
[Federal Register: June 28, 2011 (Volume 76, Number 124)]
[Notices]               
[Page 37868-37872]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28jn11-118]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64722; File No. SR-CBOE-2011-055]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change to Trade Options 
on the CBOE Silver ETF Volatility Index

 June 22, 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 June 15, 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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[[Page 37869]]

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 CBOE Silver ETF 
Volatility Index (``VXSLV''), which will be cash-settled and will have 
European-style exercise. 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.

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 proposed rule change is to permit the Exchange 
to list and trade cash-settled, European-style options on the CBOE 
Silver ETF Volatility Index (``VXSLV'').
    The Exchange has previously received approval orders to trade 
options on other volatility indexes that are calculated using certain 
individual stock and exchange-traded fund (``ETF'') options listed on 
CBOE.\3\ In the most recent approval order, the Exchange genericized 
certain of its rules to collectively refer to these indexes as 
``Individual Stock Based Volatility Indexes,'' ``ETF Based Volatility 
Indexes,'' and ``Volatility Indexes,'' as applicable.\4\ The specific 
Individual Stock Based Volatility Indexes and ETF Based Volatility 
Indexes that have been approved for options trading are listed in Rule 
24.1(bb). This filing layers VXSLV into CBOE's existing rule framework 
for ``ETF Based Volatility Indexes'' and ``Volatility Indexes,'' since 
VXSLV is comprised of ETF options.
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    \3\ See Securities Exchange Act Release Nos. 62139 (May 19, 
2010) 75 FR 29597 (May 26, 2010) (order approving proposal to list 
and trade CBOE Gold ETF Volatility Index (``GVZ'') options on CBOE) 
and 64551 (May 26, 2011), 76 FR 32000 (June 2, 2011) (order 
approving proposal to list and trade options on certain individual 
stock based volatility indexes and ETF based volatility indexes).
    \4\ See Rules 12.3, 24.1(bb), 24.4C, 24.5.04, 24.6, 24.9, 24A.7, 
24A.8, 24B.7 and 24B.8.
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Index Design and Calculation

    The calculation of VXSLV is based on the VIX methodology applied to 
options on the iShares Silver Trust (``SLV''). The VXSLV index was 
introduced by CBOE on March 16, 2011 and has been disseminated in real-
time on every trading day since that time.\5\
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    \5\ CBOE maintains a micro-site for VXSLV: http://www.cboe.com/
micro/VIXETF/VXSLV/.
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    VXSLV is an up-to-the-minute market estimate of the expected 
volatility of SLV calculated by using real-time bid/ask quotes of CBOE 
listed SLV options. VXSLV uses nearby and second nearby options with at 
least 8 days left to expiration and then weights them to yield a 
constant, 30-day measure of the expected (implied) volatility.
    For each contract month, CBOE will determine the at-the-money 
strike price. The Exchange will then select the at-the-money and out-
of-the money series with non-zero bid prices and determine the midpoint 
of the bid-ask quote for each of these series. The midpoint quote of 
each series is then weighted so that the further away that series is 
from the at-the-money strike, the less weight that is accorded to the 
quote. Then, to compute the index level, CBOE will calculate a 
volatility measure for the nearby options and then for the second 
nearby options. This is done using the weighted mid-point of the 
prevailing bid-ask quotes for all included option series with the same 
expiration date. These volatility measures are then interpolated to 
arrive at a single, constant 30-day measure of volatility.\6\
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    \6\ See proposed amendment to Interpretation and Policy .01 to 
Rule 24.1 (designating CBOE as the reporting authority for VXSLV).
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    CBOE will compute values for VXSLV underlying option series on a 
real-time basis throughout each trading day, from 8:30 a.m. until 3 
p.m. (CT).\7\ VXSLV levels will be calculated by CBOE and disseminated 
at 15-second intervals to major market data vendors.
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    \7\ Trading in SLV options (the index components of VXSLV) on 
CBOE closes at 3 p.m. (Chicago time). See Rule 24.6.02. The Exchange 
is proposing to make non-substantive changes to this rule.
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Options Trading

