
[Federal Register Volume 77, Number 66 (Thursday, April 5, 2012)]
[Notices]
[Pages 20673-20675]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-8170]



[[Page 20673]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66701; File No. SR-CBOE-2012-027]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Extend Pilot Programs Relating to FLEX Exercise 
Settlement Values and Minimum Value Sizes

March 30, 2012.
    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 March 27, 2012, 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 Exchange has designated the proposed rule change as 
constituting a rule change under Rule 19b-4(f)(6) under the Act,\3\ 
which renders the proposal effective upon filing with the Commission. 
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.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to extend the operation of its pilot 
programs regarding permissible exercise settlement values and the 
elimination of minimum value sizes for Flexible Exchange Options 
(``FLEX Options''),\4\ which pilot programs are currently set to expire 
on March 30, 2012, through the earlier of November 2, 2012 or the date 
on which the respective pilot program is approved on a permanent basis. 
The text of the proposed rule change is available on the Exchange's Web 
site (www.cboe.org/Legal), at the Exchange's Office of the Secretary 
and at the Commission.
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    \4\ FLEX Options provide investors with the ability to customize 
basic option features including size, expiration date, exercise 
style, and certain exercise prices. FLEX Options can be FLEX Index 
Options or FLEX Equity Options. In addition, other products are 
permitted to be traded pursuant to the FLEX trading procedures. For 
example, credit options are eligible for trading as FLEX Options 
pursuant to the FLEX rules in Chapters XXIVA and XXIVB. See CBOE 
Rules 24A.1(e) and (f), 24A.4(b)(1) and (c)(1), 24B.1(f) and (g), 
24B.4(b)(1) and (c)(1), and 28.17. The rules governing the trading 
of FLEX Options on the FLEX Request for Quote (``RFQ'') System 
platform are contained in Chapter XXIVA. The rules governing the 
trading of FLEX Options on the FLEX Hybrid Trading System platform 
are contained in Chapter XXIVB.
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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 Exchange 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
    On January 28, 2010, the Exchange received approval of a rule 
change that established two pilot programs regarding permissible 
exercise settlement values and the elimination of minimum value sizes 
for FLEX Options. The pilot programs are currently set to expire on 
March 30, 2012, unless otherwise extended or made permanent.\5\ The 
purpose of this rule change filing is to extend the two pilot programs 
through the earlier of November 2, 2012 or the date on which the 
respective pilot program is approved on a permanent basis. This filing 
does not propose any substantive changes to the pilot programs and 
contemplates that all other terms of FLEX Options will remain the same.
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    \5\ Securities Exchange Act Release Nos. 61439 (January 28, 
2010), 75 FR 5831 (February 4, 2010) (SR-CBOE-2009-087) (Approval 
Order); 61676 (March 9, 2010), 75 FR 13191 (March 18, 2010) (SR-
CBOE-2010-026) (technical rule change to include original pilots' 
conclusion date of March 28, 2011 in the rule text); and 64110 
(March 24, 2011), 76 FR 17463 (March 29, 2011) (SR-CBOE-2011-024) 
(extending the pilots through March 30, 2012).
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Background on the Pilots
Exercise Settlement Values Pilot for FLEX Index Options
    Under Rules 24A.4, Terms of FLEX Options, and 24B.4, Terms of FLEX 
Options, FLEX Options may expire on any business day specified as to 
day, month and year, not to exceed a maximum term of fifteen years. In 
addition, the exercise settlement value for FLEX Index Options can be 
specified as the index value determined by reference to the reported 
level of the index as derived from the opening or closing prices of the 
component securities (``a.m. settlement'' or ``p.m. settlement,'' 
respectively) or as a specified average, provided that the average 
index value must conform to the averaging parameters established by the 
Exchange.\6\ However, prior to the initiation of the exercise 
settlement values pilot, only a.m. settlements were permitted if a FLEX 
Index Option expires on, or within two business days of, a third-
Friday-of-the-month expiration (``Expiration Friday'').\7\
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    \6\ See Rules 24A.4(b)(3) and 24B.4(b)(3); see also Securities 
Exchange Act Release No. 31920 (February 24, 1993), 58 FR 12280 
(March 3, 1993) (SR-CBOE-92-17). The Exchange has determined to 
limit the averaging parameters to three alternatives: the average of 
the opening and closing index values; the average of the intra-day 
high and low index values; and the average of the opening, closing, 
and intra-day high and low index values. Any changes to the 
averaging parameters established by the Exchange would be announced 
to Trading Permit Holders via circular.
    \7\ For example, prior to the pilot, the exercise settlement 
value of a FLEX Index Option that expires on the Tuesday before 
Expiration Friday could have an a.m., p.m. or specified average 
settlement. However, the exercise settlement value of a FLEX Index 
Option that expires on the Wednesday before Expiration Friday could 
only have an a.m. settlement.
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    Under the exercise settlement values pilot, this restriction on 
p.m. and specified average price settlements in FLEX Index Options was 
eliminated.\8\ The exercise settlement values pilot is operating on a 
pilot basis, which pilot is currently set to expire on March 30, 2012.
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    \8\ No change was necessary or requested with respect to FLEX 
Equity Options. Regardless of the expiration date, FLEX Equity 
Options are settled by physical delivery of the underlying.
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Minimum Value Size Pilot for All FLEX Options
    Prior to the initiation of the pilot eliminating the minimum value 
size requirements, the minimum value size requirements under Rules 
24A.4(a)(4) and 24B.4(a)(5) were as follows:
     For opening transactions in any FLEX series in which there 
is no open interest at the time a FLEX RFQ or FLEX Order, as 
applicable, is submitted, the minimum value size was (i) for FLEX 
Equity Options, the lesser of 250 contracts or the number of contracts 
overlying $1 million in the underlying securities; and (ii) for FLEX 
Index Options, $10 million Underlying Equivalent Value. Under a prior 
pilot program (which was superseded by the minimum value size pilot 
program), the ``250 contracts'' component above had been reduced to 
``150 contracts.'' \9\
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    \9\ See Securities Exchange Act Release No. 57429 (March 4, 
2008), 73 FR 13058 (March 11, 2008) (SR-CBOE-2006-36) (approval of 
rule change that, among other things, established a one-and-a-half 
year pilot program that reduced the minimum number of contracts 
required for a FLEX Equity Option opening transaction in a new 
series).

