
[Federal Register Volume 76, Number 117 (Friday, June 17, 2011)]
[Notices]
[Pages 35503-35506]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-15039]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64654; File No. SR-CBOE-2011-039]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change To Trade Single 
Stock Dividend Options

June 13, 2011.
    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 May 31, 2011, 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

    Chicago Board Options Exchange, Incorporated (``CBOE'' or 
``Exchange'') proposes to amend certain of its rules to provide for the 
listing and trading of options that overlie the ordinary cash dividends 
paid by an issuer over an annual, semi-annual, or quarterly ``accrual 
period.'' The options will be cash-settled, have European-style 
exercise and be P.M.-settled. The text of the rule proposal is 
available on the Exchange's Web site (http://www.cboe.org/legal), 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to permit the Exchange 
to list and trade options that overlie the ordinary cash dividends paid 
by an issuer over an annual accrual period. The Exchange may also list 
series of SSDOs with an accrual period of less than a year, but in no 
event less than one quarter of a year. SSDOs will be cash-settled, have 
European-style exercise and be P.M.-settled.
Product Design
    Each SSDO represents the accumulated ordinary dividend amounts paid 
by a specific issuer over a specified accrual period. For purposes of 
SSDOs, dividends are deemed to be ``paid'' on the ex-dividend date. 
Each annual accrual period will run from the business day after the 
third Friday of December through the third Friday of the following 
December. For an SSDO with an accrual period of less than a year, the 
accrual period runs from the business day after the third Friday of the 
month beginning the accrual period through the third Friday of the 
month ending the accrual period.\3\ An example of a quarterly accrual 
period is one that will run from Monday, March 21, 2011 through Friday, 
June 17, 2011.
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    \3\ The Exchange will assign separate trading symbols to SSDOs 
overlying the accumulated ex-dividends of the same issuer that have 
different accrual periods.
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    The underlying value for SSDOs will be equal to ten (10) times the 
ex-dividend amounts of an issuer accumulated over the specified accrual 
period. Each day, CBOE will calculate the aggregate daily dividend 
totals for the specific issuer, which are summed up over any given 
accrual period (e.g., quarterly, semi-annually, annually). During each 
business day, CBOE will disseminate the underlying SSDO value, 
multiplied by ten (10), through the Options Price Reporting Authority 
(``OPRA''), the Consolidated Tape Association (``CTA'') tape and/or the 
Market Data Index (``MDI'') feed.
Options Trading
    Each SSDO will be quoted in decimals and one point will be equal to 
$100. The minimum price variation shall be established on a class-by-
class basis by the Exchange and shall not be less than $0.01. Exhibit 3 
presents proposed contract specifications for SSDOs.
    The Exchange expects that the underlying index values for SSDOs 
will be relatively low. As a result, the proposal permits the Exchange 
to designate $0.01 as the minimum price variation for quotes and 
believes that granular pricing will result in more pricing points. The 
availability of more pricing points creates tighter spreads between 
quotes, which in turn benefits investors.
    Similarly, the Exchange is proposing to list series at 1 point 
($1.00) or greater strike price intervals if the strike price is equal 
to or less than $200 and 2.5 points ($2.50) or greater strike price 
intervals if the strike price exceeds $200. Because the underlying 
value of an SSDO will fluctuate around a limited expected dividend 
value range, the Exchange believes that a granular strike price 
increment will provide investors with greater flexibility by allowing 
them to establish positions that are better tailored to meet their 
investment objectives. Below are examples of values underlying SSDOs 
using past ordinary dividend payouts over varying accrual periods:

----------------------------------------------------------------------------------------------------------------
                                                               Ex-dividend       Cumulative
                     Ex-dividend date                            amount           dividend      SSDO Index value
----------------------------------------------------------------------------------------------------------------
                                         Example: Annual Accrual Period
                                   December 21, 2009 through December 17, 2010
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Exxon Mobil Corporation (XOM):

[[Page 35504]]

