
[Federal Register: September 10, 2010 (Volume 75, Number 175)]
[Notices]               
[Page 55383-55385]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10se10-102]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62847; File No. SR-CBOE-2010-077]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Proposed Rule Change, as Modified by Amendment 
No. 1, To List Series With Up to 12 Expiration Months for Broad-Based 
Security Index Options Upon Which the Exchange Calculates a Volatility 
Index

September 3, 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 August 24, 2010, the Chicago Board Options Exchange, 
Incorporated (the ``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 September 2, 2010, the Exchange filed Amendment No. 1, 
which replaced the original filing in its entirety. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, 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

    CBOE proposes to amend Rule 24.9(a)(2), Terms of Index Option 
Contracts, to allow the Exchange to list up to twelve expiration months 
for options that overlie broad-based security indexes for which options 
are used by the Exchange to calculate a volatility index. The text of 
the rule proposal is available on the Exchange's Web site (http://
www.cboe.org/legal), at the Exchange's principal office, and at the 
Commission's Public Reference Room.

[[Page 55384]]

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 1 replaces the original filing in its entirety. The 
purpose of Amendment 1 is to provide additional reasoning for the 
proposed rule text change and to make a technical change to Rule 
24.9(a)(2) by deleting an unnecessary word from the text of the rule.
    The purpose of this rule filing is to amend Rule 24.9(a)(2), Terms 
of Index Options, to allow the Exchange to list up to twelve expiration 
months for broad-based security index options upon which the Exchange 
calculates a volatility index. Currently, Rule 24.9(a)(2) permits the 
Exchange to list only seven expiration months in any index options upon 
which the Exchange calculates a constant three-month volatility index.
    Since 2009, volatility trading has experienced significant growth 
in terms of both trading volume and in the variety of products offered. 
For example, through the first six months in 2010, CBOE Volatility 
Index (``VIX'') options averaged close to 250,000 contracts traded per 
day, a 150% increase compared to the same period in 2009. VIX futures 
volume increased 440%, averaging 13,500 contracts per day compared to 
2,500 contracts per day during the same period in 2009.
    Similarly, since 2009, three exchange-traded notes (``ETNs'') 
linked to the performance of VIX futures have been issued, two of which 
overlie listed options.\3\ In addition, Jefferies & Co. recently 
announced plans to issue an exchange-traded fund (``ETF'') \4\ that 
holds VIX futures or an economically equivalent position and Bank of 
America Merrill Lynch recently announced plans to issue an ETN based on 
forward implied volatility of S&P 500 Index options. Additionally, the 
Exchange is aware of other issuers that are engaged in similar 
volatility product initiatives.
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    \3\ ETNs are referred to ``Index-Linked Securities'' in CBOE's 
Rules. See Interpretation and Policy .13 to Rule 5.3. The ETNs 
linked to the performance of VIX futures are the (1) iPath S&P 500 
VIX Short-Term Futures ETN (``VXX''), (2) iPath S&P 500 VIX Mid-Term 
Futures ETN (``VXZ''), and (3) Barclays ETN+ Inverse S&P 500 VIX 
Short-Term Futures ETN (``XXV'').
    \4\ ETFs are referred to as ``Units'' in CBOE's Rules. See 
Interpretation and Policy .06 to Rule 5.3.
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    The Exchange was previously granted approval to list a seventh 
expiration in broad-based index classes on which the Exchange 
calculates a 3-month volatility index.\5\ In order to satisfy growing 
demand for a wider variety of volatility investment strategies, the 
Exchange is seeking to increase, from seven to twelve, the number of 
expiration months for broad-based security index options upon which the 
Exchange calculates a volatility index.
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    \5\ See Securities Exchange Act Release No. 56821 (November 20, 
2007), 72 FR 66210 (November 27, 2007) (SR-CBOE-2007-082).
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    Rule 24.9(a)(2) currently permits the Exchange to list up to seven 
expiration months at any one time for any broad-based security index 
option contracts, including reduced-value and jumbo option contracts, 
(e.g., DJX, NDX, RUT and SPX) upon which the Exchange calculates a 
constant three-month volatility index. When the Exchange proposed the 
allowance of a seventh expiration month for broad-based security index 
option contracts on which CBOE calculates a constant three-month 
volatility index, the Commission noted that the change ``will result in 
a more consistent and predictable calculation in which the option 
series that bracket three months to expiration will always expire one 
month apart * * *'' \6\ In this current proposal, the Exchange is 
seeking to create flexibility that would enable it to create volatility 
indexes of varying lengths in response to demand for a wider variety of 
volatility investment strategies. As a result, the Exchange is not 
proposing to tie the number of expiration months permitted to a 
specific volatility calculation period and is proposing to delete the 
phrase ``constant three-month'' from the existing text of Rule 
24.9(a)(2).
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    \6\ See id.
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    The Exchange believes that the additional expirations, which will 
be listed in monthly intervals over a one-year time frame, will provide 
the Exchange with the flexibility to create indexes that represent 
unique volatility exposures, and enable the Exchange to respond quickly 
to investor demand for new volatility-based products.
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 
ability to list up to twelve expiration months for broad-based security 
index options upon which the Exchange calculates a volatility index.
2. Statutory Basis
    Because the increase in the number of expiration months is limited 
to options overlying broad based security indexes upon which the 
Exchange calculates a volatility index and because the series could be 
added without presenting capacity problems, the Exchange believes the 
rule proposal is consistent with the Act and the rules and regulations 
under the Act applicable to a national securities exchange and, in 
particular, the requirements of Section 6(b) of the Act.\7\ 
Specifically, the Exchange believes that the proposed rule change is 
consistent with the Section 6(b)(5) Act \8\ requirements that the rules 
of an exchange be designed to promote just and equitable principles of 
trade, to prevent fraudulent and manipulative acts and, in general, to 
protect investors and the public interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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 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 (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:

[[Page 55385]]

    (A) By order approve or disapprove 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-2010-077 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 Number SR-CBOE-2010-077. 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 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 the 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-2010-077 and should be 
submitted on or before October 1, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-22599 Filed 9-9-10; 8:45 am]
BILLING CODE 8010-01-P