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     For a transaction in any currently-opened FLEX series 
resulting from an RFQ or from trading against the electronic book 
(other than FLEX Quotes responsive to a FLEX Request for Quotes and 
FLEX Orders submitted to rest in the electronic book), the minimum 
value size was (i) for FLEX Equity Options, the lesser of 100 contracts 
or the number of contracts overlying $1 million in the underlying 
securities in the case of opening transactions, and 25 contracts in the 
case of closing transactions; and (ii) for FLEX Index Options, $1 
million Underlying Equivalent Value in the case of both opening and 
closing transactions; or (iii) in either case the remaining underlying 
size or Underlying Equivalent Value on a closing transaction, whichever 
is less.
     The minimum value size for FLEX Quotes responsive to an 
RFQ and FLEX Orders (undecremented size) submitted to rest in the 
electronic book was 25 contracts in the case of FLEX Equity Options, 
and $1 million Underlying Equivalent Value in the case of FLEX Index 
Options, or in either case the remaining underlying size or Underlying 
Equivalent Value on a closing transaction, whichever is less. In 
addition, with respect to FLEX Index Appointed Market-Makers, FLEX 
Quotes and FLEX Orders (undecremented size) must have been for at least 
$10 million Underlying Equivalent Value or the dollar amount indicated 
in the Request for Quote (if applicable), whichever is less.
    Under the minimum value size pilot, these minimum value size 
requirements were eliminated.\10\ Like the exercise settlement values 
pilot mentioned above, the minimum value size pilot is operating on a 
pilot basis, which pilot is currently set to expire on March 30, 2012.
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    \10\ The provisions in Rules 24A.9(b) and 24B.9(c) that provide 
that every FLEX Quote entered by a FLEX Appointed Market-Maker or a 
FLEX Qualified Market-Maker shall meet or exceed the minimum value 
size parameters set forth in Rules 24A.4(a)(4)(iv) and 
24B.4(a)(5)(iv), respectively, have not been/are not applicable 
during the duration of the pilot program. This is because all 
minimum value size requirements under Rules 24A.4(a)(4) and 
24B.4(a)(5) have been eliminated under the pilot program.
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Proposal
    CBOE is proposing to extend the two pilot programs through the 
earlier of November 2, 2012 or the date on which the pilot program is 
approved on a permanent basis. CBOE believes the pilot programs have 
been successful and well received by its membership and the investing 
public for the period that they have been in operation as pilots. CBOE 
intends to submit one or more separate rule changes that would seek 
permanent approval of each pilot. The present extension of the pilots 
is being submitted so that the pilots can continue without interruption 
while CBOE seeks permanent approval of the programs under a separate 
rule change filing(s).
    In support of the proposed extension of the pilot programs, and as 
required by the pilot programs' Approval Order, the Exchange has 
submitted to the Commission pilot program reports regarding the two 
pilots, which detail the Exchange's experience with the two programs. 
Specifically, for the expiration settlement values pilot, the Exchange 
provided the Commission an annual report analyzing volume and open 
interest for each broad-based FLEX Index Options class overlying an 
Expiration Friday, p.m.-settled FLEX Index Options series.\11\ The 
annual report also contained information and analysis of FLEX Options 
trading patterns. The Exchange also provided the Commission, on a 
periodic basis, interim reports of volume and open interest. For the 
minimum value size pilot, the Exchange provided the Commission an 
annual report containing data and analysis of underlying equivalent 
values, open interest and trading volume, and analysis of the types of 
investors that initiated opening FLEX Equity and Index Options 
transactions (i.e., institutional, high net worth, or retail). The 
reports were provided to the Commission on a confidential basis.
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    \11\ The annual report also contained pilot period and pre-pilot 
period analyses of volume and open interest for Expiration Friday, 
a.m.-settled FLEX Index series and Expiration Friday Non-FLEX Index 
series overlying the same index as an Expiration Friday, p.m.-
settled FLEX Index option.
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    The Exchange believes there is sufficient investor interest and 
demand in the pilot programs to warrant their extensions. The Exchange 
believes that the programs have provided investors with additional 
means of managing their risk exposures and carrying out their 
investment objectives. Furthermore, the Exchange has not experienced 
any adverse market effects with respect to the pilot programs.
    As noted above, CBOE intends to seek permanent approval of the two 
pilot programs under a separate rule change filing(s). In the event a 
pilot program is not approved on a permanent basis by November 2, 2012, 
the Exchange will submit an additional pilot program report covering 
the extended period of the respective pilot. Such report would include 
the details referenced above and be consistent with the pilot programs' 
Approval Order. The Exchange will also continue, on a periodic basis, 
to submit interim reports of volume and open interest consistent with 
the terms of the exercise settlement values pilot program as described 
in the pilot programs' Approval Order. All such pilot reports would 
continue to be provided on a confidential basis. The Exchange will also 
continue, on a periodic basis, to gather data and conduct analysis of 
underlying equivalent values, open interest and trading volume and to 
conduct analysis of the types of investors that initiated opening FLEX 
Equity and Index Options transactions consistent with the terms of the 
minimum value size pilot as described in the pilot programs' Approval 
Order. As noted in the pilot programs' Approval Order, any positions 
established under the respective pilot program would not be impacted by 
the expiration of the pilot program.\12\
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    \12\ For example, a position in a pm-settled FLEX Index Option 
series that expires on Expiration Friday in January 2015 could be 
established during the exercise settlement values pilot. If the 
pilot program were not extended (or made permanent), then the 
position could continue to exist. However, the Exchange notes that 
any further trading in the series would be restricted to 
transactions where at least one side of the trade is a closing 
transaction. As another example, a 10-contract FLEX Equity Option 
opening position that overlies less than $1 million in the 
underlying security and expires in January 2015 could be established 
during the minimum value size pilot. If the pilot program were not 
extended (or made permanent), then the position could continue to 
exist and any further trading in the series would be subject to the 
minimum value size requirements for continued trading in that 
series. See Approval Order, supra note 6, footnotes 9 and 10.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\13\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\14\ 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 engaging in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system. Specifically, the 
Exchange believes that the proposed extension of the pilot programs, 
which permit additional exercise settlement values and eliminate 
minimum value size requirements, would provide greater opportunities 
for investors to manage risk through the use

