
[Federal Register Volume 80, Number 92 (Wednesday, May 13, 2015)]
[Notices]
[Pages 27408-27415]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-11592]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74914; File No. SR-CBOE-2015-044]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Proposed Rule To Introduce Asian Style 
Settlement and Cliquet Style Settlement for FLexible Exchange Broad-
Based Index Options

May 8, 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 May 6, 2015, the Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I and II 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

    Chicago Board Options Exchange, Incorporated (``CBOE'' or 
``Exchange'') proposes to introduce Asian style settlement and Cliquet 
style settlement for FLexible Exchange (``FLEX'') Broad-Based Index 
options. The proposed rule change would not amend the text of Rule 12.4 
(Portfolio Margin); however, the Exchange believes that it would be 
appropriate to include the proposed options in portfolio margining. 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.

[[Page 27409]]

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 self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this proposed rule change is to permit the Exchange 
to introduce Asian style settlement and Cliquet style settlement for 
FLexible Exchange (``FLEX'') Broad-Based Index options. In general, 
Asian style settlement provides for payout based on the average of 
prices of a broad-based index on pre-determined dates over a specified 
time period and Cliquet style settlement provides for a payout that is 
the greater of $0 or the (positive) sum of ``capped'' monthly returns 
of a broad-based index on pre-determined dates over a specified period 
of time.
    FLEX Broad-Based Index options provide users with the ability to 
customize key contract terms, like exercise prices, exercise styles, 
expiration dates and exercise settlement values. After surveying 
potential FLEX Broad-Based index options users, the Exchange learned 
that indexed annuity writers (insurance companies) extensively use 
over-the-counter (``OTC) options with Asian and Cliquet style 
settlement as a crediting method.\3\ Because of the level of 
customization that FLEX Broad-Based Index options provide, the Exchange 
seeks to introduce exchange-traded products that would provide 
potential market users with an alternative to the OTC market in 
customized options.
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    \3\ A ``crediting method'' is the method used to measure the 
change in the underlying index (e.g., point-to-point or annual 
reset).
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Index Annuity Writer Use of Asian and Cliquet Options
    For background, an indexed annuity is an insurance contract that is 
typically tied to a financial market index, e.g., S&P 500 Index, and 
the return is guaranteed not to fall below a level specified in the 
contract. Indexed annuity contracts typically provide that the contract 
holder will be credited interest according to a specified formula based 
on changes to the index to which the annuity contract is linked. 
Indexed annuity contracts often have exotic option liabilities embedded 
within those contracts.
    One type of annuity contract is an Asian contract (sometimes 
referred to as an averaging contract) because the settlement value is 
based on an average of selected closing prices of an index over a year. 
The contract holder of this type of contract is typically entitled to 
receive a credit on the anniversary date in an amount equal to the 
greater of $0 and the difference between the average price of an index 
and the level of the index from the date of inception or the previous 
anniversary date.
    Another type of annuity contract is a Cliquet contract (sometimes 
referred to as a contract with a monthly return cap with a global 
floor) because its payoff is the greater of zero or the sum of monthly 
capped returns of an index over a year. The contract holder of this 
type of contract is typically entitled to receive a credit on the 
anniversary date in an amount based on the sum of monthly returns 
(subject to a monthly cap) if the sum of monthly returns is greater 
than 0. If the sum of the monthly capped returns is 0 or less, the 
holder would not realize a loss (other than the premium paid) because 
the sum of monthly capped returns has a global floor of 0.
    Insurance companies that write indexed annuity contracts, 
therefore, seek financial tools to manage and hedge the embedded exotic 
option risk in these contracts. Historically, these insurers have 
traded exclusively in the OTC market by entering into bilateral 
contracts tailored to the terms of indexed annuity contracts. CBOE 
proposes to introduce two new kinds of settlement styles for FLEX 
Broad-Based Index options that would provide insurers with alternative 
hedging tools to OTC products, coupled with traditional exchange-traded 
benefits like price discovery, transparency and centralized clearing.
Asian Style Settlement
    FLEX Broad-Based Index options with Asian style settlement would be 
cash-settled call \4\ option contracts for which the final payout would 
be based on an arithmetic average of specified closing values of the 
underlying broad-based index (``Asian option''). Exercise (strike) 
prices and premium quotations for Asian options would be expressed and 
governed as provided for in Rules 24A.4(b)(2) and 24B.(b)(2). Asian 
options would have a term of approximately one year and would expire 
anytime from 350 to 371 days (which is approximately 50 to 53 calendar 
weeks) from the date of initial listing. The contract multiplier for an 
Asian option would be $100.\5\
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    \4\ Puts would not be permitted.
    \5\ See Rules 24A.1(i) and 24B.1(m). ``The Index Multiplier for 
FLEX Index Options is $100.''
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    The parties to an Asian option contract would designate a set of 
monthly observation dates and an expiration date for each contract. The 
monthly observation date would the date each month on which the price 
of the underlying broad-based index would be observed for the purpose 
of calculating the exercise settlement value for Asian options. Each 
Asian option would have 12 consecutive monthly observation dates (which 
includes an observation on the expiration date) and each observation 
would be based on the closing price of the underlying broad-based 
index. The specific monthly observation dates would be determined by 
working backward from the farthest out observation date prior to the 
expiration date. If a given monthly observation date falls on a non 
CBOE business day (e.g., holiday or weekend), the monthly observation 
would be on the immediately preceding business day (``preceding 
business day convention''). The parties may not designate a subsequent 
business day convention for Asian options.
    Asian options would have European-style exercise and may not be 
exercised prior to the expiration date. The exercise settlement value 
for Asian options would be the arithmetic average of the closing values 
of the underlying broad-based index on the 12 consecutive monthly 
observation dates, which include the expiration date of the option. 
Mathematically this is expressed as:

