
[Federal Register Volume 77, Number 217 (Thursday, November 8, 2012)]
[Notices]
[Pages 67044-67047]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-27290]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68145; File No. SR-CBOE-2012-102]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Related to Extending the FLEX Exercise Settlement Values 
Pilot

November 2, 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 October 25, 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 proposal as a ``non-
controversial'' proposed rule change pursuant to Section 19(b)(3)(A) 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).
    \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

    The Exchange is proposing to extend the operation of its Flexible 
Exchange Options (``FLEX Options'') pilot program regarding permissible 
exercise settlement values for FLEX Index Options, which pilot program 
is currently set to expire on November 2, 2012 or the date on which the 
pilot program is approved on a permanent basis.\5\ The text of the 
proposed rule

[[Page 67045]]

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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    \5\ 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, among other things, established a pilot program regarding 
permissible exercise settlement values for FLEX Index Options. The 
pilot program is currently set to expire on the earlier of November 2, 
2012 or the date on which the pilot program is approved on a permanent 
basis.\6\ The purpose of this rule change filing is to extend the pilot 
program through the earlier of November 2, 2013 or the date on which 
the pilot program is approved on a permanent basis. This filing simply 
seeks to extend the operation of the pilot program and does not propose 
any substantive changes to the pilot program.
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    \6\ At the same time the permissible exercise settlement values 
pilot was established for FLEX Index Options, the Exchange also 
established a pilot program eliminating the minimum value size 
requirements for all FLEX Options. 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); 64110 (March 24, 2011), 76 FR 17463 (March 29, 2011) 
(SR-CBOE-2011-024) (extending the pilots through March 30, 2012); 
and 66701 (March 30, 2012), 77 FR 20673 (April 5, 2012) (SR-CBOE-
2012-027) (extending the pilots through the earlier of November 2, 
2012 or the date on which the respective pilot program is approved 
on a permanent basis). The pilot program eliminating the minimum 
value size requirements has been approved on a permanent basis in a 
separate rule change filing. See Securities Exchange Act Release No. 
67624 (August 8, 2012), 77 FR 48580 (August 14, 2012) (SR-CBOE-2012-
040).
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Background on the Pilot
    Under Rules 24A.4, Terms of FLEX Options, and 24B.4, Terms of FLEX 
Options, a FLEX Option 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 a FLEX Index Option 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.\7\ 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'').\8\
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    \7\ 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 on the expiration date; the 
average of the intra-day high and low index values on the expiration 
date; and the average of the opening, closing, and intra-day high 
and low index values on the expiration date. Any changes to the 
averaging parameters established by the Exchange would be announced 
to Trading Permit Holders via circular.
    \8\ 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.\9\ The exercise settlement values pilot is currently set to 
expire on the earlier of November 2, 2012 or the date on which the 
pilot program is approved on a permanent basis.
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    \9\ 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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Proposal
    CBOE is proposing to extend the pilot program through the earlier 
of November 2, 2013 or the date on which the pilot program is approved 
on a permanent basis. CBOE believes the pilot program has been 
successful and well received by its membership and the investing public 
for the period that it has been in operation as a pilot. In support of 
the proposed extension of the pilot program, and as required by the 
pilot program's Approval Order, the Exchange has submitted to the 
Commission pilot program reports regarding the pilot, which detail the 
Exchange's experience with the program. Specifically, 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.\10\ The 
annual report also contained information and analysis of FLEX Index 
Options trading patterns. The Exchange also provided the Commission, on 
a periodic basis, interim reports of volume and open interest. The 
reports were provided to the Commission on a confidential basis.\11\
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    \10\ The annual report also contained certain 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.
    \11\ The Commission notes that although CBOE requested 
confidential treatment of the pilot reports under the Freedom of 
Information Act (``FOIA''), such confidentiality is subject to the 
provisions of FOIA. 5 U.S.C. 552.
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    The Exchange believes there is sufficient investor interest and 
demand in the pilot program to warrant its extension. The Exchange 
believes that, for the period that the pilot has been in operation, the 
program has provided investors with additional means of managing their 
risk exposures and carrying out their investment objectives. 
Furthermore, the Exchange believes that it has not experienced any 
adverse market effects with respect to the pilot program, including any 
adverse market volatility effects that might occur as a result of large 
FLEX exercises in FLEX Option series that expire near Non-FLEX 
expirations and use a p.m. settlement (as discussed below).
    In that regard, based on the Exchange's experience in trading FLEX 
Options to date and over the pilot period, CBOE continues to believe 
that the restrictions on exercise settlement values are no longer 
necessary to insulate Non-FLEX expirations from the potential adverse 
market impacts of FLEX expirations.\12\ To the contrary,

