
[Federal Register Volume 78, Number 157 (Wednesday, August 14, 2013)]
[Notices]
[Pages 49563-49565]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-19671]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70136; File No. SR-CBOE-2013-079]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Proposed Rule To Amend Rule 24.7 To Add Facts 
for Determining Whether To Halt Volatility Index Options Trading

August 8, 2013.
    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 July 29, 2013, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``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

    CBOE proposes to amend CBOE Rule 24.7 (Trading Halts, Suspensions, 
or Primary Market Closure) to add facts that may be considered when 
determining whether to halt trading in volatility index options.\3\ The 
text of the proposed rule change is available on the Exchange's Web 
site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at 
the Exchange's Office of the Secretary, and at the Commission's Public 
Reference Room.
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    \3\ CBOE calculates and lists options on several volatility 
indexes comprised of broad-based index options, individual stock 
options and exchange-traded fund (``ETF'') options. Collectively, 
these products are known as ``volatility index options'' for 
purposes of CBOE's rules. See CBOE Rule 24.9(a)(5).
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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 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange now has several years of experience with volatility 
index derivatives trading and believes that it is appropriate to 
continually review and revise trading rules for volatility index 
options. Among other things, Rule 24.7 (Trading Halts, Suspensions, or 
Primary Market Closure) sets forth several facts that may be considered 
in determining whether to halt trading in an index option class. 
Through this filing, CBOE proposes to amend Rule 24.7(a) to add 
additional facts that may be considered when determining whether to 
halt trading in volatility index options.
    First, CBOE proposes to amend Rule 24.7(a)(i), which permits 
consideration to be given to ``the extent to which trading is not 
occurring in the stocks underlying the index[.]'' Volatility indexes 
are comprised of options, not stocks. Therefore, CBOE proposes to amend 
Rule 24.7(a)(i) to permit consideration to be given (in determining 
whether to halt trading in a volatility index option class) to whether 
the component options in a volatility index are not trading. For 
example, the CBOE Volatility Index (``VIX'') is comprised of S&P 500 
Index (``SPX'') options. If trading in SPX options were not occurring, 
this fact may be given consideration in determining whether to halt 
trading in VIX options. Also, if SPX options are open for trading, this 
fact weighs in favor of not halting trading in VIX options. Similarly, 
the Exchange is proposing to amend Rule 24.7(b) which sets forth 
factors that may be considered in determining whether to resume trading 
of a halted class or series. The Exchange proposes to amend the factor 
regarding the ``extent to which trading is occurring in stocks 
underlying the index'' to include options.
    Second, CBOE proposes to add a new fact (as subparagraph (iii) to 
Rule 24.7(a)) for consideration when determining whether to halt 
trading in volatility index options. Specifically, CBOE proposes to add 
a provision that would permit consideration to be given (in determining 
whether to halt trading in a volatility index option class) to whether 
the ``current index level'' for a volatility index option is not 
available or the spot (cash) value for a volatility index option is not 
available. As described below, the ``current index level'' would mean 
the implied forward level based on corresponding volatility index 
(security) futures prices, which CBOE proposes to define in new 
Interpretation and Policy .03 to Rule 24.7.\4\
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    \4\ The Exchange notes that futures prices have been used by 
CBOE in the past to determine the ``current index value'' for VIX 
options. See Securities Exchange Act Release No. 54192 (July 21, 
2006), 71 FR 43251 (July 31, 2005) (Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment 
No. 1 Thereto Relating to Strike Price Intervals for VIX Options) 
(SR-CBOE-2006-27).
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    By way of background, option prices reflect the market's 
expectation of the price of the underlying at expiration, which is 
referred to as the ``forward level.'' For stock indexes, such as the 
S&P 500 Index, the best estimate of the forward level is the current, 
or ``spot,'' price adjusted for the ``carry,'' which is the financing 
cost of owning the component stocks in the index less the dividends 
paid by those stocks. For VIX (and other volatility indexes), a better 
estimate than the standard ``cash and carry'' model for calculating the 
forward volatility index levels at each expiration is reflected in the 
prices of the options that will actually be used to calculate the 
volatility index on a given expiration day. For example, September SPX 
options are used to calculate the VIX settlement value on the August 
VIX expiration date. Likewise, November VIX options are tied to the 
implied volatility of December SPX options, and so on.
    One important property of implied volatility is that it exhibits a 
``term structure.'' In other words, the implied volatility of options 
expiring on different dates can trade at different levels and can move 
independently. Another property related to the term structure is that 
implied volatility tends to trend toward the market's expectation of a 
long-term ``average'' value. As a result, a large spike in one-month 
implied volatility might not affect implied volatility of longer-dated 
options very much at all.
    Many market participants use volatility index (security) futures 
prices as proxies for forward volatility index levels. CBOE Futures 
Exchange, LLC (``CFE'') lists futures and security futures on all of 
the volatility indexes that underlie volatility index options trading 
on CBOE. Currently, volatility index (security) futures expirations 
correspond to each volatility index options expiration months listed on 
CBOE. Accordingly, CBOE believes that using these prices is an accurate 
and transparent method for determining the ``current index level'' for 
a volatility