[[Page 27410]]

[GRAPHIC] [TIFF OMITTED] TN13MY15.005

    Where Si is the closing price of the underlying broad-based 
index on monthly observation date on the ith monthly observation 
date.

    The exercise settlement amount for Asian options would be 
calculated similarly to other options, i.e., the difference between the 
strike price and the averaged settlement value would determine the 
value, or ``moneyness'' of the contract at expiration.
    An example of an Asian FLEX call option expiring in-the-money 
follows. On January 21, 2015, an investor hedging the value of the S&P 
500 Index over a year purchases a call option expiring on January 22, 
2016 with a strike price of 2000 and a contract multiplier of $100. The 
option has monthly observation dates occurring on the 23rd of each 
month.

------------------------------------------------------------------------
         Monthly observation date            S&P 500 Index closing value
------------------------------------------------------------------------
23-Feb-15.................................  2025.36
23-Mar-15.................................  2049.34
23-Apr-15.................................  2019.77
22-May-15 *...............................  1989.65
23-Jun-15.................................  2005.64
23-Jul-15.................................  2035.10
21-Aug-15 *...............................  2032.15
23-Sep-15.................................  2076.18
23-Oct-15.................................  2099.01
23-Nov-15.................................  2109.32
23-Dec-15.................................  2085.42
22-Jan-16.................................  2084.81
  Exercise (Averaged) Settlement Value....  24,611.75/12 = 2050.98
------------------------------------------------------------------------
* Because Asian FLEX options use the ``preceding business day
  convention,'' the dates of May 23, 2015 and August 23, 2015, were not
  used in the above example because those dates will fall on a weekend
  or a holiday. Instead the business days immediately preceding those
  dates were used as the monthly observation date.

