
[Federal Register Volume 79, Number 92 (Tuesday, May 13, 2014)]
[Notices]
[Pages 27358-27360]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-10896]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72115; File No. SR-CBOE-2014-039]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change To Amend 
Certain Margin Rules for Volatility Index Options

May 7, 2014.
    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 April 28, 2014, the 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

    CBOE proposes to amend certain margin rules for volatility index 
options. 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.

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 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
    Over the past decade, the Exchange has received approval from the 
Commission to list options on different types of volatility indexes, 
including volatility indexes comprised of options on: (1) Broad-based 
indexes, (2) individual stocks; and (3) exchange traded funds 
(``ETFs''). For each volatility index comprised of broad-based index 
options, the Exchange received approval to classify each respective 
volatility index as a ``broad-based index'' for margin purposes.\3\ For 
stock and ETF-based volatility indexes, the margin requirements were 
set at the same levels that apply to equity options.\4\
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    \3\ See Securities Exchange Act Release Nos. 49563 (April 14, 
2004), 69 FR 21589 (April 21, 2004) (order approving SR-CBOE-2003-40 
to list options on the CBOE Volatility Index (``VIX''), the CBOE 
Nasdaq 100 Index Volatility Index (``VXN'') and the CBOE Dow Jones 
Industrial Index (``VXD'')), 55425 (March 8, 2007), 72 FR 12238 
(March 15, 2007) (order approving SR-CBOE-2006-73 to list options on 
the CBOE Russell 2000 Volatility Index (``RVX'')), and 71764 (March 
21, 2014), 79 FR 17212 (March 27, 2014) (order approving SR-CBOE-
2014-003 to list options on the CBOE Short-Term Volatility Index 
(``VXST'')).
    \4\ See Securities Exchange Act Release Nos. 62139 (May 19, 
2010), 75 FR 29597 (May 26, 2010) (order approving SR-CBOE-2010-018 
to list options on the CBOE Gold ETF Volatility Index (``GVZ''), and 
64551 (May 26, 2011), 76 FR 32000 (June 2, 2011) (order approving 
SR-CBOE-2011-026 to list options on the CBOE Equity VIX on Apple 
(``VXAPL''), the CBOE Equity VIX on Amazon (``VXAZN''), the CBOE 
Equity VIX on Goldman Sachs (``VXGS''), the CBOE Equity VIX on 
Google (``VXGOG''), the CBOE Equity VIX on IBM (``VXIBM''), the CBOE 
Crude Oil ETF Volatility Index (``OVX''), the CBOE Emerging Markets 
ETF Volatility Index (``VXEEM''), the CBOE China ETF Volatility 
Index (``VXFXI''), the CBOE Brazil ETF Volatility Index (``VXEWZ''), 
the CBOE Gold Miners ETF Volatility Index (``VXGDX'') and the CBOE 
Energy Sector ETF Volatility Index (``VXXLE'')).
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    The Exchange is proposing to amend CBOE Rules 12.3 (Margin 
Requirements) and 12.4 (Portfolio Margin) to increase the minimum 
margin requirements for certain 30-day volatility index options and for 
options on the VXST Index, which is designed to reflect investors' 
consensus view of 9-day expected stock market volatility. To affect 
these changes as new minimum margin requirements going forward, the 
Exchange is proposing to add the proposed margin levels to the text of 
CBOE Rules 12.3 and 12.4. Specifically, the Exchange proposes to make 
the rule text more ``user-friendly'' by enumerating ``Volatility 
Indexes'' and identifying specific classes in the appropriate places. 
The proposed changes are described below.
Proposed Changes to CBOE Rule 12.3(c)(5)
    CBOE Rule 12.3(c)(5) sets forth the initial and maintenance margin 
requirements for short options held in a customer account. As described 
earlier, when VIX, VXN, VXD, RVX and VXST options were approved for 
trading, the Exchange was permitted to margin these products as 
``broad-based index'' options. The first chart in CBOE Rule 12.3(c)(5) 
sets forth at paragraph 3 that the initial and/or maintenance margin 
required for broad-based index options is the greater of: 100% of the 
current market value of the option plus 15% of the current underlying 
component value less any out-of-the-money amount or 100% of the current 
market value of the option plus 10% of the current underlying component 
value.\5\ The ``underlying component value'' for broad-based index 
options is the product of the current index group value and the 
applicable index multiplier. The Exchange believes that the 15% initial 
and/or maintenance margin component should be increased to 20% for 30-
day volatility index options and to 40% for 9-day volatility index 
options (VXST), which were approved to be treated as ``broad-based 
index'' options for margin purposes. For 9-day volatility index options 
(VXST), the Exchange also believes that the 10% minimum margin required 
should be increased to 20%.\6\ The Exchange is not proposing to 
increase the 10% minimum margin required for 30-day volatility index 
options.
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    \5\ There is one difference in the case of a put option. For the 
10% minimum only, 10% of the put's exercise price is required rather 
than 10% the current underlying component value.
    \6\ Prior to the April 10, 2104 launch of trading in VXST 
options, the Exchange exercised its authority under CBOE Rules 
12.3(h) and 12.10 to impose higher initial and maintenance margin 
requirements for short, uncovered VXST options. See CBOE Regulatory 
Circular RG14-040 (Margin Requirements for VXST Options).
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    Trading Permit Holder (``TPH'') organizations can, through their 
own policies and procedures, impose even higher margin requirements 
should they deem it advisable (i.e., house margin requirements). CBOE 
Rule 12.10 confirms this ability, in relevant part, as follows: ``[t]he 
amount of margin prescribed by these Rules is the minimum which must be 
required initially and subsequently maintained with respect to each 
account affected thereby; but nothing in these rules shall be construed 
to prevent a TPH organization from requiring margin in an amount 
greater than that specified.''
    To affect this change, the Exchange proposes to amend existing 
paragraph 15 to the first chart set forth in CBOE Rule 12.3(c)(5). 
Paragraph 15 currently sets forth the initial and/or maintenance margin 
required and minimum margin required for individual stock or ETF-based 
volatility indexes (whose margin requirements the Exchange is not 
proposing to change). The Exchange is

