
[Federal Register: June 18, 2008 (Volume 73, Number 118)]
[Notices]               
[Page 34811-34814]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18jn08-132]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57946; File No. SR-CBOE-2008-26]

 
 Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change To List and 
Trade Options on the BXM Index (1/10th Value)

June 10, 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 June 2, 2008, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or the ``Exchange'') 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 hereby proposes to amend certain of its rules to 
provide for the listing and trading of options that overlie an index 
that is equal to 1/10th of the value of the CBOE S&P 500 BuyWrite Index 
(the ``BXM'' or the ``BXM Index''). BXM options will be cash-settled 
and will have European-style expiration. The text of the proposed rule 
change is available on the Exchange's Web site (http://www.cboe.org/
Legal), at the CBOE's Office of the Secretary, and at the Commission's 
Public Reference Room.

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, European-style options on an index that 
is equal to 1/10th of the value of the CBOE S&P 500 BuyWrite Index (the 
``BXM'' or the ``BXM Index'').\3\
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    \3\ The Exchange is not currently proposing to list and trade 
options that overlie the full-value BXM Index, but may do so in the 
future. In that event, the Exchange will seek Commission approval.
    CBOE Futures Exchange, LLC (``CFE'') currently lists and trades 
CBOE S&P 500 BuyWrite Index future contracts, which commenced 
trading on October 2, 2006.
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Index Design
    The BXM Index measures the total rate of return of a hypothetical 
``covered call'' strategy applied to the S&P 500 Composite Price Index 
(the ``S&P 500 Index''). This strategy, referred to as the ``BXM 
covered call strategy,'' consists of a hypothetical portfolio 
consisting of a ``long'' position indexed to the S&P 500 Index on which 
are deemed sold a succession of one-month, at-the-money call options on 
the S&P 500 Index listed on the Exchange. This hypothetical portfolio 
is referred to as the ``covered S&P 500 Index portfolio.''
    The BXM Index provides a benchmark measure of the total return 
performance of this hypothetical portfolio. Dividends paid on the 
component stocks underlying the S&P 500 Index and the dollar value of 
option premium deemed received from the sold call options are 
functionally ``re-invested'' in the covered S&P 500 Index portfolio. 
The BXM Index is based on the cumulative gross rate of return of the 
covered S&P 500 Index portfolio since the inception of the BXM Index on 
June 1, 1988, when it was set to an initial value of 100.00.
    The BXM covered call strategy requires that each S&P 500 Index call 
option in the hypothetical portfolio be held to maturity, generally the 
third Friday of each month. The call option is settled against the 
Special Opening Quotation (``SOQ'') of the S&P 500 Index used as the 
final settlement price of S&P 500 Index call options.\4\ The SOQ is a 
special calculation of the S&P 500 Index that is compiled from the 
opening prices of component stocks underlying the S&P 500 Index. The 
SOQ calculation is performed when all 500

[[Page 34812]]

