
[Federal Register Volume 77, Number 192 (Wednesday, October 3, 2012)]
[Notices]
[Pages 60489-60491]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-24288]



[[Page 60489]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67937; File No. SR-CBOE-2012-091]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule To Eliminate Position and Exercise Limits for Physically-
Settled SPY Options on a Pilot Basis

September 27, 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 September 14, 2012, the Chicago Board Options Exchange, 
Incorporated (the ``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 filed the proposal as a ``non-
controversial'' proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 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

    CBOE proposes to amend its rules to eliminate position and exercise 
limits for physically-settled options on the SPDR S&P 500 ETF Trust 
(``SPY'') pursuant to a pilot program. The text of the proposed rule 
change 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's Public Reference Room.

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
    CBOE proposes to amend Interpretation and Policy .07 to Rule 4.11 
to eliminate position and exercise limits for physically-settled SPY 
options pursuant to a pilot program.\5\ This filing is based on a 
filing previously submitted by NYSE MKT LLC (f/k/a NYSE Amex, LLC 
(``NYSE Amex'')), which the Commission recently approved.\6\
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    \5\ By virtue of CBOE Rule 4.12, Interpretation and Policy .02, 
which is not being amended by this filing, the exercise limit for 
SPY options would be similarly eliminated.
    \6\ See Securities Exchange Act Release No. 67672 (August 15, 
2012) 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29).
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    The Exchange began trading SPY options on January 10, 2005 on the 
CBOE Hybrid Trading System. That year, the position limit for these 
options was increased from 75,000 contracts to 300,000 contracts on the 
same side of the market.\7\ In July 2011, the position limit for these 
options was again increased from 300,000 contracts to the current limit 
of 900,000 contracts on the same side of the market.\8\
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    \7\ See Securities Exchange Act Release No. 51041 (January 14, 
2005), 70 FR 3408 (January 24, 2005) (SR-CBOE-2005-06).
    \8\ See Securities Exchange Act Release No. 64928 (July 20, 
2011), 76 FR 44633 (July 26, 2011) (SR-CBOE-2011-065).
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    The underlying SPY tracks the performance of the S&P 500 Index and 
the Exchange states that the SPY and SPY options have deep, liquid 
markets that reduce concerns regarding manipulation and disruption in 
the underlying markets. In support of this proposed rule change, the 
Exchange has collected the following trading statistics for SPY and SPY 
options: (1) The average daily volume (``ADV'') to date (as of August 
24 2012) for SPY is 148 million shares; (2) the ADV to date in 2012 for 
SPY options is 2.6 million; (3) the total shares outstanding for SPY 
are 750.3 million; and (4) the fund market cap for SPY is $106 billion. 
The Exchange represents further that there is tremendous liquidity in 
the securities that make up the S&P 500 Index. For example, the ADV of 
the component securities in the S&P 5000 Index for the 6-month period 
of February 28, 2012 through August 28, 2012 was 635,583,189.
    Under the Exchange's proposal, the options reporting requirement 
for SPY options would continue unabated. Thus, the Exchange would still 
require that each Trading Permit Holder (``TPH'') or TPH organization 
that maintains a position in SPY 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 SPY options.\9\
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    \9\ See CBOE Rule 4.13(a).
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    In addition, CBOE Rule 4.12 [sic] provides:

    In addition to the reporting requirement described in paragraph 
(a) of this Rule, each Trading Permit Holder (other than an Exchange 
market-maker or DPM) that maintains a position in excess of 10,000 
non-FLEX equity option contracts on the same side of the market on 
behalf of its own account or for the account of a customer, shall 
report information as to whether such positions are hedged, and 
provide documentation to as to how such contracts are hedged, in a 
manner and form prescribed by the Exchange. In addition, whenever 
the Exchange determines based on a report to the Department of 
Market Regulation or otherwise, that a higher margin requirement is 
necessary in light of the risks associated with an under-hedged Non-
FLEX equity option position in excess of 10,000 contracts on the 
same side of the market, the Exchange may consider imposing 
additional margin upon the account maintaining such under-hedged 
position, pursuant to its authority under Exchange Rule 12.10. 
Additionally, it should be noted that the clearing firm carrying the 
account will be subject to capital charges under SEC Rule 15c3-1 to 
the extent of any margin deficiency resulting from the higher margin 
requirements.

