
[Federal Register Volume 78, Number 31 (Thursday, February 14, 2013)]
[Notices]
[Pages 10668-10670]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-03395]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68888; File No. SR-CBOE-2012-120]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval to Proposed Rule Change To 
Establish a Pilot Program, as Modified by Amendment Nos. 2, 3, and 4, 
To List and Trade a P.M.-Settled S&P 500 Index Option Product

February 8, 2013.

I. Introduction

    On December 5, 2012, Chicago Board Options Exchange, Incorporated 
(the ``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 
thereunder,\2\ a proposed rule change to permit the listing and trading 
of P.M.-settled options on the Standard & Poor's 500 Index (``S&P 
500''). On December 17, 2012, the Exchange filed Amendments No. 1 and 2 
to the proposed rule change.\3\ The proposed rule change was published 
for comment in the Federal Register on December 26, 2012.\4\ On January 
4, 2013, the Exchange filed Amendment No. 3 to the proposed rule 
change.\5\ On January 29, 2013, the Exchange filed Amendment No. 4 to 
the proposed rule change.\6\ The Commission received no comment letters 
on the proposal. This order approves the proposed rule change, as 
modified, on a twelve-month pilot basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange withdrew Amendment No. 1 on December 17, 2012. 
In Amendment No. 2, the Exchange represented that it does not 
believe that CBOE Trading Permit Holders will experience significant 
operations issues when trading P.M.-settled S&P 500 Index products 
on CBOE.
    \4\ See Securities Exchange Act Release No. 68457 (December 18, 
2012), 77 FR 76135 (December 26, 2012) (``Notice''). An amendment to 
the Notice was published in the Federal Register on January 8, 2013 
with a corrected deadline for comments of January 16, 2013. See 
Securities Exchange Act Release No. 68457 (December 18, 2012), 78 FR 
1296 (January 8, 2013).
    \5\ In Amendment No. 3, the Exchange explained that any P.M.-
settled S&P 500 Index options series that are part of the SPX 
options class and that have an expiration on any day other than the 
third Friday of every month will remain under the SPXPM class to 
avoid investor confusion. Because Amendment No. 3 is technical in 
nature, the Commission is not publishing it for comment.
    \6\ In Amendment No. 4, the Exchange modified the anticipated 
start date for the listing and trading of the proposed contact on 
CBOE from January 22, 2013 to February 19, 2013. See Notice, supra 
note 4, at 76136. Because Amendment No. 4 is technical in nature, 
the Commission is not publishing it for comment.
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II. Description of the Proposal

    The Exchange is proposing to amend its rules to permit it to list 
and trade, on a pilot basis, cash-settled S&P 500 index options with 
third-Friday-of-the-month (``Expiration Friday'') expiration dates for 
which the exercise settlement value will be based on the index value 
derived from the closing prices of component securities (``P.M.-
settled''). The proposed contract (referred to as ``SPXPM'') is 
currently traded on a pilot basis on C2 Options Exchange, Incorporated 
(``C2'') (the ``C2 Pilot Program'').\7\ CBOE is proposing to list and 
trade SPXPM on the same terms as the C2 Pilot Program, except that CBOE 
intends to list and trade SPXPM for an initial pilot period of twelve 
months.\8\ CBOE and C2 will not concurrently list and trade SPXPM. In 
other words, C2 (which is wholly owned by the same corporation, CBOE 
Holdings, Inc., as CBOE) will cease trading SPXPM upon the introduction 
of SPXPM trading on CBOE. CBOE initially represented that it intended 
to begin trading SPXPM on or around January 22, 2013, but in Amendment 
No. 4, CBOE instead represented its intent to begin trading SPXPM on 
February 19, 2013.\9\
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    \7\ See Securities Exchange Act Release No. 65256 (September 2, 
2011), 76 FR 55969 (September 9, 2011) (``C2 SPXPM Approval 
Order'').
    \8\ The C2 Pilot Program is a fourteen month pilot.
    \9\ See Amendment No. 4, supra note 6.
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    CBOE will list and trade SPXPM in a manner similar to how SPXPM 
currently is listed and traded on C2. In

[[Page 10669]]

particular, SPXPM on CBOE will use a $100 multiplier, and the minimum 
trading increment will be $0.05 for options trading below $3.00 and 
$0.10 for all other series. Strike price intervals will be set no less 
than 5 points apart. Consistent with existing rules for index options, 
the Exchange will allow up to twelve near-term expiration months, as 
well as LEAPS. Expiration processing will occur on the Saturday 
following Expiration Friday. The product will have European-style 
exercise and will not be subject to position limits, though there would 
be enhanced reporting requirements. The Exchange represents that the 
conditions for listing SPXPM on CBOE will be similar to those for SPX, 
which already is listed and traded on CBOE.\10\
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    \10\ See Notice, supra note 4, at 76136.
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    The Exchange proposes that SPXPM be approved on a pilot basis for 
an initial period of twelve months. As part of the pilot program, the 
Exchange committed to submit a pilot program report to the Commission 
at least two months prior to the expiration date of the pilot program 
(the ``annual report''). The annual report will contain the same 
information currently provided to the Commission pursuant to the C2 
Pilot Program and would include an analysis of volume, open interest, 
and trading patterns. The analysis will examine trading in the proposed 
option product as well as trading in the securities that comprise the 
S&P 500 index. In addition, for series that exceed certain minimum open 
interest parameters, the annual report will provide analysis of index 
price volatility and share trading activity. In addition to the annual 
report, the Exchange committed to provide the Commission with periodic 
reports while the pilot is in effect that would contain some, but not 
all, of the information contained in the annual report (``interim 
reports''). This information is identical to the information that C2 is 
required to report to the Commission pursuant to the C2 Pilot Program.

