
[Federal Register: March 19, 2008 (Volume 73, Number 54)]
[Notices]               
[Page 14859-14861]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19mr08-117]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57494; File No. SR-CBOE-2008-21]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Modify the Cut-Off Time for the Submission of Strategy 
Orders During the Modified HOSS Opening Procedure

March 13, 2008.
    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 March 11, 2008, 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 and II below, which Items have been substantially prepared by 
CBOE. The Exchange has filed the proposal as a ``non-controversial'' 
rule change pursuant to section 19(b)(3)(A) of the Act \3\ and Rule 
19b-4(f)(6) thereunder,\4\ which renders it effective upon filing with 
the Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to modify the cut-off time for the submission of 
index option orders for participation in the modified Hybrid Opening 
System (``HOSS'') opening related to a position in, or a trading 
strategy involving, volatility index options or futures. The text of 
the proposed rule change is available at CBOE, the Commission's Public 
Reference Room, and http://www.cboe.org/legal.

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 settlement date for volatility index options and futures 
contracts is on the Wednesday that is thirty days prior to the third 
Friday of the calendar month immediately following the month in which 
the applicable volatility index options or futures contract expires.\5\ 
On these settlement days, CBOE Rule 6.2B.01 provides for a modified 
HOSS opening procedure only in those index option series (i) that are 
Hybrid 3.0 classes, and (ii) whose prices are used to calculate a 
volatility index on which an option or future is traded.\6\ Currently, 
the only index options used to calculate a volatility index that trade 
on the Hybrid 3.0 platform are S&P 500 Index (``SPX'') options, which 
began trading on that platform on September 25, 2007. Specifically, SPX 
options are used to calculate the CBOE Volatility Index (``VIX'').
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    \5\ If the third Friday of the month subsequent to expiration of 
the applicable volatility index options or futures contract is a 
CBOE holiday, the final settlement date for the respective contract 
shall be thirty days prior to the CBOE business day immediately 
preceding that Friday.
    \6\ The normal HOSS opening procedure is used on all other days 
in those index options and on the volatility index options and 
futures settlement date in all contract months whose prices are not 
used to calculate the applicable volatility index.
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    Under current Rule 6.2B.01, all index option orders for 
participation in the modified HOSS opening procedure that are related 
to positions in, or a trading strategy involving, volatility index 
options or futures (``Strategy Orders'') and any change to or 
cancellation of any such Strategy Order must be received prior to 8 
a.m. (CT) (subject to a limited exception for errors). The cut-off time 
for the entry of non-Strategy Orders on volatility index settlement 
days is established on a class-by-class basis, provided the cut-off 
time is no earlier than 8:25 a.m. (CT) and no later than the

[[Page 14860]]

