
[Federal Register: May 26, 2010 (Volume 75, Number 101)]
[Notices]               
[Page 29597-29599]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26my10-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62139; File No. SR-CBOE-2010-018]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving Proposed Rule Change, as Modified by 
Amendment No. 1 Thereto, To List and Trade CBOE Gold ETF Volatility 
Index Options

May 19, 2010.

I. Introduction

    On March 18, 2010, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), 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 
CBOE Gold ETF Volatility Index (``GVZ''). On March 22, 2010, CBOE filed 
Amendment No. 1 to the proposed rule change.\3\ The proposed rule 
change was published for comment in the Federal Register on April 14, 
2010.\4\ The Commission received no comment letters on the proposal. 
This order approves the proposed rule change, as modified by Amendment 
No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, CBOE made technical corrections to the 
rule text.
    \4\ See Securities Exchange Act Release No. 61859 (April 7, 
2010), 75 FR 19439.
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II. Description

    CBOE proposes to amend certain of its rules to allow the listing 
and trading of cash-settled, European-style options on GVZ.

Index Design and Calculation

    The calculation of GVZ is based on the VIX methodology applied to 
options on the SPDR Gold Trust (``GLD''). GVZ is an up-to-the-minute 
market estimate of the expected volatility of GLD calculated by using 
real-time bid/ask quotes of CBOE listed GLD options. GVZ uses nearby 
and second nearby options with at least 8 days left to expiration and 
then weights them to yield a constant, 30-day measure of the expected 
(implied) volatility.
    For each contract month, CBOE will determine the at-the-money 
strike price. The Exchange will then select the at-the-money and out-
of-the money series with non-zero bid prices and determine the midpoint 
of the bid-ask quote for each of these series. The midpoint quote of 
each series is then weighted so that the further away that series is 
from the at-the-money strike, the less weight that is accorded to the 
quote. To compute the index level, CBOE will calculate a volatility 
measure for the nearby options and then for the second nearby options, 
using the weighted mid-point of the prevailing bid-ask quotes for all 
included option series with the same expiration date. These volatility 
measures are then interpolated to arrive at a single, constant 30-day 
measure of volatility.
    CBOE will compute values for GVZ underlying option series on a 
real-time basis throughout each trading day, from 8:30 a.m. until 3 
p.m. (CT). GVZ levels will be calculated by CBOE and disseminated at 
15-second intervals to major market data vendors.

[[Page 29598]]

Options Trading

    Options on GVZ (``GVZ Options'') will be quoted in index points and 
fractions, and one point will equal $100. The minimum tick size for 
series trading below $3 will be 0.05 ($5.00) and above $3 will be 0.10 
($10.00).
    The Exchange is proposing to permit 1 point or greater strike price 
intervals on GVZ Options. Initially, the Exchange will list in-, at- 
and out-of-the-money strike prices and may open for trading up to five 
series above and five series below the price of the calculated forward 
value of GVZ, and LEAPS series. As for additional series, either in 
response to customer demand or as the calculated forward value of GVZ 
moves from the initial exercise prices of option series that have been 
open for trading, the Exchange may open for trading up to five series 
above and five series below the calculated forward value of GVZ, and 
LEAPS series. The Exchange will not open for trading series with 1 
point strike price intervals within 0.50 point of an existing 2.5 point 
strike price with the same expiration month. The Exchange will not list 
LEAPS on GVZ Options at strike price intervals less than 1 point.

