance 
has since expired and should be deleted from the Exchange's Rulebook.
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    \4\ This provision was added in July 2004 in response to 
customer demand for index options expiring in November 2004 to hedge 
positions in stocks overlying particular index options or to hedge 
market exposure to the equity markets generally against the 
uncertainty presented by the elections. See Securities Exchange Act 
Release No. 50063 (July 22, 2004), 69 FR 45357 (July 29, 2004)(SR-
CBOE-2004-49).

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[[Page 58696]]

Capacity
    CBOE has analyzed its capacity and represents that it believes the 
Exchange and the Options Price Reporting Authority have the necessary 
systems capacity to handle the additional traffic associated with the 
additional listing of a seventh contract month in order to maintain 
four consecutive near term contract months for those broad-based 
security index options upon which the Exchange calculates a constant 
three-month volatility index.
2. Statutory Basis
    Because the increase in the number of expiration months is limited 
to broad-based security indexes upon which the Exchange calculates a 
constant three-month volatility and because the series could be added 
without presenting capacity problems, the Exchange believes the rule 
proposal is consistent with the Act 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.\5\ 
Specifically, the Exchange believes that the proposed rule change is 
consistent with the Section 6(b)(5) Act \6\ 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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    \5\ 15 U.S.C. 78f(b).
    \6\ 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 
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 such 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 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-2007-82 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-2007-82. 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 office of 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-2007-82 and should be 
submitted on or before November 6, 2007.
    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-20361 Filed 10-15-07; 8:45 am]

BILLING CODE 8011-01-P
