
[Federal Register Volume 78, Number 243 (Wednesday, December 18, 2013)]
[Notices]
[Pages 76664-76665]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30089]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71073; File No. SR-CBOE-2013-102]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change To 
Establish Modified Hybrid Opening System Opening Procedures for All 
Volatility Index Constituent Options

December 13, 2013.

I. Introduction

    On October 15, 2013, 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 
thereunder,\2\ a proposed rule change to amend CBOE Rule 6.2B to 
establish modified Hybrid Opening System (``HOSS'') opening procedures 
for all option series that are used to calculate volatility indexes. 
The proposed rule change was published for comment in the Federal 
Register on October 31, 2013.\3\ The Commission received no comments on 
the proposed rule change. This order grants approval of 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. 70755 (October 25, 
2013), 78 FR 65402 (``Notice'').
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II. Description of the Proposed Rule Change

    According to the Exchange, on the expiration/final settlement date 
for volatility index options and futures, modified HOSS opening 
procedures are used for Hybrid 3.0 option series that are used to 
calculate the exercise settlement/final settlement value for expiring 
volatility index options and futures. Currently, standard expiration 
options (i.e., third Friday expirations) on the S&P 500 index, which 
are used to calculate the CBOE Volatility Index (``VIX''), are the only 
Hybrid 3.0 options that use the modified HOSS opening procedures. 
According to the Exchange, the main feature of the modified HOSS 
opening procedures is the strategy order \4\ cut-off time for the SPX 
option series used to calculate the exercise settlement/final 
settlement value of VIX derivatives. Currently, all strategy orders 
must be submitted by 8:15 a.m. (Chicago time).\5\ In limited 
circumstances, strategy orders may be changed or cancelled.\6\
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    \4\ Option orders that are related to positions in, or a trading 
strategy involving, volatility index options or futures are known as 
``strategy orders.'' See CBOE Rule 6.2B.01(c)(iii). CBOE Rule 
6.2B.01(c)(iii)(B) sets forth the characteristics of strategy 
orders.
    \5\ The applicable cut-off time for the entry of strategy orders 
is established by the Exchange on a class-by-class basis. See CBOE 
Rule 6.2B.01(c)(iii)(A) and CBOE Regulatory Circular RG08-43 (Cut-
Off Time for Submission of Strategy Orders for Participation in SPX 
Modified HOSS Opening Procedure).
    \6\ See CBOE Rule 6.2B.01(c)(iii)(B).
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    In addition to the VIX, CBOE and CBOE Futures Exchange, LLC 
(``CFE'') also trade options and futures on other volatility indexes. 
Currently, normal HOSS opening procedures are used on all days for the 
constituent options in those volatility indexes because the constituent 
options trade on the Hybrid platform. Moreover, the Exchange plans to 
introduce CBOE Short-Term Volatility Index (``VXST'') options (to be 
traded on CBOE) and VXST futures (to be traded on CFE) that expire 
every Wednesday.\7\ The Exchange notes that the VXST will be calculated 
using SPX option series that expire on every Friday, including standard 
expiration SPX option series and non-standard expiration SPX option 
series. Because some constituent SPX option series are Hybrid series, 
the current modified HOSS opening procedures are not applicable. The 
Exchange now proposes to adopt new Interpretation and Policy .08 to 
Rule 6.2B to set forth the modified HOSS opening procedures for Hybrid 
classes and series that are used to calculate all volatility indexes, 
including the VXST, on the expiration/final settlement dates for 
volatility index derivatives.\8\
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    \7\ The VXST measures a 9-day period of expected volatility and 
is calculated using SPX option series that expire in 9 days. The 
Exchange plans to submit a separate filing to the Commission to list 
VXST options and anticipates that CFE will list VXST futures prior 
to CBOE listing VXST options.
    \8\ The Exchange also proposes other technical changes to Rules 
6.2B.01 and 24.9(a)(5). See Notice, supra note 3, at 65405-06.
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    Among other things, the Exchange proposes that, for 30-day 
volatility indexes, the modified HOSS opening procedures would be 
utilized on the days that the exercise settlement/final settlement 
value is calculated for options or futures on such volatility indexes. 
For short-term volatility indexes that measure a 9-day volatility 
period, the modified HOSS opening procedures would be utilized every 
Wednesday for Hybrid classes and series that are used to calculate such 
volatility indexes.\9\
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    \9\ If a Wednesday is an Exchange holiday or if the Friday in 
the business week following a Wednesday is an Exchange holiday, then 
the modified HOSS opening procedures would be utilized on a Tuesday. 
See CBOE Rule 6.2B.08(a).

