
[Federal Register Volume 79, Number 59 (Thursday, March 27, 2014)]
[Notices]
[Pages 17212-17214]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-06758]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71764; File No. SR-CBOE-2014-003]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change To List 
and Trade CBOE Short-Term Volatility Index Options

March 21, 2014.

I. Introduction

    On January 27, 2014, 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 list options on the CBOE 
Short-Term Volatility Index (``VXST''). The proposed rule change was 
published for comment in the Federal Register on February 6, 2014.\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. 71458 (January 31, 
2014), 79 FR 7239 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade A.M. cash-settled, 
European-style options on the VXST, which will expire every week. 
According to the Exchange, VXST is designed to measure investors' 
consensus view of future (nine day) expected stock market volatility, 
and VXST options will trade alongside the existing CBOE Volatility 
Index (``VIX'') options (which expire on a monthly basis and measure a 
30 day period of implied volatility).\4\ The Exchange states that the 
calculation of VXST is based on the VIX methodology as applied to 
option series on the S&P 500 index that expire on every Friday.\5\ The 
constituent S&P 500 index options that expire on a Friday (i.e., nine 
days from the VXST option expiration date, which is typically a 
Wednesday in the preceding week) may include the following types of 
options on the S&P 500 index: Standard monthly options, End-of-Week 
(``EOW'') expirations, and Quarterly Index (``QIX'') expirations. 
According to the Exchange, because some of the constituent options used 
to calculate VXST are A.M.-settled and some are P.M.-settled, the 
amount of time covered by a specific contract will vary slightly 
depending on the type of series used for any given A.M.-settled VXST 
option.\6\
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    \4\ According to the Exchange, the VXST index was introduced by 
CBOE on October 1, 2013 and has been disseminated at least once a 
day on every trading day since that time. See Notice, supra note 3, 
at 7239-40.
    \5\ The Exchange states that VXST is calculated in the same 
manner as other volatility indexes (e.g., VIX). A more detailed 
explanation of the method used to calculate the VIX may be found on 
the CBOE's Web site at http://www.cboe.com/micro/vix/vixwhite.pdf. 
See Notice, supra note 3, at 7240.
    \6\ For a VXST option contract calculated using A.M.-settled 
standard S&P 500 index options, the period of implied volatility 
covered by the contract will be exactly nine days. For a VXST option 
contract calculated using P.M.-settled EOW or QIX on the S&P 500 
index, the period of implied volatility covered by the contract will 
be nine days, plus 390 minutes. See Notice, supra note 3, at 7240.
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    Similar to VIX and VIX options, the cash (spot) VXST value will be 
calculated using premium quotations and the exercise settlement value 
for VXST options will be calculated using the actual opening premium 
prices of the constituent S&P 500 index options on the expiration day 
of the VXST option.\7\ The Exchange will compute values for VXST on a 
real-time basis throughout each trading day, from approximately 8:30 
a.m. (Chicago time) until approximately 3:15 p.m. (Chicago time).\8\ 
VXST levels will be calculated by CBOE and generally disseminated at 
15-second intervals to major market data vendors.\9\ The trading hours 
for VXST options will be from 8:30 a.m. to 3:15 p.m. (Chicago 
time).\10\
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    \7\ See id.
    \8\ See id.
    \9\ According to the Exchange, when VIX options and VXST options 
expire on the same day, as the calculator of volatility indexes, 
CBOE would not begin disseminating the spot (cash) values for any 
volatility index that CBOE calculates until the S&P 500 index option 
series that CBOE will use to calculate the exercise settlement value 
for VIX options have opened. On all other VXST option expiration 
days, as the calculator of volatility indexes, CBOE would not begin 
disseminating the spot (cash) values for any volatility index that 
CBOE calculates until the S&P 500 index option series that CBOE will 
use to calculate the exercise settlement value for VXST options have 
opened. See id., at n. 8.
    \10\ See id., at 7241.
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    The Exchange proposes to list up to 12 near-term VXST option 
expiration weeks, and that new series will be permitted to be added up 
to and including on the last day of trading for an expiring VXST option 
contract.\11\
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    \11\ See CBOE Rules 24.9(a)(2) and 24.9.01(c).
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    As proposed, the exercise settlement value for a VXST option will 
be calculated on the specific date (usually a Wednesday) identified in 
the option symbol for the series.\12\ If that

[[Page 17213]]

