
[Federal Register Volume 77, Number 219 (Tuesday, November 13, 2012)]
[Notices]
[Pages 67723-67724]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-27510]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68164; File No. SR-CBOE-2012-071]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change To 
Increase the Maximum Term for LEAPS to Fifteen Years

November 6, 2012.

I. Introduction

    On July 24, 2012, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4

[[Page 67724]]

thereunder,\2\ a proposed rule change to increase the maximum term for 
Long-Term Equity Options Series (``LEAPS'') to fifteen years. The 
proposed rule change was published for comment in the Federal Register 
on August 10, 2012.\3\ A designation of a longer period for Commission 
action was published in the Federal Register on September 25, 2012.\4\ 
The Commission received one comment on the proposed rule change.\5\ On 
September 6, 2012, CBOE responded to the comment letter.\6\ This order 
approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 67600 (August 6, 
2012), 77 FR 47890 (``Notice'').
    \4\ See Securities Exchange Act Release No. 67892 (September 19, 
2012), 77 FR 59029.
    \5\ See letter to Elizabeth M. Murphy, Secretary, Commission, 
from Christopher Nagy, President, KOR Trading LLC, dated August 17, 
2012 (``KOR Letter'').
    \6\ See letter to Elizabeth M. Murphy, Secretary, Commission, 
from Jenny Klebes-Golding, Senior Attorney, CBOE, dated September 6, 
2012 (``CBOE Letter'').
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II. Description of the Proposal

    Currently, the maximum term for equity and interest rate LEAPS is 
36 months (three years) and the maximum term for index LEAPS is 60 
months (five years). CBOE proposes to amend CBOE Rules 5.8, 23.5(b) and 
24.9(b) to increase the maximum term for all LEAPS to 180 months 
(fifteen years).\7\ CBOE notes that similar fifteen year maximum terms 
exist for FLEX Options.\8\
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    \7\ CBOE also proposes to make technical, non-substantive 
changes to CBOE Rules 5.8 and 24.9 to delete ``[supreg]'' symbols.
    \8\ See Securities Exchange Act Release No. 58890 (October 30, 
2008), 73 FR 66085 (November 6, 2008) and CBOE Rules 24A.4(a)(2)(iv) 
and 24B.4(a)(2)(iv).
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    CBOE states that expanding the eligible term for all LEAPS to 
fifteen years would allow the Exchange to offer products in an 
exchange-traded environment that could compete with comparable over-the 
counter (``OTC'') products. According to CBOE, it has received numerous 
requests from market participants that currently enter into OTC 
positions that have longer-dated expirations than are currently 
available on CBOE to list LEAPS with longer dated expirations on the 
Exchange. CBOE represents that it has confirmed that the OCC can 
configure its systems to support LEAPS that have a maximum term of 
fifteen years.

III. Discussion and Commission Findings

    After careful review, 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.\9\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\10\ 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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    \9\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
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    KOR suggests that CBOE's proposal lacks data evidencing actual 
interest in extended LEAPS terms.\11\ With regard to interest in the 
proposed product, CBOE responds that its proposal is geared toward an 
unmet demand of institutional investors, and was prompted by numerous 
requests from market participants, such as insurance companies offering 
equity-linked variable annuities, that have typically turned to OTC 
dealers to trade options with longer-dated expirations.\12\ CBOE also 
states that it believes that additional institutional demand for 
longer-dated LEAPS (such as, for example, S&P 500 Index options) would 
come from sell-side firms hedging longer-dated OTC instruments (such 
as, for example, S&P variance).\13\ Further, CBOE states that virtually 
all of the firms it queried suggested that the ideal maturity for 
hedging trading activity exceeds the 10-year mark and that it seeks to 
offer various maturities (particularly in S&P 500 Index options) out to 
fifteen years in order to provide a more robust and flexible market for 
longer-dated options.
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    \11\ See KOR Letter, supra note 5.
    \12\ See CBOE Letter, supra note 6.
    \13\ Id.
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    KOR also expresses concern that the proposal does not specify 
classes to which the proposal would apply and that the proposal could 
unduly burden the market through its potential impact on quote traffic 
and the costs associated with disseminating and maintaining the data 
for longer-termed LEAPS.\14\ CBOE states that it does not currently 
know all of the specific classes for which there will be future market 
demand for longer-dated LEAPS, and thus it is unable to identify such 
classes at this time.\15\ CBOE notes, however, that S&P 500 Index 
options are one of the classes that it anticipates would underlie 
longer-dated LEAPS.\16\ CBOE also states that it does not expect there 
to be a significant increase to quote traffic because CBOE anticipates 
listing longer-dated LEAPS in response to specific market demand and 
does not expect to significantly populate expirations.\17\ In addition, 
CBOE notes that certain liquidity providers are not subject to quoting 
obligations for LEAPS, which will assist with quote traffic 
mitigation.\18\
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    \14\ See KOR Letter, supra note 5.
    \15\ See CBOE Letter, supra note 6.
    \16\ Id.
    \17\ Id.
    \18\ Id.
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    Given CBOE's representation that there is demand for options with 
longer-dated expirations from institutional investors who are currently 
trading such options in the OTC market,\19\ the Commission believes 
that the proposal is reasonably designed to provide such investors with 
additional means of hedging equity portfolios from long-term market 
risk with an exchange-traded standardized security, thereby 
facilitating transactions in options and contributing to the protection 
of investors and the maintenance of fair and orderly markets. The 
Commission notes that fifteen-year expirations are already permitted 
for non-standardized FLEX Options.\20\ In addition, the Commission 
notes the Exchange's representation that it does not anticipate a 
significant increase in quote traffic.\21\ Accordingly, for the reasons 
discussed above, the Commission believes that the proposed rule change 
is consistent with the Act.
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    \19\ See Notice; see also CBOE Letter, supra note 6.
    \20\ See supra note 8.
    \21\ See CBOE Letter, supra note 6.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-CBOE-2012-071) be, and it 
hereby is, approved.
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    \22\ 15 U.S.C. 78s(b)(2).

    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. 2012-27510 Filed 11-9-12; 8:45 am]
BILLING CODE 8011-01-P