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proposing to amend paragraph 15 to expand its application to all 
volatility indexes. Specifically, the Exchange proposes to set forth 
``Volatility Indexes'' as the type of option and to set forth below 
that heading the specific volatility index option classes that are 
currently listed for trading (i.e., VIX, RVX, VXST, GVZ, OVX, VXEEM and 
VXEWZ). The Exchange believes that the identification of specific 
volatility index option classes would make finding the applicable 
minimum margin levels easier for users of CBOE's Rulebook. The Exchange 
also believes that identification of specific volatility index option 
classes would give the Exchange flexibility to change margin levels by 
volatility index class if the need arises in the future. The Exchange 
notes that this styling is similar to paragraph 9, ``Foreign Currency 
Option and Warrants,'' for which specific currencies are identified.
    The Exchange also proposes to include a category under ``Volatility 
Indexes'' labeled, ``Other Volatility Indexes identified in Rules 
24.9(a)(3) and 24.9(a)(4).'' \7\ The Exchange is proposing to include 
this general category because the Exchange has received approval to 
trade options on certain volatility indexes, which are not currently 
listed for trading. Having a general category for products that have 
already been approved for trading would enable the Exchange to quickly 
list these products when launch dates are determined. The Exchange 
expects that when this happens, CBOE would follow up with a filing to 
identify any volatility indexes on which options trading has begun.
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    \7\ CBOE Rules 24.9(a)(3) (European-style index options approved 
for trading) and 24.9(a)(4) (A.M.-settled index options approved for 
trading) identify, among other indexes, all other volatility indexes 
that have approved for options trading but which are not currently 
listed for trading.
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    The Exchange also proposes to amend the definition for ``index 
value'' for volatility indexes in Row IV (Underlying Component Value) 
to the first chart in CBOE Rule 12.3(c)(5) in order to be more clear. 
Specifically, the Exchange proposes to add the descriptive phrase, 
``current (spot or cash)'' so that the CBOE Rule 12.3(c)(5) is clear on 
its face that the current (spot or cash) value for a volatility index 
is used to calculate margin requirements. The Exchange believes that 
this descriptive phrase is necessary because the prices of the 
corresponding futures contract (on the same volatility index) are 
sometimes used as the ``current index level'' for volatility index 
options.\8\
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    \8\ See e.g., CBOE Rules 24.7(iii) and 24.7.03.
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    The Exchange is also proposing to delete ``Individual Stock or ETF 
Based'' from the Option or Warrant Issue column from the second chart 
in CBOE Rule 12.3(c)(5) and replace it with ``Volatility Indexes.'' In 
addition, the Exchange is proposing to add the descriptive phrase 
``(spot or cash)'' before the references to ``current index value'' in 
the Call and Put rows. These changes conform to the changes described 
above regarding the new category of ``Volatility Indexes'' and provide 
clarity as to what is meant by ``current index value'' for volatility 
index options.
Proposed Changes to CBOE Rule 12.4
    As an alternative to the margin requirements set forth in CBOE Rule 
12.3, CBOE Rule 12.4 (Portfolio Margin) permits TPH organizations to 
compute a margin requirement for option positions carried for customers 
using a portfolio (or risk-based) approach. CBOE proposes to amend CBOE 
Rule 12.4 to identify ``Volatility Index (30-day implied)'' and 
``Volatility Index (9-day implied)'' as portfolio types in the chart 
set forth in CBOE Rule 12.4 and to specify ``+/-20%'' and ``+/-40%) as 
the respective applicable up/down market move (high & low valuation 
points).\9\ The Exchange believes that specifying ``Volatility Index 
(30-day implied)'' and ``Volatility Index (9-day implied)'' as 
portfolio types would make finding the applicable portfolio margin 
levels easier for users of CBOE's Rulebook. The Exchange notes that 
this proposed change would increase the applicable up/down market move 
(high & low valuation points) for all of its volatility index options. 
The Exchange is proposing to delete the four footnote 1 references and 
the text of footnote 1 from the chart set forth in CBOE Rule 12.4. The 
text of the footnote reads, ``In accordance with sub-paragraph 
(b)(1)(i)(B) of Rule 15c3-1a under the Securities Exchange Act of 
1934.'' The Exchange proposes to delete this sentence because it is no 
longer deemed necessary to link the margin requirements of CBOE Rule 
12.4 to SEC Rule 15c3-1a. While SEC Rule 15c3-1a originally served as a 
