
[Federal Register Volume 79, Number 108 (Thursday, June 5, 2014)]
[Notices]
[Pages 32594-32599]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-13017]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72284; File No. SR-CBOE-2014-043]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Relating to 
Closing Rotation Procedures for S&P 500 Index Options

May 30, 2014.
    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 May 30, 2014 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

    The Exchange proposes to make minor changes to Interpretation and 
Policy .06 to Rule 6.2B (Hybrid Opening System (``HOSS'')) relating to 
month-end closing price rotation procedures for non-expiring S&P 500 
Index (``SPX'')

[[Page 32595]]

options. The text of the proposed rule change is provided below.
    (additions are italicized; deletions are [bracketed])

* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *

Rule 6.2B. Hybrid Opening System (``HOSS'')

    (a)-(h) No change.
    * * * Interpretations and Policies:
    .01-.05 No change.
    .06 Following the 3:15 p.m. Chicago time close of trading on the 
last business day of each calendar month, the Exchange will conduct 
special non-trading closing rotations for each series of S&P 500 
Index (``SPX'') options in order to determine the theoretical ``fair 
value'' of such series as of 3:00 p.m. Chicago time. During such 
special non-trading closing rotations, [the] an LMM in [each series 
of] the SPX options designated by the Exchange in each series of SPX 
options, will provide bid and offer quotations, the midpoint of 
which will reflect the theoretical fair value of the series of SPX 
options, as determined by the LMM pursuant to the LMM's algorithmic 
analysis of relevant and available data. Notwithstanding that 
trading in SPX options on the Exchange continues until 3:15 p.m., on 
the last business day of each month, after 3:15 p.m. the Exchange 
shall disseminate the 3:00 p.m. fair value quotations provided by 
[each] the designated LMM as the quotations used to calculate the 
theoretical fair value for each series of SPX options, provided, 
however, that the Exchange may determine, in the interest of fair 
and orderly markets, not to disseminate such quotations.
* * * * *

