
[Federal Register: June 11, 2008 (Volume 73, Number 113)]
[Notices]               
[Page 33128-33131]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11jn08-106]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57913; File No. SR-CBOE-2008-31]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change to List and 
Trade CBOE S&P 500 Three-Month Realized Variance Options and CBOE S&P 
500 Three-Month Realized Volatility Options

June 3, 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 May 23, 2008, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') 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 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.
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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 certain of its rules, including 
Rules 5.5, 24.1, and 24.9, to provide for the listing and trading of 
options that overlie two statistical measurements of market 
variability: Realized variance and realized volatility of the S&P 500 
Composite Stock Price Index (``S&P 500 Index''). CBOE S&P 500 Three-
Month Realized Variance options and CBOE S&P 500 Three-Month Realized 
Volatility options would be cash-settled and have European-style 
exercise. The text of the rule proposal and proposed contract 
specifications for CBOE S&P 500 Three-Month Realized Variance options 
are 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 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. The Exchange 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 the proposed rule change is to permit the Exchange 
to list and trade cash-settled options having European-style exercise 
on two statistical measurements of market variability: Realized 
variance and realized volatility of the S&P 500 Index. These 
statistical measurements are attributes of and based on a broad-based 
security index (i.e., S&P 500 Index). Three-month realized variance is 
a measure of the historical variability of the S&P 500 Index, based on 
actual prices that have been reported, or ``realized,'' historically 
looking back over a three-month period. The calculation uses daily 
returns for the three-month period relative to an average (mean) daily 
price return of zero. Three-month realized volatility is the square 
root of three-month realized variance. The Exchange also proposes to 
make technical changes to some of the rules that would be amended in 
order to list and trade realized variance and realized volatility 
options.
    Currently, the Exchange lists and trades options on the 30-day 
implied volatility of the S&P 500 Index (CBOE Volatility Index 
(``VIX'') options).\3\ With the introduction of realized variance and 
realized volatility options, market participants would be able to trade 
options that settle to the actual or realized volatility of the S&P 500 
Index that has accrued over a three-month time period. Different from 
VIX options, realized variance and realized volatility options would 
allow market participants to take a position on what they anticipate 
the actual volatility of the S&P 500 Index would be at expiration. In 
addition, the Exchange also notes that realized variance contracts are 
a popular and successful product in the over-the-counter (``OTC'') 
market. By providing a listed and standardized market for realized 
variance and realized volatility options, the Exchange seeks to attract 
investors who desire to trade options on realized variance and realized 
volatility but at the same time prefer the certainty and safeguards of 
a regulated and standardized marketplace.
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    \3\ The Exchange also calculates the CBOE S&P 500 Three-Month 
Volatility Index (``VXV''), which measures implied volatility, but 
the Exchange currently does not list VXV options.
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Calculation of Realized Variance and Realized Volatility
    The formula for three-month realized variance and three-month 
realized volatility uses continuously compounded daily returns for a 
three-month period assuming a mean daily price return of zero. The 
calculated realized variance is then annualized assuming 252 business 
days per year.\4\ The exercise-settlement value for CBOE S&P 500 Three-
Month Realized Variance options is 10,000 times the three-month 
realized variance of the S&P 500 Index, and the exercise-settlement 
value for CBOE S&P 500 Three-Month Realized Volatility options is 100 
times the three-month realized volatility of the S&P 500 Index, both of 
which are calculated using the following standardized formula:
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    \4\ The annualization factor for realized volatility is the 
square root of 252.
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REALIZED VARIANCE AND REALIZED VOLATILITY FORMULAS:

[[Page 33129]]

[GRAPHIC] [TIFF OMITTED] TN11JN08.000

Where:


    Ri = ln (Pi+1/Pi)--Daily return of the S&P 
500 Index from Pi to Pi+1.
Pi+1 = The final value of the S&P 500 Index used to 
calculate the daily return.
Pi = The initial value of the S&P 500 Index used to 
calculate the daily return.
Ne = Number of expected S&P 500 Index values needed to calculate 
daily returns during the three-month period. The total number of 
daily returns expected during the three-month period is Ne-1.
Na = The actual number of S&P 500 Index values used to calculate 
daily returns during the three-month period. Generally, the actual 
number of S&P 500 Index values will equal the expected number of S&P 
500 Index values (represented by Ne). However, if one or more 
``market disruption events'' occurs during the three-month period, 
the actual number of S&P 500 Index values will be less than the 
expected number of S&P 500 Index values by an amount equal to the 
number of market disruption events that occurred during the three-
month period. The total number of actual daily returns during the 
three-month period is Na-1.