    The exercise settlement amount for this 2000 Asian FLEX call option 
would be equal to $5,098. This amount would be determined by adding the 
12 observed closing values for the S&P 500 Index and dividing that 
amount by 12 (24,611.75/12), which is equal to 2050.98 (when rounded). 
As a result, this 2000 call option would be $5,098 in-the-money (50.98 
x $100).
    If, in the above example, the strike price for the Asian FLEX call 
option was 2060, that contract would have expired out-of-the-money. 
This is because the exercise settlement value for this 2060 call option 
is equal to 2050.98 (when rounded). Since the strike price of 2060 is 
more than the 2050.98 exercise settlement value, this option would not 
be exercised and would expire worthless.
Cliquet Style Settlement
    FLEX Broad-Based Index options with Cliquet style settlement would 
be cash-settled call \6\ option contracts for which the final payout 
would be based on the sum of monthly returns (i.e., percent changes in 
the closing value of the underlying broad-based index from one monthly 
observation date to the next monthly observation date), subject to a 
monthly return ``cap'' (e.g., 2%) applied over 12 monthly observation 
dates (``Cliquet option''). Premium quotations for Cliquet options 
would be expressed and governed as provided for in Rules 24A.4(b)(2) 
and 24B.(b)(2). Cliquet options would have a term of approximately one 
year and would expire anytime from 350 to 371 days (which is 
approximately 50 to 53 calendar weeks) from the date of initial 
listing. The contract multiplier for a Cliquet option would be $100.\7\
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    \6\ Puts would not be permitted.
    \7\ See Rules 24A.1(i) and 24B.1(m). ``The Index Multiplier for 
FLEX Index Options is $100.''
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    The parties to a Cliquet option would designate a set of monthly 
observation dates for each contract and an expiration date for each 
contract. The monthly observation date would be the date each month on 
which the price of the underlying broad-based index would be observed 
for the purpose of calculating the exercise settlement value for 
Cliquet FLEX options. Each Cliquet FLEX option would have 12 
consecutive monthly observation dates (which includes an observation on 
the expiration date) and each observation would be based on the closing 
price of the underlying broad-based index. The specific monthly 
observation dates would be determined working backward from the farther 
out observation date prior to the expiration date. If a given monthly 
observation date fell on a non CBOE business day (e.g., holiday or 
weekend), the monthly observation would be on the immediately preceding 
business day (``preceding business day convention''). The parties may 
not designate a subsequent business day convention for Cliquet options.
    The parties to a Cliquet option would designate a capped monthly 
return (percent change in the closing values of the underlying broad-
based index from one month to the next month) for the contract, which 
would be the maximum monthly return that would be included in the 
calculation of the exercise settlement value for the contract. On each 
monthly observation date, the Exchange would determine the actual 
monthly return (the percent change of the underlying broad-based index) 
using the closing value of the broad-based index on the current monthly 
observation date and the closing value of the broad-based index on the 
previous monthly observation date. The Exchange would then compare the 
actual monthly return to the capped monthly return. The value to be 
included as the monthly return for a Cliquet option would be the lesser 
of the actual monthly return or the capped monthly return.
    For example, if the actual monthly return of the underlying broad-
based index was 1.75% and the designated capped monthly return for a 
Cliquet option was 2%, the 1.75% value would be included (and not the 
2%) as the value for the observation date to determine the exercise 
settlement value. Using this same example, if the actual monthly return 
of the underlying broad-based index was 3.30%, the 2% value would be 
included (and not the 3.30%) as the value of the observation date to 
determine the exercise settlement value. This latter example 
illustrates that, Cliquet options have a capped upside. Cliquet options 
do not, however, have a capped downside for the monthly return that 
would be included in determining the exercise settlement value. Drawing 
on this same example, if the actual monthly return of the underlying 
broad-based index was -4.07%, the -4.07% value would be included as the 
value for the observation date to determine the exercise settlement 
value. There would be, however, be a global floor for Cliquet options 
so that if the sum of the monthly returns is negative, a Cliquet option 
would expire worthless.
    Unlike other options, Cliquet options would not have a traditional 
exercise (strike) price. Rather, the exercise (strike) price field for 
a Cliquet option would represent the designated capped monthly return 
for the contract and would be expressed in dollars and cents. For 
example, a capped monthly return of 2.25% would be represented by the 
dollar amount of $2.25. The ``strike'' price for a Cliquet option may 
only be expressed in a dollar and cents amount and the ``strike'' price 
for a Cliquet option may only span a range