    The text of the proposed rule change is also 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 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 make minor changes to Interpretation and 
Policy .06 to Rule 6.2B (``Interpretation and Policy .06'') to extend 
its SPX end-of-month pricing procedures to series of SPX options on the 
Hybrid Trading System (``Hybrid System'').\3\ The Exchange believes 
that the proposed rule will add consistency to S&P 500 Index-related 
markets and make it easier for investors to trade SPX options.
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    \3\ The Hybrid Platform refers to the Exchange's trading 
platform that allows automatic executions to occur electronically 
and open outcry trades to occur on the floor of the Exchange. To 
operate in this ``hybrid'' environment, the Exchange has a dynamic 
order handling system that has the capability to route orders to the 
trade engine for automatic execution and book entry, to Trading 
Permit Holder and PAR Official workstations located in the trading 
crowds for manual handling, and/or to other order management 
terminals generally located in booths on the trading floor for 
manual handling. Classes of SPX options other than standard SPX 
options are traded on the Hybrid Platform. The Hybrid 3.0 Platform 
is an electronic trading platform on the Hybrid Trading System that 
allows one or more quoters to submit electronic quotes which 
represent the aggregate Market-Maker quoting interest in a series 
for the trading crowd. Standard SPX options contracts are traded on 
the Hybrid 3.0 Platform.
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Background
    In 2001, the Chicago Mercantile Exchange (``CME'') adopted special 
settlement procedures to determine end-of-month settlement prices for 
its domestic futures contracts.\4\ Specifically, CME adopted end-of-
month valuation procedures to calculate the price of S&P 500 futures 
contracts based on the value of the underlying S&P 500 Index at the 
close of trading. CME has termed these procedures ``End-of-Month 
Special Fair Value'' (``EOM FV'') or ``Fair Value'' (``FV'') settlement 
procedures.
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    \4\ The CME originally instituted this practice for the December 
31, 1999 year-end, but has adopted the practice for each month-end 
closing date since January 2001. See generally CME Group, Month-End 
Fair Value Procedures, available at http://www.cmegroup.com/trading/equity-index/fairvaluefaq.html.
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    According to CME, ``[f]air value represents the level at which 
futures theoretically should be priced in relation to cash index values 
in the absence of transaction costs--albeit not where they necessarily 
will trade.'' \5\ Pursuant to its EOM FV settlement procedures, CME 
calculates the end-of-month final settlement value of S&P 500 futures 
contracts based on the value of the underlying S&P 500 Index cash 
market, rather than the actual final trading prices of S&P 500 futures 
contracts. CME uses its end-of-month theoretical fair value settlement 
prices for all purposes, including account value reporting and end-of-
day variation margin calls.\6\ These procedures mitigate issues caused 
by the misalignment of valuations in the S&P 500 futures market and the 
underlying S&P 500 Index cash market due to the extended trading hours 
for S&P 500 futures contracts after the close of trading in the cash 
market.
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    \5\ See generally CME Group, Month-End Fair Value Procedures, 
available at http://www.cmegroup.com/trading/equity-index/fairvaluefaq.html.
    \6\ Id.
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    The Exchange understands that CME adopted its EOM FV procedures at 
the request of institutional investors (active in both the S&P 500 
futures and S&P 500 Index cash markets), who wanted the end-of-month 
value of their futures positions to align with prices in the underlying 
S&P 500 Index cash market. If the month-end settlement price of 
investors' futures positions were based on the actual closing trading 
prices as of the 3:15 p.m.\7\ close of futures market while the month-
end closing price of their cash positions were based on the 3:00 p.m. 
close of trading in the underlying S&P 500 Index cash market, investors 
might experience tracking errors and/or financial reporting 
incongruities that do not reflect actual portfolio performance. Pricing 
model discrepancies or misaligned pricing between the S&P 500 futures 
and S&P 500 Index cash market could also lead to unnecessary and/or 
unwarranted margin calls and returns as well as other hedging and 
accounting problems. The EOM FV settlement procedures adopted by CME 
mitigate these issues by aligning the end-of-month settlement prices of 
S&P 500 futures contracts with closing prices in the underlying cash 
market as of 3:00 p.m.\8\
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    \7\ All times referred to herein are stated as Chicago Central 
Standard Time.
    \8\ CME has explained the reason for maintaining its 3:00 p.m. 
fair value procedure as follows:
    Stock index products on the . . . [CME] normally close and 
settle fifteen minutes after the daily close of trading in cash 
equities. The cash/futures basis may be affected to the extent that 
futures may fluctuate--sometimes sharply--during those final fifteen 
minutes. As such, this may become a difficulty for institutional 
traders practicing coordinated cash/futures strategies. Still, the 
opportunity to lay off equity market exposure during those fifteen 
minutes subsequent to the cash close has proven quite beneficial. 
The use of FV settlement procedures is intended to address this so-
called ``tracking error'' while still permitting trade [sic] to 
continue for fifteen minutes past the 3:00 p.m. cash close. 
Conceptually, the fair value settlement is determined when the cash 
market closes at 3:00 p.m., since any new information following 3:00 
p.m. will not affect the closing price of the stocks and the 
indexes. However, information or events subsequent to the cash close 
may still impact futures prices. Market participants should be aware 
of the possibility that futures may trade at prices apart from fair 
value settlement prices between 3;00 [sic] p.m. and the close of the 
market at 3:15 p.m. on days on which FV settlement procedures are 
applied.
    See id.

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[[Page 32596]]