[[Page 67046]]

CBOE believes that the restriction actually places the Exchange at a 
competitive disadvantage to its OTC counterparts in the market for 
customized options, and unnecessarily limits market participants' 
ability to trade in an exchange environment that offers the added 
benefits of transparency, price discovery, liquidity, and financial 
stability.
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    \12\ In further support, the Exchange also notes that the p.m. 
and specified average price settlements are already permitted for 
FLEX Index Options on any other business day except on, or within 
two business days of, Expiration Friday. The Exchange is not aware 
of any market disruptions or problems caused by the use of these 
settlement methodologies on these expiration dates (or on the 
expiration dates addressed under the pilot program). The Exchange is 
also not aware of any market disruptions or problems caused by the 
use of customized options in the OTC markets that expire on or near 
Expiration Friday and have a p.m. or specified average exercise 
settlement value. In addition, the Exchange believes the reasons for 
limiting expirations to a.m. settlement, which is something the SEC 
has imposed since the early 1990s for Non-FLEX Options, revolved 
around a concern about expiration pressure on the New York Stock 
Exchange (``NYSE'') at the close that are no longer relevant in 
today's market. Today, however, the Exchange believes stock 
exchanges are much better able to handle volume. There are multiple 
primary listing and unlisted trading privilege (``UTP'') markets, 
and trading is dispersed among several exchanges and alternative 
trading systems. In addition, the Exchange believes that 
surveillance techniques are much more robust and automated. In the 
early 1990s, it was also thought by some that opening procedures 
allow more time to attract contra-side interest to reduce 
imbalances. The Exchange believes, however, that today order flow is 
predominantly electronic and the ability to smooth out openings and 
closes is greatly reduced (e.g., market-on-close procedures work 
just as well as openings). Also other markets, such as the NASDAQ 
Stock Exchange, do not have the same type of pre-opening imbalance 
disseminations as the NYSE, so many stocks are not subject to the 
same procedures on Expiration Friday. In addition, the Exchange 
believes that the NYSE has reduced the required time a specialist 
has to wait after disseminating a pre-opening indication. So, in 
this respect, the Exchange believes there is less time to react in 
the opening than in the close. Moreover, to the extent there may be 
a risk of adverse market effects attributable to p.m. settled 
options (or certain average price settled options related to the 
closing price) that would otherwise be traded in a non-transparent 
fashion in the OTC market, the Exchange continues to believe that 
such risk would be lessened by making these customized options 
eligible for trading in an exchange environment because of the added 
transparency, price discovery, liquidity, and financial stability 
available.
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    The Exchange also notes that certain position limit, aggregation 
and exercise limit requirements continue to apply to FLEX Index Options 
in accordance with Rules 24A.7, Position Limits and Reporting 
Requirements, 24A.8, Exercise Limits, 24B.7, Position Limits and 
Reporting Requirements, and 24B.8, Exercise Limits. Additionally, all 
FLEX Options remain subject to the position reporting requirements in 
paragraph (a) of CBOE Rule 4.13, Reports Related to Position 
Limits.\13\ Moreover, the Exchange and its Trading Permit Holder 
organizations each have the authority, pursuant to CBOE Rule 12.10, 
Margin Required is Minimum, to impose additional margin as deemed 
advisable. CBOE continues to believe these existing safeguards serve 
sufficiently to help monitor open interest in FLEX Option series and 
significantly reduce any risk of adverse market effects that might 
occur as a result of large FLEX exercises in FLEX Option series that 
expire near Non-FLEX expirations and use a p.m. settlement.
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    \13\ CBOE Rule 4.13(a) provides that ``[i]n a manner and form 
prescribed by the Exchange, each Trading Permit Holder shall report 
to the Exchange, the name, address, and social security or tax 
identification number of any customer who, acting alone, or in 
concert with others, on the previous business day maintained 
aggregate long or short positions on the same side of the market of 
200 or more contracts of any single class of option contracts dealt 
in on the Exchange. The report shall indicate for each such class of 
options, the number of option contracts comprising each such 
position and, in the case of short positions, whether covered or 