[[Page 27411]]

between $0.05 and $25.95. In addition, the ``strike'' price for a 
Cliquet option may only be designated in $0.05 increments, e.g., $1.75, 
$2.50, $4.15. Increments of $0.01 in the ``strike'' price field 
(representing the capped monthly return) would not be permitted.
    The first ``monthly'' return for a Cliquet option would be based on 
the initial reference value, which would be the closing value of the 
underlying broad-based index on the date a new Cliquet option is 
listed. The time period measured for the first ``monthly'' return would 
be between the initial listing date and the first monthly observation 
date. For example, if a Cliquet option was opened on January 1 and the 
parties designated the 31st of each month as the monthly observation 
date, the measurement period for the first monthly return would span 
the time period from January 1 to January 31. The time period measured 
for the second monthly return, and all subsequent monthly returns, 
would run from the 31st of one month to the 31st of the next month (or 
the last CBOE business day of each month depending on the actual number 
of calendar days in each month covered by the contract).
    Cliquet options would have European-style exercise and may not be 
exercised prior to the expiration date. The exercise settlement value 
for Cliquet options would be equal to the initial reference price of 
the underlying broad-based index multiplied by the sum of the monthly 
returns (with the cap applied) on the 12 consecutive monthly 
observation dates, which include the expiration date of the option, 
provided that the sum is greater than 0. If the sum of the monthly 
returns (with the applied cap) is 0 or a less, the option would expire 
worthless.\8\ Mathematically this is expressed as:
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    \8\ Prior to expiration, it is possible that the accumulated 
monthly returns could become negative to a point at which it is 
known that the value of the contract at expiration would be zero. 
The holder or writer of such a position may choose to exit the 
position prior to expiration for a negligible credit or debit 
amount, respectively.
[GRAPHIC] [TIFF OMITTED] TN13MY15.006


    An example of a Cliquet option follows. On January 21, 2015, an 
investor hedging the value of the S&P 500 Index over a year 
purchases a Cliquet FLEX call option expiring on January 22, 2016 
with a capped monthly return of 2% and a contract multiplier of 
$100. The initial reference price of the S&P 500 Index (closing 
value) on January 21, 2015 is 2000. The option has monthly 
observation dates occurring on the 23rd of each month.

----------------------------------------------------------------------------------------------------------------
                                                   S&P 500 Index  Actual monthly  Capped monthly  Sum of monthly
            Monthly observation date               closing value      return      return  (CMRi)      returns
                                                       (Si)          (percent)       (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
23-Feb-15.......................................         2025.36            1.27            1.27            1.27
23-Mar-15.......................................         2049.34            1.18            1.18            2.45
23-Apr-15.......................................         2019.77           -1.44           -1.44            1.01
22-May-15*......................................         1989.65           -1.49           -1.49           -0.48
23-Jun-15.......................................         2005.64            0.80            0.80            0.32
23-Jul-15.......................................         2035.10            1.47            1.47            1.79
21-Aug-15 *.....................................         2032.15           -0.14           -0.14            1.65
23-Sep-15.......................................         2076.18            2.17         ** 2.00            3.65
23-Oct-15.......................................         2099.01            1.10            1.10            4.75
23-Nov-15.......................................         2109.32            0.49            0.49            5.24
23-Dec-15.......................................         2085.42           -1.13           -1.13            4.11
22-Jan-16.......................................         2084.81           -0.03           -0.03            4.08

[[Page 27412]]

 
Exercise Settlement Value:                                        [(4.08% * 2000.00)] + 2 = 83.60
----------------------------------------------------------------------------------------------------------------
* Because Cliquet FLEX options use the ``preceding business day convention,'' the dates of May 23, 2015, and
  August 23, 2015, were not used in the above example because those dates will fall on a weekend or a holiday.
  Instead the business days immediately preceding those dates were used as the monthly observation dates.
** Monthly capped return applied.