    The S&P 500 futures market and SPX options market are highly 
interconnected. Many investors use SPX options to hedge S&P 500 futures 
positions. Because of the interconnectedness between the S&P 500 
futures and SPX options markets, the Exchange believed that the use of 
end-of-month pricing procedures that diverged significantly form [sic] 
the CME's EOM FV pricing procedures would be disruptive to fair and 
orderly markets. Although the Exchange could have aligned the end-of-
month settlement prices of standard non-expiring SPX options with the 
end-of-month prices of the related S&P 500 futures contracts (and the 
underlying S&P Index cash market) by simply ending trading at 3:00 p.m. 
on the last trading day of each month, the Exchange determined that 
closing trading in SPX options market prior to the close of trading at 
the CME would also be disruptive to fair and orderly markets. In 
particular, the Exchange believed that closing trading for standard 
non-expiring SPX options during S&P 500 futures trading hours would be 
disruptive to many market participants who hedge S&P 500 futures 
positions with SPX options. Accordingly, the Exchange adopted end-of-
month settlement practices designed to align its end-of-month pricing 
with CME's EOM FV settlement procedures. The Exchange's end-of-month 
pricing procedures were adopted through a series of Regulatory 
Circulars and subsequently codified in the Exchange's rules in 
Interpretation and Policy .06.\9\
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    \9\ See CBOE Interpretation and Policy .06 to Rule 6.2B; 
Securities and Exchange Act Release No. 34-67992; File No. SR-CBOE-
2012-095 (October 5, 2012) (Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change Relating to Closing Rotation 
Procedures for S&P 500 Index Options).
    See also CBOE Regulatory Circular RG99-233 (Dec. 21, 1999), 
available at https://www.cboe.org/publish/regcir/rg99-233.pdf; CBOE 
Regulatory Circular RG00-049 (Mar. 29, 2000), available at https://www.cboe.org/publish/regcir/rg00-049.pdf; CBOE Regulatory Circular 
RG01-014 (Jan. 25, 2001), available at http://www.cboe.com/publish/RegCir/RG01-014.pdf; CBOE Regulatory Circular RG01-040 (Mar. 29, 
2001), available at https://www.cboe.org/publish/regcir/rg01-040.pdf; CBOE Regulatory Circular RG01-058 (Apr. 27, 2001), 
available at https://www.cboe.org/publish/regcir/rg01-058.pdf; CBOE 
Regulatory Circular RG02-019 (Apr. 4, 2002), available at http://www.cboe.com/publish/RegCir/RG02-019.pdf; CBOE Regulatory Circular 
RG02-039 (June 12, 2002), available at http://www.cboe.com/publish/RegCir/RG02-039.pdf; CBOE Regulatory Circular RG02-073 (Sept. 17, 
2002), available at http://www.cboe.com/publish/RegCir/RG02-073.pdf; 
CBOE Regulatory Circular RG02-118 (Dec. 19, 2002), available at 
http://www.cboe.org/publish/regcir/rg02-118.pdf; CBOE Regulatory 
Circular RG03-016 (Mar. 19, 2003), available at http://www.cboe.com/publish/RegCir/RG03-016.pdf; CBOE Regulatory Circular RG03-039 (June 
11, 2003), available at http://www.cboe.com/publish/RegCir/RG03-039.pdf; CBOE Regulatory Circular RG03-075 (Sept. 10, 2003), 
available at http://www.cboe.com/publish/RegCir/RG03-075.pdf; CBOE 
Regulatory Circular RG03-082 (Sept. 22, 2003), available at http://www.cboe.com/publish/RegCir/RG03-082.pdf; CBOE Regulatory Circular 
RG03-110 (Dec. 17, 2003), available at http://www.cboe.com/publish/RegCir/RG03-110.pdf; CBOE Regulatory Circular RG04-132 (Dec. 30, 
2004), available at http://www.cboe.com/publish/RegCir/RG04-132.pdf; 
CBOE Regulatory Circular RG05-130 (Dec. 29, 2005), available at 
http://www.cboe.com/publish/RegCir/RG05-130.pdf; CBOE Regulatory 
Circular RG06-130 (Dec. 19, 2006), available at http://www.cboe.org/publish/regcir/rg06-130.pdf; CBOE Regulatory Circular RG08-004 (Jan. 
8, 2008), available at http://www.cboe.com/publish/RegCir/RG08-004.pdf; CBOE Regulatory Circular RG09-151 (Dec. 30, 2009), 
available at http://www.cboe.org/publish/regcir/rg09-151.pdf; and 
CBOE Regulatory Circular RG12-023 (Jan. 30, 2012), available at 
http://www.cboe.org/publish/regcir/rg12-023.pdf.
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Current Exchange Procedures
    Currently, on days other than the last business day of each month, 
