
[Federal Register Volume 80, Number 22 (Tuesday, February 3, 2015)]
[Notices]
[Pages 5863-5865]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-02012]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74159; File No. SR-CBOE-2015-007]


Self-Regulatory Organizations: Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Adopt a Box Spread Strategy Rebate for Users of 
the Exchange's Customized Options Pricing Service

January 28, 2015.
    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 January 15, 2015, 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

    The Exchange proposes to adopt a box spread strategy rebate for 
users of the Exchange's Customized Options Pricing Service (``COPS''). 
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 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 adopt a box spread strategy rebate for 
users of the Exchange's COPS.\3\ COPS provides market participants with 
an ``end-of-day'' \4\ file and ``historical'' \5\ files of valuations 
for Flexible Exchange (``FLEX'') \6\ options and certain over-the-
counter (``OTC'') options (collectively, ``COPS Data''). Market Data 
Express, LLC (``MDX''), an affiliate of CBOE, offers COPS Data for sale 
to all market participants. COPS Data is available to ``Subscribers'' 
for internal use and internal distribution only, and to ``Customers'' 
who, pursuant to a written vendor agreement between MDX and a Customer, 
may distribute the Data externally (i.e., act as a vendor) and/or use 
and distribute the Data internally.
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    \3\ See Securities Exchange Act Release No. 67813 (September 10, 
2012), 77 FR 56903 (September 14, 2012) (SR-CBOE-2012-083), 
Securities Exchange Act Release No. 67928 (September 26, 2012), 77 
FR 60161 (October 2, 2012) (SR-CBOE-2012-090), Securities Exchange 
Act Release No. 70705 (October 17, 2013), 78 FR 63265 (October 23, 
2013) (SR-CBOE-2013-097), Securities Exchange Act Release No. 70845 
(November 12, 2013), 78 FR 69168 (November 18, 2013) (SR-CBOE-2013-
104), and Securities Exchange Act Release No. 72621 (July 16, 2014), 
79 FR 42616 (July 22, 2014) (SR-CBOE-2014-057).
    \4\ ``End of day'' refers to data that is distributed prior to 
the opening of the next trading day.
    \5\ ``Historical'' COPS data consists of COPS data that is over 
one month old (i.e., copies of the ``end-of-day'' COPS file that are 
over one month old).
    \6\ FLEX options are exchange traded options that provide 
investors with the ability to customize basic option features 
including size, expiration date, exercise style, and certain 
exercise prices.
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    COPS Data consists of indicative \7\ and implied volatility values 
for four categories of ``customized'' options. The first category of 
options is all open series of FLEX options listed on any exchange that 
offers FLEX options for trading.\8\ The second category is OTC options 
that have the same degree of customization as FLEX options. The third 
category includes options with strike prices expressed in percentage 
terms. Values for such options are expressed in percentage terms and 
are theoretical values.\9\ The fourth category includes ``exotic'' 
options.\10\
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    \7\ ``Indicative'' values are indications of potential market 
prices only and as such are neither firm nor the basis for a 
transaction.
    \8\ Current FLEX options open interest spans over 2,000 series 
on over 300 different underlying securities.
    \9\ These values are theoretical in that they are indications of 
potential market prices for options that have not traded (i.e., do 
not yet exist). Market participants sometimes express option values 
in percentage terms rather than in dollar terms because they find it 
is easier to assess the change, or lack of change, in the 
marketplace from one day to the next when values are expressed in 
percentage terms.
    \10\ Exotic options are options which are generally traded OTC 
and are more complex than standard options, usually relating to 
determination of payoff. An exotic option may also include a non-
standard underlying instrument, developed for a particular client or 
for a particular market.
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    The Exchange uses values produced by CBOE Trading Permit Holders 
(``TPHs'') to produce COPS Data. Participating CBOE TPHs submit values 
to MDX on options series specified by MDX on a daily basis. These 
values are generated by the TPH's internal pricing models. The 
valuations that MDX ultimately publishes are an average of multiple 
contributions of values from participating CBOE TPHs. For each value 
provided by MDX through COPS, MDX includes a corresponding indication 
of the number of market-maker contributors that factored into that 
value.
    CBOE TPHs that meet the following objective qualification criteria 
are allowed to contribute values to MDX for purposes of producing COPS 
Data. Interested CBOE TPHs must be approved by the Exchange, have the

