
[Federal Register: July 29, 2008 (Volume 73, Number 146)]
[Notices]               
[Page 43963-43966]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29jy08-90]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58207; File No. SR-CBOE-2008-26]

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

July 22, 2008.

I. Introduction

    On June 2, 2008, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Pursuant to Section 19(b)(1) 
of the Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade options on the 
BXM Index (1/10th value). The proposed rule change was published for 
comment in the Federal Register on June 18, 2008.\3\ The Commission 
received no comments regarding the proposal. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 57946 (June 10, 
2008), 73 FR 34811 (``Notice'').
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II. Description of the Proposal

    CBOE proposes 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 (``BXM'' or ``BXM Index'').\4\
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    \4\ The Exchange is not currently proposing to list and trade 
options that overlie the full-value BXM Index.
    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

[[Page 43964]]

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.\5\ 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 that is 
performed when all 500 stocks underlying the S&P 500 Index have opened 
for trading, and is usually determined before 10 a.m. Chicago time.\6\ 
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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    \5\ 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.
    \6\ 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.\7\ 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. 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\ If the last value of the S&P 500 Index reported before 10 
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.
    \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.\10\
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    \9\ Information regarding the BXM Index may be found on CBOE's 
Web site at the following Internet address: www.cboe.com/micro/bxm.
    \10\ See Notice, supra note 3 for further discussion of the BXM 
Index calculation.
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Options Trading

    BXM options will be quoted in terms of the underlying BXM Index (1/
10th 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 
($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). The Exchange will initially list at least two strike 
prices above and two strike prices below the current value of the BXM 
Index (1/10th 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 (1/10th value) on the preceding day.
    The Exchange proposes 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 (1/10th 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 (1/10th 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 (1/10th 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 also proposes to set forth a delisting policy with 
respect to BXM options. Specifically, the Exchange will, 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 (1/10th 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 will be granted.\11\
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    \11\ 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.
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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

[[Page 43965]]

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 (1/10th 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 states that it 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 (1/10th 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 underlying indicator value. 
Additional margin may be required pursuant to Exchange Rule 12.10.
    The Exchange proposes to designate 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 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.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\13\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\14\ which requires, among other things, 
that the rules of a national securities exchange be designed to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest.
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    \13\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the BXM Index (1/10th value) options 
should provide investors with a potentially useful investment choice. 
The Commission believes that permitting $1.00 strike price intervals 
for BXM option series will provide investors with added flexibility in 
the trading of BXM options and further the public interest by allowing 
investors to establish positions that are better tailored to meet their 
investment objectives. Further, the Commission notes that it has 
previously approved Exchange rules that permit the Exchange to list 
series at $1.00 or lower strike price intervals in similar option 
products.\15\ The Commission also believes that the proposal strikes a 
reasonable balance between the Exchange's desire to accommodate market 
participants by offering a wider array of investment opportunities and 
the need to avoid unnecessary proliferation of options series and the 
corresponding increase in quotes. The Commission notes that the 
delisting policy proposed by the Exchange is designed to mitigate the 
number of options series with no open interest, which would reduce 
quote traffic accordingly.
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    \15\ Rule 24.9.01(b) permits the CBOE to list series on options 
based on one-one hundredth (1/100th) of the value of the Dow Jones 
Industrial Average Index at no less than $0.50 intervals. See 
Securities Exchange Act Release No. 39011 (September 3, 1997), 62 FR 
47840 (September 11, 1997) (SR-CBOE-1997-26). Rule 24.9.11 allows 
the Exchange to list strike price intervals at no less than $1 for 
the Mini-SPX option, which is based on 1/10th the value of the S&P 
500 Index. 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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    The Commission notes that the BXM Index is calculated in real time 
by CBOE every 15 seconds during each trading day. The BXM Index 
calculation is disseminated through OPRA, and is publicly available 
through most price quote vendors.
    Because the BXM Index is calculated using values of the S&P 500 
Index, the Commission believes it is appropriate that the position and 
exercise limits for BXM options be the same as for other broad-based 
index options, which similarly have no position and exercise limits. 
Further, the Commission notes that the margin requirements for broad-
based index options will also apply to BXM options.
    The Commission also believes that the Exchange's proposal to allow 
BXM options to be eligible for trading as FLEX options is consistent 
with the Act. The Commission previously approved rules relating to the 
listing and trading of FLEX Options on CBOE, which gives investors and 
other market participants the ability to individually tailor, within 
specified limits, certain terms of those options.\16\ The current 
proposal incorporates BXM (1/10th value) options that trade as FLEX 
Options into these existing rules and regulatory framework.
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    \16\ See Securities Exchange Act Release No. 31910 (February 23, 
1993), 58 FR 12056 (March 2, 1993).
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    The Commission notes that CBOE represented that it had an adequate 
surveillance program to monitor trading of options on the BXM Index (1/
10th Value) and intends to apply its existing

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surveillance program to support the trading of these options. In 
approving the proposed rule change, the Commission has also relied upon 
the Exchange's representation that it has the necessary systems 
capacity to support new options series that will result from this 
proposal. The Commission expects the Exchange to continue to monitor 
for option series with little or no open interest and trading activity 
and, consistent with the delisting policy approved today as part of 
this proposed rule change, to act promptly to delist such options.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-CBOE-2008-26) is approved.
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    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Florence E. Harmon,
Acting Secretary.
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    \18\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E8-17310 Filed 7-28-08; 8:45 am]

BILLING CODE 8010-01-P