    VXSLV options will trade pursuant to the existing trading rules for 
other Volatility Index options. VXSLV options will be quoted in index 
points and fractions and one point will equal $100. The minimum tick 
size for series trading below $3 will be 0.05 ($5.00) and above $3 will 
be 0.10 ($10.00). Initially, the Exchange will list in-, at- and out-
of-the-money strike prices and the procedures for adding additional 
series are provided in Rule 5.5.\8\ Dollar strikes (or greater) will be 
permitted for VXSLV options where the strike price is $200 or less and 
$5 or greater where the strike price is greater than $200. The Exchange 
will not be permitted to list LEAPS on VXSLV options at strike price 
intervals less than $1.\9\
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    \8\ See Rule 5.5(c). ``Additional series of options of the same 
class may be opened for trading on the Exchange when the Exchange 
deems it necessary to maintain an orderly market, to meet customer 
demand or when the market price of the underlying * * * moves 
substantially from the initial exercise price or prices.'' For 
purposes of this rule, ``market price'' shall mean the implied 
forward level based on any corresponding futures price or the 
calculated forward value of VXSLV.
    \9\ See Rule 24.9.01(l). The Exchange is proposing to amend Rule 
24.9.01(l) by expressly providing that ``[t]he Exchange shall not 
list LEAPS on Volatility Index options at strike price intervals 
less than $1.'' The Exchange notes that when GVZ options were 
approved for trading, a substantially similar provision regarding 
the strike price intervals for LEAPS was adopted. See Securities 
Exchange Act Release No. 62139 (May 19, 2010) 75 FR 29597 (May 26, 
2010). However, when the Exchange filed to list options on certain 
individual stock based volatility indexes and ETF based volatility 
indexes, the Exchange revised the strike setting parameters for 
Volatility Index options to permit $1 strikes where the strike price 
is $200 or less. The LEAPS strike setting provision was 
inadvertently not carried forward at the time Rule 24.9.01(l) was 
adopted, but should have been.
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    Transactions in VXSLV may be effected on the Exchange between the 
hours of 8:30 a.m. Chicago time and 3 p.m. (Chicago time). The Exchange 
is proposing to close trading at 3 p.m. (Chicago time) for VXSLV 
options because trading in SLV options on CBOE closes at 3 p.m. 
(Chicago time).\10\
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    \10\ See Rule 24.6.02.
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Exercise and Settlement

    The proposed options will typically expire on the Wednesday that is 
30 days prior to the third Friday of the calendar month immediately 
following the expiration month (the expiration date of the options used 
in the calculation of the index). If the third Friday of the calendar 
month immediately following the expiring month is a CBOE holiday, the 
expiration date will be 30 days prior to the CBOE business day 
immediately preceding that Friday.\11\ For example, November 2011 Vol 
VXSLV options would expire on Wednesday, November 16, 2011, exactly 30 
days prior to the third Friday of the calendar month immediately 
following the expiring month.
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    \11\ See Rule 24.9(a)(5).
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    Trading in the expiring contract month will normally cease at 3 
p.m.

[[Page 37870]]

(Chicago time) on the business day immediately preceding the expiration 
date. Exercise will result in delivery of cash on the business day 
following expiration. VXSLV options will be A.M.-settled.\12\ The 
exercise settlement value will be determined by a Special Opening 
Quotations (``SOQ'') of VXSLV calculated from the sequence of opening 
prices of a single strip of options expiring 30 days after the 
settlement date. The opening price for any series in which there is no 
trade shall be the average of that options' bid price and ask price as 
determined at the opening of trading.\13\
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    \12\ See proposed amendment to Rule 24.9(a)(4) (adding VXSLV to 
the list of A.M.-settled index options approved for trading on the 
Exchange).
    \13\ See Rule 24.9(a)(5).
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    The exercise-settlement amount will be equal to the difference 
between the exercise-settlement value and the exercise price of the 
option, multiplied by $100. When the last trading day is moved because 
of a CBOE holiday, the last trading day for expiring options will be 
the day immediately preceding the last regularly-scheduled trading day.

