
[Federal Register Volume 78, Number 104 (Thursday, May 30, 2013)]
[Notices]
[Pages 32524-32527]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-12847]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69638; File No. SR-CBOE-2013-055]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change To Amend Its 
Rules Regarding the Trading of XSP Options

May 24, 2013.
    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 May 14, 2013, 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, II, and III 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

    The Exchange proposes to amend its rules regarding the trading of 
XSP options. The text of the proposed rule change is available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at

[[Page 32525]]

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 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 these 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 aspects 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 proposes to amend its rules regarding the trading of 
XSP options (which have 1/10 the value of the S&P 500 Index options). 
First, the Exchange proposes to amend Interpretation and Policy .14 to 
Rule 24.9 to state that the Exchange may list options on XSP whose 
exercise settlement value is derived from closing prices on the last 
trading day prior to expiration (``P.M.-settled''). The Exchange 
currently offers the SPXPM options class, which are P.M.-settled 
options on the S&P 500 Index. SPXPM trades on a pilot basis, which 
pilot period is to end 12 months from the approval date (which was 
February 8, 2013). The Exchange proposes to add P.M.-settled XSP 
options to the SPXPM pilot program (and to insert the date February 8, 
2014 in place of ``[insert date 12 months from approval]'' to designate 
the end date of the pilot period). CBOE proposes to abide by the same 
reporting requirements for the trading of P.M.-settled XSP under this 
pilot program as the Exchange does for the trading of SPXPM.\3\ Upon 
approval of this proposed rule change, the Exchange would change the 
trading symbol for A.M.-settled XSP options, allow any series with open 
interest in A.M.-settled XSP options to expire, delete any A.M.-settled 
XSP series without open interest and, going forward, only list XSP 
series that are P.M.-settled. The purpose of this proposed change is to 
permit the trading of XSP options on a P.M.-settled basis, as the 
Exchange believes that this will encourage greater trading in XSP 
options.
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    \3\ For the details of these reporting requirements, see 
Securities Exchange Act Release Nos. 68888 (February 8, 2013), 78 FR 
10668 (February 14, 2013) and 68457 (December 18, 2012), 77 FR 76135 
(December 26, 2012) (SR-CBOE-2012-120).
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    The Exchange proposes to make a number of corresponding amendments 
to its rules in conjunction with the proposed trading of XSP options on 
a P.M.-settled basis.
    First, Interpretation and Policy .04 to Rule 24.6 states that on 
the last trading day, transactions in expiring PM-settled S&P 500 Index 
options (SPXPM) may be effected on the Exchange between the hours of 
8:30 a.m. and 3:00 p.m. (as opposed to the normal trading hours for 
non-expiring SPXPM options, which are from 8:30 a.m. until 3:15 
p.m.).\4\ The Exchange proposes to add P.M.-settled XSP options to this 
statement.\5\
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    \4\ All times referenced are Chicago time.
    \5\ The proposed Interpretation and Policy .04 to Rule 24.6 
would read: On their last trading day, transactions in expiring 
P.M.-settled S&P 500 Index options (SPXPM) and P.M.-settled XSP 
options may be effected on the Exchange between the hours of 8:30 
a.m. (Chicago time) and 3:00 p.m. (Chicago time).
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    XSP options (which are based on the S&P 500 Index) are typically 
priced in the market based on corresponding futures values. The primary 
listing markets for the component securities that comprise the S&P 500 
close trading in those securities at 3:00 p.m. The primary listing 
exchanges for the component securities disseminate closing prices of 
