
[Federal Register: September 15, 2010 (Volume 75, Number 178)]
[Notices]               
[Page 56147-56150]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15se10-122]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62870; File No. SR-CBOE-2010-078]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Permit Certain FLEX Options To Trade Under the FLEX 
Trading Procedures for a Limited Time on a Closing Only Basis

September 8, 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 30, 2010, 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. 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 is proposing to amend certain CBOE rules pertaining to

[[Page 56148]]

Flexible Exchange (``FLEX'') Options to permit certain FLEX Options to 
continue to trade under the FLEX trading procedures for a limited time. 
The text of the proposed rule change is available on the Exchange's Web 
site (http://www.cboe.org/Legal), on the Commission's Web site at 
http://www.sec.gov; 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this filing is to allow certain FLEX Options, which 
are identical in all terms to a Non-FLEX Option, to continue to trade 
using the FLEX trading procedures for the balance of the trading day on 
which the Non-FLEX Option is added as an intra-day add.
    The Exchange recently adopted rule changes to allow FLEX Options to 
expire on or within two business days of a third-Friday-of-the-month 
expiration (``Expiration FLEX Options'').\3\ Such FLEX Options could 
have either an American-, European-, or European-Capped-style exercise. 
Among other things, the rule change also provided that Expiration FLEX 
Options will be permitted before (but not after) Non-FLEX Options with 
identical terms are listed. Once and if an option series is listed for 
trading as a Non-FLEX Option series, (i) all existing open positions 
established under the FLEX trading procedures shall be fully fungible 
with transactions in the respective Non-FLEX Option series, and (ii) 
any further trading in the series would be as Non-FLEX Options subject 
to the Non-FLEX trading procedures and rules.
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    \3\ See Securities Exchange Act Release No. 59417 (February 18, 
2009), 74 FR 8591 (February 25, 2009) (SR-CBOE-2008-115).
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    The Options Clearing Corporation (``OCC'') became concerned that, 
in certain circumstances, in the event a Non-FLEX Option is listed with 
identical terms to an existing FLEX Option, OCC could not net the 
positions in the contracts until the next business day. If the Non-FLEX 
Option were listed intra-day, and an investor with a position in the 
FLEX Option attempted to close the position using the Non-FLEX Option, 
the investor would be technically long in one contract and short in the 
other contract. This would expose the investor to assignment risk until 
the next day despite having offsetting positions.
    The limited circumstances are:
     The Non-FLEX Option is listed intra-day.
     The FLEX contract is for American-style exercise.
     All other terms are identical and the contracts are 
otherwise fungible.
    The risk does not occur in expiration Friday FLEX Option positions 
during the five days prior to expiration, as no new Non-FLEX Option 
series may be listed within five days of expiration. It also does not 
exist for FLEX Option positions that will be identical to Non-FLEX 
series to be added after expiration, as those new series are added 
``overnight'' and OCC will convert the FLEX position to the Non-FLEX 
Option series at the time the Non-FLEX series is created. In addition, 
it does not exist for FLEX Options positions that have a European-
Capped-style exercise, as there are no Non-FLEX European-Capped-style 
options currently traded on CBOE. Further, it does not exist for most 
FLEX Index Options listed on CBOE, as most Non-FLEX Index options 
currently traded on CBOE are European-style exercise, and thus the Non-
FLEX Index Options cannot be exercised on the day the series is listed. 
The only exception is Non-FLEX, American-style options on the S&P 100 
(OEX).
    As an example, suppose underlying issue XYZ, trading around $25 per 
share, has options listed on the March cycle, and in February an 
investor wishes to buy just-out-of-the-money call options that expire 
in May. Since the Non-FLEX May Options will not be listed until after 
the March expiration, the investor enters a FLEX Option order in 
February to buy 250 Call 30 options expiring on the third Friday of 
May. If, as expected, the Non-FLEX May 30 call options are listed on 
the Monday after March expiration, the investor's open FLEX position 
will be converted by OCC over the weekend following March expiration to 
the Non-FLEX series.
    However, if XYZ stock should decline between the time of the FLEX 
transaction and March expiration, the May 30 calls may not be added 
after March expiration. If that were to occur, the May 30 calls may be 
added sometime later. Suppose the Exchange receives a request to add 
the May 30 calls on the morning of the Wednesday after expiration, and 
the Exchange lists them immediately. The investor with the FLEX 
position may then decide it is an opportune time to close his position.
    Under the current rules, the investor would be required to close 
the position by entering a sell order in the new Non-FLEX Option 
series. However, when the Non-FLEX transaction is reported to OCC, the 
investor is considered short in the Non-FLEX Option series, and is 
still long in the FLEX Option. OCC cannot aggregate the FLEX positions 
into the Non-FLEX series until after exercise and assignment 
processing. If a buyer in the new Non-FLEX series were to exercise the 
options, the original investor who had attempted to close the FLEX 
position with an offsetting Non-FLEX trade would be at risk of being 
assigned on the technically short Non-FLEX position.
    Because of this risk, OCC will not clear an American-style 
expiration Friday FLEX option. The Exchange has spoken with OCC and OCC 
has agreed that allowing an option position in a FLEX contract to be 
closed using a FLEX Option in such circumstances will mitigate the 
risk.
    The assignment risk does not exist if the Non-FLEX Option is to be 
added the next trading day. In situations where OCC is aware that a 
series will be added overnight, they can convert the FLEX position to a 
Non-FLEX position before the next trading day. However, OCC cannot 
guarantee that an identical Non-FLEX series will not be added intra-
day, and thus will not clear such American-style FLEX Options.
    CBOE is proposing a limited exception to the requirement that the 
trading in such options be under the Non-FLEX trading procedures. The 
Exchange proposes that, in the event a Non-FLEX Option is listed intra-
day, a FLEX Option position with identical terms could be closed under 
the FLEX trading procedures, but only for the balance of the trading 
day on which the series is added. Under the proposed rule change, both 
sides of the FLEX transaction would have to be closing only positions.
    This change will allow a FLEX Option to be traded in such a manner 
to mitigate assignment risk.
    A FLEX Post Official (also referred to in the rules as simply a 
``FLEX

