
[Federal Register: October 7, 2010 (Volume 75, Number 194)]
[Notices]               
[Page 62167-62169]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07oc10-91]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63026; File No. SR-CBOE-2010-046]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change To Amend 
Certain Rules Pertaining to Credit Options

October 1, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 20, 2010, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``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

    CBOE proposes to amend certain rules pertaining to Credit Options. 
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.

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 Exchange received approval to list and trade Credit Default 
Options and Credit Default Basket Options (collectively ``Credit 
Options'') in 2007, and is planning to re-launch these products.\3\ In 
connection with the Exchange's planned re-launching of Credit Options, 
the Exchange will be introducing contracts that have a payout that is 
less than $100,000.\4\ In addition, the Exchange would like to: (1) 
Change the quoting convention for Credit Default Options, (2) change 
the minimum price variation for Credit Option, and (3) designate a 
single applicable Credit Event for Credit Options.
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    \3\ See Securities Exchange Act Release Nos. 55871(June 6, 
2007), 72 FR 32372 (June 12, 2007) (SR-CBOE-2006-84); 56275 (August 
17, 2007), 72 FR 47097 (August 22, 2007).
    \4\ See Securities Exchange Act Release No. 56380 (September 10, 
2007), 72 FR 52948 (September 17, 2007) (SR-CBOE-2007-105) 
(immediately effective filing pertaining to contract multiplier for 
Credit Default Options).
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Quoting Convention and Minimum Price Variation Changes
    When CBOE launched Credit Default Options, the Exchange designated 
the cash settlement amount to be $100,000, which was equal to an 
exercise settlement value of $100 multiplied by a contract multiplier 
of 1,000 (which was specified by the Exchange at listing).\5\ Because 
the exercise settlement value is currently fixed by rule at $100,\6\ 
bids and offers for contracts are expressed in amounts ranging from $0 
(no bid) to $100. The range of bids and offers is not hard coded into 
CBOE's rules and is a function of pricing options that have a fixed 
payout.\7\ To arrive at the total amount a bid or offer represents per 
contract, the bid or offer is multiplied by the contract multiplier. 
For example, if a Credit Default Option has a cash settlement amount of 
$100,000 ($100 x 1,000), bids of $0.05, $45.15 and $67.50 equate to 
premium amounts of $50, $45,150 and $67,500, respectively.
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    \5\ The Exchange may vary the particular contract multiplier on 
a class-by-class basis within a range of 1 to 1,000. See 29.1(a).
    \6\ See Rule 29.1(a)(i).
    \7\ The Exchange notes that with a fixed exercise settlement 
value of $100, any quote above $100 (e.g., $150) would not make 
economic sense since it would represent a premium cost ($150 x 1,000 
= $150,000) that exceeds than [sic] the exercise settlement amount 
of the contract ($100 x 1,000 = $100,000).
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    CBOE proposes to change the quoting conventions for Credit Default 
Options by permitting the exercise settlement value to be an amount 
determined by the Exchange on a class-by-class basis and that would be 
equal to $1 or $100, or a value between those values. By permitting the 
Exchange to vary the exercise settlement value, the range of bids and 
offers would vary in tandem. For example, if the Exchange sets the 
exercise settlement value at $10, bids and offers for that contract 
would range from $0 (no bid) to $10, and the total premium amount would 
be determined by multiplying the bid or offer by the contract 
multiplier.
    In addition, by permitting the Exchange to set the exercise 
settlement value on a class-by-class basis, the Exchange would be able 
to list a contract having a cash settlement amount that could be 
arrived at in different ways. For example, for a Credit Default Option 
with a cash settlement amount of $1,000, the Exchange could: (1) Set 
the exercise settlement value at $1 with a contract multiplier of 
$1,000, (2) set the exercise settlement value at $10 with a contract 
multiplier of 100, (3) set the exercise settlement value at $100 with a 
contract multiplier of 10, or (4) set the exercise settlement value at 
$1,000 with a contract multiplier of 1. The Exchange notes that it will 
not list more than one Credit Default Option contract with a cash 
settlement amount

[[Page 62168]]

arrived at in difference [sic] ways.\8\ The Exchange notes that it has 
the discretion to set the exercise settlement value for binary options 
on a class-by-class and is seeking to introduce that same flexibility 
to Credit Default Options.\9\
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    \8\ See e-mail from Jennifer L. Klebes, Senior Attorney, CBOE, 
to Jennifer Dodd, Special Counsel, and Andrew Madar, Special 
Counsel, Commission, dated September 27, 2010.
    \9\ See Rule 22.1(e).
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    The Exchange is also proposing to change the minimum price 
variation (``MPV'') for Credit Default Options. Currently, the MPV for 
bids and offers on both simple and complex orders for Credit Options is 
fixed at $0.05.\10\ Similar to binary options, the Exchange would like 
to build in the flexibility to establish the MPV on a class-by-class 
basis at an increment not less then $0.01.\11\ The ability to designate 
$0.01 as the MPV would permit more pricing points than is currently 
allowed and would allow for more granular pricing points when lower 
exercise settlement values are designated. The Exchange believes that 
the introduction of more pricing points creates tighter spreads between 
quotes, which in turn benefits investors. For example, if the Exchange 
designates the exercise settlement value as $1 bids and offers for that 
contract would range from $0 (no bid) to $1 and only 20 price points 
would be available since the MPV is $0.05 ($0.05, $0.10, etc.). If the 
MPV is $0.01 and the designated exercise settlement value is $1, there 
would be 100 price points available for quoting. The Exchange notes 
that it has the discretion to establish the MPV on a class-by-class 
basis for binary options and believes that permitting more price points 
for options having a lower exercise settlement value will benefit 
market participants.
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    \10\ See Rule 29.14(b).
    \11\ See Rule 22.13(b).
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Designation of Single Credit Event Change
    Currently, CBOE Rules 29.2, Designation of Credit Default Options, 
and 29.2A, Designation of Credit Default Basket Option Contracts, 
provide that a failure-to-pay default will always be a designated 
Credit Event for Credit Options. In addition, the Exchange may 
designate other event(s) of default and/or restructuring as Credit 
Events. The Exchange believes that there may be a market for Credit 
Options that specify a single Credit Event (e.g., bankruptcy as defined 
in accordance with the terms of the Relevant Obligation(s)) and is 
therefore proposing to provide the Exchange with the ability to 
designate a single Credit Event. To make this change, the Exchange is 
proposing revisions to Rules 29.2(a) and 29.2A(a)(6) respectively.
Technical Change
    The Exchange is also proposing to make a technical, non-substantive 
change to Rule 29.3.
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 designate $0.01 as the MPV for Credit Options. The Exchange 
does not believe that this change will lead to a proliferation of 
quotes and notes that the change will affect one series [sic] a product 
and not multiple series (i.e., various strikes) since Credit Options do 
not have strikes.
2. Statutory Basis
    The Exchange believes this 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.\12\ Specifically, the Exchange believes that the 
proposed rule change is consistent with the Section 6(b)(5) Act \13\ 
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, and thereby will provide investors with additional tools to 
hedge risk and tailor their investment needs.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 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

    No written comments were solicited or received with respect to the 
proposed rule change.

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:
    (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-2010-046 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2010-046. 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

[[Page 62169]]

identifying information from submissions. You should submit only 
information that you wish to make publicly available. All submissions 
should refer to File Number SR-CBOE-2010-046 and should be submitted on 
or before October 28, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-25251 Filed 10-6-10; 8:45 am]
BILLING CODE 8011-01-P