model for CBOE Rule 12.4, a difference between the two, such as the 
addition of the ``Volatility Index (30-day implied)'' and ``Volatility 
Index (9-day implied)'' categories to CBOE Rule 12.4, results in 
inconsistency, and the current footnote may imply there must be 
consistency.
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    \9\ Prior to the April 10, 2104 launch of trading in VXST 
options, the Exchange exercised its authority under CBOE Rule 12.10 
to provide that the magnitude of the valuation point range under 
CBOE Rule 12.4 for VXST options held in a portfolio margin is +/-40% 
and that the price of the VXST futures contract with a corresponding 
expiration will be used to calculate theoretical gains and losses 
for VXST options. See CBOE Regulatory Circular RG14-056 (Margin 
Requirements for VXST Options).
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    The Exchange also proposes to amend subparagraph (a)(9) to CBOE 
Rule 12.4, which sets forth the definition for ``underlying 
instrument'' as meaning ``a security or security index upon which any 
listed option, unlisted derivative, security futures product or related 
instrument is based. The term underlying instrument shall not be deemed 
to include, futures contracts, options on futures contracts or 
underlying stock baskets.'' The Exchange proposes to amend that 
definition by adding the following phrase at the end of the definition, 
``except that, for the purpose of calculating theoretical gains and 
losses for a listed option, unlisted derivative, or security futures 
product overlying a volatility index pursuant to this Rule, the price 
of a futures contract referencing the same volatility index may be 
utilized in lieu of the current (spot or cash) index value.'' The 
Exchange is proposing the make this change because a more accurate 
theoretical price for a volatility index option is obtained, and thus a 
more accurate portfolio margin requirement is derived, by using the 
price of a futures contract that references the same volatility index. 
Market participants price volatility index options in view of the price 
a futures contract that references the same volatility index, rather 
than using the cash or spot index value.
    In addition, the Exchange proposes to amend subparagraph (d)(3)(ii) 
to CBOE Rule 12.4 to add volatility index options to the list of 
eligible positions for portfolio margin. Finally, the Exchange proposes 
to make a technical change earlier in Rule 12.4(a)(5) to delete the 
unnecessary word ``and'' from the definition of ``option series.''
Ongoing Analysis Regarding Margin Levels
    The Exchange will continue to analyze and review the appropriate 
minimum margin levels for volatility index option. Specifically, the 
Exchange will continue to review market data in order to determine 
whether the proposed margin levels should remain or be adjusted. Among 
other things, CBOE may propose an alternate methodology for determining 
margin levels or CBOE may subsequently change margin levels after 
having time to study the impact of the proposed rule change. Any such 
change would be

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accomplished by way of a rule filing with the Commission.
2. Statutory Basis
    The Exchange believes the proposed rule changes are 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 changes 
are consistent with the Section 6(b)(5) \11\ requirements that the 
rules of an exchange be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, 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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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that increasing the minimum margin 
requirements for certain volatility index options will protect the 
integrity of the Exchange's marketplace by setting margin at a level 
that is appropriate for the given instrument. Also, the Exchange 
believes that the proposed changes will benefit investors and other 
market participants by making CBOE's rules more user-friendly in that 
the applicable margin levels will be easier to locate in CBOE's 
Rulebook.

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 
that the proposed rule change will impose any burden on intramarket 
competition because it applies to all customers that hold positions in 
volatility index options. The Exchange does not believe the proposed 
rule changes will impose any burden on intermarket competition as it 
will result in margin levels being increased to appropriate levels for 
volatility index options.

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-2014-039 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2014-039. 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 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-2014-039 and should be 
submitted on or before June 3, 2014.

    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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-10896 Filed 5-12-14; 8:45 am]
BILLING CODE 8011-01-P