Wednesday or the Friday in the business week following that Wednesday 
(i.e., nine days away) is an Exchange holiday, the exercise settlement 
value will be calculated on the business day immediately preceding the 
Wednesday.\13\ According to the Exchange, on the day the exercise 
settlement value is calculated for VXST options, modified Hybrid 
Opening System (``HOSS'') opening procedures will be used to calculate 
the exercise settlement value.\14\ The exercise settlement value of a 
VXST option will be calculated by the Exchange as a Special Opening 
Quotation (``SOQ'') of VXST using the sequence of opening prices of the 
options that comprise the VXST index.\15\ The opening price for any 
series in which there is no trade will be the average of that option's 
bid price and ask price as determined at the opening of trading.\16\ 
The ``time to expiration'' used to calculate the SOQ will account for 
the actual number of days and minutes until expiration for the 
constituent option series.\17\
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    \12\ See CBOE Rule 24.9(a)(6). According to the Exchange, option 
symbols are constructed as follows: Symbol + Expiration Date (Year, 
Month, Day) + Call or Put + Strike Price (in dollars to three 
decimal places). See Notice, supra note 3, at n. 14.
    \13\ See CBOE Rule 24.9(a)(6).
    \14\ See CBOE Rules 6.2B.01 and 6.2B.08. The Exchange states 
that the main feature of the modified HOSS opening procedures is the 
strategy order cut-off time for the constituent option series that 
will be used to calculate the exercise settlement value of a 
volatility index. See Notice, supra note 3, at n. 15.
    \15\ See CBOE Rule 24.9(a)(6).
    \16\ See id.
    \17\ See id.
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    The expiration date of a VXST option will be on the same day that 
the exercise settlement value of the VXST option is calculated.\18\ The 
last trading day for a VXST option will be the business day immediately 
preceding the expiration date of the VXST option (typically a 
Tuesday).\19\ When the last trading day is moved because of an Exchange 
holiday, the last trading day for an expiring VXST option contract will 
be the day immediately preceding the last regularly scheduled trading 
day.\20\ Exercise will result in delivery of cash on the business day 
following expiration. The exercise-settlement amount will be equal to 
the difference between the exercise-settlement value and the exercise 
price of the option, multiplied by $100.
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    \18\ See id.
    \19\ See id.
    \20\ See id.
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    As proposed, VXST options will be quoted in index points and 
fractions and one point will equal $100.\21\ The Exchange proposes that 
the minimum tick size for series trading below $3 will be 0.05 ($5.00) 
and above $3 will be 0.10 ($10.00).\22\ The Exchange proposes to permit 
$0.50 (or greater) strike price intervals for VXST options where the 
strike price is less than $75. The Exchange also proposes to permit $1 
(or greater) strike price intervals for VXST options where the strike 
price is $200 or less. Further, the Exchange proposes to permit $5 (or 
greater) strike price intervals for VXST options where the strike price 
is greater than $200.\23\
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    \21\ See Notice, supra note 3, at 7240.
    \22\ See id., at 7240-41.
    \23\ See CBOE Rules 5.5.23 and 24.9.01(i). The Exchange also 
proposes to make a technical change to CBOE Rule 24.9.12, which 
permits $0.50 and $1 strike price intervals for index options used 
to calculate volatility indexes. Specifically, the Exchange notes 
that it proposes to add ``and $150'' to the rule text as those two 
words were inadvertently omitted from the proposed rule text changes 
to Rule 24.9.12 contained in original rule filing, but were 
described in detail in the purpose section. See Notice, supra note 
3, at 7241 and n. 13.
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    The Exchange does not propose to establish any position or exercise 
limits for VXST options.\24\ In addition, the Exchange proposes that 
VXST options be margined as ``broad-based index'' options.\25\ The 
Exchange notes that, except as modified by this proposed rule change, 
Chapters I through XIX and Chapter XXIV of its rules will apply to VXST 
options.\26\
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    \24\ See CBOE Rules 24.4(a) and 24.5. According to the Exchange, 
VXST options will be subject to the same reporting requirements 
triggered for other options dealt in on the Exchange. See Notice, 
supra note 3, at 7242 and CBOE Rule 24.4.03.
    \25\ See CBOE Rules 12.3 and 24.4.04.
    \26\ See Notice, supra note 3, at 7242.
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    The Exchange states that it has analyzed its capacity and 
represents that it believes the Exchange and the Options Price 
Reporting Authority (``OPRA'') have the necessary systems capacity to 
handle the additional traffic associated with the listing of new series 
that will result from the introduction of VXST options.\27\
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    \27\ See id.
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    The Exchange represents that it will use the same surveillance 
procedures currently utilized for its other index options to monitor 
trading in VXST options, as well as enhanced surveillance procedures at 
expiration, several of which would be automated.\28\ The Exchange 
further represents that these surveillance procedures will be adequate 
to monitor trading in VXST options.\29\ The Exchange states that, for 
surveillance purposes, it will have complete access to information 
regarding trading activity in the pertinent underlying securities.\30\
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    \28\ See id.
    \29\ See id.
    \30\ See id.
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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.\31\ 
Specifically, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\32\ 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. Specifically, the Commission believes that VXST options will 
provide investors with an additional trading and hedging mechanism. In 
addition, the Commission believes that the Exchange's proposal with 
respect to position limits, margin, strike price intervals, minimum 
trading increments, series openings, exercise limits, and other aspects 
of the proposed rule change are appropriate and consistent with the 
Act.
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    \31\ 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).
    \32\ 15 U.S.C. 78f(b)(5).
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    As a national securities exchange, the Exchange is required, under 
Section 6(b)(1) of the Act,\33\ to enforce compliance by its members 
and persons associated with its members with the provisions of the Act, 
Commission rules and regulations thereunder, and its own rules. In this 
regard, the Commission notes that trading of VXST options will be 
subject to Chapters I through XIX and Chapter XXIV of CBOE rules.\34\ 
Moreover, the Exchange has represented that it will use the same 
surveillance procedures currently utilized for its other index options 
to monitor trading in VXST options, as well as enhanced surveillance 
procedures at expiration, several of which would be automated.\35\ The 
Exchange has represented that these surveillance procedures will be 
adequate to monitor trading in VXST options.\36\ The Exchange also 
stated that it will have complete access to information regarding 
trading activity in the pertinent underlying securities.\37\ In 
approving the proposed listing and trading of the VXST options, the 
Commission has also relied on the Exchange's representation that it and 
the OPRA have the necessary systems

[[Page 17214]]

capacity to handle the additional traffic associated with the listing 
of new series that will result from the introduction of VXST 
options.\38\
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    \33\ 15 U.S.C. 78f(b)(1).
    \34\ See supra note 26 and accompanying text.
    \35\ See supra note 28 and accompanying text.
    \36\ See supra note 29 and accompanying text.
    \37\ See supra note 30 and accompanying text.
    \38\ See supra note 27 and accompanying text.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\39\ that the proposed rule change (SR-CBOE-2014-003) be, and 
hereby is, approved.
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    \39\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-06758 Filed 3-26-14; 8:45 am]
BILLING CODE 8011-01-P