stocks underlying the S&P 500 Index have opened for trading, and is 
usually determined before 10 a.m. Chicago time.\5\ The final settlement 
price of the call option at maturity is the greater of 0 and the 
difference between the SOQ minus the strike price of the expiring call 
option.
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    \4\ If the third Friday of the month is an exchange holiday, the 
call option will be settled against the SOQ on the previous business 
day and the new call option will be selected on that day as well.
    \5 \ If one or more stocks in the S&P 500 Index do not open on 
the day the SOQ is calculated, the final settlement price for SPX 
options is determined in accordance with the Rules and By-Laws of 
The Options Clearing Corporation (``OCC'').
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    Subsequent to the settlement of the expiring call option, a new at-
the-money call option expiring in the next month is then deemed 
written, or sold, a transaction commonly referred to as a ``roll.'' The 
strike price of the new call option is the S&P 500 Index call option 
listed on CBOE with the closest strike price above the last value of 
the S&P 500 Index reported before 10 a.m. Chicago time.\6\ For example, 
if the last S&P 500 Index value reported before 10 a.m. Chicago time is 
901.10 and the closest listed S&P 500 Index call option strike price 
above 901.10 is 905, then the 905 strike S&P 500 Index call option is 
selected as the new call option to be incorporated into the BXM Index. 
The long S&P 500 Index component and the short call option component 
are held in equal notional amounts, i.e., the short position in the 
call option is ``covered'' by the long S&P 500 Index component.
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    \6\ If the last value of the S&P 500 Index reported before 10:00 
a.m. Chicago time is exactly equal to a listed S&P 500 Index call 
option strike price, then the new call option is the S&P 500 Index 
call option with that exact at-the-money strike price.
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    Once the strike price of the new call option has been identified, 
the new call option is deemed sold at a price equal to the volume-
weighted average of the traded prices (``VWAP'') of the new call option 
during the half-hour period beginning at 10:30 a.m. Chicago time.\7\ 
CBOE calculates the VWAP in a two-step process: first, CBOE excludes 
trades in the new call option between 10:30 a.m. and 11 a.m. Chicago 
time that are identified as having been executed as part of a 
``spread,'' and then CBOE calculates the weighted average of all 
remaining transaction prices of the new call option between 10:30 a.m. 
and 11 a.m. Chicago time, with weights equal to the fraction of total 
non-spread volume transacted at each price during this period. The 
source of the transaction prices used in the calculation of the VWAP is 
CBOE's Market Data Retrieval (``MDR'') System.\8\ If no transactions 
occur in the new call option between 10:30 a.m. and 11 a.m. Chicago 
time, then the new call option is deemed sold at the last bid price 
reported before 11 a.m. Chicago time. The value of option premium 
deemed received from the new call option is functionally ``reinvested'' 
in the portfolio.
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    \7\ The timing of the roll and the price used to sell the new 
call has changed over time. The monthly roll originally occurred at 
the close of trading on the third Friday of the month, i.e. the 
strike price of the new call was determined at 3 p.m. Chicago time, 
and the new call was deemed to be sold at the last bid price before 
3 p.m. Chicago time. Since October 16, 1992, the call has been 
rolled at 11 a.m. Chicago time instead, and starting on June 18, 
2004, the new call began to be sold at the VWAP.
    \8\ Time and sales information from CBOE's MDR System is 
disseminated through the Options Price Reporting Authority 
(``OPRA'') and is publicly available through most price quote 
vendors.
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Index Calculation

    The BXM Index is calculated in real-time by CBOE every 15 seconds 
during each trading day, excluding roll dates (for the respective 
components of the covered S&P 500 Index portfolio). The BXM Index 
calculation is disseminated through OPRA and is publicly available 
through most price quote vendors.\9\ The BXM Index is a chained index, 
i.e., its value is equal to 100 times the cumulative product of gross 
daily rates of return of the covered S&P 500 Index portfolio since the 
inception date of the BXM Index. On any given day, the BXM Index is 
calculated as follows:

    \9\ Information regarding the BXM Index may be found on CBOE's 
Web site at the following Internet address: http://www.cboe.com/
micro/bxm.
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BXMt = BXM t-1 (1 - Rt)

where Rt is the daily rate of return of the covered S&P 
500 Index portfolio. This rate includes ordinary cash dividends paid 
on the stocks underlying the S&P 500 Index that trade ``ex-
dividend'' on that date.

    On each trading day excluding roll dates, the daily gross rate of 
return of the BXM equals the change in the value of the components of 
the covered S&P 500 Index portfolio, including the value of ordinary 
cash dividends payable on component stocks underlying the S&P 500 Index 
that trade ``ex-dividend'' on that date, as measured from the close in 
trading on the preceding trading day. The gross daily rate of return is 
equal to:

1 + Rt = (St + Divt - Ct)/(St-1 - Ct-1)

    In this equation, St is the closing value of the S&P 500 Index at 
date t, Divt represents the ordinary cash dividends payable 
on the component stocks underlying the S&P 500 Index that trade ``ex-
dividend'' at date t expressed in S&P 500 Index points, and 
Ct is the arithmetic average of the last bid and ask prices 
of the call option reported before 4 p.m. ET at date t. St-1 
is the closing value of the S&P 500 Index on the preceding trading day 
and Ct-1 is the average of the last bid and ask prices of 
the call option reported before 4 p.m. ET on the preceding trading day.
    On roll dates, the gross daily rate of return is compounded from 
three gross rates of return: the gross rate of return from the previous 
close to the time the SOQ is determined and the expiring call is 
settled; the gross rate of return from the SOQ to the initiation of the 
new call position; and the gross rate of return from the time the new 
call option is deemed sold to the close of trading on the roll date, 
expressed as follows:

