
[Federal Register Volume 80, Number 71 (Tuesday, April 14, 2015)]
[Notices]
[Pages 20032-20035]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-08453]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74681; File No. SR-CBOE-2015-023]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Accelerated Approval of Proposed Rule 
Change, as Modified by Amendment No. 1, to List and Trade Options on 
the MSCI EAFE Index and on the MSCI Emerging Markets Index

April 8, 2015.

I. Introduction

    On February 26, 2015, the Chicago Board Options Exchange, 
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and 
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade options on the 
MSCI EAFE Index and the MSCI Emerging Markets (``EM'') Index. The 
proposed rule change was published for comment in the Federal Register 
on March 10, 2015.\3\ On March 24, 2015, the Exchange filed Amendment 
No. 1 to the proposed rule change.\4\ The Commission received no 
comments on the proposed rule change. This order grants approval of the 
proposed rule change, as modified by Amendment No. 1, on an accelerated 
basis.


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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. 74430 (March 4, 
2015), 80 FR 12675 (``Notice'').
    \4\ Amendment No. 1 corrects the customer portfolio margin 
description in the Exhibit 3 to conform it to Exchange Rule 12.4. As 
the stated in the Notice, the MSCI EAFE and MSCI EM Index options 
would be subject to the same rules that currently govern other CBOE 
index options, including margin requirements. Amendment No. 1 is not 
subject to notice and comment because it is technical in nature and 
does not materially alter the substance of the proposed rule change 
or raise any novel regulatory issues.
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade P.M. cash-settled, 
European-style

[[Page 20033]]

