
[Federal Register Volume 79, Number 126 (Tuesday, July 1, 2014)]
[Notices]
[Pages 37369-37371]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-15327]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72468; File No. SR-CBOE-2014-039]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change as Modified by 
Amendment No. 1 To Amend Certain Margin Rules for Volatility Index 
Options

June 25, 2014.

I. Introduction

    On April 28, 2014, the Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend certain margin rules for 
volatility index options. The proposed rule change was published for 
comment in the Federal Register on May 13, 2014.\3\ The Commission 
received no comment letters regarding the proposed rule change. On June 
10, 2014, CBOE filed Amendment No. 1 to the proposed rule change.\4\ 
This order approves the proposed rule change, as modified by Amendment 
No. 1.
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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. 72115 (May 7, 2014), 
79 FR 27358 (``Notice'').
    \4\ In Partial Amendment No. 1, CBOE requested that the 
implementation date for the rule be 30 days from the date of this 
approval order (``Amendment No. 1''). Amendment No. 1 does not 
change any of the proposed rule text that was submitted in the 
original filing. Amendment No. 1 is technical in nature and, 
therefore, the Commission is not publishing it for comment.
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II. Description of the Proposed Rule Change

    CBOE proposes to amend certain margin rules for volatility index 
options. Over the past decade, CBOE 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 from the Commission to classify 
each respective volatility index as a ``broad-based index'' for margin 
purposes.\5\ For stock and ETF-based volatility indexes, the margin 
requirements were set at the same levels that apply to equity 
options.\6\
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    \5\ 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'')).
    \6\ 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.\7\ 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, CBOE believes the proposal rule 
changes will make the rule text more ``user-friendly'' by enumerating 
``Volatility Indexes'' and identifying specific classes in the 
appropriate places.
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    \7\ See Notice, supra note 3, at 27358.
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Proposed Changes to CBOE Rule 12.3(c)(5)

    CBOE Rule 12.3(c)(5) sets forth the initial and maintenance margin

[[Page 37370]]

requirements for short options held in a customer account. As stated 
above, when the Commission approved the VIX, VXN, VXD, RVX and VXST 
options 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.\8\ 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%.\9\ The 
Exchange is not proposing to increase the 10% minimum margin required 
for 30-day volatility index options.\10\
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    \8\ 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.
    \9\ 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).
    \10\ See Notice, supra note 3, at 27358.
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    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 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).\11\
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    \11\ See Notice, supra note 3, at 27359.
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    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)'' \12\ because the Exchange has received 
approval to trade options on certain volatility indexes, which are not 
currently listed for trading. 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.\13\
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    \12\ 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.
    \13\ See Notice, supra note 3, at 27359.
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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 Trading Permit Holder 
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).\14\ 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.\15\
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    \14\ 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).
    \15\ See Notice, supra note 3, at 27359.
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    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.'' \16\ 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 to 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.\17\
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    \16\ See id. at 27359.
    \17\ See id.
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    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

[[Page 37371]]

unnecessary word ``and'' from the definition of ``option series.'' \18\
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    \18\ See id.
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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 accomplished by way of a rule filing with the 
Commission.\19\
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    \19\ See id. at 27359-60.
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Implementation Date

    CBOE filed Amendment No. 1 to request a 30-day implementation 
period for the proposed rule that would commence upon approval of the 
proposed rule change.\20\ The Exchange believes that this is an 
appropriate timeframe for Trading Permit Holder organizations and their 
customers to prepare for the proposed margin increases.
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    \20\ See Amendment No. 1.
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III. Discussion and Commission Findings

    After careful review, 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.\21\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\22\ 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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    \21\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that increasing the minimum margin 
requirements (including the portfolio margin requirements) for certain 
volatility index options will protect the integrity of the marketplace 
by setting margin at a level that is appropriate for the given 
instrument. The proposed changes also will benefit investors and other 
market participants by making some clarifying changes to CBOE's margin 
rules, and by making CBOE's rules more user-friendly in that the 
applicable margin levels will be easier to locate in CBOE's rulebook.
    Finally, the implementation date of the proposed rule change will 
be 30 days from the effective date of this approval order. The 
Commission believes that a 30-day implementation date is an appropriate 
timeframe for broker-dealers and their customers to prepare for the 
proposed margin increases.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-CBOE-2014-039), as modified 
by Amendment No. 1, is approved.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-15327 Filed 6-30-14; 8:45 am]
BILLING CODE 8011-01-P


