
[Federal Register Volume 80, Number 136 (Thursday, July 16, 2015)]
[Notices]
[Pages 42152-42156]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-17398]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75425; File No. SR-CBOE-2015-044]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule, as Modified by Amendment No. 
1, To Introduce Asian Style Settlement and Cliquet Style Settlement for 
FLexible Exchange Broad-Based Index Options

July 10, 2015.

I. Introduction

    On May 6, 2015, 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 permit Asian style settlement 
and Cliquet style settlement for FLexible Exchange (``FLEX'') Broad-
Based Index options. The proposed rule change was published for comment 
in the Federal Register on May 13, 2015.\3\ CBOE filed Amendment No. 1 
to the proposed rule change on June 18, 2015.\4\ The Commission 
received no comments regarding the proposal. The Commission is 
publishing this notice to solicit comments on Amendment No. 1 from 
interested persons, and is approving 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. 74914 (May 8, 2015), 
80 FR 27408.
    \4\ Amendment No. 1 replaces the original filing in its 
entirety. Amendment No. 1 removes proposed amendments to the 
strategy-based customer margin requirements in CBOE Rule 12.3 and 
modifies Form 19b-4, and Exhibits 1, 3, and 5 to clarify that the 
Exchange would apply the Exchange's existing strategy-based customer 
margin requirements for broad-based index options, which are set 
forth in Rule 12.3. Amendment No. 1 also deletes references to 
portfolio margining from Form 19b-4 and Exhibits 1 and 3.
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II. Description of the Proposal

    The Exchange proposes to amend CBOE Rules 24A.1 (Definitions), 
24A.4 (Terms of FLEX Options), 24B.1 (Definitions) and 24B.4 (Terms of 
FLEX Options) to permit Asian style settlement and Cliquet style 
settlement for FLEX Broad-Based Index options.\5\
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    \5\ Chapter XXIVA sets forth Flexible Exchange Options rules and 
chapter XXIVB sets forth FLEX Hybrid Trading System rules.
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Asian Style Settlement
    FLEX Broad-Based Index options with Asian style settlement will be 
cash-settled call \6\ option contracts for which the final payout will 
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 will be expressed and 
governed as provided for in CBOE Rules 24A.4(b)(2) and 24B.(b)(2). 
Asian options will 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 will be $100.\7\
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    \6\ Puts will 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 an Asian option contract will designate a set of 
monthly observation dates and an expiration date for each contract. The 
monthly observation date will be the date each month on which the price 
of the underlying broad-based index will be observed for the purpose of 
calculating the exercise settlement value for Asian options. Each Asian 
option will have 12 consecutive monthly observation dates (which 
includes an observation on the expiration date) and each observation 
will be based on the closing price of the underlying broad-based index. 
The specific monthly observation dates will 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 will 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 will have European-style exercise and may not be 
exercised prior to the expiration date. The exercise settlement value 
for Asian options will 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:
[GRAPHIC] [TIFF OMITTED] TN16JY15.001


[[Page 42153]]


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 will be calculated 
similarly to other options, i.e., the difference between the strike 
price and the averaged settlement value will 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.

------------------------------------------------------------------------
                                                         S&P 500 Index
               Monthly observation date                  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
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* 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 will 
be cash-settled call \8\ option contracts for which the final payout 
will 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 will 
be expressed and governed as provided for in CBOE Rules 24A.4(b)(2) and 
24B.(b)(2). Cliquet options will have a term of approximately one year 
and will 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 will be $100.\9\
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    \8\ Puts will not be permitted.
    \9\ See CBOE Rules 24A.1(i) and 24B.1(m).
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    The parties to a Cliquet option will designate a set of monthly 
observation dates for each contract and an expiration date for each 
contract. The monthly observation date will be the date each month on 
which the price of the underlying broad-based index will be observed 
for the purpose of calculating the exercise settlement value for 
Cliquet FLEX options. Each Cliquet FLEX option will have 12 consecutive 
monthly observation dates (which includes an observation on the 
expiration date) and each observation will be based on the closing 
price of the underlying broad-based index. The specific monthly 
observation dates will be determined working backward from the farther 
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 will 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 will 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 
will be the maximum monthly return that will be included in the 
calculation of the exercise settlement value for the contract. On each 
monthly observation date, the Exchange will 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 will then compare the 
actual monthly return to the capped monthly return. The value to be 
included as the monthly return for a Cliquet option will 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 will not have a traditional 
exercise (strike) price. Rather, the exercise (strike) price field for 
a Cliquet option will 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 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) will not be permitted.
    The first ``monthly'' return for a Cliquet option will be based on 
the initial reference value, which will 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 will 
be between the initial listing date

