

[Federal Register: November 27, 2007 (Volume 72, Number 227)]
[Notices]               
[Page 66210-66211]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27no07-124]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56821; File No. SR-CBOE-2007-82]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of 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

November 20, 2007.

I. Introduction

    On July 17, 2007, 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 permit the Exchange to: (i) 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volatility index; and (ii) remove outdated rule text from Rule 
24.9(a)(2). On September 19, 2007, 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 16, 2007.\3\ The Commission received no comments on the 
proposal. This order approves the proposed rule change, as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 56632 (October 9, 
2007), 72 FR 58694 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

    In its proposal, CBOE proposed 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.
    In the filing, CBOE explained that it had plans to introduce new 
volatility products and new volatility indexes in the near future, 
including the CBOE S&P 500 Three-Month Volatility Index (``VXV'').\4\ 
According to CBOE, 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 (like other volatility 
indexes such as the CBOE Volatility Index or ``VIX''), 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.
---------------------------------------------------------------------------

    \4\ 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.
---------------------------------------------------------------------------

    CBOE stated in its filing that 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 proposed 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.
    CBOE explained that 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

[[Page 66211]]

the time.\5\ 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 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, 
according to CBOE, may make the index unattractive as an underlying for 
volatility products.
---------------------------------------------------------------------------

    \5\ See Notice, supra note 3, at 58695 (providing examples to 
illustrate the effect of the proposed rule change).
---------------------------------------------------------------------------

    Under the proposed rule change, however, the Exchange will be 
permitted, eight times a year, to add an additional seventh month in 
order to maintain four consecutive near term contract months.
    The Exchange also proposed to remove outdated rule text from Rule 
24.9(a)(2). Specifically, the Exchange proposed to delete the provision 
that permitted the Exchange to list up to seven expiration months at 
any one time for the SPX, MNX and DJX index option contracts, provided 
that one of those expiration months is November 2004.\6\
---------------------------------------------------------------------------

    \6\ 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).
---------------------------------------------------------------------------

Capacity

    CBOE represented that it 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.

III. Discussion

    After careful review, the Commission finds that CBOE's proposal 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, and to remove certain outdated rule text from Rule 
24.9(a)(2) is consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to a national securities exchange 
\7\ and, in particular, the requirements of section 6 of the Act \8\ 
and the rules and regulations thereunder. The Commission believes that 
increasing, 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 (to accommodate a fourth 
consecutive near-term month while maintaining the listing of three 
months on a quarterly expiration cycle) will result in a more 
consistent and predictable calculation in which the option series that 
bracket three months to expiration will always expire one month apart, 
thereby promoting just and equitable principles of trade while 
protecting investors and the public interest.
---------------------------------------------------------------------------

    \7\ 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).
    \8\ 15 U.S.C. 78f.
---------------------------------------------------------------------------

    The Commission also notes CBOE's representations that it possesses 
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.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-CBOE-2007-82), as amended, 
be, and hereby is, approved.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-23001 Filed 11-26-07; 8:45 am]

BILLING CODE 8011-01-P