options on the MSCI EAFE Index and the MSCI EM Index.\5\ According to 
the Exchange, the MSCI EAFE Index is a free floated-adjusted market 
capitalization index that is designed to measure the equity market 
performance of developed markets, excluding the U.S. and Canada. The 
MSCI EAFE Index consists of 21 developed market country indexes and has 
over 900 constituents. According to the Exchange, the MSCI EM Index is 
a free float-adjusted market capitalization index that is designed to 
measure the equity market performance of emerging markets. The MSCI EM 
Index consists of 23 emerging market country indexes and has over 800 
constituents.\6\ The Exchange states that the indexes are monitored and 
maintained by MSCI Inc. (``MSCI'').\7\ Adjustments to the indexes are 
made on a daily basis, and MSCI reviews the indexes quarterly.
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    \5\ The Exchange proposes to list up to twelve near-term 
expiration months for the MSCI EAFE and MSCI EM Index options. The 
Exchange also proposes to list LEAPS on the MSCI EAFE Index and the 
MSCI EM Index. The exchange proposes that options on the MSCI EAFE 
Index and the MSCI EM Index would be eligible for all other 
expirations permitted for other broad-based indexes (e.g., End of 
Week/End of Month Expirations, Short Term Option Series, and 
Quarterly Options Series). In addition, the Exchange proposes to 
designate the MSCI EAFE Index and the MSCI EM Index as eligible for 
trading as FLEX options.
    \6\ The Exchange states that the MSCI EAFE Index and the MSCI EM 
Index each meet the definition of a broad-based index as set forth 
in Exchange Rule 24.1(i)(1).
    \7\ The Exchange proposes to designate MSCI as the reporting 
authority for the MSCI EAFE Index and the MSCI EM Index.
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    According to the Exchange, both the MSCI EAFE Index and the MSCI EM 
Index are calculated in U.S. dollars on a real-time basis from the open 
of the first market on which the components are traded to the closing 
of the last market on which the components are traded. The 
methodologies used to calculate the MSCI EAFE Index and the MSCI EM 
Index are similar to the methodology used to calculate the value of 
other benchmark market-capitalization weighted indexes.\8\ Real-time 
data is distributed approximately every 15 seconds while the indexes 
are being calculated using MSCI's real-time calculation engine to 
Bloomberg L.P. (``Bloomberg''), FactSet Research Systems, Inc. 
(``FactSet''), and Thomson Reuters (``Reuters''). End of day data is 
distributed daily to clients through MSCI as well as through major 
quotation vendors, including Bloomberg, FactSet, and Reuters.
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    \8\ Specifically, the indexes are based on the MSCI Global 
Investable Market Indexes Methodology. Further detail regarding this 
methodology can be found in the Notice, supra note 3, at notes 5 and 
9 and accompanying text.
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    The Exchange proposes that trading hours for MSCI EAFE Index 
options would be from 8:30 a.m. (Chicago Time) to 3:15 p.m. (Chicago 
Time), except that trading in expiring MSCI EAFE Index options would 
end at 10:00 a.m. (Chicago Time) on their expiration date. Trading 
hours for MSCI EM Index options would be from 8:30 a.m. (Chicago Time) 
to 3:15 p.m. (Chicago Time).
    The Exchange proposes that MSCI EAFE and MSCI EM Index options 
would expire on the third Friday of the expiration month.\9\ The 
exercise settlement value would be the official closing values of the 
MSCI EAFE Index and the MSCI EM Index as reported by MSCI on the last 
trading day of the expiring contract. The exercise settlement amount 
would be equal to the difference between the exercise-settlement value 
and the exercise price of the option, multiplied by the contract 
multiplier ($100).\10\ Exercise would result in delivery of cash on the 
business day following expiration.
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    \9\ According to the Exchange, when the last trading day/
expiration date is moved because of an Exchange holiday or closure, 
the last trading day/expiration date for expiring options would be 
the immediately preceding business day.
    \10\ According to the Exchange, if the exercise settlement value 
is not available or the normal settlement procedure cannot be 
utilized due to a trading disruption or other unusual circumstance, 
the settlement value would be determined in accordance with the 
rules and bylaws of the Options Clearing Corporation.
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    The Exchange proposes to create specific initial and maintenance 
listing criteria for options on the MSCI EAFE Index and the MSCI EM 
Index. Specifically, the Exchange proposes to add new Interpretation 
and Policy .01(a) to Rule 24.2 to provide that the Exchange may trade 
MSCI EAFE and MSCI EM Index options if each of the following conditions 
is satisfied: (1) The index is broad-based, as defined in Exchange Rule 
24.1(i)(1); (2) options on the index are designated as P.M.-settled 
index options; (3) the index is capitalization-weighted, price-
weighted, modified capitalization-weighted, or equal dollar-weighted; 
(4) the index consists of 500 or more component securities; (5) all of 
the component securities of the index will have a market capitalization 
of greater than $100 million; (6) no single component security accounts 
for more than fifteen percent (15%) of the weight of the index, and the 
five highest weighted component securities in the index do not, in the 
aggregate, account for more than fifty percent (50%) of the weight of 
the index; (7) non-U.S. component securities (stocks or ADRs) that are 
not subject to comprehensive surveillance agreements do not, in the 
aggregate, represent more than: (i) Twenty percent (20%) of the weight 
of the MSCI EAFE Index, and (ii) twenty-two and a half percent (22.5%) 
of the weight of the MSCI EM Index; (8) during the time options on the 
index are traded on the Exchange, the current index value is widely 
disseminated at least once every fifteen (15) seconds by one or more 
major market data vendors; however, the Exchange may continue to trade 
MSCI EAFE Index options after trading in all component securities has 
closed for the day and the index level is no longer widely disseminated 
at least once every fifteen (15) seconds by one or more major market 
data vendors, provided that EAFE futures contracts are trading and 
prices for those contracts may be used as a proxy for the current index 
value; (9) the Exchange reasonably believes it has adequate system 
capacity to support the trading of options on the index, based on a 
calculation of the Exchange's current Independent System Capacity 
Advisor (ISCA) allocation and the number of new messages per second 
expected to be generated by options on such index; and (10) the 
Exchange has written surveillance procedures in place with respect to 
surveillance of trading of options on the index.
    Additionally, the Exchange proposes to add new Interpretation and 
Policy .01(b) to Rule 24.2 to set forth the following maintenance 
listing standards for options on the MSCI EAFE Index and the MSCI EM 
Index: (1) The conditions set forth in subparagraphs .01(a)(1), (2), 
(3), (4), (7), (8), (9), and (10) must continue to be satisfied, the 
conditions set forth in subparagraphs .01(a)(5) and (6) must be 
satisfied only as of the first day of January and July in each year; 
and (2) the total number of component securities in the index may not 
increase or decrease by more than thirty-five percent (35%) from the 
number of component securities in the index at the time of its initial 
listing. In the event a class of index options listed on the Exchange 
pursuant to Interpretation and Policy .01(a) fails to satisfy these 
maintenance listing standards, the Exchange shall not open for trading 
any additional series of options of that class unless the continued 
listing of that class of index options has been approved by the 
Commission under Section 19(b)(2) of the Act.
    The contract multiplier for the MSCI EAFE and MSCI EM Index options 
would be $100. The Exchange proposes that the minimum tick size for 
series