1 + Rt = (1 + Ra) x (1 + Rb) x (1 + Rc)

where:
1 + Ra = (S\SOQ\ + Divt - CSettle)/(St-1 - Ct-1);
1 + Rb = (S\VWAV\)/(S\SOQ\), and
1 + Rc = (St - Ct)/(S\VWAV\ - CVWAP)

    In this equation, Ra is the rate of return of the 
covered S&P 500 Index portfolio from the previous close of trading 
through the settlement of the expiring call option. S\SOQ\ is the 
Special Opening Quotation used in determining the settlement price of 
the expiring call option. As previously defined, Divt 
represents dividends on S&P 500 Index component stocks determined in 
the same manner as on non-roll dates, and CSettle is the 
final settlement price of the expiring call option. St-1 and 
Ct-1 are determined in the same manner as on non-roll dates.
    Rb is the rate of return of the un-covered S&P 500 Index portfolio 
from the settlement of the expiring option to the time the new call 
option is deemed sold. S\VWAV\ is the volume-weighted average value of 
the S&P Index based on the same time and weights used to calculate the 
VWAP in the new call option.
    Rc is the rate of return of the covered S&P 500 Index 
portfolio from the time the new call option is deemed sold to the close 
of trading on the roll date. As defined above, S\VWAV\ is the volume-
weighted average value of the S&P Index based on the same time and 
weights used to calculate the VWAP in the new call option. 
Cvwap is the volume-weighted average trading price of the 
new call option between 10:30 a.m. and 11 a.m. Chicago time, and 
Ct refers to the average bid/ask quote of the new call 
option reported before 3 p.m. Chicago time on the roll date.
Options Trading
    BXM options will be quoted in terms of the underlying BXM Index 
(\1/10\th value). Both options prices and cash index levels will be 
stated in decimal format and one point will equal $100. The minimum 
tick size for series trading below 3.00 will be 0.05 point ($5.00) and 
the minimum tick for series trading at and above 3.00 will be 0.10 
point

[[Page 34813]]