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[[Page 76665]]

    The Exchange also proposes to establish criteria for identifying 
strategy orders, a cut-off time for strategy orders to be established 
by the Exchange on a class-by-class basis,\10\ and a prohibition 
against changing or cancelling strategy orders.\11\ In addition, the 
Exchange proposes that all other option orders for participation in the 
modified HOSS opening procedures, and any change to or cancellation of 
any such order, must be received prior to the applicable cut-off time 
in order to participate at the opening price for the applicable option 
series.\12\
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    \10\ The strategy order cut-off time will be no earlier than 
8:00 a.m. and no later than the opening of trading in the option 
series.
    \11\ Similar to the existing modified HOSS opening procedures, 
the Exchange would permit a strategy order to be changed or 
cancelled after the strategy order cut-off time if the order is (i) 
not executed in the modified HOSS opening procedures and the change 
or cancellation is submitted after the modified HOSS opening 
procedures have concluded, or (ii) changed or cancelled to correct a 
legitimate error. See CBOE Rule 6.2B.08(c).
    \12\ The applicable cut-off time would be established by the 
Exchange on a class-by-class basis, provided it would be no earlier 
than 8:25 a.m. and no later than the opening of trading in the 
option series. See CBOE Rule 6.2B.08(d).
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    The Exchange represents that it currently conducts heightened 
surveillance on the days when the modified HOSS opening procedures are 
utilized. The Exchange further represents that those same heightened 
surveillance practices will be utilized on every Wednesday and that 
these surveillance practices will be adequate to monitor trading in all 
constituent option series used to calculate volatility indexes. The 
Exchange also expects to enhance surveillance practices in tandem with 
any resultant trading volume growth.

III. Discussion and Commission Findings

    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.\13\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\14\ 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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    \13\ 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).
    \14\ 15 U.S.C. 78f(b)(5).
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    The proposed modified HOSS opening procedures would apply only on 
the expiration/final settlement dates for volatility index options and 
futures. The normal HOSS opening procedures would apply on all other 
days. Except for the rule provisions that the Exchange identifies as 
applicable only to Hybrid 3.0 options,\15\ the proposed modified HOSS 
opening procedures applicable to all volatility index constituent 
options are similar to the existing modified HOSS opening procedures 
applicable to VIX constituent options.\16\
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    \15\ See Notice, supra note 3, at 65405.
    \16\ See CBOE Rule 6.2B.01.
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    The Exchange states that the primary purpose of this proposed rule 
change is to establish a strategy order cut-off time on expiration/
final settlement dates for options series that are used to calculate 
the exercise settlement/final settlement value for volatility index 
options and futures. As noted by the Exchange, applying a strategy 
order cut-off time to volatility index constituent options on 
expiration/final settlement dates will allow exposure of order 
imbalances in the constituent options that resulted from unwinding 
hedges for volatility index derivatives, allow market participants to 
review and offset order imbalances, and facilitate a more stable 
opening process because an option series will not open if there is an 
imbalance. In addition, as noted by the Exchange, the strategy order 
cut-off time could result in market participants submitting orders that 
price-improve the constituent options.
    The other aspects of the proposed rule change, including the 
technical amendments to CBOE Rules 6.2B.01 and 24.9(a)(5), as noted by 
the Exchange, are intended to provide additional clarity to the 
Exchange's rules, including in connection with the existence of 
different volatility indexes that overlie different implied volatility 
measurement periods.\17\
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    \17\ The Exchange notes that it will submit a separate rule 
filing to propose the listing of VXST options.
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    The Commission believes that the proposed rule change is consistent 
with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-CBOE-2013-102) be, and 
hereby is, approved.
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    \18\ 15 U.S.C. 78s(b)(2).
    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-30089 Filed 12-17-13; 8:45 am]
BILLING CODE 8011-01-P