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index option and whether the corresponding (security) futures prices 
are not available is a fact that may be considered in determining 
whether to halt trading in a class of volatility index options. Also, 
if the corresponding (security) futures prices are available, this fact 
weighs in favor of not halting trading in volatility index options. As 
such, volatility index options trading should be permitted if the 
corresponding volatility index (security) futures prices are available 
(even if spot (cash) values are not disseminated).
    Importantly, the Exchange believes that volatility index options 
trading should not be conditioned on the concurrent dissemination of 
the spot (cash) value of a volatility index. Specifically, the Exchange 
believes that this could be somewhat confusing as to the significance 
of the role that the spot (cash) value plays vis-[agrave]-vis 
volatility index options trading. The spot (cash) value of a volatility 
index is an instantaneous measure of expected volatility in 30 days. As 
to a specific volatility index option contract that is listed for 
trading, the spot (cash) value bears little relation to the value that 
that contract will settle to at expiration. (However, the Exchange 
believes that if the spot (cash) value is not being disseminated, that 
is a factor that may be considered in determining whether to halt 
trading). Therefore, the Exchange believes that it is appropriate to 
permit volatility index options trading even if spot (cash) values are 
not being disseminated.
    Finally, the Exchange is proposing to make technical changes to 
Rule 24.7(a), Rule 24.7(d) and Rule 24.7.01 to make numbering changes.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\5\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5)\6\ 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.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change will protect the integrity of the 
Exchange's marketplace by permitting the Exchange to consider 
additional facts when determining whether to halt trading in volatility 
indexes options. Rule 24.7 is currently predicated on indexes being 
comprised of stocks and includes facts that may be considered by the 
Exchange when determining whether to halt trading based on the index 
components being stocks. The current filing amends Rule 24.7(a) to 
account for indexes comprised of options and allows the Exchange to 
consider the following facts when determining whether to halt trading: 
(1) Whether the component options are not trading, (2) whether the 
``current index level'' (as measured by the implied forward level based 
on volatility index (security) futures prices) is not available, or (3) 
whether the spot (cash) value for a volatility index is not available.
    The Exchange believes that the proposal will lessen investor 
confusion because it will not condition volatility index option trading 
on the dissemination of the spot (cash) value of a volatility index.\7\ 
Because the spot (cash) value of a volatility index is an instantaneous 
measure of implied volatility in 30 days, that value is not a good 
estimate of where the market's expectation of the prices of the options 
that will actually be used to calculate the settlement value for a 
volatility index option. The Exchange believes that a better estimate 
is reflected in the prices of the corresponding volatility index 
(security) futures. Accordingly, the Exchange believes that investor 
confusion would be lessened if: (1) volatility index options are 
permitted to trade even if the spot (cash) value is not disseminated; 
and (2) the Exchange is permitted to consider whether the ``current 
index level'' (as measured by the implied forward level based on 
volatility index (security) futures prices) or the spot (cash) value is 
not available in determining whether to halt trading.
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    \7\ The Commission notes that CBOE Rule 24.7 does not currently, 
by its terms, require the Exchange to halt trading in volatility 
index options when the current index level or the spot (cash) value 
for the volatility index option is not available.
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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 not necessary or appropriate in furtherance of 
the purposes of the Act. Specifically, CBOE believes that the ability 
to consider additional facts that are relevant to volatility index 
options trading when determining whether to halt trading will benefit 
all volatility index market participants and does not impose any burden 
on competition.

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

    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-2013-079 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-2013-079. 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

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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 CBOE. 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-2013-079 and should be 
submitted on or before September 4, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-19671 Filed 8-13-13; 8:45 am]
BILLING CODE 8011-01-P