[[Page 5864]]

ability to provide valuations to MDX in a timely manner each day after 
the close of trading, and sign a services agreement with CBOE. 
Interested CBOE TPHs must also have the ability to provide both 
indicative and implied volatility valuations on several different types 
of options, including (i) options on all open FLEX series traded on any 
exchange that offers FLEX options for trading, (ii) options on any 
potential new FLEX options series, (iii) OTC options that have the same 
degree of customization as FLEX options, (iv) customized options where 
the strike price is expressed in percentage terms (the valuations 
provided to MDX must also be expressed in percentage terms), and (v) 
exotic options. In addition, interested CBOE TPHs must participate in a 
testing phase with MDX. The values submitted by a TPH during the 
testing phase and in live production must meet MDX's quality control 
standards designed to ensure the integrity and accuracy of COPS Data. 
Any TPH that meets the COPS qualification criteria may contribute to 
COPS. MDX has implemented procedures including monthly performance 
reviews to help ensure the integrity and accuracy of COPS Data.
    To help ensure that MDX receives numerous values from multiple TPHs 
on a consistent basis, MDX shares revenue from the sale of COPS Data 
with participating CBOE TPHs.\11\ The fees that MDX charges for COPS 
Data are set forth on the Price List on the MDX Web site 
(www.marketdataexpress.com) (``MDX Web site''). MDX currently charges a 
fee per option per day for ``end-of-day'' COPS data. The amount of the 
fee is reduced based on the number of options valuations purchased.
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    \11\ See Securities Exchange Act Release No. 72621 (July 16, 
2014), 79 FR 42616 (July 22, 2014) (SR-CBOE-2014-057) for a detailed 
description of the Exchange's COPS Data revenue-sharing plan.
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    Interpretation .02 to CBOE Rule 6.42 defines a ``box spread'' as 
``an aggregation of positions in a long call option and short put 
option with the same exercise price (``buy side'') coupled with a long 
put option and short call option with the same exercise price (``sell 
side'') all of which have the same aggregate current underlying value, 
and are structured as either: (A) A ``long box spread'' in which the 
sell side exercise price exceeds the buy side exercise price or (B) a 
``short box spread'' in which the buy side exercise price exceeds the 
sell side exercise price.'' Essentially, for our purposes, a box spread 
involves being synthetically long an underlying product at one price 
and synthetically short the underlying product at a higher price. It is 
constructed through the combination of four options. All options have 
the same underlying product and same expiration date. The synthetic 
long position is achieved through the purchase of a call option and the 
sale of a put option at the same strike price and expiration date. The 
synthetic short position, conversely, is achieved through the purchase 
of a put and the sale of a call at the same strike price (the strike 
price of the synthetic short is higher than the strike price of the 
synthetic long).
    For example, one could construct a 1000/2000 box spread in option 
XYZ expiring January 16, 2015. To establish the synthetic long, you 
would buy one XYZ call with a strike price of 1000 and sell one XYZ put 
with a strike price of 1000. Then, to establish the synthetic short, 
you would buy one XYZ put with a strike price at 2000 and sell one XYZ 
call with a strike price at 2000.
    The payoff at expiration of a box spread is the difference between 
the higher-struck synthetic short minus the lower-struck synthetic 
long. Therefore, the value of the box spread employed in the example 
above would be 1000. The price of a box spread is the present value of 
the payoff, and therefore, box spreads provide useful information about 
interest rate assumptions within the options markets. If the box spread 
in the example above was being quoted in the market at 999.50, this 
would imply an interest rate of 0.05%.
    COPS users (and potential COPS users) are usually interested in a 
number of series (aside from just the one included in the box spread). 
As such, it is useful for them to know the implied interest rate in the 
options market. The current COPS fee structure would require these 
customers to purchase not only the four series in the box spread, but 
also the other series in which their primary interest lies. Charging 
the box spread by series makes COPS cost-prohibitive for some 
customers. Indeed, the Exchange believes that a number of potential 
COPS customers are not using COPS because the current fee structure 
(charging for all four valuations of a box spread) is deterring these 
potential COPS customers from becoming COPS users.
    As such, the Exchange proposes to institute a COPS Box Strategy 
Rebate (the ``Rebate'').\12\ Under the proposed rebate, the Exchange 
would ultimately treat the four orders involved in creating the box 
spread as one series for fee purposes. Because Exchange systems are not 
currently configured to recognize four separate orders as being part of 
one box spread, the Exchange would make available a COPS Box Strategy 
Rebate Request Form (the ``Form''). This Form will be very similar to 
the Exchange's current ``Strategies Rebate Form'' and would involve 
listing the relevant trade details necessary to denote the four series 
as part of one box spread.\13\ Once the rebate form has been submitted 
and verified by CBOE as having described a box spread,\14\ the TPH will 
be rebated three series' worth of transaction fees. In sum, COPS users 
purchasing four options valuations for a box spread can be rebated the 
cost of three of the valuations by submitting the COPS Box Strategy 
Rebate Request Form within three days of the end of the month in which 
the box spread valuations were purchased.
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    \12\ The Exchange initially filed the proposed fee change on 
January 2, 2015 (SR-CBOE-2015-001). On January 15, 2015, the 
Exchange withdrew that filing and submitted this filing.
    \13\ These details would include the execution date, option 
symbol, put/call, and strike price for each of the four options 
purported to compose the box spread.
    \14\ The Exchange will verify that the purported box spread was 
composed of four options, all with the same underlying product and 
expiration date, that create a synthetic long and synthetic short 
position.
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    So, for example, if a COPS user purchased four valuations that made 
up a box spread, he would be charged $5.00.\15\ Upon completing the 
Form, he would then be rebated $3.75. The Exchange currently institutes 
a similar rebate process for transaction fees assessed to multi-class 
spread orders, short stock interest, reversal, conversion (reversals 
and conversions are components of a box spread), and jelly roll 
strategy orders.\16\
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    \15\ This assumes that the COPS user purchased 0-50 valuations 
per day. The Exchange offers lower per-valuation prices based on the 
number of valuations purchased per day (See the COPS Price List on 
the MDX Web site).
    \16\ See CBOE Fees Schedule, Footnote 13.
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    From a practical standpoint for the users, the purpose of COPS is 
to get end-of-day valuations. COPS users want to know the inputs into 
an option's price. There are five major inputs into an option's price: 
(1) Underlying price, (2) time to expiration, (3) strike price, (4) 
implied volatility, and (5) interest rates. The proposed box spread 
rebate would allow the Exchange to provide COPS users with a cost 
effective method to extract implied interest rates.
    The proposed change is to take effect on January 2, 2015.\17\
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    \17\ The Commission notes that CBOE's proposal was filed on 
January 15, 2015, but a prior proposed rule change containing the 
same fee change was filed on January 2, 2015 and withdrawn by CBOE 
on January 15, 2015. See infra footnote 12.

