
[Federal Register Volume 76, Number 150 (Thursday, August 4, 2011)]
[Notices]
[Pages 47280-47283]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-19748]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64991; File No. SR-CBOE-2011-039]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change To List 
and Trade Single Stock Dividend Options

July 29, 2011.
    On May 31, 2011, 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 (the ``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade cash-settled 
options that overlie the ordinary cash

[[Page 47281]]

dividends paid by an issuer over an annual, semi-annual, or quarterly 
``accrual period.'' The proposed rule change was published for comment 
in the Federal Register on June 17, 2011.\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. 64654 (June 13, 
2011), 76 FR 35503 (``Notice'').
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I. Description of Proposal

    CBOE proposes to list and trade cash-settled, P.M.-settled, 
European-style exercise options that overlie the ordinary cash 
dividends paid by an issuer (``SSDO'') over an annual accrual period. 
CBOE also may list series of SSDOs with an accrual period of less than 
a year, but in no event less than one quarter of a year.

Product Design

    Each SSDO represents the accumulated ordinary dividend amounts paid 
by a specific issuer over a specified accrual period.\4\ 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.\5\
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    \4\ For purposes of SSDOs, dividends are deemed to be ``paid'' 
on the ex-dividend date.
    \5\ 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 accrual 
period. 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 Exchange proposes that the minimum price variation for quotes 
shall be established on a class-by-class basis by the Exchange and 
shall not be less than $0.01. CBOE also proposes 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. 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 
in different years for any single stock underlying an SSDO and up to 
ten contract months for accrual periods of less than a year.\6\ 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.
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    \6\ See Notice, supra note 3, for an example of listing five 
annual contract months expiring in December in different years.
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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 to 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

    CBOE has represented that it 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. The Exchange represents 
that these surveillance procedures shall be adequate to monitor trading 
in these option products. For surveillance purposes, the CBOE has 
represented that it will have complete access to information regarding 
trading activity in the pertinent securities whose dividend payment is 
the basis for particular SSDOs.

Position Limits

    CBOE proposes that 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. CBOE represents that 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. CBOE states that because the pricing of 
ordinary options versus SSDOs will differ dramatically, the Exchange 
believes there is no need to aggregate positions to prevent 
manipulative practices involving the underlying options.

Exchange Rules Applicable

    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).
    CBOE proposes to designate SSDO options as eligible for trading as 
Flexible

[[Page 47282]]

Exchange Options (``FLEX options'') as provided for in Chapters XXIVA 
(Flexible Exchange Options) and XXIVB (FLEX Hybrid Trading System).

Capacity

    CBOE represents that it has analyzed its capacity and believes that 
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.