    The exercise settlement amount for this January 22, 2016 Cliquet 
option, with a capped monthly 2% return (``strike price'') and a 
contract multiplier of $100 would be equal to $8,360. This value 
would be calculated by summing the monthly capped returns (equal to 
4.08%) and multiplying that amount by the initial reference price 
(equal to 2000), which equals 81.60. The ``strike price'' (2%) 
amount would then be added to that amount (81.60) to arrive at an 
exercise settlement value of 83.60. Because the ``strike price'' 
field for a Cliquet option would be the manner in which the 
designated capped monthly return would be identified for the 
contract and because the designated monthly return for the contract 
would have been already substantively applied to determine the 
exercise settlement value, the ``strike price'' of 2.0 would be 
subtracted from the exercise settlement value before the contract 
multiplier ($100) would be applied [(83.60 - 2) * 100]. Accordingly, 
resulting payout for this contract would be $8,160.
    If the sum of the monthly capped returns had been negative, this 
option would have expired worthless.

Specific Rule Text Changes

    To expressly permit Asian style settlement and Cliquet style 
settlement for FLEX Broad-Based Index options, CBOE is proposing to 
amend Rules 24A.1 (Definitions), 24A.4 (Terms of FLEX Options), 
24B.1 (Definitions) and 24B.4 (Terms of FLEX Options).\9\ First, 
CBOE proposes to amend Rules 24A.1 \10\ and 24B.1 \11\ by adding the 
below definitions to those rules:
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    \9\ Chapter XXIVA sets forth Flexible Exchange Options rules and 
Chapter XXIVB sets forth FLEX Hybrid Trading System rules.
    \10\ The Exchange proposes to add the definitions of ``Asian 
style settlement'' and ``Cliquet style settlement'' to Rule 24A.1 as 
new subparagraphs (r) and (s), respectively.
    \11\ The Exchange proposes to add the definitions of ``Asian 
style settlement'' and ``Cliquet style settlement'' to Rule 24B.1 as 
new subparagraphs (aa) and (bb), respectively.

    The term ``Asian style settlement'' is a settlement style that 
may be designated for FLEX Broad-Based Index Options and results in 
the contract settling to an exercise settlement value that is based 
on an arithmetic average of the specified closing prices of an 
underlying broad-based index taken on 12 predetermined monthly 
observation dates (including on the expiration date). FLEX Broad-
Based Index Options with Asian style settlement have ``preceding 
business day convention,'' meaning that if a monthly observation 
date falls on a non CBOE business day (e.g., holiday or weekend), 
the monthly observation would be on the immediately preceding 
business day. FLEX Broad-Based Index Options with Asian style 
settlement have European-style exercise.
    The term ``Cliquet style settlement'' is a settlement style that 
may be designated for FLEX Broad-Based Index Options and results in 
the contract settling to an exercise settlement value that is equal 
to the greater of $0 or the sum of capped monthly returns (i.e., 
percent changes in the closing value of the underlying broad-based 
index from one month to the next month) applied over 12 
predetermined monthly observation dates (including on the expiration 
date). FLEX Broad-Based Index Options with Cliquet style settlement 
have ``preceding business day convention,'' meaning that if a 
monthly observation date falls on a non CBOE business day (e.g., 
holiday or weekend), the monthly observation would be on the 
immediately preceding business day. FLEX Broad-Based Index Options 
with Cliquet style settlement have European-style exercise.

    Second, the CBOE proposes to amend Rules 24A.4(b) \12\ and 24B.4(b) 
\13\ by adding the below terms that the parties to Asian options and 
Cliquet options must designate and the parameters governing the 
parties' designations:
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    \12\ The Exchange proposes to set forth the terms for Asian 
options and Cliquet options to Rule 24A.4(b) as new subparagraphs 
(5) and (6), respectively.
    \13\ The Exchange proposes to set forth the terms for Asian 
options and Cliquet options to Rule 24B.4(b) as new subparagraphs 
(5) and (6), respectively.