[[Page 20675]]

of FLEX Options. Further, the Exchange notes that it has not 
experienced any adverse effects from the operation of the pilot 
programs. The Exchange also believes that the extension of the exercise 
settlement values pilot and minimum value size pilot does not raise any 
unique regulatory concerns. In particular, although p.m. settlements 
may raise questions with the Commission, the Exchange believes that, 
based on the Exchange's experience in trading FLEX Options to date and 
over the pilot period, market impact and investor protection concerns 
will not be raised by this rule change. The Exchange also believes that 
the proposed rule change would continue to provide Trading Permit 
Holders and investors with additional opportunities to trade customized 
options in an exchange environment (which offers the added benefits of 
transparency, price discovery, liquidity, and financial stability as 
compared to the over-the-counter market) and subject to exchange-based 
rules, and investors would benefit as a result.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 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 that is 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

    The Exchange neither solicited nor received comments on the 
proposal.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the proposed rule change does not: (i) Significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-
4(f)(6) thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \17\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6) \18\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing. The Commission notes that 
waiving the 30-day operative delay would prevent the expiration of the 
pilot programs on March 30, 2012, prior to the extension of the pilot 
programs taking effect, and believes that waiving the 30-day operative 
delay is consistent with the protection of investors and the public 
interest.\19\ Therefore, the Commission designates the proposal 
operative upon filing.
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    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ 17 CFR 240.19b-4(f)(6).
    \19\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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 email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2012-027 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-2012-027. This 
file number should be included on the subject line if email 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-2012-027 and 
should be submitted on or before April 26, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-8170 Filed 4-4-12; 8:45 am]
BILLING CODE 8011-01-P


