
[Federal Register Volume 76, Number 159 (Wednesday, August 17, 2011)]
[Notices]
[Pages 51099-51103]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-20912]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65116; File No. SR-CBOE-2011-055]


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

August 11, 2011.

I. Introduction

    On June 15, 2011, Chicago Board Options Exchange, Incorporated (the 
``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\ a proposed rule 
change to trade options on the CBOE Silver ETF Volatility Index 
(``VXSLV''). The proposed rule change was published for comment in the 
Federal Register on June 28, 2011.\2\ The Commission received no 
comment letters on the proposed rule change. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ See Securities Exchange Act Release No. 64722 (June 22, 
2011), 76 FR 37868.
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II. Description

    The Exchange proposes to amend certain of its rules to allow the 
listing and trading of cash-settled, European-style options on 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

[[Page 51100]]

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. (Chicago time).\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 
proposes 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 strikes will be permitted 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 proposes 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 proposes 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. (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 proposes 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 Options 
Series, Quarterly Options Series, and Delayed Start Options Series will 
be aggregated with position in options contracts in the same VXSLV 
class.\16\ Exercise limits will be

[[Page 51101]]

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 proposes 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 proposes 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 proposes 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 an 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
    [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 put(s) 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 proposes that the margin requirements for VXSLV 
options be set at the same levels that apply to ETF Based Volatility 
Index options

[[Page 51102]]

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 
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.

III. Discussion

    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.\19\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\20\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, 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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    \19\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation.
    \20\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that it has previously approved the listing 
and trading of options on volatility indexes that are calculated using 
certain individual stock and ETF options listed on CBOE, and CBOE has 
genericized certain of its rules to collectively refer to these indexes 
as ``Individual Stock Based Volatility Indexes,'' ``ETF Volatility 
Based Indexes,'' and ``Volatility Indexes.'' \21\ The Commission notes 
that this filing layers VXSLV into CBOE's existing framework for ``ETF 
Volatility Based Indexes'' and ``Volatility Indexes,'' since VXSLV is 
comprised of ETF options.
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    \21\ See supra note 3.
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    As a national securities exchange, CBOE is required under Section 
6(b)(1) of the Act \22\ to enforce compliance by its members, and 
persons associated with its members, with the provisions of the Act, 
Commission rules and regulations thereunder, and its own rules. In 
addition, brokers that trade VXSLV options will also be subject to best 
execution obligations and FINRA rules.\23\ Applicable Exchange rules 
also require that customers receive appropriate disclosure before 
trading VXSLV options.\24\ Furthermore, brokers opening accounts and 
recommending options transactions must comply with relevant customer 
suitability standards.\25\
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    \22\ 15 U.S.C. 78f(b)(1).
    \23\ See NASD Rule 2320.
    \24\ See CBOE Rule 9.15.
    \25\ See FINRA Rule 2360(b) and CBOE Rules 9.7 and 9.9.
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    VXSLV options will trade pursuant to the existing rules for other 
Volatility Index options. The Commission believes that the listing 
rules proposed by CBOE for VXSLV options are consistent with the Act. 
Dollar or greater strikes for VXSLV options where the strike price is 
$200 or less and $5 or greater strikes when the strike price is greater 
than $200 should provide investors with greater flexibility in the 
trading of VXSLV options and further the public interest by allowing 
investors to establish positions that are better tailored to meet their 
investment objectives.
    The Commission notes that CBOE will compute values for VXSLV 
underlying option series on a real-time basis throughout each trading 
day, and that VXSLV levels will be calculated by CBOE and disseminated 
at 15-second intervals to major market data vendors.
    The Commission believes that the Exchange's proposed position 
limits and exercise limits for VXSLV options are appropriate and 
consistent with the Act. The Commission notes that the Exchange 
proposed that the existing position limits for ETF Based Volatility 
Index options will apply to VXSLV options. The Commission also notes 
the Exchange stated that SLV options, which are the underlying 
components for VXSLV, are among the most actively traded option classes 
currently listed. In addition, the Commission notes that the existing 
position limits for FLEX ETF Based Volatility Index options will apply 
to VXSLV options, and the position and exercise limits for FLEX VXSLV 
options will be equal to the position and exercise limits for Non-FLEX 
VXSLV options. Further, positions in FLEX VXSLV options that expire on 
the same day as Non-FLEX VXSLV options will be aggregated with 
positions in Non-FLEX VXSLV options.
    The Commission also notes that the margin requirements for ETF 
Based Volatility Index options will apply to options on VXSLV. The 
Commission finds this to be reasonable and consistent with the Act.
    Further, the Commission believes that the Exchange's proposal to 
allow VXSLV options 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.\26\ 
The Commission has also previously approved the listing and trading of 
FLEX options on ETF Based Volatility Indexes. The current proposal 
incorporates VXSLV options that trade as FLEX options into these 
existing rules and regulatory framework.
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    \26\ See Securities Exchange Act Release No. 31920 (February 24, 
1993), 58 FR 12280 (March 3, 1993).
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    The Commission notes that CBOE represented that it has an adequate 
surveillance program to monitor trading of VXSLV options and intends to 
apply its existing surveillance program to support the trading of these 
options. Finally, in approving the proposed rule change, the Commission 
has relied upon the Exchange's representation that it has the necessary 
systems capacity to

[[Page 51103]]

support new options series that will result from this proposal.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\27\ that the proposed rule change (SR-CBOE-2011-055) be, and 
hereby is, approved.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20912 Filed 8-16-11; 8:45 am]
BILLING CODE 8011-01-P