opening of trading in the option series.\7\ Any imbalance of contracts 
to buy over contracts to sell in the applicable index option series, or 
vice versa, as indicated on the electronic book, as well as expected 
opening prices and sizes are published in a snapshot form on the CBOE 
and CBOE Futures Exchange (``CFE'') Web sites as soon as practicable up 
through the opening bell on settlement days when the modified HOSS 
opening procedure is utilized. They are also currently continually 
disseminated on the Hybrid trading system.
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    \7\ See CBOE Rule 6.2B.01(c)(iv).
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    An example of a Strategy Order includes a market participant who 
places SPX option orders on the book prior to the opening of trading on 
the settlement date for VIX futures to unwind hedge strategies 
involving SPX options. In particular, a commonly used hedge for VIX 
futures involves holding a portfolio of SPX options that will be used 
to calculate the settlement value of the VIX futures contract on the 
settlement date. The Exchange has observed that traders holding hedged 
VIX futures positions to settlement tend to trade out of their SPX 
options on VIX settlement days.\8\
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    \8\ The Exchange originally proposed a cut-off time for the 
entry of Strategy Orders to provide market participants with time to 
review order imbalances and to place off-setting orders in the book, 
thereby encouraging additional market participation in the 
applicable index option opening which improves the settlement value 
calculation. See Securities Exchange Act Release No. 52367 (August 
31, 2005), 70 FR 53401 (September 8, 2005) (SR-CBOE-2004-86). In 
order to strike the appropriate balance between maintaining a time 
period for market participants to respond to order imbalances and 
providing traders seeking convergence with additional time to enter 
Strategy Orders, the Exchange is currently proposing to modify the 
cut-off time for the entry of Strategy Orders as described more 
fully herein.
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    Recently, the Exchange has received requests from market 
participants to extend the cut-off time for the entry of Strategy 
Orders on volatility index settlement days. Market participants have 
explained that because Strategy Orders cannot be modified or cancelled 
after 8 a.m. (CT) (except for errors), they are exposed to risk 
associated with market movements between 8 a.m. (CT) and the opening 
bell, which is after 8:30 a.m. (CT), and in the case of such market 
movements, may be unable to obtain convergence with the VIX futures 
final settlement value.
    Specifically, the final value to which VIX futures settle is 
calculated using the opening prices of constituent SPX options: Out-of-
the-money puts and calls that have non-zero bid prices. The Exchange 
determines whether a particular option series is ``out-of-the-money'' 
by reference to an ``at-the-money'' index strike price (K0); 
put series with strike prices below K0 and call series with 
strike prices above K0 are considered constituent SPX 
options, provided that these series have non-zero bid prices. Both the 
put and call series with strike price K0 are also considered 
constituent options. As the market moves, and the K0 strike 
price changes, the constituent SPX options will also change. For 
example, at 8 a.m. (CT), suppose K0 is deemed to be 1350. 
Market participants would be expected to enter Strategy Orders for SPX 
put series with strike prices of 1350 and lower, and SPX call series 
with strike prices of 1350 and higher. Now suppose that the market 
moved after 8 a.m. (CT) and the K0 strike price changed to 
1325. In order to obtain convergence with the SPX option hedge and the 
VIX futures final settlement value, market participants would need to 
change certain of their resting Strategy Orders to reflect the new set 
of constituent SPX options. Specifically, resting Strategy Orders for 
put series with strike prices between 1325 and 1350 would need to be 
cancelled and replaced by Strategy Orders for call series with strike 
prices between 1325 and 1350.
    In response, the Exchange believes that it is appropriate to 
eliminate a specific cut-off time for Strategy Orders and instead 
provide that the cut-off time may be established by the Exchange on a 
class-by-class basis, provided that the established cut-off time cannot 
be set earlier than 8 a.m. (CT) or later than the opening of trading in 
the option series for which the modified HOSS opening procedure is 
utilized. The amended rule text also provides that pronouncements 
regarding changes to the established Strategy Order cut-off time would 
be announced to the membership via a Regulatory Circular that is issued 
at least one day prior to implementation. As proposed, the instant rule 
change builds flexibility into the rule to allow for future 
modifications to the applicable Strategy Order cut-off time, which may 
be appropriate in the future as technology improves and processes 
become more automated. In addition, the proposed rule provisions 
regarding the cut-off time for Strategy Orders are consistent with 
current rule provisions regarding the cut-off time for non-Strategy 
Orders in that both sets of provisions are structured to permit the 
Exchange to designate a cut-off time within a particular time range to 
permit the Exchange to adjust the cut-off time as circumstances 
evolve.\9\
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    \9\ See Rule 6.2B.01(c)(iv); see also Securities Exchange Act 
Release No. 54275 (August 4, 2006), 71 FR 45866 (August 10, 2006) 
(SR-CBOE-2006-61).
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    In support of this change, the Exchange notes that since the 8 a.m. 
(CT) cut-off time for Strategy Orders was first established in 2005, 
the trading system for receiving, processing, and matching orders 
during the opening process has become much more automated.\10\ Also, 
order imbalances are now published on the Hybrid trading system and are 
thus more widely disseminated. For example, before SPX options traded 
on the Hybrid 3.0 platform, order imbalances were only visible to 
market participants in the trading crowd and in snapshots on the CBOE 
and CFE Web sites. Now imbalances are also continually disseminated 
prior to the opening of trading through the Hybrid trading system. As a 
result of the enhanced trading system, it no longer takes as much time 
for information regarding order imbalances to reach market 
participants, and market participants can react to those order 
imbalances sooner by placing offsetting orders. Accordingly, there does 
not appear to be a need to have Strategy Orders submitted as early as 
is the case currently, and the Exchange expects to move the Strategy 
Order cut-off time to a later time. However, if the Exchange learns 
from experience that the cut-off time needs to be adjusted further to 
be earlier or later within the time range between 8 a.m. (CT) and the 
opening of trading to provide for an optimal opening process, the 
proposed rule will provide the Exchange with the flexibility to do 
that.
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    \10\ See supra note 8.
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2. Statutory Basis
    Because the proposed modification to the cut-off time for Strategy 
Orders on volatility index settlement days will permit the Exchange to 
provide market participants with additional time to enter Strategy 
Orders, is designed to better enable market participants to meet their 
trading objectives (e.g., obtain convergence with the VIX futures final 
settlement value), and provides the Exchange with the ability to 
continue to provide market participants with time to respond to order 
imbalances, the Exchange believes the rule proposal is consistent with 
the Act and the rules and regulations thereunder applicable to a 
national securities exchange and, in particular, the requirements of 
section 6(b) of the Act.\11\ Specifically, the Exchange believes that 
the proposed rule change is consistent with section

[[Page 14861]]

6(b)(5) of the Act,\12\ which requires 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. In addition, the Exchange notes that the 
proposal which established the current rule provision governing the 
cut-off time for non-Strategy Orders (which permits the Exchange to 
designate a cut-off time within a particular time range) was designated 
by the Commission to be effective and operative upon filing.\13\
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ See supra note 9.
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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 that is 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

    Written comments on the proposed rule change were neither solicited 
nor received.

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

    Because the foregoing rule change does not: (1) Significantly 
affect the protection of investors or the public interest; (2) impose 
any significant burden on competition; and (3) become operative for 30 
days after the date of this filing, or such shorter time as the 
Commission may designate, it has become effective pursuant to section 
19(b)(3)(A) of the Act \14\ and Rule 19b-4(f)(6) thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\16\ 
However, Rule 19b-4(f)(6)(iii) \17\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission waive the 30-day operative delay. The Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest because such waiver 
will allow market participants to receive the benefits of the proposed 
rule change prior to the next settlement date when the modified HOSS 
opening procedure will be utilized, which will be on Wednesday, March 
19, 2008. For this reason, the Commission designates the proposed rule 
change to be operative upon filing with the Commission.\18\
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    \16\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to 
the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change, at least five business days prior to the date of filing 
of the proposed rule change, or such shorter time as designated by 
the Commission. The Exchange has satisfied the five-day pre-filing 
notice requirement.
    \17\ Id.
    \18\ For the purposes only of waiving the 30-day operative 
delay, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of such proposed rule 
change the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors or otherwise in 
furtherance of the purposes of the Act.

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-2008-21 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-2008-21. 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 the 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-2008-21 and should be 
submitted on or before April 9, 2008.
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    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-5520 Filed 3-18-08; 8:45 am]

BILLING CODE 8011-01-P
