
[Federal Register Volume 81, Number 198 (Thursday, October 13, 2016)]
[Notices]
[Pages 70714-70716]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-24776]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79069; File No. SR-BatsBZX-2016-26]


Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order 
Granting Approval of Proposed Rule Change, as Modified by Amendment No. 
1, To Amend BZX Rule 14.11(d) To Add the EURO STOXX 50 Volatility 
Futures to the Definition of Futures Reference Asset

October 7, 2016.

I. Introduction

    On June 23, 2016, Bats BZX Exchange, Inc. (``Exchange'' or ``BZX'') 
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 
amend BZX Rule 14.11(d) in order to add the EURO STOXX 50 Volatility 
(``VSTOXX'') Futures (``VSTOXX Futures'') to the definition of Futures 
Reference Asset. The proposed rule change was published for comment in 
the Federal Register on July 12, 2016.\3\ On August 23, 2016, pursuant 
to Section 19(b)(2) of the Act,\4\ the Commission designated a longer 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change.\5\ On September 30, 2016, the 
Exchange filed Amendment No. 1 to the proposed rule change.\6\ 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 78236 (Jul. 6, 
2016), 81 FR 45185 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 78640, 81 FR 59257 
(Aug. 29, 2016).
    \6\ In Amendment No. 1, the Exchange: (a) Clarified that an 
issuer would be required to represent to the Exchange that it will 
advise the Exchange of any failure of Futures-Linked Securities to 
comply with the continued listing requirements; (b) provided 
additional information regarding the comparability of the VSTOXX 
Futures and the CBOE Volatility Index (``VIX'') Futures currently 
included in the definition of Futures Reference Asset; (c) included 
additional background regarding the EURO STOXX 50 Index; (d) 
clarified that VSTOXX levels will be calculated by STOXX (as defined 
herein) and disseminated by major market data vendors such as 
Bloomberg and Thomson Reuters on a real-time basis throughout each 
trading day; and (e) made other grammatical corrections and 
typographical edits. Because the changes in Amendment No. 1 clarify 
certain statements in the proposal and do not materially alter the 
substance of the proposed rule change or raise any novel regulatory 
issues, it is not subject to notice and comment. Amendment No. 1, 
which amended and replaced the proposed rule change in its entirety, 
is available on the Commission's Web site at: https://www.sec.gov/comments/sr-batsbzx-2016-26/batsbzx201626-1.pdf.
---------------------------------------------------------------------------

II. Exchange's Description of the Proposal

    The Exchange proposes to amend BZX Rule 14.11(d) to add VSTOXX 
Futures to the definition of Futures Reference Asset.\7\ By adding 
VSTOXX Futures to the definition of Futures Reference Asset, the 
Exchange would be permitted to generically list and trade Futures-
Linked Securities linked to

[[Page 70715]]

VSTOXX Futures pursuant to Rule 19b-4(e) under the Act.\8\
---------------------------------------------------------------------------

    \7\ As defined in BZX Rule 14.11(d), ``Futures Reference Asset'' 
currently includes an index of (a) futures on Treasury Securities, 
GSE Securities, supranational debt and debt of a foreign country or 
a subdivision thereof, or options or other derivatives on any of the 
foregoing; or (b) interest rate futures or options or derivatives on 
the foregoing in this subparagraph (b); or (c) CBOE Volatility Index 
(VIX) Futures.
    \8\ 17 CFR 240.19b-4(e). Rule 19b-4(e) provides that the listing 
and trading of a new derivative securities product by a self-
regulatory organization (``SRO'') shall not be deemed a proposed 
rule change, pursuant to section (c)(1) of Rule 19b-4, if the 
Commission has approved, pursuant to Section 19(b) of the Act, the 
SRO's trading rules, procedures, and listing standards for the 
product class, and the SRO has a surveillance program for the 
product class.
---------------------------------------------------------------------------

    The Exchange has made the following representations and statements 
in describing the proposal, including information and background 
relating to VSTOXX and VSTOXX Futures.\9\
---------------------------------------------------------------------------

    \9\ The Commission notes that additional information regarding 
EURO STOXX 50, VSTOXX, and VSTOXX Futures, among other things, can 
be found in the Notice. See Notice, supra note 3.
---------------------------------------------------------------------------