[[Page 56149]]

Official'') \4\ has the regulatory responsibility for reviewing the 
conformity of FLEX trades to the terms and specifications contained in 
Rule 24A.4 or 24B.4, as applicable. In the event a Non-FLEX series, 
having the same terms as an existing expiration Friday FLEX Option, is 
listed intra-day, the FLEX Official will review any subsequent FLEX 
transactions in that series and verify that the transaction is being 
executed for the purpose of closing out an existing FLEX position. In 
addition:
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    \4\ FLEX Officials are Exchange employees or independent 
contractors designated pursuant to Rule 24A.12 or 24B.14.
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     With respect to FLEX trades occurring on the Chapter XXIVA 
FLEX trading platform, should such trading platform be used by the 
Exchange,\5\ the FLEX Official will not disseminate a FLEX Request for 
Quote for any order representing a FLEX series having the same terms as 
a Non-FLEX series, unless such FLEX Order is a closing order (and it is 
the day the Non-FLEX series has been added). Additionally, if the FLEX 
Official were to disseminate a FLEX Request for Quotes for a closing 
order representing a FLEX series having the same terms as a Non-FLEX 
series, the FLEX Official would only accept response quotes and orders 
that were closing out an existing FLEX position.
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    \5\ Currently CBOE's Chapter XXIVA FLEX trading platform is not 
utilized by the Exchange. Instead, all FLEX Options are currently 
traded on CBOE's Chapter XXIVB FLEX trading platform.
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     With respect to FLEX trades occurring on the Chapter XXIVB 
FLEX trading platform, the FLEX Official will make an announcement that 
the FLEX series is now restricted to closing transactions; a FLEX 
Request for Quotes may not be disseminated for any order representing a 
FLEX series having the same terms as a Non-FLEX series, unless such 
FLEX Order is a closing order (and it is the day the Non-FLEX series 
has been added); and only responses that were closing out an existing 
FLEX position would be permitted. Any transactions that occur that do 
not conform to these requirements would be nullified by the FLEX 
Official pursuant to Rule 24B.14.
    The CBOE Department of Regulation reviews FLEX trading activity, 
and, in the event a Non-FLEX series with the same terms as an 
expiration Friday FLEX option is listed intra-day, will review any 
subsequent FLEX transactions in the series to verify that they are 
closing a position.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act \6\ and the rules and regulations thereunder and, in 
particular, the requirements of Section 6(b) of the Act.\7\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \8\ in that it is 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, by giving 
CBOE Trading Permit Holders and investors additional tools to trade 
customized options in an exchange environment while allowing a FLEX 
position to be traded in such a manner as to mitigate inadvertent 
assignment risk.
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    \6\ 15 U.S.C. 78s(b)(1).
    \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

    Because the foregoing rule does not (i) significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest, provided that the self-regulatory organization 
has given the Commission written notice of its intent to file the 
proposed rule change at least five business days prior to the date of 
filing of the proposed rule change or such shorter time as designated 
by the Commission, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \9\ and Rule 19b-4(f)(6) 
thereunder.\10\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires that a self-regulatory organization submit to the 
Commission written notice of its intent to file the proposed rule 
change, along with a brief description and text of the proposed rule 
change, at least five business days prior to the filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Commission notes that the Exchange has satisfied 
this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of the filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\11\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing.
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    \11\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission notes that the proposed rule change is substantially 
similar to a proposed rule change previously submitted by NYSE Arca 
which was published for notice and comment in the Federal Register.\12\ 
The Commission notes that it did not receive any comments on the NYSE 
Arca proposal, and does not believe the CBOE's proposal raises any new 
or novel issues. Further, as noted above, because of the inadvertent 
assignment risk, market participants could not trade previously 
approved American style FLEX Options expiring on Expiration Friday.\13\ 
The proposal seeks to mitigate such assignment risks by limiting 
certain FLEX transactions to closing only, thereby allowing the trading 
of previously approved FLEX Options. For these reasons, the Commission 
believes that waiver of the 30-day operative delay is consistent with 
the protection of investors and the public interest and therefore, 
designates the proposed rule change operative upon filing.\14\
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    \12\ See Securities Exchange Act Release No. 62321 (June 17, 
2010), 75 FR 36130 (June 24, 2010) (SR-NYSEArca-2010-46).
    \13\ See supra note 5.
    \14\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule

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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-2010-078 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-2010-078. 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 such 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 No. SR-CBOE-2010-078 and should be 
submitted on or before October 6, 2010

    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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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-22947 Filed 9-14-10; 8:45 am]
BILLING CODE 8010-01-P