    Asian style settlement. The parties to FLEX Broad-Based Index 
Options may designate Asian style settlement. FLEX Broad-Based Index 
Options with Asian style settlement shall be call options (no puts) 
and designated by: (i) The duration of the contract which may range 
from 350 to 371 days (which is approximately 50 to 53 calendar 
weeks) from the date of listing; (ii) the strike price; (iii) the 
expiration date which must be a CBOE business day; and (iv) a set of 
monthly observation dates.
    Cliquet style settlement. The parties to FLEX Broad-Based Index 
Options may designate Cliquet style settlement. FLEX Broad-Based 
Index Options with Cliquet style settlement shall be call options 
(no puts) and be designated by: (i) The duration of the contract 
which may range from 350 to 371 days (which is approximately 50 to 
53 calendar weeks) from the date of listing; (ii) the capped monthly 
return that must be expressed in dollars and cents and in increments 
not less than $0.05 and must be a value between $0.05 and $25.95; 
(iii) the expiration date which must be a CBOE business day; and 
(iv) a set of monthly observation dates. The capped monthly return 
will serve as the ``exercise (strike) price'' for a FLEX Broad-Based 
Index Option with Cliquet style settlement.

    Exhibit 3 presents contract specifications for Asian style 
settlement and Cliquet style settlement for FLEX Broad-Based Index 
options.
    In CBOE's experience, successful and popular products have often 
originated in the OTC marketplace. When such products lend themselves 
to more standardized terms, there is a natural migration to exchange 
trading which benefits the users of exchange listed products. CBOE 
believes that market participants can benefit from being able to trade 
these customized options in an exchange environment in several ways, 
including, but not limited to the following: (1) Enhanced efficiency in 
initiating and closing out positions; (2) increased market 
transparency; and (3) heightened contra-party creditworthiness due to 
the role of The Options Clearing Corporation (``OCC'') as issuer and 
guarantor of FLEX Broad-Based Index options.\14\
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    \14\ The launch of Asian and Cliquet options would be permitted 
subject to the Commission's approval of an OCC rule filing to make 
risk model changes necessary to accommodate the clearance and 
settlement of the proposed options. The Exchange would issue a 
circular to Trading Permit Holders to announce a specific launch 
date for the proposed options.
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    CBOE believes that expressly permitting Asian and Cliquet FLEX 
Broad-Based Index options is important and necessary to the Exchange's 
efforts to create a market that provides individuals interested in 
FLEX-type options with an improved but comparable alternative to the 
OTC market in customized options, which can take on contract 
characteristics similar to FLEX Options but are not subject to the same 
restrictions. By making these changes, market participants would now 
have greater flexibility in determining whether to execute their 
customized options in an exchange environment or in the OTC market.

[[Page 27413]]

Margin
    CBOE proposes a strategy-based margin requirement in Rule 12.3 
(Margin Requirements) for short Asian options that would incrementally 
decrease over time. Settlement of Asian options would be based on the 
arithmetic average of closing values (on specified observation dates) 
of the underlying broad-based index. Volatility would be generally 
lowered due to the averaging effect. A cumulative average develops as 
observation dates pass, and subsequent observation date broad-based 
index values have gradually less influence on the average. Because of 
the averaging effect, CBOE believes that a margin requirement that 
incrementally decreases over time is warranted.
    For an Asian option having an underlying index that is broad-based, 
CBOE proposes that the same margin requirement currently applicable to 
a standard broad-based index call option be applied to an Asian option 
during the first quartile of its life, which ends with the third 
observation date. The current initial and maintenance margin 
requirement for a standard broad-based index call option carried short 
is the option premium received (or current market value), plus 15% of 
the underlying broad-based index value less any out-of-the-money 
amount, to a minimum of the option premium received (or current market 
value), plus 10% of the underlying broad-based index value. CBOE 
proposes to decrease the 15% basic and 10% minimum to 8% and 6%, 
respectively, after the third observation date; to 6% and 4% after the 
sixth observation date; and lastly, to 5% and 3% after the ninth 
observation date.
    CBOE believes it is appropriate to include Asian options in 
portfolio margining.\15\
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    \15\ A theoretical pricing model would continue to be used to 
derive position values at each valuation point for the purpose of 
determining the gain or loss. Currently the only model that 
qualifies is OCC's Theoretical Intermarket Margining System 
(``TIMS'').
---------------------------------------------------------------------------