A. Description of VSTOXX and VSTOXX Futures

    According to the Exchange, the VSTOXX was originally developed in 
2005 and is based on EURO STOXX 50 Index \10\ real-time option prices 
that are listed on the Eurex Deutschland (``Eurex'').\11\ The VSTOXX is 
designed to reflect market expectations of near-term to long-term 
volatility by measuring the square root of the implied variances across 
all options of a given time to expiration. The Exchange represents that 
the model for VSTOXX aims to make pure volatility tradable, i.e., it 
should be possible to replicate the indices with an options portfolio 
that does not react to price fluctuations, but to changes in volatility 
only. The VSTOXX does not measure implied volatilities of at-the-money 
EURO STOXX 50 Index options, but the implied variance across all 
options of a given time to expiry.\12\
---------------------------------------------------------------------------

    \10\ The EURO STOXX 50 Index includes 50 stocks that are among 
the largest free-float market capitalization stocks from 12 Eurozone 
countries: Austria, Belgium, Finland, France, Germany, Greece, 
Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. 
Additional details of the EURO STOXX 50 Index, including information 
relating to weighting and eligibility requirements for components, 
among other things, can be found in the Notice and Amendment No 1 to 
the proposed rule change. See Notice and Amendment No. 1, supra 
notes 3 and 6.
    \11\ The Exchange represents that Eurex is a member of the 
Intermarket Surveillance Group (``ISG'') and, accordingly, the 
Exchange may obtain information regarding trading in the underlying 
VSTOXX Futures contracts. For a list of the current members and 
affiliate members of ISG, see www.isgportal.com.
    \12\ The VSTOXX is calculated using a series of sub-indices that 
are based on put and call options on the EURO STOXX 50 Index in 
eight expiry months, with a maximum time to expiry of two years, in 
order to bracket a 30-day calendar period. VSTOXX levels will be 
calculated by STOXX and disseminated by major market-data vendors 
such as Bloomberg and Thomson Reuters. Additional details of the 
VSTOXX, including information relating to calculation methodology, 
can be found in the Notice and Amendment No 1 to the proposed rule 
change. See Notice and Amendment No. 1, supra notes 3 and 6.
---------------------------------------------------------------------------

    According to the Exchange, VSTOXX Futures are cash settled and 
trade between the hours of 7:30 a.m. and 10:30 p.m. Central European 
Time (2:30 a.m. and 5:30 p.m. Eastern Time).\13\ The VSTOXX Futures 
contract value is 100 Euros per index point of the underlying and it is 
traded to two decimal places, with a minimum price change of 0.05 
points (equivalent to a value of 5 Euros). The daily settlement price 
is determined during the closing auction of the respective futures 
contracts. The last trading day and final settlement day is 30 calendar 
days prior to the third Friday of the expiration month of the 
underlying options, which is usually the Wednesday prior to the second-
to-last Friday of the respective maturity month.
---------------------------------------------------------------------------

    \13\ The Exchange represents that additional information 
regarding the VSTOXX Futures can be found on the Eurex Web site. 
Additional details of the VSTOXX Futures, including monthly trading 
volume and open interest, among other things, also can be found in 
the Notice and Amendment No 1 to the proposed rule change. See 
Notice and Amendment No. 1, supra notes 3 and 6.
---------------------------------------------------------------------------

B. Comparability of VSTOXX and VIX

    According to the Exchange, the VSTOXX and VIX are nearly identical 
calculations of expected volatility in the EURO STOXX 50 Index and the 
S&P 500, respectively, based on pricing in the applicable options. The 
exchange represents that both processes involve screening of available 
option prices, followed by the construction of variance terms and then 
the subsequent weighting of those terms into the index values, and that 
the differences between the two processes are largely cosmetic. VSTOXX 
employs the following screens on EURO STOXX 50 Index options: (i) All 
option prices that are one-sided or without both a bid and ask are 
screened out; (ii) only options that are quoted within an established 
maximum spread are eligible for inclusion; and (iii) options that are 
too far out of the money (i.e., that would change the index value less 
than 0.5 index points) are excluded. Similarly, VIX excludes options on 
the S&P 500 as follows: (a) All calls that have a bid price of zero are 
excluded, and, after two consecutive strikes have zero bid prices, no 
higher strikes are used; and (b) all puts that have a bid price of zero 
are excluded and after two consecutive strikes have zero bid prices, no 
lower strikes are used. The Exchange notes that, while these screens 
are not exactly the same, they are both designed to exclude options 
from their universe that do not have sufficient liquidity for the index 
to rely on their pricing for purposes of calculating volatility. In 
addition, after choosing the applicable options universe, both VSTOXX 
and VIX use essentially identical formulas for calculating variance 
across the included options. Finally, after determining the variance, 
both VSTOXX and VIX use a substantively identical formula for weighting 
each of the individual variances in order to calculate the respective 
index value.