[[Page 20034]]

trading below $3 would be 0.05 ($5.00), and above $3 would be 0.10 
($10.00). The Exchange also proposes that the strike price interval for 
MSCI EAFE and MSCI EM Index options would be no less than $5, except 
that the strike price interval would be no less than $2.50 if the 
strike price is less than $200.
    The Exchange proposes to apply the default position limits for 
broad-based index options of 25,000 contracts on the same side of the 
market (and 15,000 contracts near-term limit) to MSCI EAFE and MSCI EM 
Index options. All position limit hedge exemptions would apply. The 
exercise limits for MSCI EAFE and MSCI EM Index options would be 
equivalent to the position limits for those options. In addition, the 
Exchange proposes that the position limits for FLEX options on the MSCI 
EAFE Index and the MSCI EM Index would be equal to the position limits 
for non-FLEX options on the MSCI EAFE Index and the MSCI EM Index. The 
exercise limits for FLEX options on the MSCI EAFE Index and the MSCI EM 
Index would be equivalent to the position limits for those options.
    The Exchange states that, except as modified by the proposal, 
Exchange Rules in Chapters I through XIX, XXIV, XXIVA, and XXIVB would 
equally apply to MSCI EAFE and MSCI EM Index options. The Exchange also 
states that MSCI EAFE and MSCI EM Index options would be subject to the 
same rules that currently govern other CBOE index options, including 
sales practice rules, margin requirements,\11\ and trading rules.\12\
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    \11\ The Exchange states that MSCI EAFE and MSCI EM Index 
options would be margined as broad-based index options.
    \12\ See, e.g., Exchange Rule Chapters IX (Doing Business with 
the Public), XII (Margins), IV (Business Conduct), VI (Doing 
Business on the Trading Floor), VIII (Market-Makers, Trading Crowds 
and Modified Trading Systems), and XXIV (Index Options).
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    The Exchange represents that it has an adequate surveillance 
program in place for MSCI EAFE and MSCI EM Index options and intends to 
use the same surveillance procedures currently utilized for each of the 
Exchange's other index options to monitor trading in the proposed 
options. The Exchange also states that it is a member of the 
Intermarket Surveillance Group, is an affiliate member of the 
International Organization of Securities Commissions, and has entered 
into various comprehensive surveillance agreements and/or Memoranda of 
Understanding with various stock exchanges. Finally, the Exchange 
represents that it believes it and the Options Price Reporting 
Authority (``OPRA'') have the necessary systems capacity to handle the 
additional traffic associated with the listing of new series that would 
result from the introduction of MSCI EAFE and MSCI EM Index options.

III. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\13\ 
Specifically, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\14\ 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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    \13\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the listing and trading of MSCI EAFE 
Index options will broaden trading and hedging opportunities for 
investors by providing an options instrument based on an index designed 
to measure the equity market performance of developed markets 
(excluding the U.S. and Canada). Similarly, the Commission believes 
that the listing and trading of MSCI EM Index options will broaden 
trading and hedging opportunities for investors by providing an options 
instrument based on an index designed to measure the equity market 
performance of emerging markets. Moreover, the Exchange states that the 
iShares MSCI EAFE exchange traded fund (``EFA'') is an actively-traded 
product and that it lists actively-traded options overlying EFA. The 
Exchange likewise states that the iShares MSCI Emerging Markets 
exchange traded fund (``EEM'') is an actively-traded product and that 
it lists actively-traded options overlying EEM.
    Because the MSCI EAFE Index and the MSCI EM Index are broad-based 
indexes composed of actively-traded, well-capitalized stocks, the 
trading of options on these indexes does not raise unique regulatory 
concerns. The Commission believes that the listing standards, which are 
created specifically and exclusively for these indexes, are consistent 
with the Act, for the reasons discussed below.\15\
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    \15\ The Commission notes that it previously approved the 
listing and trading of options on the MSCI EAFE Index and the MSCI 
EM Index on NASDAQ OMX PHLX LLC (``Phlx''). See Securities Exchange 
Act Release Nos. 66420 (February 17, 2012), 77 FR 11177 (February 
24, 2012) (SR-Phlx-2011-179) (order approving the listing of MSCI EM 
Index options on Phlx) and 66861 (April 26, 2012), 77 FR 26056 (May 
2, 2012) (SR-Phlx-2012-28) (order approving the listing of MSCI EAFE 
Index options on Phlx). See also Securities Exchange Act Release No. 
67071 (May 29, 2012), 77 FR 33013 (June 4, 2012) (SR-Phlx-2012-67) 
(notice of filing and immediate effectiveness of proposed rule 
change to amend the trading hours for MSCI EAFE Index options). The 
Exchange states that its proposal is substantially similar to the 
Phlx proposals that were approved by the Commission.
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    The Commission notes that proposed Interpretation and Policy .01 to 
Exchange Rule 24.2 would require that the MSCI EAFE Index and the MSCI 
EM Index each consist of 500 or more component securities. Further, for 
options on the MSCI EAFE Index and the MSCI EM Index to trade, each of 
the minimum of 500 component securities would need to have a market 
capitalization of greater than $100 million. The Commission notes that, 
according to the Exchange, the MSCI EAFE Index has more than 900 
components and the MSCI EM Index has more than 800 components, all of 
which must meet the market capitalization requirement to permit options 
on these indexes to begin trading.
    The Commission notes that the proposed listing standards for 
options on the MSCI EAFE Index and the MSCI EM Index would not permit 
any single component security to account for more than 15% of the 
weight of the index, and would not permit the five highest weighted 
component securities to account for more than 50% of the weight of the 
index in the aggregate. The Commission believes that, in view of the 
requirement on the number of securities in each index, the number of 
countries represented in each index, and the market capitalization, 
this concentration standard is consistent with the Act. Further, the 
Exchange states that no single component accounts for more than 5% of 
either index. As noted above, the Exchange represents that it has an 
adequate surveillance program in place for MSCI EAFE and MSCI EM Index 
options and intends to use the same surveillance procedures currently 
utilized for each of the Exchange's other index options to monitor 
trading in the proposed options.
    The Commission notes that, consistent with the Exchange's generic 
listing standards for broad-based index options, non-U.S. component 
securities