Exercise and Settlement

    The proposed options will typically expire on the Wednesday that is 
thirty days prior to the third Friday of the calendar month immediately 
following the expiration month (the expiration date of the options used 
in the calculation of the index). If the third Friday of the calendar 
month immediately following the expiring month is a CBOE holiday, the 
expiration date will be thirty days prior to the CBOE business day 
immediately preceding that Friday. Trading in the expiring contract 
month will normally cease at 3 p.m. (CT) on the business day 
immediately preceding the expiration date. Exercise will result in 
delivery of cash on the business day following expiration. GVZ Options 
will be A.M.-settled. The exercise settlement value will be determined 
by a Special Opening Quotation (``SOQ'') of GVZ calculated from the 
sequence of opening prices of a single strip of options expiring 30 
days after the settlement date. The opening price for any series in 
which there is no trade shall be the average of that options' bid price 
and ask price as determined at the opening of trading.
    The exercise-settlement amount will be equal to the difference 
between the exercise-settlement value and the exercise price of the 
option, multiplied by $100. When the last trading day is moved because 
of a CBOE holiday, the last trading day for expiring options will be 
the day immediately preceding the last regularly-scheduled trading day.

Position and Exercise Limits

    For regular options trading, the Exchange is proposing to establish 
position limits for GVZ Options at 50,000 contracts on either side of 
the market and no more than 30,000 contracts in the nearest expiration 
month. Positions in Short Term Option Series, Quarterly Options Series, 
and Delayed Start Option Series would be aggregated with positions in 
options contracts in the same GVZ class. Exercise limits would be the 
equivalent to the proposed position limits.\5\ GVZ Options would be 
subject to the same reporting requirements triggered for other options 
dealt in on the Exchange.\6\
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    \5\ See Rule 24.5, Exercise Limits, which provides that exercise 
limits are equivalent to position limits.
    \6\ See Rule 4.13, Reports Related to Position Limits.
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    For FLEX Options trading, the Exchange proposes that the position 
limits for FLEX GVZ Options will be equal to the position limits for 
Non-FLEX GVZ Options established pursuant to Rule 24.4. Similarly, the 
Exchange is proposing that the exercise limits for FLEX GVZ Options 
will be equivalent to the position limits established pursuant to Rule 
24.4. The proposed position and exercise limits for FLEX GVZ Options 
are consistent with the treatment of position and exercise limits for 
other FLEX Index Options. The Exchange is also proposing to provide 
that as long as the options positions remain open, positions in FLEX 
GVZ Options that expire on the same day as Non-FLEX GVZ Options, as 
determined pursuant to Rule 24.9(a)(5), shall be aggregated with 
positions in Non-FLEX GVZ Options and shall be subject to the position 
limits set forth in Rules 4.11, 24.4, 24.4A and 24.4B, and the exercise 
limits set forth in Rules 4.12 and 24.5.

Exchange Rules Applicable

    Except as modified herein, the rules in Chapters I through XIX, 
XXIV, XXIVA, and XXIVB will equally apply to GVZ Options.
    The Exchange is proposing that the margin requirements for GVZ 
Options be set at the same levels that apply to equity options under 
Exchange Rule 12.3. Margin of up to 100% of the current market value of 
the option, plus 20% of the underlying volatility index value must be 
deposited and maintained. Additional margin may be required pursuant to 
Exchange Rule 12.10.
    The Exchange proposes to designate GVZ Options as eligible for 
trading as flexible exchange options (``GVZ FLEX Options'') as provided 
for in Chapters XXIVA (Flexible Exchange Options) and XXIVB (FLEX 
Hybrid Trading System). GVZ FLEX Options will only expire on business 
days that non-FLEX options on Volatility Indexes expire. As is 
described earlier, the Exchange is proposing to amend Rule 24.9(a)(5) 
to provide that the exercise settlement value of GVZ Options for all 
purposes under CBOE Rules will be calculated as the Wednesday that is 
thirty days prior to the third Friday of the calendar month immediately 
following the month in which GVZ Options expire.

Capacity

    CBOE 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 GVZ Options.

Surveillance

    The Exchange proposes to use the same surveillance procedures 
currently utilized for each of the Exchange's other index options to 
monitor trading in GVZ Options. The Exchange represents that these 
surveillance procedures shall be adequate to monitor trading in options 
on these volatility indexes. For surveillance purposes, the Exchange 
states that it will have complete access to information regarding 
trading activity in the pertinent underlying securities.