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of Section 6 of the Act \14\ and the rules and regulations 
thereunder applicable to a national securities exchange.\15\ In 
particular, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\16\ which requires, among other things, 
that the Exchange's rules be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, 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.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f.
    \15\ 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).
    \16\ 17 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission notes that VIX Futures are currently included as a 
Futures Reference Asset for Futures-Linked Securities.\17\ The 
Commission also notes that, based on the Exchange's representations, 
the VSTOXX and VIX employ nearly identical calculations of expected 
volatility in the EURO STOXX 50 Index and the S&P 500, respectively. In 
addition, both VSTOXX and VIX use essentially identical formulas for 
calculating variance across the included options, and, after 
determining the variance, use a substantively identical formula for 
weighting each of the individual variances in order to calculate the 
respective index value. Given the similarities between VSTOXX and VIX, 
which was previously approved by the Commission as a Futures Reference 
Asset, the Commission believes that it is consistent with the Act for 
the Exchange

[[Page 70716]]

to amend its listing standard to include VSTOXX as a Futures Reference 
Asset.
---------------------------------------------------------------------------

    \17\ See supra note 7.
---------------------------------------------------------------------------

    In addition, the Commission notes that, notwithstanding the 
addition of VSTOXX Futures to the definition of Futures Reference 
Asset, the existing initial and continued listing criteria applicable 
to Linked-Securities, generally, and Futures-Linked Securities, 
specifically, would continue to apply. For example, the Exchange 
represents that any Futures-Linked Securities linked to VSTOXX Futures 
would be required to meet both the initial and continued listing 
standards under BZX Rule 14.11(d)(2)(K)(iv)(b) and (c) or be subject to 
delisting or removal proceedings. These initial and continued listing 
standards require, among other things: (i) The value of the Futures 
Reference Asset be calculated and widely disseminated by one or more 
major market data vendors on at least a 15-second basis during the 
Exchange's regular market session; (ii) for Futures-Linked Securities 
that are periodically redeemable, the Intraday Indicative Value of the 
securities be calculated and widely disseminated by the Exchange or one 
or more major market data vendors on at least a 15-second basis during 
the Exchange's regular market session; (iii) the aggregate market value 
or the principal amount of the Futures-Linked Securities be at least 
$400,000; and (iv) the value of the VSTOXX Futures be calculated and 
available. In addition, any Futures-Linked Securities linked to VSTOXX 
Futures also would be required to meet the listing standards applicable 
to all Linked Securities under BZX Rule 14.11(d)(2). The Exchange 
represents that any securities it would list and trade pursuant to 
amended BZX Rule 14.11(d) would continue to comply with all Exchange 
rules applicable to the listing and trading of Linked Securities.
    Further, the Exchange represents that its existing surveillance 
procedures are adequate to continue to properly monitor the trading of 
the Futures-Linked Securities linked to VSTOXX Futures in all trading 
sessions and to deter and detect violations of Exchange rules. 
Specifically, the Exchange stated that it intends to utilize its 
existing surveillance procedures applicable to derivative products, 
which includes Linked Securities, to monitor trading in the Futures-
Linked Securities. The Commission notes that Eurex, on which VSTOXX 
Futures trade, is a member of ISG, and the Exchange represents that it 
may obtain information regarding trading in the underlying VSTOXX 
Futures.
    The Commission further notes that the issuer of a series of Linked 
Securities is and will continue to be required to comply with Rule 10A-
3 under the Act for the initial and continued listing of Linked 
Securities, as provided under BZX Rule 14.11(d)(2)(F). Moreover, the 
Exchange represents that prior to listing Futures-Linked Securities 
linked to VSTOXX Futures pursuant to BZX Rule 14.11(c)(2)(K)(iv), an 
issuer would be required to represent to the Exchange that it will 
advise the Exchange of any failure of the Futures-Linked Securities to 
comply with the continued listing requirements.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5) of the Act \18\ and the rules and regulations thereunder 
applicable to a national securities exchange.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-BatsBZX-2016-26), as 
modified by Amendment No. 1 thereto, be, and it hereby is, approved.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78s(b)(2).
    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-24776 Filed 10-12-16; 8:45 am]
 BILLING CODE 8011-01-P