    CBOE proposes a strategy-based margin requirement in Rule 12.3 for 
short Cliquet options that, with one exception, would also 
incrementally decrease over time. Settlement of Cliquet options would 
be based on the sum of the returns for 12 consecutive time periods of 
approximately 30 days in length, each ending on an observation date. In 
the case of Cliquet options with capped monthly returns, volatility 
would be generally lowered because of the capping effect. In addition, 
the lower the capped monthly return, the lower the sensitivity to moves 
in the underlying broad-based index.
    Also, the sum of returns for 12 consecutive time periods, based on 
historical analysis, is expected to be less than the return on the 
underlying broad-based index from beginning to end of the same 12 
consecutive month time period, except in the case of a negative return. 
However, with a Cliquet option, a negative sum of returns would be 
excluded as a possibility because a floor of zero would be set for the 
sum of returns. Additionally, a cumulative return develops as 
observation dates pass, and as subsequent observation date returns 
compile, the likelihood of the sum of returns increasing or decreasing 
significantly would gradually be lowered. Because of these influences, 
CBOE believes that a margin requirement that incrementally decreases 
over time is warranted.
    Because Cliquet options would not have a traditional exercise 
(strike) price, no out-of-the-money amount deduction would be 
calculated for margin purposes. Therefore, no minimum percentage margin 
requirement would be necessary in that, without an out-of-the-money 
calculation, the margin requirement calculated using the basic margin 
requirement percentage would never be reduced.
    For Cliquet options, three separate categories, based on a time 
frame within the life of a Cliquet option, would be established for 
margin requirement purposes. The three categories proposed are: (1) The 
time period starting with the trade through the 10th observation date; 
(2) the time period starting after the 10th observation date through 
the 11th observation date; and (3) the time period starting after the 
11th observation date through the 12th (final) observation date.
    During the time period starting with a Cliquet option's trade date 
through its 10th observation date, in the case of an index that is 
broad-based, CBOE proposes a margin requirement of 100% of the current 
market value of the option plus the percentage of the current 
``underlying component value.'' The percentage required would be the 
lesser of: the cap percentage multiplied by three (3) or 15%.\16\
---------------------------------------------------------------------------

    \16\ As noted previously, proposed CBOE Rules 24A.4(b) and 
24B.4(b) would not permit the monthly return cap to exceed 25.95%.
---------------------------------------------------------------------------

    CBOE proposes to decrease the percentage requirement to the lesser 
of: The cap percentage multiplied by two (2) or 15% beginning after the 
10th observation date through the 11th observation date, and to further 
decrease the percentage requirement to the lesser of: the cap 
percentage or 15% beginning after the 11th observation date through the 
12th (final) observation date.
    CBOE believes it is appropriate to include Cliquet options in 
portfolio margining.\17\
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    \17\ A theoretical pricing model would continue to be used to 
derive position values at each valuation point for the purpose of 
determining the gain or loss. Currently the only model that 
qualifies is OCC's TIMS.
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Exchange Rules Applicable
    Except as modified herein, the rules in Chapters I through XIX, 
XXIV, XXIVA and XXIVB would equally apply to Asian and Cliquet options. 
For example, per Rule 6.1A (Extended Trading Hours), Asian and Cliquet 
options would not be eligible for trading during Extended Trading 
Hours. Also, for example, Rules 24A.7 and 24A.8 set forth the position 
limits and reporting requirements applicable to FLEX Broad-Based Index 
options and Rules 24A.7 and 24B.7 set forth the exercise limits 
applicable to FLEX Broad-Based Index options. Respecting positions and 
exercise limits, these provisions set forth general rules and carve-
outs for certain broad-based FLEX Broad-Based Index options, which 
would apply with equal force to Asian and Cliquet options.
Surveillance
    The Exchange would use the same surveillance procedures currently 
utilized for the Exchange's other FLEX Broad-Based Index options to 
monitor trading in Asian and Cliquet options. The Exchange further 
represents that these surveillance procedures shall be adequate to 
monitor trading in options on these option products. For surveillance 
purposes, the Exchange will have complete access to information 
regarding trading activity in the pertinent underlying securities.
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 the Section 6(b)(5) \19\ requirements that the rules 
of an exchange be designed to promote just and equitable principles of 
trade, to prevent fraudulent and manipulative acts, to remove 
impediments to and to perfect the mechanism for a free and open market 
and a national market