III. Discussion and Commission Findings

    After careful consideration of the proposal, 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,\11\ and, in particular, the requirements 
of Section 6 of the Act.\12\ Specifically, the Commission finds that 
the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\13\ which requires that an exchange have rules designed to remove 
impediments to and perfect the mechanism of a free and open market and 
to protect investors and the public interest, to allow CBOE to conduct 
a limited, and carefully monitored, pilot as proposed.
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    \11\ 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).
    \12\ 15 U.S.C. 78f.
    \13\ 15 U.S.C. 78f(b)(5).
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    As noted in the Commission's order approving the listing and 
trading of SPXPM on C2 on a pilot program basis, the Commission has 
concerns about the potential impact on the market at expiration for the 
underlying component stocks for a P.M.-settled, cash-settled index 
option such as SPXPM.\14\ The potential impact today remains unclear, 
given the significant changes in the closing procedures of the primary 
markets over the past two decades. The Commission is mindful of the 
historical experience with the impact of P.M. settlement of cash-
settled index derivatives on the underlying cash markets, but 
recognizes that these risks may be mitigated today by the enhanced 
closing procedures that are now in use at the primary equity markets.
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    \14\ See C2 SPXPM Approval Order, supra note 7, at 55972, 55974-
55975.
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    To assist the Commission in assessing any potential impact of a 
P.M.-settled S&P 500 index option on the options markets as well as the 
underlying cash equities markets, CBOE will be required to submit data 
to the Commission in connection with the pilot in exactly the same 
scope and format as C2 was required to submit as a condition of 
Commission approval of SPXPM on a pilot basis. The Commission believes 
that CBOE's proposed twelve-month pilot, together with the data and 
analysis that CBOE will provide to the Commission, will allow CBOE and 
the Commission to monitor for and assess any potential for adverse 
market effects. Specifically, the data and analysis will assist the 
Commission in evaluating the effect of allowing P.M. settlement for S&P 
500 index options on the underlying component stocks.
    CBOE's proposed twelve-month pilot will enable the Commission to 
collect current data to assess and monitor for any potential for impact 
on markets, including the underlying cash equities markets. In 
particular, the data collected from CBOE's pilot program will help 
inform the Commission's consideration of whether the SPXPM pilot should 
be modified, discontinued, extended, or permanently approved. The P.M. 
settlement pilot information should help the Commission assess the 
impact on the markets and determine whether other changes are 
necessary. Furthermore, the Exchange's ongoing analysis of the pilot 
should help it monitor any potential risks from large P.M.-settled 
positions and take appropriate action on a timely basis if warranted.
    As the Commission noted when it approved C2's proposal to list and 
trade SPXPM, approval of CBOE's proposal to transfer listing of SPXPM 
from C2 to CBOE could benefit investors and the public interest to the 
extent it attracts trading in P.M.-settled S&P 500 index options from 
the opaque OTC market to the more transparent exchange-listed markets, 
where trading in the product will be subject to exchange trading rules 
and exchange surveillance.\15\
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    \15\ See C2 SPXPM Approval Order, supra note 7, at 55976.
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    The Exchange represents that it has adequate surveillance 
procedures to monitor trading in these options thereby helping to 
ensure the maintenance of a fair and orderly market, and has 
represented that it has sufficient capacity to handle additional 
traffic associated with this new listing.\16\ In addition, CBOE 
represents that it does not expect that its Trading Permit Holders will 
experience significant operation issues as a result of the cessation of 
trading on C2 of SPXPM upon the introduction of trading of SPXPM on 
CBOE.\17\ CBOE stated that there are no C2 Trading Permit Holders that 
are not also CBOE Trading Permit Holders, so any C2 Trading Permit 
Holder that is currently trading SPXPM on C2 will have access to trade 
SPXPM on CBOE.\18\
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    \16\ See Notice, supra note 4, at 76138.
    In addition, the Commission notes that CBOE would have access to 
information through its membership in the Intermarket Surveillance 
Group with respect to the trading of the securities underlying the 
S&P 500 index, as well as tools such as large options positions 
reports to assist its surveillance of SPXPM options.
    In approving the proposed rule change, the Commission also has 
relied upon the Exchange's representation that it has the necessary 
systems capacity to support new options series that will result from 
this proposal. See Notice, supra note 4, at 76138.
    \17\ See Notice, supra note 4, at 76136.
    \18\ See Amendment No. 2, supra note 3.
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    For the reasons discussed above, the Commission finds that CBOE's 
proposal is consistent with the Act, including Section 6(b)(5) thereof, 
in that it is designed to remove impediments to and perfect the 
mechanism of a free and open market, and, in general, to protect 
investors and the public interest. As it found in the case of C2's 
original proposal to list and trade SPXPM, and in light of the enhanced 
closing

[[Page 10670]]

procedures at the underlying markets and the potential benefits to 
investors discussed above, the Commission finds that it is appropriate 
and consistent with the Act to approve CBOE's proposal on a pilot 
basis. The collection of data during the pilot and CBOE's active 
monitoring of any effects of SPXPM on the markets will help CBOE and 
the Commission assess any impact of P.M. settlement in today's market.
    As noted in Amendment No. 4, CBOE represented its intent to begin 
trading SPXPM on February 19, 2013, which is the first day of a new 
expiration cycle for options.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-CBOE-2012-120), as modified 
by Amendment Nos. 2, 3, and 4, be, and hereby is, approved, as amended, 
on a 12 month pilot basis set to expire on February 8, 2014.
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    \19\ 15 U.S.C. 78s(b)(2).
    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03395 Filed 2-13-13; 8:45 am]
BILLING CODE 8011-01-P