    For purposes of calculating the respective exercise-settlement 
value to which the options would settle, realized variance and realized 
volatility are calculated from a series of values of the S&P 500 Index 
beginning with the Special Opening Quotation (``SOQ'') of the S&P 500 
Index on the first day of the three-month period, and ending with the 
S&P 500 Index SOQ on the last day of the three-month period.\5\ All 
other values in the series are closing values of the S&P 500 Index.
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    \5\ The SOQ is calculated per normal index calculation 
procedures and uses the opening (first) reported sales price in the 
primary market of each component stock in the index on the last 
business day (usually a Friday) before the expiration date. If a 
stock in the index does not open on the day on which the exercise-
settlement value is determined, the last reported sales price in the 
primary market is used to calculate the exercise-settlement value.
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    For example, the final exercise-settlement value to which a CBOE 
S&P 500 Three-Month Realized Variance option contract expiring on 
Friday, September 19, 2008 would settle would be calculated using the 
S&P 500 Index SOQ on Friday, June 20, 2008, the closing prices of the 
S&P 500 Index from Monday, June 23, 2008 through Thursday, September 
18, 2008 and the S&P 500 Index SOQ on Friday, September 19, 2008.
    As described above, three-month realized variance and three-month 
realized volatility would be calculated using actual daily values of 
the S&P 500 Index, which is a broad-based security index. By extension, 
products based on statistical measurements that are derived from S&P 
500 Index values should similarly be treated as products based directly 
on S&P 500 Index values. For purposes of CBOE's rules, the indicative 
values for three-month realized variance and three-month realized 
volatility shall be treated as indexes.
    Currently, CBOE calculates indicative values for implied and 
realized variance, and publishes those values daily after the close of 
trading. The CBOE S&P 500 Implied Variance indicator (``IUG'') is a 
measure of the market's expectation of future variance of the S&P 500 
Index that is implied by the daily settlement price of the front-month 
CBOE S&P 500 Three-Month Variance futures contract.\6\ The CBOE S&P 500 
Realized Variance indicator (``RUG'') is a measure of the realized 
variance of the S&P 500 Index from the beginning of the three-month 
period to the current date. IUG and RUG are disseminated through the 
Options Price Reporting Authority (``OPRA'') and are publicly available 
through most price quote vendors.\7\
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    \6\ CBOE Futures Exchange, LLC (``CFE'') currently lists CBOE 
S&P 500 Three-Month Realized Variance future contracts, which 
commenced trading on May 18, 2004.
    \7\ These values can be accessed by typing in the ticker symbol 
(IUG or RUG) at the following Web page: http://cfe.cboe.com/
DelayedQuote/SSFQuote.aspx.
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Options Trading
    The exercise-settlement value for CBOE S&P 500 Three-Month Realized 
Variance options would be 10,000 times the three-month realized 
variance of the S&P 500 Index. Realized variance would be quoted in 
variance points and fractions and one point would equal $50. The 
minimum tick size for all series would be 0.10 point ($5.00) and the 
minimum strike price interval would be $5.00.\8\
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    \8\ See Rules 5.5 and 24.9.
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    The exercise-settlement value for CBOE S&P 500 Three-Month Realized 
Volatility options would be 100 times the three-month realized 
volatility of the S&P 500 Index. Realized volatility would be quoted in 
volatility points and fractions and one point would equal $100. The 
minimum tick size for series trading below 3.00 would be 0.05 point 
($5.00) and the minimum tick for series trading at and above 3.00 would 
be 0.10 point ($10.00). The minimum strike price interval would be 
$1.00.
    The Exchange proposes to list series at $1 or greater strike price 
intervals on CBOE S&P 500 Three-Month Realized Volatility options. The 
Exchange believes that $1 strike price intervals would provide 
investors with greater flexibility by allowing them to establish 
positions that are better tailored to meet their investment objectives. 
CBOE believes that traders would likely use the related CBOE S&P 500 
Three-Month Variance futures contract price as a proxy for the 
``current index level.'' This is because the futures contract price 
reflects: (i) The realized variance of the S&P 500 Index experienced to 
date; and (ii) the market's expectation of the future variance of the 
S&P 500 Index at expiration of the respective contract. CBOE believes 
that using futures prices is an accurate and transparent method for 
determining the ``current index level'' used to center the range in 
which $1 or greater strikes in CBOE S&P 500 Three-Month Realized 
Volatility options would be listed.\9\
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    \9\ The Commission has approved the listing of options and LEAPS 
in $1 strike intervals, and the use of futures prices in setting 
those strike intervals, for all other implied volatility products 
approved for listing and trading on the Exchange. See Rule 
24.9.01(e)(ii). See also Securities Exchange Act Release Nos. 54192 
(July 21, 2006), 71 FR 43251 (July 31, 2006) (SR-CBOE-2006-27) ($1 
strikes for VIX options); 55425 (March 8, 2007), 72 FR 12238 (March 
15, 2007) (SR-CBOE-2006-73) ($1 strikes for RVX options); 56813 
(November 19, 2007), 72 FR 66211 (November 27, 2007) (SR-CBOE-2007-
52) ($1 strikes for VXD and VXN options and $1 strikes for RVX, VIX, 
VXD and VXN LEAPS).
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    Initially, the Exchange would list at least two strike prices above 
and two strike prices below the square root of the related CBOE S&P 500 
Three-Month Variance futures contract price at or about the time a 
series is opened for trading on the Exchange. As part of this

