
[Federal Register: November 29, 2010 (Volume 75, Number 228)]
[Notices]               
[Page 73155-73156]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29no10-146]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63352; File No. SR-CBOE-2010-046]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change To Amend 
Certain Rules Pertaining to Credit Options

November 19, 2010.

I. Introduction

    On September 20, 2010, the Chicago Board Options Exchange, 
Incorporated (``CBOE'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend its rules relating to 
Credit Options. The proposed rule change was published for comment in 
the Federal Register on October 7, 2010.\3\ The Commission received no 
comments on the proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 63026 (October 1, 
2010), 75 FR 62167 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to amend its rules governing Credit Options 
\4\ to make three substantive changes. First, CBOE proposes to permit 
the Exchange to fix the exercise settlement value for Credit Default 
Options, on a class-by-class basis, at $1 or $100, or at a value 
between those two points. Currently, the exercise settlement value is 
fixed at $100. Since the cash settlement amount for Credit Default 
Options is the product of the exercise settlement value multiplied by a 
contract multiplier that may be fixed by the Exchange on a class-by-
class basis within a range of 1 to 1,000, this change will enable the 
Exchange to list a Credit Default Option contact with a cash settlement 
amount that could be arrived at in different ways.\5\ Second, the 
proposal would permit the Exchange to establish the minimum price 
variation (``MPV'') for all Credit Options, which is currently $0.05, 
on a class-by-class basis, at an increment no less than $0.01, which 
would permit more pricing points, such as when lower exercise 
settlement values are designated. Third, the proposal would give the 
Exchange authority to list Credit Options that contemplate only a 
single credit event. Currently, CBOE rules for Credit Options enumerate 
several potential credit events, the occurrence of any one of which 
could allow the Credit Option to be exercised. For example, a failure-
to-pay default will always be a designated credit event for each class, 
and the Exchange may, on a class-by-class basis, specify other events 
of default or a restructuring.\6\ The Exchange proposes to amend its 
rules to permit it to list Credit Options designating a single credit 
event, such as a failure-to-pay default, another event of default, or a 
restructuring. The Exchange also proposes to make a technical, non-
substantive change to one of its rules governing Credit Options, Rule 
29.3.
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    \4\ Credit Options include Credit Default Options and Credit 
Default Basket Options. Credit Default Options are cash-settled 
binary options that are automatically exercised upon the occurrence 
of specified credit events or expire worthless. See CBOE Rule 
29.1(b); Securities Exchange Act Release No. 55871 (June 6, 2007), 
72 FR 32372 (June 12, 2007) (SR-CBOE-2006-84) (order approving 
CBOE's proposed rules to list and trade Credit Default Options). 
Credit Default Basket Options are cash-settled binary options based 
on a basket of at least two reference entities. See CBOE Rule 
29.1(h); Securities Exchange Act Release No. 56275 (August 17, 
2007), 72 FR 47097 (August 22, 2007) (SR-CBOE-2007-26) (order 
approving CBOE's proposed rules to list and trade Credit Default 
Basket Options).
    \5\ The Exchange has represented that it will not list more than 
one Credit Default Option contract with a cash settlement amount 
arrived at in different ways. See Notice at note 8 and accompanying 
text.
    \6\ See CBOE Rules 29.2 and 29.2A.
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III. Discussion and Commission's Findings

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\7\ In particular, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act,\8\ which requires, among other things, that the Exchange's rules 
be designed to prevent fraudulent and manipulative acts and practices; 
to promote just and equitable principles of trade; to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities; to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system; and, in general, to protect investors and the public interest.
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    \7\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal to authorize the Exchange 
to list Credit Options that contemplate only a single credit event is 
consistent with the Act. In addition, the Commission believes that the 
proposal to allow the Exchange flexibility to fix the exercise 
settlement value for Credit Default Options within a range of $1 to 
$100 is consistent with the Act. With this change, the Exchange could 
list a contract with a cash settlement value of $10,000 with a 
multiplier of 1,000 and an exercise settlement amount of $10, or with a 
multiplier of 100 and an exercise settlement amount of $100. There 
could be concerns if the Exchange were to seek to list Credit Default 
Options having the same cash settlement value but with different 
combinations of multiplier and cash settlement amount.

[[Page 73156]]

This could fragment the market and dilute the liquidity of economically 
identical products. The Exchange has represented, however, that it will 
not list more than one Credit Default Option contract with a cash 
settlement value that has been arrived at in multiple ways.\9\ The 
Commission's approval of this aspect of the proposal incorporates that 
representation.\10\
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    \9\ See supra note 5.
    \10\ The Commission also notes that the CBOE currently has the 
flexibility to set the exercise settlement value for binary options 
listed on the Exchange on a class-by-class basis. See CBOE Rule 
22.1(e). See also Notice at note 9 and accompanying text.
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    Finally, the Commission believes that the proposal to use an MPV of 
as little as $0.01 for all Credit Options is consistent with the Act. 
With exercise settlement values as low as $1, the ability to set the 
MPV at $0.01 would make available 100 price points for quoting bids and 
offers in the range of $0 to $1, as opposed to only 20 price points 
under the current MPV of $0.05. The CBOE has represented that it has 
analyzed its capacity and believes that it 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; and that the Exchange believes that the 
change will not lead to a proliferation of quotes and thus do not have 
multiple series with different strike prices, because Credit Options do 
not have strike prices.\11\
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    \11\ See Notice. The Commission also notes that the Exchange has 
the discretion to establish the MPV on a class-by-class basis for 
binary options at an increment no less than $0.01. See CBOE Rule 
22.13(b).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-CBOE-2010-046), be, and it 
hereby is, approved.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-29893 Filed 11-26-10; 8:45 am]
BILLING CODE 8011-01-P