II. Discussion and Commission Findings

    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\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\8\ which requires, among other things, that 
the rules of a national securities exchange be designed to promote just 
and equitable principles of trade, 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 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 CBOE's proposal gives options 
investors the ability to make an additional investment choice in a 
manner consistent with the requirements of Section 6(b)(5) of the 
Act.\9\ The Commission notes that SSDOs will allow market participants 
to hedge their exposure to changes in the dividend payment policies of 
the underlying securities. Further, the Commission believes that the 
listing rules proposed by CBOE for SSDOs are reasonable and consistent 
with the Act, as discussed below.
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    \9\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that permitting $1.00 strike price 
intervals if the strike price is equal to or less than $200 will 
provide investors with added flexibility in the trading of these 
options and will further the public interest by allowing investors to 
establish positions that are better tailored to meet their investment 
objectives. As explained by CBOE, the underlying value of an SSDO is 
expected to fluctuate around a limited expected dividend value 
range,\10\ and therefore, the implementation of $1.00 strike price 
intervals is designed to provide investors with flexibility. Because of 
this characteristic the Commission believes that the implementation of 
$1 strike price intervals for SSDOs, within the parameters of the rule, 
is appropriate.
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    \10\ The Commission notes that, in the Notice the Exchange 
provided a number of examples of values underlying SSDOs using past 
ordinary dividend payouts over varying accrual periods, and these 
values ranged from 1 to 22.70. See Notice, supra note 3.
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    The Commission believes that CBOE's proposal to allow the minimum 
price variation to be no less than $0.01, as established on a class-by-
class basis, is consistent with the Act, given the expected low 
underlying dividend values for SSDOs. CBOE has represented that it 
expects that the underlying dividend values for SSDOs will be 
relatively low, and that granular pricing will provide for more pricing 
points. Further, CBOE has represented that it has analyzed its capacity 
and believes that it 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. In particular, the 
Exchange noted that expected dividend payments, on which the value of 
SSDOs are predicated, are generally much less volatile than share 
prices, and thus there is less need to list numerous strike prices for 
each expiration date of an SSDO or to add many new strikes over the 
life of an SSDO.
    The Commission notes that, on a daily basis, CBOE will calculate 
the aggregate daily dividend totals for the specific issuer, and will 
disseminate the underlying SSDO value, multiplied by ten (10), through 
OPRA, the CTA and/or the MDI feed.
    The Exchange has proposed to apply the same position and exercise 
limits as those for standard options overlying the same security. 
However, the Exchange notes that positions in SSDOs will not be 
aggregated with positions in the ordinary positions overlying the stock 
of the issuer paying the dividends underlying the SSDO, because the 
pricing of ordinary options and SSDOs vary greatly and thus it is 
unnecessary to aggregate the positions to prevent manipulative 
practices involving the underlying. The Commission believes that CBOE's 
proposed rules relating to position and exercise limits are appropriate 
and consistent with the Act.
    The Exchange also proposes to margin SSDOs in the same manner as 
single stock options; however, 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 and the applicable 
modifier. The Commission believes that CBOE's proposed rules relating 
to margin requirements are appropriate.
    The Commission also believes that CBOE's proposal to allow SSDOs to 
be eligible for trading as FLEX options is consistent with the Act. The 
Commission previously approved rules relating to the listing and 
trading of FLEX options on CBOE, which give investors and other market 
participants the ability to individually tailor, within specified 
limits, certain terms of those options.\11\
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    \11\ See Securities Exchange Act Release No. 31910 (February 23, 
1993), 58 FR 12056 (March 2, 1993).
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    The Commission notes that CBOE represented that it has an adequate 
surveillance program to monitor trading of SSDOs and intends to apply 
its existing surveillance program for single stock options to support 
the trading of these options. As with other securities, there is a 
potential risk that a corporate insider may exploit his or her advance 
knowledge of changes to an issuer's dividend policy through the 
purchase or sale of an SSDO. The Commission has taken a number of 
enforcement actions in cases where insiders executed securities 
transactions to exploit their knowledge of changes in issuers' dividend 
policies.\12\ Accordingly, adequate surveillance is an important 
responsibility of the CBOE. In addition, CBOE has represented that it 
is confident that it has adequate tools in place to surveil for market 
manipulation. Further, CBOE is a member of the ISG and can obtain 
trading activity in information in the underlying securities whose 
dividend payment is the basis for particular SSDOs from the exchanges 
that list the securities. The Commission believes that CBOE should have 
the ability and resources to adequately surveil for manipulation in 
SSDOs.
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    \12\ See, e.g., SEC v. David L. Johnson, Civil Action No. 05-CV-
4789 (USDC E.D. Pa.) (Sept. 7, 2005) (consent to permanent 
injunction, disgorgement and civil penalty for a person who 
allegedly sold shares of an issuer based on inside information of a 
dividend cut, and tipped his son to do likewise); SEC v. Barry 
Hertz, Civil Action No. 05-2848 (USDC E.D.N.Y.) (Mar. 16, 2007) 
(consent to final judgment, including an injunction and two-year bar 
from serving as an officer or director of a public corporation, for 
a person alleged to have traded on inside information, including 
purchasing shares of an issuer while in possession of positive news 
of a first time dividend issuance).
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    In approving the proposed rule change, the Commission has also 
relied upon CBOE's representation that it has the necessary systems 
capacity to support the new options series that will result from this 
proposal.

[[Page 47283]]

III. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-CBOE-2011-039) is hereby 
approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    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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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-19748 Filed 8-3-11; 8:45 am]
BILLING CODE 8011-01-P