the component securities, which are used to calculate the exercise 
settlement value of the S&P 500. CBOE believes that, under normal 
trading circumstances, the primary listing markets have sufficient 
bandwidth to prevent any data queuing that would cause any trades that 
are executed prior to the closing time from being reported after 3:00 
p.m. Despite the fact that the exercise settlement value will be fixed 
at or soon after 3:00 p.m., if the Exchange did not close trading in 
expiring P.M.-settled XSP options at 3:00 p.m. on their last trading 
day, trading in expiring P.M.-settled XSP options would continue for an 
additional fifteen minutes until 3:15 p.m. and would not be priced on 
corresponding futures values, but rather the known cash value. At the 
same time, the prices of non-expiring P.M.-settled XSP options series 
would continue to move and be priced in response to changes in 
corresponding futures prices.
    A potential pricing divergence could occur between 3:00 p.m. and 
3:15 p.m. on the final trading day in expiring P.M.-settled XSP options 
(e.g., switch from pricing off of futures to cash). Further, the switch 
from pricing off of futures to cash can be a difficult and risky 
switchover for liquidity providers. As a result, without closing 
expiring contracts at 3:00 p.m., it is foreseeable that Market-Makers 
would react by widening spreads in order to compensate for the 
additional risk. Therefore, the Exchange believes that, in order to 
mitigate potential investor confusion and the potential for increased 
costs to investors, it is appropriate to cease trading in the expiring 
P.M.-settled contracts of SPXPM and XSP with P.M.-settlement, as they 
are based on the S&P 500 Index, at 3:00 p.m. The Exchange does not 
believe that the proposed change will impact volatility on the 
underlying cash market at the close on third Fridays. Further, the 
Exchange already closes trading on the last trading day for 
transactions in expiring SPXPM options at 3:00 p.m.
    The Exchange also proposes to amend Interpretation and Policy .03 
to Rule 6.42 regarding minimum increments for bids and offers for XSP 
options. Currently, the minimum increments for bids and offers for XSP 
options are $0.01 for all option series quoted below $3 (including 
LEAPS) and $0.05 for all option series $3 and above (including 
LEAPS).\6\ However, the current minimum increments for bids and offers 
for SPY options, which is an exchange-traded fund that tracks the 
performance of 1/10th the value of the S&P 500 Index, is $0.01 
regardless of whether option series is quoted above, at, or below 
$3.\7\ Because both XSP options and SPY options prices are based, in 
some manner, on 1/10th the price of the S&P 500 Index, the Exchange 
believes that it is important that these products have the same minimum 
increments for consistency and competitive reasons. As such, the 
Exchange proposes to state that for so long as SPY options participate 
in the Penny Pilot program, the minimum increments for XSP are $0.01 
for all options series (including LEAPS).\8\
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    \6\ This minimum increment pricing regime for XSP options was 
established in 2007, and was established in the same amounts that 
were concurrently approved for physically settled options on the 
SPDR S&P 500 ETF (``SPY''). See Securities Exchange Act Release No. 
56565 (September 27, 2007), 72 FR 56403 (October 3, 2007) (approval 
of SR-CBOE-2007-98, which extended and expanded the Penny Pilot 
Program).
    \7\ The minimum increment for all option series in the SPY 
option class became $0.01 in 2010. See Securities Exchange Act 
Release No. 61478 (February 3, 2010), 75 FR 6762 (February 10, 2010) 
(SR-CBOE-2010-009).
    \8\ The proposed Interpretation and Policy .03 to Rule 6.42 
would read: For so long as SPDR options (SPY) and options on 
Diamonds (DIA) participate in the Penny Pilot Program, the minimum 
increments for Mini-SPX Index Options (XSP) are $0.01 for all 
options series (including LEAPS) and for options on the Dow Jones 
Industrial Average (DJX) are $0.01 for all option series quoted 
below $3 (including LEAPS), and $0.05 for all option series $3 and 
above (including LEAPS).

