
[Federal Register: August 12, 2010 (Volume 75, Number 155)]
[Notices]               
[Page 49010-49013]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12au10-98]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62658; File No. SR-CBOE-2009-075]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Proposed Rule Change, as Modified by Amendment 
Nos. 1 and 2, To Establish a Pilot Program to List P.M.-Settled End of 
Week and End of Month Expirations for Options on Broad-Based Indexes

 August 5, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 14, 2009, the Chicago Board Options Exchange, 
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and 
Exchange Commission (the ``Commission'') the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
the Exchange. On May 3, 2010, the Exchange filed Amendment 1 to the 
proposed rule change, and on July 30, 2010, the Exchange filed 
Amendment 2 to the proposed rule change.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as modified by Amendment Nos. 1 and 2, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment 2 replaces Amendment 1 and the original filing in 
their entireties.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE requests approval to establish a pilot program that would 
permit P.M.-settled options on broad-based indexes that expire on: (a) 
Any Friday of the month, other than the third Friday-of-the-month 
(``End of Week Expirations''), and (b) the last trading day of the 
month (``End of Month Expirations''). The text of the rule proposal is 
available on the Exchange's Web site (http://www.cboe.org/legal), at 
the Exchange'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 self-regulatory organization 
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 those 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 parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Amendment 2 replaces Amendment 1 and the original filing in their 
entireties. The purpose of Amendment 2 is to broaden the definition of 
End of Week Expirations to include any Friday of the month, other than 
the third Friday-of-the-month.
    The purpose of this filing is to establish a pilot program that 
would permit P.M.-settled options on broad-based indexes to expire on 
(a) any Friday of the month, other than the third Friday-of-the-month 
(``End of Week Expirations'' or ``EOWs''), and (b) the last trading day 
of the month (``End

[[Page 49011]]

of Month Expirations'' or ``EOMs'').\4\ For example, if EOWs and EOMs 
were currently listed, the expiration dates for October 2010 would be: 
October 1 (EOW), October 8 (EOW), October 15 (standard), October 22 
(EOW) and October 29 (EOM).\5\ Under the End of Week/End of Month 
Expirations Pilot Program (``Program''), EOWs and EOMs will be 
permitted on any broad-based index that is eligible for regular options 
trading. EOWs and EOMs will be cash-settled and have European-style 
exercise.
---------------------------------------------------------------------------

    \4\ If the last trading day of the month is a Friday, the 
Exchange will list an End of Month expiration series and not an End 
of Week expiration.
    \5\ See Rule 24.9(a)(2) for specific rule governing the 
expiration months that may be listed for index options. CBOE does 
not intend to list EOWs or EOMs that would expire on Exchange 
holidays.
---------------------------------------------------------------------------

    The proposal will become effective on a pilot basis for a period 
fourteen months to commence on the next full month after approval is 
received to establish the Program. If the Exchange were to propose an 
extension of the Program or should the Exchange to propose to make the 
Program permanent, then the Exchange would submit a filing proposing 
such amendments to the Program. Any positions established under the 
Program would not be impacted by the expiration of the Pilot. For 
example, if the Exchange lists an EOW or EOM expiration that expires 
after the Program expires (and is not extended) then those positions 
would continue to exist. However, any further trading in those series 
would be restricted to transactions where at least one side of the 
trade is a closing transaction.\6\
---------------------------------------------------------------------------

    \6\ The Exchange intends to address this point in a circular to 
members should the Exchange receive approval to establish the 
Program.
---------------------------------------------------------------------------

    To implement the Pilot as described above, the Exchange is 
proposing to add new subparagraph (e) to Rule 24.9 to expressly provide 
the Exchange with the ability to list P.M.-settled EOWs and EOMs on 
broad-based indexes eligible for options trading. The amendment to Rule 
24.9 will also set forth that the duration of the Program will be 
effective for a period of fourteen months from the next full month from 
approval.
    EOMs and EOWs will be subject to the same rules that currently 
govern the trading of traditional index options, including sales 
practice rules, margin requirements, and floor trading procedures. 
Contract terms for EOWs and EOMs will be similar to regular index 
options, with one general exception: the exercise settlement value will 
be based on the index value derived from the closing prices of 
component stocks.
    Since EOWs and EOMs will be a new type of series and not a new 
class, the Exchange proposes that EOWs and EOMs on the same broad-based 
index (e.g., of the same class) shall be aggregated for position limits 
(if any) and any applicable reporting and other requirements.\7\ The 
Exchange is proposing to add ``EOWs'' and ``EOMs'' to Rule 24.4(b) to 
reflect the aggregation requirement. This proposed aggregation is 
consistent the aggregation requirements for other types of option 
series (e.g., QOS, QIXs) that are listed on the Exchange and which do 
not expire on the customary ``third Saturday.\8\''
---------------------------------------------------------------------------

