[Federal Register Volume 80, Number 92 (Wednesday, May 13, 2015)]
[Notices]
[Pages 27408-27415]
[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.

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:

[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

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

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.
---------------------------------------------------------------------------

    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.

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\
---------------------------------------------------------------------------

    \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

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<EMAIL_ADDRESS>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.

    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).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-11592 Filed 5-12-15; 8:45 am]
 BILLING CODE 8011-01-P


[Federal Register Volume 79, Number 18 (Tuesday, January 28, 2014)]
[Notices]
[Pages 4526-4527]
[FR Doc No: 2014-01572]

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DEPARTMENT OF TRANSPORTATION

Office of the Secretary

Notice of Applications for Certificates of Public Convenience and
Necessity and Foreign Air Carrier Permits Filed Under Subpart B
(Formerly Subpart Q) During the Week Ending December 7, 2013

    The following Applications for Certificates of Public Convenience
and Necessity and Foreign Air Carrier Permits were filed under Subpart
B (formerly Subpart Q) of the Department of Transportation's Procedural
Regulations (See 14 CFR 301.201 et. seq.). The due date for Answers,
Conforming Applications, or Motions to Modify Scope are set forth below
for each application. Following the Answer period DOT may process the
application by expedited procedures. Such procedures may consist of the
adoption of a show-cause order, a tentative order, or in appropriate
cases a final order without further proceedings.
    Docket Number: DOT-OST-2013-0204.
    Date Filed: December 2, 2013.
    Due Date for Answers, Conforming Applications, or Motion to Modify
Scope: December 23, 2013.
    Description: Application of Norwegian Air International Limited
(``Norwegian International'') requesting exemption authority and a
foreign air carrier permit to enable it to conduct foreign scheduled
and charter air transportation of persons, property and mail to the
full extent permitted under the open skies U.S.-E.U.-Iceland-Norway Air
Transport Agreement; Norwegian International requests authority to
engage in: (a) Foreign scheduled and charter air transportation of
persons, property and mail from any point or points behind any Member
State(s) of the European Union, via any point or points in any Member
State and via intermediate points, to any point(s) in the United States
and beyond; (b) foreign scheduled and charter air transportation of
persons, property, and mail between any point or points in the United
States and any point or points in any member of the European Common
Aviation Area; (c) foreign scheduled and charter air transportation of
persons

property and mail between any point or points in Norway, via
intermediate points, and any point or points in the United States; (d)
foreign scheduled and charter cargo air transportation between any
point or points in the United States and any other point or points; (e)
other charters pursuant to the prior approval requirements; and (f)
scheduled and charter transportation consistent with any future,
additional rights that may be granted to European Union carriers under
the U.S.-E.U. Open Skies Agreement.

Barbara J. Hairston,
Supervisory Dockets Officer, Docket Operations, Federal Register
Liaison.
[FR Doc. 2014-01572 Filed 1-27-14; 8:45 am]
BILLING CODE 4910-9X-P