the final closing price of standard non-expiring SPX options traded on 
the Hybrid 3.0 Platform is determined by the OCC based on the final 
end-of-day trading quotations that it receives from the Exchange. In 
general, the OCC determines the closing price of standard non-expiring 
SPX options using the midpoint between the final bid and final offer 
quotations disseminated by the Exchange through the Options Price 
Reporting Authority (``OPRA'').
    On the last business day of each month, however, the Exchange 
conducts special end-of-month non-trading rotations for series of 
standard non-expiring SPX options pursuant to Interpretation and Policy 
.06. These special non-trading closing rotations are conducted on the 
same month-end business days on which CME calculates the EOM FV 
settlement prices of the S&P 500 futures contracts based on the 
theoretical fair value of the underlying S&P 500 Index cash market at 
the close of trading.\10\ The OCC calculates the final month-end 
settlement prices for standard non-expiring SPX options based on non-
trading quotations provided by a designated Lead Market-Maker (``LMM'') 
or LMMs in the SPX, which are then ``smoothed'' by the OCC with an 
implied volatility curve. LMMs calculate non-trading closing bid and 
offer quotations to reflect the theoretical fair value of the options 
through pricing algorithms with a number of relevant inputs, in 
particular, the EOM FV settlement prices of the related S&P 500 futures 
contracts at CME.\11\ The theoretical fair value prices are 
disseminated to the OCC via OPRA after the 3:15 p.m. close of trading 
on the last business day of each month (on the same day that CME 
performs its end-of-month fair market valuations for the S&P 500 
futures). Consistent with CME's practices, the Exchange considers the 
end-of-month theoretical fair value closing prices of SPX options 
traded on the Hybrid 3.0 Platform to be the final month-end settlement 
prices for all purposes, including OCC margin calculations, even though 
no actual trades occur at these prices.
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    \10\ See CBOE Interpretation and Policy .06 to Rule 6.2B.
    \11\ See Securities and Exchange Act Release No. 34-67992; File 
No. SR-CBOE-2012-095 (October 5, 2012) (Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change Relating to Closing 
Rotation Procedures for S&P 500 Index Options).
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Proposed Rule Change
    The Exchange proposes minor changes to its rules to extend its 
current end-of-month settlement pricing procedures for SPX options 
traded on the Hybrid 3.0 Platform to series of SPX options traded on 
the Hybrid System (e.g., SPXW). The Exchange believes that extending 
Interpretation and Policy .06 to additional groups of series of SPX 
options will allow investors to realize consistency in the SPX options 
market and with respect to valuations in the S&P 500 futures market and 
underlying S&P 500 Index cash market.
    Although Interpretation and Policy .06 does not restrict the 
Exchange from conducting special end-of-month non-trading closing 
rotations for series of SPX options traded on the Hybrid System, 
Interpretation and Policy .06 does not contemplate the application of 
month-end fair value pricing procedures in groups of series of SPX 
options without an LMM. Thus, under the Exchange's current rules, the 
Exchange cannot extend Interpretation and Policy .06 to series of SPX 
options traded on the Hybrid System with no LMM.\12\ The proposed 
changes to Interpretation and Policy .06 will allow a designated LMM in 
the SPX options class to conduct non-trading closing rotations for 
series of SPX options on the Hybrid System.
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    \12\ Notably, the Exchange's rules do not require the 
appointment of an LMM in each options class or group of series of 
options. See CBOE Rule 8.14.
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    Under the proposed rule, end-of-month settlement pricing procedures 
will be conducted in the same manner in all series of SPX options. The 
Exchange expects that LMMs in the SPX class will continue to base their 
end-of-month non-trading quotations substantially and materially on the 
closing prices of the related S&P 500