    \7\ See e.g., Rule 4.13, Reports Related to Position Limits and 
Interpretation and Policy .03 to Rule 24.4 which sets forth the 
reporting requirements for certain broad-based indexes that do not 
have position limits.
    \8\ As will be discussed in detail below, the Exchange trades 
structured quarterly and short term options. FLEX Options do not 
become fungible with subsequently introduced Non-FLEX structured 
quarterly and short term options. See Securities Exchange Act 
Release No. 59675 (April 1, 2009), 74 FR 15794 (April 7, 2009) (SR-
OCC-2009-05). Because of the similarities between EOW and EOM 
expirations and existing structured quarterly and short term 
options, FLEX Options will similarly not become fungible with EOW 
and EOM expirations listed for trading.
---------------------------------------------------------------------------

    Annual Program Report:
    As part of the Program, the Exchange will submit a Program report 
to the Securities and Exchange Commission (``Commission'') at least two 
months prior to the expiration date of the Program (the ``annual 
report''). As described below, the annual report will contain an 
analysis of volume, open interest and trading patterns. In addition, 
for series that exceed certain minimum open interest parameters, the 
annual report would provide analysis of index price volatility and, if 
needed, share trading activity. The annual report will be provided to 
the Commission on a confidential basis.
    Analysis of Volume and Open Interest:
    For EOW and EOM series, the annual report will contain the 
following volume and open interest data for each broad-based index 
overlying EOW and EOM options:
    (1) Monthly volume aggregated for all EOW and EOM series,
    (2) Volume in EOW and EOM series aggregated by expiration date,
    (3) Month-end open interest aggregated for all EOW and EOM series,
    (4) Month-end open interest for EOM series aggregated by expiration 
date and week-ending open interest for EOW series aggregated by 
expiration date,
    (5) Ratio of monthly aggregate volume in EOW and EOM series to 
total monthly class volume, and
    (6) Ratio of month-end open interest in EOM series to total month-
end class open interest and ratio of week-ending open interest in EOW 
series to total week-ending open interest.
    In addition, the annual report will contain the information noted 
above for standard Expiration Friday, AM-settled series, if applicable 
\9\, for the period covered in the pilot report as well as for the six-
month period prior to the initiation of the pilot.
---------------------------------------------------------------------------

    \9\ Standard OEX & XEO option series are P.M.-settled.
---------------------------------------------------------------------------

    Upon request by the SEC, CBOE will provide a data file containing: 
(1) EOW and EOM option volume data aggregated by series, and (2) EOW 
week-ending open interest for expiring series and EOM month-end open 
interest for expiring series.
    Monthly Analysis of EOW & EOM Trading Patterns:
    In the annual report, CBOE also proposes to identify EOW and EOM 
trading patterns by undertaking a time series analysis of open interest 
in EOW and EOM series aggregated by expiration date compared to open 
interest in near-term standard Expiration Friday A.M.-settled series in 
order to determine whether users are shifting positions from standard 
series to EOW and EOM series. Declining open interest in standard 
series accompanied by rising open interest in EOW and EOM series would 
suggest that users are shifting positions.
    Provisional Analysis of Index Price Volatility and Share Trading 
Activity:
    For each EOW and EOM Expiration that has open interest that exceeds 
certain minimum thresholds, the annual report will contain the 
following analysis related to index price changes and, if needed, 
underlying share trading volume at the close on expiration dates:
    (1) A comparison of index price changes at the close of trading on 
a given expiration date with comparable price changes from a control 
sample. The data will include a calculation of percentage price changes 
for various time intervals and compare that information to the 
respective control sample. Raw percentage price change data as well as 
percentage price change data normalized for prevailing market 
volatility, as measured by the CBOE Volatility Index (``VIX''), will be 
provided; and
    (2) if needed, a calculation of share volume for a sample set of 
the component securities representing an upper limit on share trading 
that could be attributable to expiring in-the-money EOW and EOM 
expirations. The data, if needed, will include a comparison of the 
calculated share volume for securities in the sample set to the