Position and Exercise Limits

    The Exchange is proposing that the existing position limits for ETF 
Based Volatility Index options apply to VXSLV options.\14\ For regular 
options trading, the position limit for VXSLV options will be 50,000 
contracts on either side of the market and no more than 30,000 
contracts in the nearest expiration month. CBOE believes that a 50,000 
contract position limit is appropriate due to the fact that SLV 
options, which are the underlying components for VXSLV, are among the 
most actively traded option classes currently listed. In determining 
compliance with these proposed position limits, VXSLV options will not 
be aggregated with the SLV options.\15\ Positions in Short Term Option 
Series, Quarterly Options Series, and Delayed Start Option Series will 
be aggregated with position in options contracts in the same VXSLV 
class.\16\ Exercise limits will be equivalent to the proposed position 
limits.\17\ VXSLV options will be subject to the same reporting 
requirements triggered for other options dealt in on the Exchange.
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    \14\ See Rule 24.4C (Position Limits for Individual Stock or ETF 
Based Volatility Index Options).
    \15\ See Rule 24.4C(b).
    \16\ See proposed new subparagraph (c) to Rule 24.4C. The 
Exchange is proposing to add new subparagraph (c) regarding 
aggregation to Rule 24.4C. The Exchange notes that when GVZ options 
were approved for trading, the position limits for GVZ options were 
layered into existing Rule 24.4 (Position Limits for Broad-Based 
Index Options). Rule 24.4(e) sets forth an aggregation requirement 
substantially similar to proposed new subparagraph (c) to Rule 
24.4C. See Securities Exchange Act Release No. 62139 (May 19, 2010) 
75 FR 29597 (May 26, 2010). When the Exchange filed to list options 
on certain individual stock based volatility indexes and ETF based 
volatility indexes, the Exchange removed GVZ from Rule 24.4 and 
proposed a new rule setting forth positions limits for these 
products. The aggregation requirement from Rule 24.4(e) was 
inadvertently not carried forward at the time Rule 24.4C was 
adopted, but should have been.
    \17\ See Rule 24.5.
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    The Exchange is proposing that the existing position limits for 
FLEX ETF Based Volatility Index options apply to VXSLV options. 
Specifically, the position limits for FLEX VXSLV Options will be equal 
to the position limits for Non-FLEX VXSLV Options.\18\ Similarly, the 
exercise limits for FLEX VXSLV Options will be equivalent to the 
position limits set forth in Rule 24.4C. As provided for in Rules 
24A.7(d) and 24B.7(d), as long as the options positions remain open, 
positions in FLEX VXSLV Options that expire on the same day as Non-FLEX 
VXSLV Index Options, as determined pursuant to Rule 24.9(a)(5), shall 
be aggregated with positions in Non-FLEX VXSLV Options and shall be 
subject to the position limits set forth in Rules 4.11, 24.4, 24.4A, 
24.4B and 24.4C, and the exercise limits set forth in Rules 4.12 and 
24.5.
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    \18\ See Rules 24A.7(a)(5) and 24B.7(a)(5).
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    The Exchange is proposing that the existing Hedge Exemption for ETF 
Based Volatility Index options apply to VXSLV options, which would be 
in addition to the standard limit and other exemptions available under 
Exchange rules, interpretations and policies. The following procedures 
and criteria must be satisfied to qualify for a ETF Based Volatility 
Index hedge exemption:
     The account in which the exempt option positions are held 
(``hedge exemption account'') has received prior Exchange approval for 
the hedge exemption specifying the maximum number of contracts which 
may be exempt. The hedge exemption account has provided all information 
required on Exchange-approved forms and has kept such information 
current. Exchange approval may be granted on the basis of verbal 
representations, in which event the hedge exemption account shall 
within two (2) business days or such other time period designated by 
the Department of Market Regulation furnish the Department of Market 
Regulation with appropriate forms and documentation substantiating the 
basis for the exemption. The hedge exemption account may apply from 
time to time for an increase in the maximum number of contracts exempt 
from the position limits.
     A hedge exemption account that is not carried by a CBOE 
member organization must be carried by a member of a self-regulatory 
organization participating in the Intermarket Surveillance Group.
     The hedge exemption account maintains a qualified 
portfolio, or will effect transactions necessary to obtain a qualified 
portfolio concurrent with or at or about the same time as the execution 
of the exempt options positions, of a net long or short position in ETF 
Based Volatility Index futures contracts or in options on ETF Based 
Volatility Index futures contracts, or long or short positions in ETF 
Based Volatility Index options, for which the underlying ETF Based 
Volatility Index is included in the same margin or cross-margin product 
group cleared at the Clearing Corporation as the ETF Based Volatility 
Index option class to which the hedge exemption applies. To remain 
qualified, a portfolio must at all times meet these standards 
notwithstanding trading activity.
     The exemption applies to positions in ETF Based Volatility 
Index options dealt in on the Exchange and is applicable to the 
unhedged value of the qualified portfolio. The unhedged value will be 
determined as follows: (1) The values of the net long or short 
positions of all qualifying products in the portfolio are totaled; (2) 
for positions in excess of the standard limit, the underlying market 
value (a) of any economically equivalent opposite side of the market 
calls and puts in broad-based index options, and (b) of any opposite 
side of the market positions in ETF Based Volatility Index futures, 
options on ETF Based Volatility Index futures, and any economically 
equivalent opposite side of the market positions, assuming no other 
hedges for these contracts exist, is subtracted from the qualified 
portfolio; and (3) the market value of the resulting unhedged portfolio 
is equated to the appropriate number of exempt contracts as follows--
the unhedged qualified portfolio is divided by the correspondent 
closing index value and the quotient is then divided by the index 
multiplier or 100.
     Only the following qualified hedging transactions and 
positions will be eligible for purposes of hedging a qualified 
portfolio (i.e. futures and options) pursuant to Interpretation .01 to 
Rule 24.4C:
    [cir] Long put(s) used to hedge the holdings of a qualified 
portfolio;
    [cir] Long call(s) used to hedge a short position in a qualified 
portfolio;
    [cir] Short call(s) used to hedge the holdings of a qualified 
portfolio; and

