
[Federal Register: September 21, 2010 (Volume 75, Number 182)]
[Notices]               
[Page 57539-57540]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21se10-131]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62911; File No. SR-CBOE-2009-075]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving 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

September 14, 2010.
    On October 14, 2009, the Chicago Board Options Exchange, 
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and 
Exchange Commission (the ``Commission''), pursuant to Section 19(b)(1) 
of the Securities Exchange Act of 1934 (``Act''),\1\ a proposed rule 
change to establish a pilot program that would permit p.m.-settled 
options on broad-based indexes expiring on any Friday of the month, 
other than the third Friday of the month, as well as the last trading 
day of the month. 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.\2\ The proposed rule change 
was published for comment in the Federal Register on August 12, 
2010.\3\ The Commission received no comment letters on the

[[Page 57540]]

proposed rule change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Amendment 2 replaced 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.
    \3\ See Securities Exchange Act Release No. 62658 (August 5, 
2010), 75 FR 49009 (``Notice'').
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    The Exchange is proposing 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 \4\ 
(``End of Week Expirations'' or ``EOWs''), and (b) the last trading day 
of the month (``End of Month Expirations'' or ``EOMs'').\5\ Under the 
End of Week/End of Month Expirations Pilot Program (``Pilot''), 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, and 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, except the exercise settlement value will be based on 
the index value derived from the closing prices of component stocks. 
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.\6\ The duration of the Pilot will be 
effective for a period of fourteen months from the next full month from 
approval.\7\
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    \4\ A third Friday of the month expiration is generally referred 
to as ``Expiration Friday.''
    \5\ 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). 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. 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.
    \6\ See e.g., CBOE 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.
    \7\ Any positions established under the Pilot would not be 
impacted by the expiration of the Pilot. If an EOW or EOM expiration 
expires after the Pilot expires, 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. The Exchange would address this point in a 
circular to members. See Notice, supra note 3, 75 FR 49011.
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    Currently, the vast majority of options in the standardized options 
markets are a.m.-settled.\8\ In light of historic Commission concerns 
about expanding p.m. settlement, CBOE has represented that, at least 
two months prior to the expiration of the Pilot, it will provide the 
Commission with an annual report analyzing EOW and EOM volume, open 
interest, and trading patterns.\9\ In addition, for series that exceed 
specific minimum open interest parameters, the annual report will 
provide an analysis of index price volatility and, if needed, 
underlying share trading volume.\10\ The annual report will be provided 
to the Commission on a confidential basis.\11\
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    \8\ In the 1980s, the options and futures markets began moving 
from closing-price to opening price settlement procedures for stock 
index options and futures as a result of increased market and price 
volatility in underlying component stocks due to the unwinding of 
arbitrage-related positions at the close on expiration Friday.
    \9\ The annual report would also contain information and 
analyses of standard Expiration Friday, a.m.-settled series, if 
applicable, for the period covered in the pilot report as well as 
for the six-month period prior to the initiation of the pilot. See 
Notice, supra note 3, 75 FR at 49011.
    \10\ For each EOW and EOM Expiration that has open interest that 
exceeds certain minimum thresholds, the annual report will contain a 
comparison of index price changes at the close of trading on a given 
expiration date with comparable price changes from a control sample; 
and 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.
    \11\ CBOE will also provide to the Commission upon request 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.
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    The Commission has carefully reviewed CBOE's proposed rule change 
and finds that it is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange,\12\ and, in particular, Section 6(b)(5) of the 
Act,\13\ which requires that an exchange have rules designed to promote 
just and equitable principles of trade, remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and to protect investors and the public interest, to allow CBOE 
to conduct limited, and carefully monitored, pilots as proposed.
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    \12\ 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).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Commission has had concerns about the adverse effects and 
impact of p.m. settlement upon market volatility and the operation of 
fair and orderly markets on the underlying cash market at or near the 
close of trading. Only in limited instances has the Commission 
previously approved p.m. settlement for cash-settled options. In 1993, 
the Commission approved CBOE's listing of p.m.-settled, cash-settled 
options on certain broad-based indexes expiring on the first business 
day of the month following the end of each calendar quarter 
(``Quarterly Index Expirations'').\14\ In 2006, the Commission 
approved, on a pilot basis, CBOE's listing of p.m.-settled index 
options expiring on the last business day of a calendar quarter 
(``Quarterly Options Series'').\15\ In 2010, the Commission approved 
CBOE's listing of p.m.-settled FLEX options on a pilot basis.\16\
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    \14\ See Securities Exchange Act Release No. 31800 (February 1, 
1993), 58 FR 7274 (February 5, 1993).
    \15\ See Securities Exchange Act Release No. 54123 (July 11, 
2006), 71 FR 40558 (July 17, 2006).
    \16\ 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).
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    The Commission believes that it is appropriate to approve the 
proposal on a pilot basis. CBOE's proposed fourteen month Pilot will 
allow for both the Exchange and the Commission to monitor the potential 
for adverse market effects. In particular, the Commission notes that 
CBOE will provide the Commission with the annual report analyzing 
volume and open interest of EOWs and EOMs, will also contain 
information and analysis of EOW and EOM trading patterns, and index 
price volatility and share trading activity for series that exceed 
minimum parameters. This information will enable the Commission to 
evaluate whether allowing p.m. settlement for EOW and EOMs will result 
in increased market and price volatility in the underlying component 
stocks.
    The p.m. settlement Pilot information should help the Commission 
assess the impact on the markets and determine whether other changes 
are necessary. Furthermore, the Exchange's ongoing analysis of the 
Pilot should help it monitor any potential risks from large p.m.-
settled positions and take appropriate action if warranted.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-CBOE-2009-075), as modified 
by Amendment Nos. 1 and 2, be, and hereby 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\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-23455 Filed 9-20-10; 8:45 am]
BILLING CODE 8010-01-P