[[Page 49012]]

average daily trading volumes of those securities over a sample period.
    The minimum open interest parameters, control sample, time 
intervals, method for selecting the component securities, and sample 
periods will be determined by the Exchange and the Commission.
    Discussion:
    In support of this proposal, the Exchange states that it trades 
other types of series and FLEX Options \10\ that expire on different 
days than regular options and in some cases have P.M.-settlement. For 
example, since 1993 the Exchange has traded Quarterly Index Expirations 
(``QIXs'') that are cash-settled options on certain broad-based indexes 
which expire on the first business day of the month following the end 
of a calendar quarter and are P.M.-settled.\11\ The Exchange also 
trades Quarterly Option Series (``QOS'') that overlie exchange traded 
funds (``ETFs'') or indexes which expire at the close of business on 
the last business day of a calendar quarter and are P.M.-settled.\12\ 
The Exchange has experience with these special dated options and has 
not observed any market disruptions resulting from the P.M.-settlement 
feature of these options. The Exchange does not believe that any market 
disruptions will be encountered with the introduction of P.M.-
settlement EOM expirations, which will effectively permit the Exchange 
to fill in the remaining eight calendar months with series that expire 
on the last trading day of the month.
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 61439 (January 28, 
2010), 75 FR 5831 (February 4, 2010) (SR-CBOE-2009-087) (order 
approving rule change to establish a pilot program to modify FLEX 
option exercise settlement values and minimum value sizes).
    \11\ See Rule 24.9(c).
    \12\ See Rules 5.5(e) and 24.9(a)(2)(B).
---------------------------------------------------------------------------

    The Exchange trades Short Term Option Series that may overlie any 
security approved for listing and trading on the Exchange and which are 
opened for trading on any Friday that is a business day and that expire 
on the next Friday that is a business day.\13\ These existing Short 
Term Option Series, however, are A.M.-settled and only have a contract 
duration of a single week. The Exchange seeks to introduce P.M.-settled 
EOW expirations to provide market participants with a tool to hedge 
special events and to reduce the premium cost of buying protection. 
Currently, the Exchange believes that market participants may be paying 
for more protection than needed if they are seeking to hedge weekend or 
special event risk that occurs. The Exchange believes that an EOW 
expiration would allow market participants to purchase an option based 
on their needed timing and allow them to tailor their investment or 
hedging needs more effectively. In addition, because P.M.-settlement 
permits trading throughout the day on the day the contract expires, the 
Exchange believes this feature will permit market participants to more 
effectively manage overnight risk and trade out of their positions up 
until the time the contract settles.
---------------------------------------------------------------------------

    \13\ See Rules 5.5(d) and 24.9(a)(2)(A).
---------------------------------------------------------------------------

    Finally, the Exchange considers this proposal to be a competitive 
rule filing. Specifically, a futures exchange has the ability to list 
options on broad-based index futures that expire on the first and 
second Fridays of the month. In addition, the same futures exchange 
lists end-of-month options on broad-based index futures that expire on 
the last trading day of the month.\14\ As a result, that futures 
exchange is able to provide four expirations for each month for certain 
broad-based indexes, on which CBOE similarly trades security 
options.\15\ The Exchange believes that the introduction of EOW and EOM 
expirations will enable the Exchange to compete more effectively with 
the futures markets.
---------------------------------------------------------------------------

    \14\ The options have European-style exercise and at expiration 
settle into a futures contract.
    \15\ Those indexes are the S&P 500 Index (``SPX'') and the Mini-
SPX Index.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act\16\ and the rules and regulations thereunder and, in 
particular, the requirements of Section 6(b) of the Act.\17\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5)\18\ requirements that the rules of 
an exchange be designed to promote just and equitable principles of 
trade, to prevent fraudulent and manipulative acts, to remove 
impediments to and to perfect the mechanism for a free and open market 
and a national market system, and, in general, to protect investors and 
the public interest interest [sic], by expanding the ability of 
investors to hedge risks against market movements stemming from 
economic releases or market events that occur throughout the month. 
Accordingly, the Exchange believes that EOWs and EOMs should create 
greater trading and hedging opportunities and flexibility, and provide 
customers with the ability to more closely tailor their investment 
objectives.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(1).
    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 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 neither solicited nor received comments on the 
proposal.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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 or disapprove the 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-2009-075 on the subject line.

Paper Comments

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

All submissions should refer to File No. SR-CBOE-2009-075. 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/

[[Page 49013]]

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 Web site 
viewing and printing 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 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 No. SR-CBOE-2009-075 and 
should be submitted on or before September 2, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-19853 Filed 8-11-10; 8:45 am]
BILLING CODE 8010-01-P