[[Page 33130]]

initial listing, the Exchange would list strike prices that are within 
5 points from the square root of the related CBOE S&P 500 Three-Month 
Variance futures contract price on the preceding day.
    As for additional series, the Exchange would be permitted to add 
additional series when the Exchange deems it necessary to maintain an 
orderly market, to meet customer demand or when the square root of the 
related CBOE S&P 500 Three-Month Variance futures contract price moves 
substantially from the initial exercise price or prices. To the extent 
that any additional strike prices are listed by the Exchange, such 
additional strike prices shall be within thirty percent (30%) above or 
below the square root of the related CBOE S&P 500 Three-Month Variance 
futures contract price. The Exchange would also be permitted to open 
additional strike prices that are more than 30% above or below the 
square root of the related CBOE S&P 500 Three-Month Variance futures 
contract price, provided that demonstrated customer interest exists for 
such series, as expressed by institutional, corporate or individual 
customers or their brokers. Market-makers trading for their own account 
would not be considered when determining customer interest. In addition 
to the initial listed series, the Exchange proposes to list up to sixty 
(60) additional series per expiration month for each series in CBOE S&P 
500 Three-Month Realized Volatility options. Further, LEAPS on CBOE S&P 
500 Three-Month Realized Volatility options would not be listed at 
intervals less than $1.
    The Exchange also proposes to set forth a delisting policy with 
respect to CBOE S&P 500 Three-Month Realized Volatility options. 
Specifically, the Exchange would, on a monthly basis, review series 
that are outside a range of five (5) strikes above and five (5) strikes 
below the square root of the related CBOE S&P 500 Three-Month Variance 
futures contract price and delist series with no open interest in both 
the put and the call series having a: (i) Strike higher than the 
highest strike price with open interest in the put and/or call series 
for a given expiration month; and (ii) strike lower than the lowest 
strike price with open interest in the put and/or call series for a 
given expiration month.
    Notwithstanding the proposed delisting policy, customer requests to 
add strikes and/or maintain strikes in CBOE S&P 500 Three-Month 
Realized Volatility option series eligible for delisting shall be 
granted.
    The Exchange also proposes to add new Interpretation and Policy .11 
to Rule 5.5, Series of Option Contracts Open for Trading, which would 
be an internal cross reference stating that the intervals between 
strike prices for CBOE S&P 500 Three-Month Realized Volatility options 
series would be determined in accordance with proposed new 
Interpretation and Policy .01(g) to Rule 24.9.
Exercise and Settlement
    The proposed options would expire on the Saturday following the 
third Friday of the expiring month. Trading in the expiring contract 
month would normally cease at 3:15 p.m. Chicago time on the business 
day preceding the last day of trading (ordinarily the Thursday before 
expiration Saturday, unless there is an intervening holiday). When the 
last trading day is moved because of an Exchange holiday (such as when 
CBOE is closed on the Friday before expiration), the last trading day 
for expiring options would be Thursday. As described above, the 
exercise-settlement value would be calculated from a series of values 
of the S&P 500 Index beginning with the SOQ of the S&P 500 Index on the 
first day of the three-month period, and ending with the S&P 500 Index 
SOQ on the last day of the three-month period. All other values in the 
series are closing values of the S&P 500 Index.
    The exercise-settlement amount is equal to the difference between 
the exercise-settlement value and the exercise price of the option 
multiplied by $50 for CBOE S&P 500 Three-Month Realized Variance 
options and multiplied by $100 for CBOE S&P 500 Three-Month Realized 
Volatility options.
Surveillance
    The Exchange would use the same surveillance procedures currently 
utilized for each of the Exchange's other index options to monitor 
trading in CBOE S&P 500 Three-Month Realized Variance options and CBOE 
S&P 500 Three-Month Realized Volatility options. The Exchange 
represents that these surveillance procedures are adequate to monitor 
trading in options on these option products. For surveillance purposes, 
the Exchange would have complete access to information regarding 
trading activity in the pertinent underlying securities (i.e., S&P 500 
Index component securities).
Position Limits
    The Exchange is not proposing to establish any position limits for 
CBOE S&P 500 Three-Month Realized Variance options and CBOE S&P 500 
Three-Month Realized Volatility options. Because realized variance and 
realized volatility are calculated using values of the S&P 500 Index, 
the Exchange believes that the position and exercise limits for these 
new products should be the same as those for broad-based index options 
(e.g., SPX, for which there are no position limits). CBOE S&P 500 
Three-Month Realized Variance options and CBOE S&P 500 Three-Month 
Realized Volatility options would be subject to the same reporting and 
other requirements triggered for other options dealt in on the 
Exchange.\10\
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    \10\ See Rule 4.13, Reports Related to Position Limits.
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Exchange Rules Applicable
    As stated above, for purposes of CBOE's rules, the indicative 
values for three-month realized variance and three-month realized 
volatility shall be treated as indexes. Except as modified by this 
proposal, the rules in Chapters I through XIX, XXIV, XXIVA, and XXIVB 
would equally apply to CBOE S&P 500 Three-Month Realized Variance 
options and CBOE S&P 500 Three-Month Realized Volatility options.
    CBOE S&P 500 Three-Month Realized Variance options and CBOE S&P 500 
Three-Month Realized Volatility options would be margined as ``broad-
based index'' options, and under CBOE rules, especially, Rule 
12.3(c)(5)(A), the margin requirement for a short put or call shall be 
100% of the current market value of the contract plus up to 15% of the 
respective underlying indicative value. Additional margin may be 
required pursuant to Exchange Rule 12.10.
    The Exchange proposes that CBOE S&P 500 Three-Month Realized 
Variance options and CBOE S&P 500 Three-Month Realized Volatility 
options be eligible for trading as Flexible Exchange Options as 
provided for in Chapters XXIVA (Flexible Exchange Options) and XXIVB 
(FLEX Hybrid Trading System).
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 
listing of new series that would result from the introduction of CBOE 
S&P 500 Three-Month Realized Variance options and CBOE S&P 500 Three-
Month Realized Volatility options.