[[Page 37871]]

    [cir] Short put(s) used to hedge a short position in a qualified 
portfolio.
     The following strategies may be effected only in 
conjunction with a qualified stock portfolio:
    [cir] A short call position accompanied by long put(s), where the 
short call(s) expires with the long put(s), and the strike price of the 
short call(s) equals or exceeds the strike price of the long put(s) (a 
``collar''). Neither side of the collar transaction can be in-the-money 
at the time the position is established. For purposes of determining 
compliance with Rule 4.11 and Rule 24.4C, a collar position will be 
treated as one (1) contract;
    [cir] A long put position coupled with a short put position 
overlying the same ETF Based Volatility Index and having an equivalent 
underlying aggregate index value, where the short put(s) expires with 
the long put(s), and the strike price of the long put(s) exceeds the 
strike price of the short put(s) (a ``debit put spread position''); and
    [cir] A short call position accompanied by a debit put spread 
position, where the short call(s) expires with the puts and the strike 
price of the short call(s) equals or exceeds the strike price of the 
long put(s). Neither side of the short call, long put transaction can 
be in-the-money at the time the position is established. For purposes 
of determining compliance with Rule 4.11 and Rule 24.4C, the short call 
and long put positions will be treated as one (1) contract.
     The hedge exemption account shall:
    [cir] Liquidate and establish options, their equivalent or other 
qualified portfolio products in an orderly fashion; not initiate or 
liquidate positions in a manner calculated to cause unreasonable price 
fluctuations or unwarranted price changes.
    [cir] Liquidate any options prior to or contemporaneously with a 
decrease in the hedged value of the qualified portfolio which options 
would thereby be rendered excessive.
    [cir] Promptly notify the Exchange of any material change in the 
qualified portfolio which materially affects the unhedged value of the 
qualified portfolio.
     If an exemption is granted, it will be effective at the 
time the decision is communicated. Retroactive exemptions will not be 
granted.

Exchange Rules Applicable

    Except as modified herein, the rules in Chapters I through XIX, 
XXIV, XXIVA, and XXIVB will equally apply to VXSLV options.
    The Exchange is proposing that the margin requirements for VXSLV 
options be set at the same levels that apply to ETF Based Volatility 
Index options under Exchange Rule 12.3. Margin of up to 100% of the 
current market value of the option, plus 20% of the underlying 
volatility index value must be deposited and maintained. Additional 
margin may be required pursuant to Exchange Rule 12.10.
    As with other ETF Based Volatility Index options, the Exchange 
hereby designates VXSLV options as eligible for trading as Flexible 
Exchange Options as provided for in Chapters XXIVA (Flexible Exchange 
Options) and XXIVB (FLEX Hybrid Trading System). The Exchange notes 
that FLEX VXSLV Options will only expire on business days that non-FLEX 
VXSLV options expire. This is because the term ``exercise settlement 
value'' in Rules 24A.4(b)(3) and 24B.4(b)(3), Special Terms for FLEX 
Index Options, has the same meaning set forth in Rule 24.9(a)(5). As is 
described earlier, Rule 24.9(a)(5) provides that the exercise 
settlement value of VXSLV options for all purposes under CBOE Rules 
will be calculated as the Wednesday that is thirty days prior to the 
third Friday of the calendar month immediately following the month in 
which a VXSLV option expires.

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 
listing of new series that would result from the introduction of VXSLV 
options.

Surveillance

    The Exchange will use the same surveillance procedures currently 
utilized for each of the Exchange's other Volatility Index and index 
options to monitor trading in VXSLV options. The Exchange further 
represents that these surveillance procedures shall be adequate to 
monitor trading in VXSLV options. For surveillance purposes, the 
Exchange will have complete access to information regarding trading 
activity in the pertinent underlying securities.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) \19\ of the Securities Exchange Act of 1934 (the ``Act''), 
in general, and furthers the objectives of Section 6(b)(5) \20\ 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 protection of investors and the 
public interest. The Exchange believes that the introduction of VXSLV 
options will attract order flow to the Exchange, increase the variety 
of listed options to investors, and provide a valuable hedging tool to 
investors.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 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 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-2011-055 on the subject line.

[[Page 37872]]

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-2011-055. 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 the 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 Number SR-CBOE-2011-055 and should be 
submitted on or before July 19, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-16075 Filed 6-27-11; 8:45 am]
BILLING CODE 8011-01-P