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[[Page 5865]]

 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.\18\ Specifically, the Exchange believes the proposed rule change 
is consistent with Section 6(b)(4) of the Act,\19\ which requires that 
Exchange rules provide for the equitable allocation of reasonable dues, 
fees, and other charges among its Trading Permit Holders and other 
persons using its facilities. The Exchange believes the Rebate is 
reasonable because it will allow COPS users who purchase four 
valuations that make up a box spread to only be ultimately charged for 
one of those valuations (thereby saving three valuations' worth of 
fees).
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes the Rebate is equitable and not unfairly 
discriminatory because it will apply to all COPS users who purchase 
four valuations that make up a box spread. While receiving end-of-day 
valuations via COPS is extremely different than, and not really 
comparable to, trading on CBOE, it should be noted that the components 
of a box spread trade, reversals and conversions, are also subject to 
rebates.\20\ From a practical standpoint for the users, the purpose of 
COPS is to get end-of-day valuations. COPS users want to know the 
inputs into an option's price. There are five major inputs into an 
option's price: (1) Underlying price, (2) time to expiration, (3) 
strike price, (4) implied volatility, and (5) interest rates. The 
proposed Rebate simply allows the Exchange to provide COPS users with a 
cost effective method to extract implied interest rates. While the 
Exchange cannot conceive of any purpose for COPS users to request 
pricing on a box spread (other than those described herein), the Rebate 
will be available to all COPS users.
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    \20\ See CBOE Fees Schedule, Footnote 13.
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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. CBOE does not believe that the 
proposed rule change will impose any burden on intramarket competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act because the Rebate will be available to all COPS users. CBOE 
does not believe that the proposed rule change will impose any burden 
on intermarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act because the Rebate only applies 
to CBOE COPS users, and does not affect pricing or fees on other 
exchanges. To the extent the Rebate makes CBOE a more attractive 
marketplace for market participants on other exchanges, such market 
participants may become CBOE market participants (and COPS users).

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \21\ and paragraph (f) of Rule 19b-4 \22\ 
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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    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f).
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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-2015-007 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2015-007. 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 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-2015-007 and 
should be submitted on or before February 24, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-02012 Filed 2-2-15; 8:45 am]
BILLING CODE 8011-01-P