[[Page 32597]]

futures contracts (which reflect the theoretical fair value of the S&P 
500 Index cash market as of 3:00 p.m. as determined by CME), in all 
series of SPX options. The Exchange believes that the proposed rule 
will allow investors to realize consistency in the SPX options market 
by ensuring that the same pricing models are applied to determine the 
end-of-month theoretical fair value of each non-expiring series of SPX 
options. The Exchange believes that the application of consistent 
pricing models in the SPX options market will protect investors' 
interests by mitigating the risk of tracking errors and inconsistent 
reporting that may be caused by the dissemination of closing quotations 
derived from several different pricing models.
    The Exchange believes that extending Interpretation and Policy .06 
to additional groups of series of SPX options will promote the 
functioning of a fair and orderly market in SPX options. The 
misalignment of month-end S&P 500 futures valuations and SPX options 
prices poses unnecessary risk to investors who actively trade in these 
markets. Such inconsistencies expose investors to the possibility of 
unwarranted and potentially significant margin calls, which may not 
reflect actual levels of portfolio risk or true market exposure. The 
Exchange believes that extending Interpretation and Policy .06 to 
additional groups of series of SPX options will mitigate these risks 
and allow investors to realize consistency with respect to the margin 
treatment of SPX options.
    Interpretation and Policy .06 was adopted in response to investors' 
requests for end-of-month pricing of SPX options on the Hybrid 3.0 
Platform consistent with CME's end-of-month S&P 500 futures valuations. 
Similarly, the Exchange is proposing this rule change in response to 
investors' requests for consistent pricing between the S&P 500 futures 
and series of SPX options traded on the Hybrid System. The Exchange 
anticipates disseminating end-of-month non-trading closing rotation 
quotations for each series of SPX options so long as doing so remains 
consistent with CME's end-of-month pricing practices in the S&P 500 
futures. The Exchange, however, cannot predict whether CME will change 
its EOM FV procedures in the future. Accordingly, the proposed rule 
change preserves the Exchange's discretion not to disseminate the 3:00 
p.m. fair value quotations provided by a designated LMM in a series, if 
the Exchange determines that disseminating the quotations would not be 
in the interests of investors or fair and orderly markets. In the event 
that the CME determines not to apply its special EOM FV procedures, 
either on a particular month-end trading day or otherwise, the Exchange 
would allow the actual 3:15 p.m. closing quotations to act as the final 
quotations, as occurs on other trading days.
    The Exchange believes that the proposed rule is designed to guard 
against unfair discrimination in the application of its end-of-month 
settlement pricing procedures. The proposed rule merely extends the 
Exchange's current end-of-month pricing procedures (which have been 
reviewed and accepted by the Commission), to additional series of SPX 
options. Under the proposed rule an LMM in the SPX class will provide 
end-of-month non-trading quotations for each series of SPX options. LMM 
appointments in SPX options will continue to be governed by CBOE Rules 
8.15 and 8.15A and selected based on the criteria set forth in those 
rules including, but not limited to: adequacy of capital; experience in 
trading index options or options on ETPs; presence in the trading 
crowd; and ability to meet required quoting and market-making 
obligations as described in the Exchange's rules.\13\ The Exchange 
believes that the LMM appointment process and procedures are objective; 
all Trading Permit Holders may request an LMM appointment subject to 
approval based on nondiscriminatory criteria and considerations 
designed to promote fair and orderly markets. To the extent that there 
may be more than one LMM appointed in the SPX, the Exchange will 
designate an LMM to provide end-of-month non-trading quotations for 
each group of series of SPX options on a monthly rotating basis.
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    \13\ CBOE Rules 8.15(a) and 8.15A(a).
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    The Exchange recognizes that LMMs may have an interest in the 
outcome of month-end valuation determinations based on the composition 
of their own proprietary positions. For example, an LMM may have an 
incentive to skew their fair value determinations to minimize the risk 
of potential variation margin calls from the OCC to cover proprietary 
holdings. The Exchange believes, however, that these risks are 
substantially mitigated by the weight given to the CME's valuations of 
related S&P 500 futures contracts. The Exchange expects that under the 
proposed rule the end-of-month non-trading closing quotations provided 
by the designated LMM in each series of SPX options will continue to be 
materially, if not directly, based on CME's EOM FV calculations. The 
Exchange believes that the risk of market manipulation is further 
limited by the fact that fair valuations can generally be approximated 
by other third parties and verified through independent checks.
    In addition, the Exchange is equipped to monitor LMMs' end-of-month 
fair value calculations. The Exchange currently monitors the fair value 
calculations of LMMs who quote end-of-month fair value settlement 
prices for SPX options on the Hybrid 3.0 Platform. The Exchange also 
conducts surveillance and oversight of LMMs' fair value quotations to 
monitor for potential attempts at manipulation. Should the proposed 
rule change take effect, the Exchange would extend its regulatory 
practices to monitor the end-of-month fair valuation calculations of 
LMMs who quote any series of SPX options under Interpretation and 
Policy .06.
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.\14\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \15\ 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. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \16\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ Id.
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    In particular, the proposed rule change furthers the interests of 
fair and orderly markets by allowing investors to realize consistency 
across the SPX options, S&P 500 futures and S&P 500 Index cash markets. 
The Exchange proposes to extend the end-of-month fair value pricing 
procedures in Interpretation and Policy .06 to additional series of SPX 
options traded on the Hybrid System to better align end-of-month prices 
in the SPX options