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.\7\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\8\ which requires, among other things, that 
the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, 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. In 
accordance with the Memorandum of Understanding entered into between 
the Commodity Futures

[[Page 29599]]

Trading Commission (``CFTC'') and the Commission on March 11, 2008, and 
in particular the addendum thereto concerning Principles Governing the 
Review of Novel Derivative Products, the Commission believes that novel 
derivative products that implicate areas of overlapping regulatory 
concern should be permitted to trade in either or both a CFTC- or 
Commission-regulated environment, in a manner consistent with laws and 
regulations (including the appropriate use of all available exemptive 
and interpretive authority).
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    \7\ 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).
    \8\ 15 U.S.C. 78f(b)(5).
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    As a national securities exchange, the CBOE is required under 
Section 6(b)(1) of the Act\9\ to enforce compliance by its members, and 
persons associated with its members, with the provisions of the Act, 
Commission rules and regulations thereunder, and its own rules. In 
addition, brokers that trade GVZ Options will also be subject to best 
execution obligations and FINRA rules.\10\ Applicable exchange rules 
also require that customers receive appropriate disclosure before 
trading GVZ Options.\11\ Further, brokers opening accounts and 
recommending options transactions must comply with relevant customer 
suitability standards.\12\
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    \9\ 15 U.S.C. 78f(b)(1).
    \10\ See NASD Rule 2320.
    \11\ See CBOE Rule 9.15.
    \12\ See FINRA Rule 2360(b) and CBOE Rules 9.7 and 9.9.
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    GVZ Options will trade as options under the trading rules of the 
CBOE.\13\ The Commission believes that the listing rules proposed by 
CBOE for GVZ Options are consistent with the Act. One point or greater 
strike price intervals for GVZ Options should provide investors with 
greater flexibility in the trading of GVZ Options and further the 
public interest by allowing investors to establish positions that are 
better tailored to meet their investment objectives.
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    \13\ See, also, discussion of listing and trading rules for GLD 
options. (Securities Exchange Act Release No. 57894 (May 30, 2008), 
73 FR 32061 (June 5, 2008) (SR-Amex-2008-15; SR-CBOE-2005-11; SR-
ISE-2008-12; SR-NYSEArca-2008-52; and SR-Phlx-2008-17) (order 
approving the listing and trading of options on GLD).
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    The Commission notes that CBOE will compute values for GVZ 
underlying option series on a real-time basis throughout each trading 
day, and that GVZ levels will be calculated by CBOE and disseminated at 
15-second intervals to major market data vendors.
    The Commission believes that the Exchange's proposed position 
limits and exercise limits for GVZ Options are appropriate and 
consistent with the Act. The Commission notes that GLD options 
comprising the underlying components of GVZ rank among the most 
actively traded options classes. Specifically, the Exchange has 
represented that in 2009, GLD ranked as the thirteenth most actively 
traded option class industry-wide, averaging 136,000 contracts per day, 
and the twelfth most actively traded options class on CBOE, averaging 
over 50,000 contracts per day. In addition, the Commission notes that 
the position and exercise limits for FLEX GVZ Options will be equal to 
the position and exercise limits for non-FLEX GVZ Options. Further, 
positions in FLEX GVZ Options that expire on the same day as non-FLEX 
GVZ Options will be aggregated with positions in Non-FLEX GVZ Options.
    The Commission also notes that the margin requirements for equity 
options will also apply to options on GVZ. The Commission finds this to 
be reasonable and consistent with the Act.
    The Commission also believes that the Exchange's proposal to allow 
GVZ 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 give investors and 
other market participants the ability to individually tailor, within 
specified limits, certain terms of those options.\14\ The current 
proposal incorporates GVZ Options that trade as FLEX Options into these 
existing rules and regulatory framework.
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    \14\ 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 has an adequate 
surveillance program to monitor trading of GVZ Options and intends to 
apply its existing surveillance program to support the trading of these 
options. Finally, 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.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-CBOE-2010-018), as modified 
by Amendment No. 1, be, and hereby is, approved.
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-12553 Filed 5-25-10; 8:45 am]
BILLING CODE 8010-01-P