($10.00). In accordance with Rule 24.9(a)(2), the Exchange will 
typically list three near-term expiration months and three additional 
expiration months from the March quarterly cycle (March, June, 
September and December).
    The minimum strike price interval for BXM options will be 0.01 
point ($1.00). CBOE believes that because the BXM Index is less 
volatile than other broad-based indexes (e.g., S&P 500 Index), $1 
strike price intervals in BXM option series will provide investors with 
greater flexibility by allowing them to establish positions that are 
better tailored to meet their investment objectives. This is consistent 
with existing Exchange rules and practices that allow the Exchange to 
list series at $1 (or lower) strike price intervals in similar options 
products. For example, Rule 24.9.01(b) allows the Exchange to list 
series on options based on one-one hundredth (\1/100\th) of the value 
of the Dow Jones Industrial Average Index at no less than $0.50 
intervals.\10\ Similarly, Rule 24.9.11 allows the Exchange to list 
strike price intervals at no less than $1 for the reduced-value version 
of the Standard & Poor's S&P 500 Stock Index option (``Mini-SPX 
option''), which is based on \1/10\th the value of the S&P 500 
Index.\11\
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    \10\ See Securities Exchange Act Release No. 39011 (September 3, 
1997), 62 FR 47840 (September 11, 1997) (SR-CBOE-1997-26).
    \11\ See Securities Exchange Act Release Nos. 52625 (October 18, 
2005), 70 FR 61479 (October 24, 2005) (SR-CBOE-2005-81) and 57049 
(December 27, 2007), 73 FR 528 (January 3, 2008) (SR-CBOE-2007-125).
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    To address this, the Exchange is proposing to list series at $1 or 
greater strike price intervals on BXM options that overlie an index 
that is equal to \1/10\th the value of the BXM Index. Initially, the 
Exchange will list at least two strike prices above and two strike 
prices below the current value of the BXM Index (\1/10\th value) at or 
about the time a series is opened for trading on the Exchange. As part 
of this initial listing, the Exchange will list strike prices that are 
within 5 points from the closing value of the BXM Index (\1/10\th 
value) on the preceding day.
    As for additional series, the Exchange will be permitted to add 
additional series when the Exchange deems it necessary to maintain an 
orderly market, to meet customer demand, or when the underlying BXM 
Index (\1/10\th value) 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 
30 percent above or below the closing value of the BXM Index (\1/10\th 
value). The Exchange will also be permitted to open additional strike 
prices that are more than 30 percent above or below the current BXM 
Index (\1/10\th value) provided that customer interest for such series 
is demonstrated and 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 may list up to 60 additional 
series per expiration month for each series in BXM options. In 
addition, the Exchange proposes that it shall not list LEAPS on BXM 
options at intervals less than $5.
    The Exchange is also proposing to set forth a delisting policy with 
respect to BXM options. Specifically, the Exchange would, on a monthly 
basis, review series that are outside a range of five strikes above and 
five strikes below the current value of the BXM Index (\1/10\th value) 
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 BXM options in 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 BXM option series would be determined in accordance 
with proposed new Interpretation and Policy .01(f) to Rule 24.9.
Exercise and Settlement
    The proposed options will expire on the Saturday following the 
third Friday of the expiration month. Trading in the expiring contract 
month will 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 will be Wednesday and the SOQ of the BXM Index 
will be calculated on Thursday.
    Exercise will result in delivery of cash on the business day 
following expiration. BXM options will be A.M.-settled. As described 
above, the exercise settlement value of a BXM option shall be a SOQ of 
the BXM Index (\1/10\th value). The exercise-settlement amount is equal 
to the difference between the exercise-settlement value and the 
exercise price of the option, multiplied by $100.
    If the exercise settlement value is not available or the normal 
settlement procedure cannot be utilized due to a trading disruption or 
other unusual circumstance, the settlement value will be determined in 
accordance with the rules and bylaws of the OCC.
Surveillance
    The Exchange will use the same surveillance procedures currently 
utilized for each of the Exchange's other index options to monitor 
trading in BXM options. The Exchange further represents that these 
surveillance procedures shall be adequate to monitor trading in options 
on these option products. For surveillance purposes, the Exchange will 
have complete access to information regarding trading activity in the 
pertinent underlying securities (i.e., S&P 500 Index component 
securities).
Position and Exercise Limits; Reporting of Positions
    The Exchange is not proposing to establish any position and 
exercise limits for BXM options. Because the BXM Index (\1/10\th value) 
is calculated using values of the S&P 500 Index, the Exchange believes 
that the position and exercise limits for this new product should be 
the same as those for broad-based index options, e.g., SPX, for which 
there are no position limits.
    BXM options will be subject to the same reporting and other 
requirements triggered for other options dealt in on the Exchange.\12\
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    \12\ See e.g., Rule 4.13, Reports Related to Position Limits. 
For purposes of calculating reportable positions, the Exchange has 
employed a contract factor of 10 for determining reporting and other 
requirements for BXM options. For example, the reporting 
requirements of Rule 24.4.03 for BXM options will be triggered when 
an end of day aggregate position exceeds 1 million contracts.
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Exchange Rules Applicable
    Except as modified herein, the rules in Chapters I through XIX, 
XXIV, XXIVA, and XXIVB will equally apply to BXM options.
    BXM options will 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

[[Page 34814]]

underlying indicator value. Additional margin may be required pursuant 
to Exchange Rule 12.10.
    The Exchange hereby designates BXM options as 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 OPRA have the necessary systems capacity to handle the 
additional traffic associated with the listing of new series that would 
result from the introduction of BXM options.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \13\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act \14\ in particular, in that it will 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 will 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 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

    No written comments were solicited or received with respect to the 
proposed rule change.

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 CBOE 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-2008-26 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-2008-26. 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 offices 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-2008-26 and should be 
submitted on or before July 9, 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. E8-13703 Filed 6-17-08; 8:45 am]

BILLING CODE 8010-01-P