[[Page 27414]]

system, and, in general, to protect investors and the public interest.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is designed to 
promote just and equitable principles of trade in that the availability 
of Asian and Cliquet FLEX Broad-Based Index options would give market 
participants greater flexibility in determining where they will execute 
their customized options. By trading a product in an exchange traded 
environment (that is currently being used extensively in the OTC 
market) would also enable the Exchange to compete more effectively with 
the OTC market.
    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that it would 
hopefully lead to the migration of options currently trading in the OTC 
market to trading to the Exchange and the development of more 
standardized products. Also, any migration to the Exchange would result 
in increased market transparency.
    Additionally, the Exchange believes that the proposed rule change 
is designed to remove impediments to and to perfect the mechanism for a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest in that it should create 
greater trading and hedging opportunities and flexibility. The proposed 
rule change should also result in enhanced efficiency in initiating and 
closing out positions and heightened contra-party creditworthiness due 
to the role of OCC as issuer and guarantor of FLEX Broad-Based Index 
options. Further, the proposal would result in increased competition by 
permitting the Exchange to offer products that are currently used 
extensively in the OTC market.
    The Exchange believes that the proposed strategy-based margin 
requirements for Asian and Cliquet options are consistent with the Act 
because they are designed to protect investors and the public interest 
by setting margin levels at appropriate levels for these instruments. 
First, the proposed options are limited to broad-based indexes and the 
index on which the Exchange expects the most interest is the S&P 500 
Index, which has deep and liquid markets. Second, the short option 
margin levels proposed to be established would apply to retail 
customers, whom the Exchange does not believe to be the primary sellers 
(i.e., writers) of the proposed options. Third, as to short Asian and 
Cliquet positions, the Exchange notes that the proposed margin levels 
would start at the same level that is required for regular options on 
broad-based indexes (15%) and would incrementally decrease over time. 
The Exchange believes that the incremental decrease over time is 
appropriate given the nature of the proposed options (i.e., the risk 
associated with the options decreases as the time to expiration nears). 
Also, the Exchange represents that it conducted an extensive analysis 
over various time periods when considering the proposed margin levels 
and represents that for each percentage movement observed, the proposed 
margin level percentages closely track the percentage movements 
observed. In other words, the Exchange is proposing conservative and 
well-founded margin levels for the proposed options. As a result, the 
Exchange believes that the proposed margin levels would protect the 
integrity of the Exchange's marketplace by setting margins at levels 
that are appropriate for these instruments.

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 not necessary or appropriate in furtherance of 
the purposes of the Act. Specifically, CBOE believes that the 
introduction of new settlement types (Asian and Cliquet) for FLEX 
Broad-Based Index options would enhance competition among market 
participants and would also enable the Exchange to compete more 
effectively with the OTC market by offering a product that is currently 
use extensively in the OTC market.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2015-044 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-2015-044. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the CBOE. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2015-044 and should be 
submitted on or before June 3, 2015.


[[Page 27415]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-11592 Filed 5-12-15; 8:45 am]
 BILLING CODE 8011-01-P