[[Page 42154]]

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 will have European-style exercise and may not be 
exercised prior to the expiration date. The exercise settlement value 
for Cliquet options will 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 will expire 
worthless.\10\ Mathematically this is expressed as:
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    \10\ 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] TN16JY15.002

    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
      Monthly observation date          closing value      Actual monthly     Capped monthly     Sum of monthly
                                             (Si)            return (%)     return (CMRi) (%)     returns (%)
----------------------------------------------------------------------------------------------------------------
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
                                     ---------------------------------------------------------------------------
Exercise Settlement Value...........                        [(4.08% * 2000.00)] + 2 = 83.60
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* 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.


[[Page 42155]]

    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.
Margin
    The Exchange will margin Asian and Cliquet FLEX Broad-Based Index 
options as ``broad-based index'' options under CBOE's existing 
rules.\11\ Thus, under current Rule 12.3(c)(5)(A), the margin 
requirement for a short call will be 100% of the current market value 
of the contract plus up to 15% of the ``product of the current index 
group value and the applicable index multiplier.'' Additional margin 
may be required pursuant to Rules 12.3(h) and 12.10.
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    \11\ See Exhibit 3 to Amendment No. 1.
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Exchange Rules Applicable
    Except as modified by this proposal, the rules in chapters I 
through XIX, XXIV, XXIVA and XXIVB will equally apply to Asian and 
Cliquet options. For example, per CBOE Rule 6.1A (Extended Trading 
Hours), Asian and Cliquet options will not be eligible for trading 
during Extended Trading Hours. Also, for example, CBOE 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 will apply with equal force to Asian and 
Cliquet options.
Surveillance
    The Exchange will 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.

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.\12\ 
Specifically, the Commission finds that the proposed rule change is 
consistent with section 6(b)(5) of the Act,\13\ 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. The Commission believes that the Asian and Cliquet settlement 
styles for FLEX Broad-Based Index options may provide investors with 
additional trading and hedging tools. The Commission also believes that 
CBOE's proposal to allow Asian and Cliquet style settlement for FLEX 
Broad-Based Index options may give investors and other market 
participants the ability to individually tailor, within specified 
limits, certain terms of those options. Further, the Commission 
believes that the Exchange's proposal with respect to Asian and Cliquet 
style settlement, contract specifications, margin, and other aspects of 
the proposed rule are appropriate and consistent with the Act.
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    \12\ 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).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Exchange has represented that the launch of Asian and Cliquet 
style settlement would be permitted subject to the Commission's 
approval of an Options Clearing Corporation (``OCC'') rule filing to 
make risk model changes necessary to accommodate the clearance and 
settlement of the proposed options. The Exchange will issue a circular 
to Trading Permit Holders to announce a specific launch date for the 
proposed options.
    The Commission notes that the Exchange would use the same 
surveillance procedures currently utilized for the Exchange's other 
FLEX Broad-Based Index options to monitor trading in those options with 
Asian and Cliquet style settlement. The Exchange has represented that 
these surveillance procedures shall be adequate to monitor trading in 
options on these option products. The Exchange has also stated that for 
surveillance purposes, the Exchange will have complete access to 
information regarding trading activity in the pertinent underlying 
securities.

IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
to 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

[[Page 42156]]

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 
August 6, 2015.

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

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of the amendment in the Federal 
Register. Amendment No. 1 modifies the proposed rule change by removing 
proposed amendments to the strategy-based customer margin requirements 
in CBOE Rule 12.3 and removing references to portfolio margining. The 
Commission believes that the removal of the proposed margin 
requirements for Asian and Cliquet FLEX Broad-Based Index options, set 
forth in Amendment No. 1, simply clarify that the Exchange would apply 
the existing strategy-based customer margin requirements for broad-
based index options to Asian and Cliquet options. In addition, the 
Commission notes that the Exchange has represented that it will monitor 
trading in the proposed products and would continue to evaluate the 
strategy-based customer margin levels.\14\ Accordingly, the Commission 
finds good cause, pursuant to section 19(b)(2) of the Act,\15\ to 
approve the proposed rule change, as modified by Amendment No. 1, on an 
accelerated basis.
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    \14\ See Amendment No. 1.
    \15\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-CBOE-2015-044), as modified 
by Amendment No. 1, be, and it hereby is, approved on an accelerated 
basis.
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    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-17398 Filed 7-15-15; 8:45 am]
BILLING CODE 8011-01-P