[[Page 32598]]

market with prices of related S&P 500 futures contracts and prices in 
the underlying cash market. The Exchange believes that greater 
consistency in SPX options market is in the best interests of 
investors.
    The Exchange also believes that the proposed rule change will 
contribute to more robust and competitive markets by making it easier 
for investors to trade S&P 500 Index-related securities and, in 
particular, making it easier for investors to use SPX options to hedge 
S&P 500 futures positions. Thus, the proposed rule change will 
facilitate investors' use of risk-reducing trading strategies and 
promote robust trading activity in the S&P 500 Index-related markets. 
The Exchange also believes that extending its fair value pricing 
procedures to additional groups of series of SPX options will mitigate 
risk to investors, including investors' risk of tracking errors, 
misrepresentative financial reporting, and potential unwarranted margin 
calls that may be caused by misaligned end-of-month settlement pricing 
in the S&P 500 Index-related markets, rather than actual portfolio risk 
or market exposure.
    The Exchange believes that the proposed rule change is designed to 
guard against unfair discrimination in the application of its end-of-
month settlement pricing procedures. The proposed rule merely extends 
the Exchange's current procedures (which have been reviewed and 
approved by the Commission), to additional series of SPX options. Under 
the proposed rule a designated LMM in each series of the SPX options 
will provide end-of-month non-trading settlement pricing quotations for 
series of SPX options. LMM appointments in SPX options will continue to 
be governed by CBOE Rules 8.15 and 8.15A and selected based on the 
criteria set forth in those rules including, but not limited to: 
adequacy of capital; experience in trading index options or options on 
ETPs; presence in the trading crowd; and ability to meet the required 
quoting and market-making obligations described in the Exchange's 
rules.\17\ The Exchange believes that the LMM appointment procedures 
and process set forth in Rules 8.15 and 8.15A are objective; all TPHs 
may request an appointment subject to the nondiscriminatory criteria 
set forth in Rules 8.15 and 8.15A, which are designed to promote fair 
and orderly markets.
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    \17\ CBOE Rules 8.15(a) and 8.15A(a).
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    The Exchange recognizes that LMMs may have an interest in the 
outcome of month-end valuation determinations based on the composition 
of their own proprietary positions. For example, an LMM may have an 
incentive to skew their fair value determinations to minimize the risk 
of potential of variation margin calls from the OCC to cover 
proprietary holdings. The Exchange believes, however, that these risks 
are substantially mitigated by the weight given to fair valuations of 
the related S&P 500 futures contracts at CME. The Exchange expects that 
the end-of-month non-trading closing price quotations provided by LMMs 
for series of SPX options on the Hybrid System will continue to be 
materially, if not directly, based on CME's EOM FV calculations under 
the proposed rule. The Exchange believes that the risk of market 
manipulation is further limited by the fact that fair valuations can 
generally be approximated by other third parties and verified through 
independent checks.
    In addition, the Exchange is equipped to protect investors through 
end-of-month fair value calculations monitoring practices. The Exchange 
currently monitors the fair value calculations of LMMs who quote end-
of-month fair value settlement prices for SPX options on the Hybrid 3.0 
Platform. The Exchange also conducts surveillance and oversight of 
LMMs' fair value quotations to monitor for potential attempts at 
manipulation. Under the proposed rule, the Exchange would extend its 
regulatory practices to monitor LMMs' end-of-month price calculations 
for all series of SPX options quoted in accordance with Interpretation 
and Policy .06.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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. Extending the Exchange's 
current end-of-month fair value settlement procedures to other series 
of SPX options will not adversely affect investors. These procedures 
will be equally applied to affect all market participants equally in 
the SPX options market. Furthermore, the Exchange believes that the 
proposed rule will bolster competition and contribute to more robust 
markets by making it easier for investors to trade SPX options and use 
SPX options to hedge S&P 500 futures positions. The Exchange believes 
that the proposed rule will bolster competition with other exchanges by 
making it easier for investors to trade S&P 500 Index-related 
securities listed on exchanges other than CBOE.

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

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \18\ and 
Rule 19b-4(f)(6) \19\ thereunder. At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6).
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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-2014-043 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-2014-043. 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

[[Page 32599]]

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 the 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-2014-043 and should be 
submitted on or before June 26, 2014.
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    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-13017 Filed 6-4-14; 8:45 am]
BILLING CODE 8001-01-P