 
    2/8/2010..............................................             $0.42             $0.42              4.20
    5/11/2010.............................................             $0.42             $0.84              8.40
    8/11/2010.............................................             $0.42             $1.26             12.60
    11/9/2010.............................................             $0.44             $1.70             17.00
General Electric Company (GE):
    12/23/2009............................................             $0.10             $0.10              1.00
    2/25/2010.............................................             $0.10             $0.20              2.00
    6/17/2010.............................................             $0.10             $0.30              3.00
    9/16/2010.............................................             $0.12             $0.42              4.20
                                                                             -----------------------------------
    12/22/2010............................................             $0.14             Not Included
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                                       Example: Semi-Annual Accrual Period
                                     June 21, 2010 through December 17, 2010
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ONEOK Partners, L.P. (OKS):
    1/27/2010.............................................             $1.11             Not Included
    4/28/2010.............................................             $1.12             Not Included
                                                                             -----------------------------------
    7/28/2010.............................................             $1.13             $1.13             11.30
    10/27/2010............................................             $1.14             $2.27             22.70
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Caterpillar Inc. (CAT):
    1/15/2010.............................................             $0.42             Not Included
    4/22/2010.............................................             $0.42             Not Included
                                                                             -----------------------------------
    7/16/2010.............................................             $0.44             $0.44              4.40
    10/21/2010............................................             $0.44             $0.88              8.80
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                                        Example: Quarterly Accrual Period
                                 December 21, 2010 through March 19, 2010 [sic]
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International Business Machines
Corporation (IBM):
    2/8/2010 [sic]........................................             $0.55             $0.55              5.50
                                                                             -----------------------------------
    5/16/2010 [sic].......................................             $0.65             Not Included
    8/6/2010 [sic]........................................             $0.65             Not Included
    11/8/2010 [sic].......................................             $0.65             Not Included
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Altria Group, Inc. (MO):
    3/11/2010 [sic].......................................             $0.35             $0.35              3.50
                                                                             -----------------------------------
    6/11/2010 [sic].......................................             $0.35             Not Included
    9/13/2010 [sic].......................................             $0.38             Not Included
    12/23/2010 [sic]......................................             $0.38             Not Included
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    Initially, the Exchange will list in-, at- and out-of-the-money 
strike prices and may open for trading up to five annual contract 
months expiring in December for any single stock underlying an SSDO and 
up to ten contract months for accrual periods of less than a year. The 
Exchange is proposing to use the expected dividend (i.e., the aggregate 
value of dividends that are expected to be paid by the issuer over a 
given accrual period) amount for setting the initial strikes. Near-term 
SSDOs will reflect dividends accumulating in the then-current accrual 
period. All other SSDO options (i.e., contracts listed for trading that 
are not in the then-current accrual period) will reflect dividends 
expected in comparable accrual periods beyond the current accrual 
period.
    The Exchange may open for trading additional series, either in 
response to customer demand or as the price of the expected dividends 
for an issuer changes.
    The Exchange is proposing to permit the listing of up to five 
annual contract months that expire in December in different years for 
any single stock underlying an SSDO. For example, the Exchange would be 
permitted to list the following annual XOM contracts: December 2011, 
December 2012, December 2013, December 2014 and December 2015. As shown 
in the following table, each annual XOM SSDO contract features a one-
year accrual period that begins on the first business day following the 
third Friday in December and ends on the respective XOM SSDO expiration 
date. As of May 17, 2011, near-term XOM SSDO prices would reflect a 
combination of actual dividend payouts of $0.91 ($0.44 on the ex-
dividend date of February 8, 2011 and $0.47 on the ex-dividend date of 
May 11, 2011), plus any ordinary cash dividends expected to be paid 
(estimated to be $0.94--$0.47 on two expected ex-dividend dates) 
through December 16, 2011. Since the accrual periods for longer-dated 
SSDOs expiring in December 2012, December 2013, December 2014 and 
December 2015 have not yet begun, longer-dated SSDO prices would 
reflect dividends that are expected to be paid during their respective 
one-year accrual periods. The expected dividends for longer-dated SSDOs 
listed in the table reflect an assumption of 5% dividend growth 
annually through December 2015. In-, at- and out-of-the-money SSDO 
strike prices would be listed relative to the Expected SSDO Index level 
equal to ten

[[Page 35505]]

times the dividends expected during the relevant accrual period.