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of the MSCI EAFE Index that are not subject to comprehensive 
surveillance agreements will not, in the aggregate, represent more than 
20% of the weight of the index. With respect to the MSCI EM Index, non-
U.S. component securities that are not subject to comprehensive 
surveillance agreements must not, in the aggregate, represent more than 
22.5% of the weight of the index.
    The proposed listing standards require that, during the time 
options on the MSCI EAFE Index and the MSCI EM Index are traded on the 
Exchange, the current index value is widely disseminated at least once 
every 15 seconds by one or more major market data vendors. However, the 
Exchange may continue to trade MSCI EAFE Index options after trading in 
all component securities has closed for the day and the index level is 
no longer widely disseminated at least once every 15 seconds by one or 
more major market data vendors, provided that EAFE futures contracts 
are trading and prices for those contracts may be used as a proxy for 
the current index value.\16\
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    \16\ The Exchange notes that, because trading in the components 
of the MSCI EAFE Index ends at approximately 11:30 a.m. (Chicago 
Time), there will not be a current MSCI EAFE Index level calculated 
and disseminated during a portion of the time when MSCI EAFE Index 
options would be traded (from approximately 11:30 a.m. (Chicago 
Time) to 3:15 p.m. (Chicago Time)). However, the Exchange states 
that EAFE futures contracts will be trading during this time period 
and that the futures prices would be a proxy for the current MSCI 
EAFE Index level during this time period. The Exchange states that 
MSCI EAFE Mini Index futures contracts are listed for trading on the 
Intercontinental Exchange, Inc. (``ICE'') and other derivatives 
contracts on the MSCI EAFE Index are listed for trading in Europe. 
Similarly, the Exchange states that MSCI Emerging Markets Mini Index 
futures contracts are listed for trading on ICE and other 
derivatives contracts on the MSCI EM Index are listed for trading in 
Europe.
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    In addition, the proposed listing standards require the Exchange to 
reasonably believe that it has adequate system capacity to support the 
trading of options on the MSCI EAFE Index and the MSCI EM Index. As 
noted above, the Exchange represents that it believes it and the OPRA 
have the necessary systems capacity to handle the additional traffic 
associated with the listing of new series that would result from the 
introduction of MSCI EAFE and MSCI EM Index options.
    As a national securities exchange, the Exchange is required, under 
Section 6(b)(1) of the Act,\17\ to enforce compliance by its members, 
and persons associated with its members, with the provisions of the 
Act, Commission rules and regulations thereunder, and its own rules. As 
noted above, the Exchange states that, except as modified by the 
proposal, Exchange Rules in Chapters I through XIX, XXIV, XXIVA, and 
XXIVB would equally apply to MSCI EAFE and MSCI EM Index options. The 
Exchange also states that MSCI EAFE and MSCI EM Index options would be 
subject to the same rules that currently govern other CBOE index 
options, including sales practice rules, margin requirements, and 
trading rules.
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    \17\ 15 U.S.C. 78f(b)(1).
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    The Commission further believes that the Exchange's proposed 
position and exercise limits, trading hours, margin, strike price 
intervals, minimum tick size, series openings, and other aspects of the 
proposed rule change are appropriate and consistent with the Act.

IV. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\18\ for approving the proposed rule change, as modified by 
Amendment No. 1, prior to the 30th day after the date of publication of 
notice in the Federal Register. As noted above, the Commission 
previously approved the listing and trading of options on the MSCI EAFE 
Index and the MSCI EM Index on another exchange,\19\ and the current 
proposal is substantially similar to the rules that were approved by 
the Commission. The prior proposals and the current proposal were each 
subject to a full 21-day comment period and no comments were received 
on any of the proposals.
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    \18\ 15 U.S.C. 78s(b)(2).
    \19\ See supra note 15.
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    The Exchange requested that the Commission accelerate approval of 
the proposal. The Exchange believes that accelerated approval by the 
Commission would enable these options to be brought to market sooner, 
which would broaden trading and hedging opportunities for investors by 
creating new options on indexes that are demonstrably popular.
    The Commission finds that good cause exists to approve the 
proposal, as modified by Amendment No. 1, on an accelerated basis.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-CBOE-2015-023), as modified 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-08453 Filed 4-13-15; 8:45 am]
BILLING CODE 8011-01-P