uncovered.'' For purposes of this Rule, the term ``customer'' in 
respect of any Trading Permit Holder includes ``the Trading Permit 
Holder, any general or special partner of the Trading Permit Holder, 
any officer or director of the Trading Permit Holder, or any 
participant, as such, in any joint, group or syndicate account with 
the Trading Permit Holder or with any partner, officer or director 
thereof.'' Rule 4.13(d).
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    CBOE is also cognizant of the OTC market, in which similar 
restrictions on exercise settlement values do not apply. CBOE continues 
to believe that the pilot program is appropriate and reasonable and 
provides market participants with additional flexibility in determining 
whether to execute their customized options in an exchange environment 
or in the OTC market. CBOE continues to believe that market 
participants benefit from being able to trade these customized options 
in an exchange environment in several ways, including, but not limited 
to, enhanced efficiency in initiating and closing out positions, 
increased market transparency, and heightened contra-party 
creditworthiness due to the role of OCC as issuer and guarantor of FLEX 
Options.
    If, in the future, the Exchange proposes an additional extension of 
the pilot program, or should the Exchange propose to make the pilot 
program permanent (which the Exchange currently intends to do), the 
Exchange will submit, along with any filing proposing such amendments 
to the pilot program, an additional pilot program report covering the 
extended period during which the pilot program was in effect and 
including the details referenced above and consistent with the pilot 
program's Approval Order. The pilot program report would be submitted 
to the Commission at least two months prior to the new expiration date 
of the pilot program. 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 program's Approval Order. All such pilot reports 
would continue to be provided on a confidential basis.\14\ As noted in 
the pilot program's Approval Order, any positions established under the 
pilot program would not be impacted by the expiration of the pilot 
program.\15\
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    \14\ If the Exchange seeks permanent approval of the pilot 
program, the Exchange recognizes that certain information in the 
pilot reports may need to be made available on a public basis. The 
Commission notes that although CBOE requested confidential treatment 
of the pilot reports under FOIA, such confidentiality is subject to 
the provisions of FOIA. 5 U.S.C. 552.
    \15\ 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. 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 \16\ in general and furthers the objectives of 
Section 6(b)(5) of the Act \17\ in particular in that it should promote 
just and equitable principles of trade, serve to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and protect investors and the public interest. 
Specifically, the Exchange believes that the proposed extension of the 
pilot program, which permits additional exercise settlement values, 
would provide greater opportunities for investors to manage risk 
through the use of FLEX Options. Further, the Exchange believes that it 
has not experienced any adverse effects from the operation of the pilot 
program, including any adverse market volatility effects that might 
occur as a result of large FLEX exercises in FLEX Option series that 
expire near Non-FLEX expirations and use a p.m. settlement. The 
Exchange also believes that the extension of the exercise settlement 
values 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

[[Page 67047]]

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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    \16\ 15 U.S.C. 78f(b).
    \17\ 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 \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, along 
with a brief description and text of 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 requested 
that the Commission waive the 30-day operative delay so that the 
proposed rule change may become operative upon filing. The Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest. The Commission notes 
that waiving the 30-day operative delay would prevent the expiration of 
the pilot programs on November 2, 2012, prior to the extension of the 
pilot program becoming operative. Therefore, the Commission hereby 
waives the 30-day operative delay and designates the proposal operative 
upon filing.\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-2012-102 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-2012-102. 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-2012-102 and should be 
submitted on or before November 29, 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. 2012-27290 Filed 11-7-12; 8:45 am]
BILLING CODE 8011-01-P