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                                      Accrual period end                                      Actual +
     Accrual period start date      date (SSDO expiration      Actual         Expected        expected      Expected SSDO           SSDO strikes
                                            date)             dividends       dividends       dividends      index level
--------------------------------------------------------------------------------------------------------------------------------------------------------
December 20, 2010.................  December 16, 2011....           $0.91           $0.94           $1.85          $18.50  16, 17, 18, 19, 20
December 19, 2011.................  December 21, 2012....  ..............            1.94            1.94           19.40  17, 18, 19, 20, 21
December 24, 2012.................  December 20, 2013....  ..............            2.04            2.04           20.40  19, 20, 21, 22, 23
December 23, 2013.................  December 19, 2014....  ..............            2.14            2.14           21.40  20, 21, 22, 23, 24
December 22, 2014.................  December 18, 2015....  ..............            2.25            2.25           22.50  21, 22, 23, 24, 25
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In addition, the Exchange is proposing to permit the listing of up 
to ten contract months for accrual periods of less than a year. Near-
term SSDOs with accrual periods of less than a year will reflect 
dividends accumulating in the then-current accrual period. All other 
SSDOs will reflect dividends expected in comparable accrual periods 
beyond the current accrual period.
Exercise and Settlement
    The proposed options will expire on the Saturday following the 
third Friday of the expiring month. Trading in the expiring contract 
month will normally cease at 3 p.m. Chicago time on the last day of 
trading (ordinarily the Friday before expiration Saturday, unless there 
is an intervening holiday). When the last trading day is moved because 
of an Exchange holiday (such as when CBOE is closed on the Friday 
before expiration), the last trading day for expiring options will be 
Thursday.
    Exercise will result in delivery of cash on the business day 
following expiration. SSDOs will be P.M.-settled. The Exchange is 
proposing P.M.-settlement for SSDOs because options trading on 
individual stocks are P.M. settled. As a result, the Exchange is 
proposing to match the expiration style for SSDOs to individual stock 
option exercise. The exercise-settlement amount will be equal [sic] ten 
times the ordinary cash dividends paid by the issuer over the accrual 
period. The exercise settlement amount is equal to the difference 
between the exercise-settlement value and the exercise price of the 
option, multiplied by the contract multiplier ($100).
    If the exercise settlement value is not available or the normal 
settlement procedure cannot be utilized due to a trading disruption or 
other unusual circumstance, the settlement value will be determined in 
accordance with the rules and bylaws of the OCC.
Surveillance
    The Exchange will use the same surveillance procedures currently 
utilized for each of the Exchange's other single stock options to 
monitor trading in SSDOs. Such procedures include for example 
monitoring dividend announcements. CBOE is confident that it has 
adequate tools in place to surveil for market manipulation. The 
Exchange represents that these surveillance procedures shall be 
adequate to monitor trading in options on these option products. For 
surveillance purposes, the Exchange will have complete access to 
information regarding trading activity in the pertinent securities 
whose dividend payment is the basis for particular SSDOs. Specifically, 
as a member of the Intermarket Surveillance Group (``ISG''), the 
Exchange is able to obtain this information from the exchanges listing 
the securities whose dividend payment is the basis for particular 
SSDOs. CBOE's access to information from the ISG and tools such as the 
Exchange's large options positions reports should prove more than 
sufficient for surveillance of market manipulation.
Position Limits
    Position and exercise limits for SSDOs will be the same as those 
for standard options overlying the same security. While positions in 
SSDOs will be aggregated with longer-dated positions in SSDOs with the 
same underlying stock for position and exercise limits purposes, they 
will not be aggregated with positions in the ordinary options overlying 
the stock of the issuer paying the dividends underlying the SSDO. The 
reason for not aggregating positions with ordinary options is that 
SSDOs are based solely on expected dividends for an issuer and will 
reflect the forward value of that expectation. In contrast, the value 
of ordinary stock options reflect a variety of factors, of which 
expected dividends is only one. Hence the pricing of ordinary options 
versus SSDOs will differ dramatically and there is no need to aggregate 
positions to prevent manipulative practices involving the underlying.
Exchange Rules Applicable
    A new Rule 5.9 is proposed to govern the listing and trading of 
SSDOs. In addition, SSDOs will be margined in the same manner as single 
stock options under Exchange Rule 12.3. Purchasers of puts or calls, 
however, must be paid in full, even if there remains longer than nine 
months until expiration for the position. For SSDOs, the aggregate 
contract value on which the margin amount will be calculated will be 
the product of the forward expected dividend amount for the accrual 
period (as adjusted for any contract scaling factor) and the applicable 
multiplier ($100).
    The Exchange hereby designates SSDO options as eligible for trading 
as Flexible Exchange Options as provided for in Chapters XXIVA 
(Flexible Exchange Options) and XXIVB (FLEX Hybrid Trading System).
Capacity
    CBOE has analyzed its capacity and represents that it believes the 
Exchange and OPRA have the necessary systems capacity to handle the 
additional traffic associated with the listing of new series that will 
result from the introduction of SSDOs. This is particularly the case 
since the value of SSDOs are predicated on expected dividend payments, 
which are generally much less volatile than share prices. Hence, there 
is less need to list numerous strike prices for each expiration date of 
an SSDO or to have to add many new strikes over the life of an SSDO.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) \4\ of the Act, in general, and furthers the objectives of 
Section 6(b)(5) \5\ in particular in that it is 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 facilitating transactions in securities, and to 
remove impediments to and perfect the mechanisms of a free and open 
market in a manner consistent with the

[[Page 35506]]

protection of investors and the public interest. The Exchange believes 
that the introduction of SSDOs will provide investors with the ability 
to invest in options that settle to a value that represents the 
accumulated dividend amounts paid by a specific issuer over a specified 
accrual period. This will protect investors and the public interest by 
allowing market participants to hedge against potential declines in 
dividend income from long positions in the underlying stocks, which can 
be significant over long holding periods. In addition, the Exchange 
understands that dividend options trade in the other-the-counter [sic] 
marketplace and believes that the introduction of SSDOs will attract 
order flow to the Exchange, increase the variety of listed options to 
investors, and provide a valuable hedging tool to investors. Similarly, 
the proposed rule change will permit market participants to trade SSDOs 
in an environment subject to exchange-based rules that provides price 
transparency and eliminates contra-party risk through the role of the 
OCC as issuer, thus removing impediments to a free and open market 
consistent with the Act. Finally, SSDOs will be subject to CBOE's 
rules, regulations and oversight, which provide enhanced investor 
protection and market surveillance.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 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 up to 90 days (i) As the 
Commission may designate 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 the 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-2011-039 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-2011-039. 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 publicly available. All 
submissions should refer to File Number SR-CBOE-2011-039 and should be 
submitted on or before July 8, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-15039 Filed 6-16-11; 8:45 am]
BILLING CODE 8011-01-P