[[Page 33131]]

Technical Changes
    The Exchange proposes to make technical changes to Rules 24.4.03, 
24.4.04, and 24.5, Exercise Limits by adding ``VIX, VXN and VXD'' to 
the rule text.\11\ The Exchange proposes to make technical changes to 
Rules 24A.7(b), 24A.8(a), 24B.7(b), and 24B.8(a), by adding the 
parenthetical phrase, ``including reduced-value option contracts'' to 
the rule text. These FLEX rules already contemplate reduced-value 
option contracts, and the proposed changes are consistent with the 
treatment of non-FLEX reduced-value option contracts.\12\
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    \11\ The Exchange inadvertently neglected to request the 
Commission's approval to add ``VIX, VXN and VXD'' to the respective 
rule text when the position limits for these products were 
eliminated. See Securities Exchange Act Release No. 54019 (June 20, 
2006), 71 FR 36569 (June 27, 2006) (SR-CBOE-2006-55).
    \12\ See Securities Exchange Act Release No. 56350 (September 4, 
2007), 72 FR 51878 (September 11, 2007) (SR-CBOE-2007-79).
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) \13\ of 
the Act in general and furthers the objectives of Section 6(b)(5) \14\ 
in particular in that it would permit trading in options based on the 
index pursuant to rules designed to prevent fraudulent and manipulative 
acts and practices and to promote just and equitable principles of 
trade, and thereby would provide investors with the ability to invest 
in options that provide statistical measurements of market variability.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE believes that the proposed rule change does not 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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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 No. SR-CBOE-2008-31 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2008-31. 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 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-2008-31 and should be 
submitted on or before July 2, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-13019 Filed 6-10-08; 8:45 am]

BILLING CODE 8010-01-P
