
[Federal Register Volume 77, Number 144 (Thursday, July 26, 2012)]
[Notices]
[Pages 43897-43899]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-18219]


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SECURITIES AND EXCHANGE COMMISSION

Release No. 34-67478; File No. SR-CBOE-2012-066]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change To Increase 
Position and Exercise Limits for EEM Options

July 20, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 9, 2012, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend Interpretation and Policy .07 to Rule 4.11 
(Position Limits) to increase the position and exercise limits for 
options on the iShares MSCI Emerging Markets Index Fund (``EEM'') to 
500,000 contracts. 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 Exchange began trading options on the iShares MSCI Emerging 
Markets Index Fund (``EEM'') on March 9, 2006. Position limits for 
exchange-traded fund (``ETFs'') options, such as EEM options, are 
determined pursuant to Rule 4.11 and vary according to the number of 
outstanding share [sic] and past six-month trading volume of the 
underlying stock or ETF. The largest in capitalization and most 
frequently traded stocks and ETFs have an option position limit of 
250,000 contracts (with adjustments for splits, re-capitalizations, 
etc.) on the same side of the market; smaller capitalization stocks and 
ETFs have position limits of 200,000, 75,000, 50,000 or 25,000 
contracts (with adjustments for splits, re-capitalizations, etc.) on 
the same side of the market. The current position limit for EEM options 
is 250,000 contracts. The purpose of the proposed rule change is to 
amend CBOE Rule 4.11, Interpretation and Policy .07 to increase the 
position and exercise limits for EEM options to 500,000 contracts.\3\
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    \3\ By virtue of CBOE Rule 4.12, Interpretation and Policy .02, 
which is not being amended by this filing, the exercise limit for 
EEM options would be similarly increased.
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    There is precedent for establishing position limits for options on 
actively-traded ETFs and these position limit levels are set forth in 
Interpretation and Policy .07 to Rule 4.11.

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                                                              Position
                Security underlying option                      limit
                                                             (contracts)
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The DIAMONDS Trust (DIA)..................................       300,000
The Standard and Poor's Depositary Receipts Trust (SPY)...       900,000
The iShares Russell 2000 Index Fund (IWM).................       500,000

[[Page 43898]]

 
The PowerShares QQQ Trust (QQQQ)..........................       900,000
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    In support of this proposed rule change, the Exchange has collected 
trading statistics comparing EEM to IWM and SPY. As shown in the 
following table, the average daily volume in 2011 for EEM was 65 
million shares compared to 64.1 million shares for IWM and 213 million 
shares for SPY. The total shares outstanding for EEM are 922.9 million 
compared to 192.6 million shares for IWM and 716.1 million shares for 
SPY. Further, the fund market cap for EEM is $41.1 billion compared to 
$15.5 billion for IWM and $98.3 billion for SPY.

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                                                                    2011 ADV (mil.       2011 ADV (option     Shares outstanding      Fund market cap
                              ETF                                      shares)              contracts)              (mil.)                 ($bil)
--------------------------------------------------------------------------------------------------------------------------------------------------------
EEM...........................................................                   65                 280,000                 922.9                  41.1
IWM...........................................................                   64.1               662,500                 192.6                  15.5
SPY...........................................................                  213               2,892,000                 716.1                  98.3
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    The Exchange believes that increasing position limits for EEM 
options will lead to a more liquid and competitive market environment 
for EEM options that will benefit customers interested in this product.
    Under the Exchange's proposal, the options reporting requirement 
for EEM options would continue unabated. Thus, the Exchange would still 
require that each Trading Permit Holder (``TPH'') or TPH organization 
that maintains a position in EEM options on the same side of the 
market, for its own account or for the account of a customer, report 
certain information to the Exchange. This information would include, 
but would not be limited to, the option position, whether such position 
is hedged and, if so, a description of the hedge, and the collateral 
used to carry the position, if applicable. Exchange market-makers 
(including Designated Primary Market-Makers) would continue to be 
exempt from this reporting requirement, as market-maker information can 
be accessed through the Exchange's market surveillance systems. In 
addition, the general reporting requirement for customer accounts that 
maintain an aggregate position of 200 or more option contracts would 
remain at this level for EEM options.\4\
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    \4\ For reporting requirements, see CBOE Rule 4.13.
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    As the anniversary of listed options trading approaches its 
fortieth year, the Exchange believes that the existing surveillance 
procedures and reporting requirements at CBOE, other options exchanges, 
and at the several clearing firms are capable of properly identifying 
unusual and/or illegal trading activity. In addition, routine oversight 
inspections of the Exchange's regulatory programs by the Commission 
have not uncovered any material inconsistencies or shortcomings in the 
manner in which the Exchange's market surveillance is conducted. These 
procedures utilize daily monitoring of market movements via automated 
surveillance techniques to identify unusual activity in both options 
and underlying stocks.\5\
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    \5\ These procedures have been effective for the surveillance of 
EEM options trading and will continue to be employed.
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    Furthermore, large stock holdings must be disclosed to the 
Commission by way of Schedules 13D or 13G.\6\ Options positions are 
part of any reportable positions and, thus, cannot be legally hidden. 
Moreover, the Exchange's requirement that TPHs file reports with the 
Exchange for any customer who held aggregate large long or short 
positions of any single class for the previous day will continue to 
serve as an important part of the Exchange's surveillance efforts.
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    \6\ 17 CFR 240.13d-1.
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    The Exchange believes that the current financial requirements 
imposed by the Exchange and by the Commission adequately address 
concerns that a TPH or its customer may try to maintain an inordinately 
large un-hedged position in an option, particularly on EEM. Current 
margin and risk-based haircut methodologies serve to limit the size of 
positions maintained by any one account by increasing the margin and/or 
capital that a TPH must maintain for a large position held by itself or 
by its customer.\7\ In addition, the Commission's net capital rule, 
Rule 15c3-1 \8\ under the Act,\9\ imposes a capital charge on TPHs to 
the extent of any margin deficiency resulting from the higher margin 
requirement.
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    \7\ See CBOE Rule 12.3 for a description of margin requirements.
    \8\ 17 CFR 240.15c3-1.
    \9\ 15 U.S.C. 78s(b)(1) [sic].
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder, including the 
requirements of Section 6(b) of the Act.\10\ In particular, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \11\ requirements that the rules of an exchange be 
designed to promote just and equitable principles of trade, to prevent 
fraudulent and manipulative acts, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and to perfect the mechanism for a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest. Specifically, the proposed 
rule change will benefit large market makers (which generally have the 
greatest potential and actual ability to provide liquidity and depth in 
the product), as well as retail traders, investors, and public 
customers, by providing them with a more effective trading and hedging 
vehicle. In addition, the Exchange believes that the structure of EEM 
options and the considerable liquidity of the market for EEM options 
diminish the opportunity to manipulate this product and disrupt the 
underlying market that a lower position limit may protect against.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 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 (i) as the Commission may 
designate up to

[[Page 43899]]

90 days of such date 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 email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2012-066 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-2012-066. 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 
10:00 a.m. and 3:00 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-2012-066 and should be 
submitted on or before August 16, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-18219 Filed 7-25-12; 8:45 am]
BILLING CODE 8011-01-P