    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

[[Page 60490]]

to identify unusual activity in both options and underlying stocks.\10\
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    \10\ These procedures have been effective for the surveillance 
of SPY 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.\11\ 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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    \11\ 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 SPY. 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.\12\ In addition, the Commission's net capital rule, 
Rule 15c3-1 \13\ under the Securities Exchange Act of 1934 (the 
``Act''),\14\ imposes a capital charge on TPHs to the extent of any 
margin deficiency resulting from the higher margin requirement.
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    \12\ See CBOE Rule 12.3 for a description of margin 
requirements.
    \13\ 17 CFR 240.15c3-1.
    \14\ 15 U.S.C. 78s(b)(1).
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Pilot Program

    The Exchange proposes that this rule change be adopted pursuant to 
a pilot program, set to expire November 27, 2013.\15\ The Exchange will 
perform an analysis of the initial pilot program to eliminate position 
limits in SPY after the first twelve (12) months of the pilot program 
(the ``Pilot Report''). The Pilot Report will detail the size and 
different types of strategies employed with respect to positions 
established as a result of the elimination of position limits in SPY. 
In addition, the report will note whether any problems resulted due to 
the no limit approach and any other information that may be useful in 
evaluating the effectiveness of the pilot program. The Pilot Report 
will compare the impact of the pilot program, if any, on the volumes of 
SPY options and the volatility in the price of the underlying SPY 
shares, particularly at expiration. In preparing the report the 
Exchange will utilize various data elements such as volume and open 
interest. In addition the Exchange will make available to Commission 
staff data elements relating to the effectiveness of the pilot program.
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    \15\ The Exchange will notify CBOE Trading Permit Holders of the 
establishment of the pilot program and the running dates of the 
pilot program via regulatory circular.
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    Conditional on the findings in the Pilot Report, CBOE will file 
with the Commission a proposal to either extend the pilot program, 
adopt the pilot program on a permanent basis, or terminate the pilot 
program. If the pilot program is not extended or adopted on a permanent 
basis by November 27, 2013, the position limits for SPY would revert to 
limits in effect at the commencement of the pilot program.
    The Exchange believes that the elimination of position and exercise 
limits on SPY options on a pilot basis is required for competitive 
purposes as well as for purposes of consistency and uniformity among 
the competing options exchanges. This supports the Exchange's current 
proposal to eliminate the position and exercise limits applicable to 
physically-settled SPY options on a pilot basis.
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.\16\ In particular, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \17\ 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.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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    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 SPY options and the considerable 
liquidity of the market for SPY options diminish the opportunity to 
manipulate this product and disrupt the underlying market that a lower 
position limit may protect against. The Exchange also believes that the 
proposed rule change will benefit a greater number of market 
participants who are CBOE TPHs and members of other exchanges, such as 
NYSE Amex. This is because SPY is a multiply listed options class and 
currently there is not a uniform and consistent position and exercise 
limits regime across all of the exchanges that list SPY options. The 
proposed filing will benefit market participants because it will ensure 
consistency and uniformity among the competing options exchanges as to 
the position and exercise limits for a multiply listed options class.

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

    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 \18\ and Rule 19b-
4(f)(6) thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 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 \20\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6) \21\ 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, noting that doing 
so will ensure fair competition among

[[Page 60491]]

options exchanges and immediately benefit market participants who are 
CBOE TPHs and members of other exchanges, such as NYSE Amex, by 
ensuring consistency and uniformity across options exchanges with 
respect to the multiply listed SPY options class. The Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest. Therefore, the 
Commission designates the proposal operative as of September 27, 
2012.\22\
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    \20\ 17 CFR 240.19b-4(f)(6).
    \21\ 17 CFR 240.19b-4(f)(6).
    \22\ 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-2012-091 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-2012-091. 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-2012-091 and 
should be submitted on or before October 24, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-24288 Filed 10-2-12; 8:45 am]
BILLING CODE 8011-01-P