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[[Page 32526]]

    The Exchange also proposes to amend its rules regarding strike 
price intervals for XSP options. Currently, Interpretation and Policy 
.11 to Rule 24.9 states that [n]otwithstanding Interpretation and 
Policy .01(a) to Rule 24.9, the interval between strike prices of 
series of XSP options will be $1 or greater, subject to a number of 
somewhat-involved conditions.\9\ The Exchange proposes to simplify 
these rules and provide that the interval between strike prices of 
series of XSP options will be $1 or greater where the strike price is 
$300 or less and $5.00 or greater where the strike price is greater 
than $300. Along with simplifying XSP's strike price interval rules, 
allowing strike price intervals of as little as $1 up to a strike price 
of $300 will allow for greater granularity and more trading options in 
XSP, which is currently trading at around $163. Only allowing strike 
price intervals of $5 or greater beginning at $200 would limit the 
ability of the Exchange to offer more relevant and tailored trading 
options for investors. Options on the S&P 500 Index (SPX or SPXPM) have 
strike price intervals of $5 or greater, but XSP options, which as a 
Mini S&P 500 Index has \1/10\th the value of the S&P 500 Index options, 
should therefore be permitted smaller strike price intervals than the 
S&P 500 Index options.
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    \9\ Those conditions are:
    (a) The Exchange may list series at $1 or greater strike price 
intervals on Mini-SPX options with strike prices that are no more 
than 20% away from one-tenth of the current value of the Standard & 
Poor's 500 Stock Index (``S&P 500 Index''). FOR EXAMPLE, if the 
current value of the S&P 500 Index is at 1,200.00, the Exchange may 
only list new series at $1 strike price intervals in Mini-SPX 
options that are between $96 and $144 strike prices.
    (b) The Exchange may list series at $3 or greater strike price 
intervals on Mini-SPX options with strike prices that are no more 
than 25% away from one-tenth of the current value of the S&P 500 
Index.
    (c) The Exchange may list series at $5 or greater strike price 
intervals on Mini-SPX options that are more than 25% away from one-
tenth of the current value of the S&P 500 Index.
    (d) The Exchange shall not list LEAPS or reduced-value LEAPS on 
Mini-SPX options at intervals less than $5.
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    Aside from the proposed changes outlined above, trading in P.M.-
settled XSP options will operate in the same manner as trading 
currently operates in A.M.-settled XSP options. The trading symbol will 
remain XSP, and XSP will continue to trade on the Exchange's Hybrid 
Trading System (``Hybrid''). XSP options will still have a $100 
multiplier and European-style exercise. Expiration processing would 
occur on Saturday following the third Friday of the month. No position 
or exercise limits will be in effect for XSP options, and the same 
position reporting and margin requirements will apply.
    Finally, in preparing this proposed rule change, the Exchange 
noticed an erroneous reference in Interpretation and Policy .10 to Rule 
5.5, which states that the intervals between strike prices of XSP 
series shall be determined in accordance with Interpretation and Policy 
.14 to Rule 24.9. However, it is Interpretation and Policy .11, not 
Interpretation and Policy .14, to Rule 24.9 that discusses strike price 
intervals for XSP options. As such, the Exchange proposes to correct 
this reference in Interpretation and Policy .10 to Rule 5.5 to refer to 
Interpretation and Policy .11 to Rule 24.9.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\10\ Specifically, 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 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. The Exchange believes that the introduction of 
P.M. settlement for XSP options in the manner proposed does not raise 
any prohibitive regulatory concerns. Further, the Exchange believes 
that the proposal will not adversely impact fair and orderly markets on 
third (``expiration'') Fridays for the underlying stocks comprising the 
S&P 500 index. The Exchange believes that CBOE has experienced no 
meaningful regulatory concerns, nor an adverse impact on fair and 
orderly markets, in connection with the CBOE pilot program that permits 
trading of SPXPM (which is P.M.-settled), nor in connection with the 
previous pilot program that permitted trading of SPXPM on C2 Options 
Exchange, Incorporated. Additionally, the proposed rule change would 
provide TPHs and investors with an opportunity to trade XSP options 
with a P.M. settlement feature on CBOE subject to transparent exchange-
based rules. Investors would also benefit from the opportunity to trade 
in association with this product on third (``expiration'') Fridays 
thereby removing impediments to a free and open market consistent with 
the Act.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    The proposal to end trading at 3:00 p.m. on the last trading day 
for transactions in expiring P.M.-settled XSP options will prevent 
continued trading on a product after the exercise settlement value has 
been fixed. This eliminates potential confusion and thereby protects 
investors and the public interest. The Exchange believes that the 
proposal to match up the rules regarding minimum increments for bids 
and offers for XSP options with those for SPY options perfects the 
mechanism for a free and open market and a national market system 
because both products are based, in some manner, on \1/10\th the price 
of the S&P 500 Index, and therefore it makes sense to have the same 
minimum increments of bids and offers for both. The correcting of the 
reference in Interpretation and Policy .10 to Rule 5.5 will eliminate 
any potential confusion, thereby removing impediments to and perfecting 
the mechanism for a free and open market and a national market system, 
and, in general, protecting investors and the public interest. The 
Exchange believes that the proposal to amend the strike price intervals 
for XSP options rule perfects the mechanism for a free and open market 
system. Along with simplifying the strike price interval rules for XSP 
options, allowing strike price intervals of as little as $1 up to a 
strike price of $300 will allow for greater granularity and will 
hopefully generate more trading in XSP options, which is currently 
trading at around $163. Only allowing strike price intervals of $5 or 
greater beginning at $200 would limit the ability of the Exchange to 
offer more relevant trading options for investors. Options on the S&P 
500 Index (SPX or SPXPM) have strike price intervals of $5 or greater, 
but XSP, which as a Mini S&P 500 Index has \1/10\th the value of the 
S&P 500 Index options, should therefore be permitted smaller strike 
price intervals than the S&P 500 Index options.

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. The Exchange does not believe 
the proposed changes will impose any unnecessary or inappropriate 
burden on intramarket competition because they will apply

[[Page 32527]]

equally to all CBOE market participants and P.M.-settled XSP options 
will be available to all CBOE market participants. The Exchange 
believes that the proposed changes to minimum pricing (e.g., matched 
between SPY and XSP options) will enhance competition and is necessary 
for consistency. To the extent that the advent of XSP options trading 
in a P.M.-settled manner, or any other proposed rule changes described 
herein, may make CBOE a more attractive marketplace to market 
participants at other exchanges, such market participants may elect to 
become CBOE market participants.

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 
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 up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange 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-2013-055 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-2013-055. 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 such 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-2013-055, and should be 
submitted on or before June 20, 2013.

    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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2013-12847 Filed 5-29-13; 8:45 am]
BILLING CODE 8011-01-P


