[Federal Register: April 17, 2008 (Volume 73, Number 75)]
[Notices]
[Page 20985-20989]
[DOCID:fr17ap08-104]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57642; File No. SR-CBOE-2006-105]

Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change, as Modified
by Amendment No. 2 Thereto, To List for Trading Binary Options on
Broad-Based Indexes

April 9, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 29, 2006, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been substantially
prepared by the Exchange. CBOE filed Amendment No. 1 to the proposed
rule change on September 6, 2007.\3\ CBOE filed Amendment No. 2 to the
proposed rule change on April 4, 2008.\4\ The Commission is publishing
this notice to solicit comments on the proposed rule change, as
amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaces the original filing in its
entirety.
    \4\ Amendment No. 2 replaces the original filing and Amendment
No. 1 in their entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to amend its rules to enable the initial and
continued listing and trading on the Exchange of binary options on
board-based indexes. The text of the proposed rule change is available
at the Exchange's principal office, the Commission's Public Reference
Room, and http://www.cboe.org.legal.

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

    In its filing with the Commission, CBOE 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 these statements may be examined at the places specified in
Item IV below. CBOE has prepared summaries, set forth in Sections A, B,
and C below, of the most significant aspects of such statements.

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

1. Purpose
    The purpose of this proposed rule change is to enable the listing
and trading on the Exchange of binary options on broad-based indexes.
Binary options have an exercise settlement amount that is equal to the
applicable exercise settlement value multiplied by the applicable
contract multiplier. The exercise settlement value would be an amount
determined by the Exchange on a class-by-class basis and would be
greater or equal to $10 and less than or equal to $1,000. The contract
multiplier also would be established on a class-by-class basis and at
least one. A binary option would be automatically exercised if the
settlement value of the underlying index equals, exceeds, or is less
than the exercise price, depending on the type of the option (i.e.,
call or put). Binary options would be based on the same framework as
existing standardized options that are traded on the Exchange and other
options exchanges; however, the payout of a binary option is contingent
upon the occurrence of the option being ``in'' or ``at-the-money''
versus the degree to which the option is ``in-the-money.'' As a result,
payout at expiration would be an ``all-or-nothing'' occurrence.
(1) Characteristics of Binary Options
    The proposed binary options would be European-style and would have
an exercise settlement amount that is based on the exercise price in
relation to the settlement value of the underlying broad-based index at
expiration. After a particular binary option class has been approved
for listing and trading on the Exchange, the Exchange may open for
trading series of options on that class. In order to afford investors
maximum flexibility, binary option series may expire from one day up to
36 months from the time that they are listed. Binary options would be
quoted based on the existing strike intervals utilized for traditional
index options (e.g., $2.50 per contract if the index is below 200 and
$5.00 per contract is the index is above 200) with minimum price
variations, established by class, to be no less than $0.01.
    At expiration, a binary option would pay out an exercise settlement
amount equal to the exercise settlement value multiplied by the
contract multiplier. Unlike traditional index options, the value of the
payout is not affected by the magnitude of the difference between the
underlying index and the exercise price. Rather the payout would be a
set amount contingent upon whether the settlement value of the
underlying index is: (1) Equal to or above the exercise price at
expiration for a binary call option; or (2) below the exercise price at
expiration for a binary put option.
(2) The OTC Market
    Binary options have been traded in the over-the-counter (``OTC'')
market for many years. However, OTC binary options have certain
disadvantages. OTC binary options are typically offered by an
institution on a non-fungible basis so the customer can purchase or
close out the option only from the particular institution that is
issuing the option. As a result, OTC binary options lack transparency
and a trading market (liquidity). The Exchange's proposal is intended
to provide the market for binary options with a standardized product
without the credit risk of an individual issuer. By providing a listed
and standardized market for a class of binary options, the Exchange
seeks to attract investors who desire a binary option but at the same
time prefer the certainty and safeguards of a regulated and
standardized marketplace.
    Binary options are designed to be a simplified version of
traditional, exchange-traded options and to provide investors with a
simple product with an easy to understand risk profile.

(3) Simplicity
    Binary options are easier to understand and utilize than
traditional options because of the manner of their payout (i.e., set
exercise settlement amount if underlying closes at, below, or above the
exercise price) and because they are cash-settled. A significant
benefit of a binary option is that the buyer and writer of the option
know the expected return at the time of purchase if the underlying
index performs as expected. In contrast, the ``traditional'' option
does not typically have a known return at the time of purchase, i.e.,
the return cannot be accurately determined until the option is nearing
expiration due to price movements. In addition, because the return on
the binary option is a set amount, a buyer of a binary option does not
need to determine the absolute magnitude of the underlying index's
price movement relative to the exercise price, as is the case with
traditional options.
(4) Risk Transparency
    In addition, unlike traditional options where a writer has
unlimited risk, the maximum obligation in connection with a binary
option is known when the contract is written. And, unlike with an OTC
binary option, counter-party credit risk is significantly reduced
through the issuance and guarantee of the contracts by The Options
Clearing Corporation (``OCC'').
(5) Liquidity
    As an exchange-traded option, binary options would have the
advantage of liquidity provided by market makers, and therefore,
spreads should be tighter than in the OTC market. Further, the Exchange
believes that standardization would enable more interested parties to
become market participants. In other words, CBOE's proposal offers a
more transparent and level playing field than the OTC market.
Discussion of Particular Rules
(1) Definitions (Proposed Rule 22.1)
    Proposed Chapter XXII includes new proposed definitions applicable
to binary options in Rule 22.1. In particular, the terms ``binary
option,'' ``exercise price,'' ``exercise settlement amount,''
``contract multiplier,'' and ``reporting authority'' would be defined.
In addition, the term ``call binary option'' would be defined to mean
an option that returns an exercise settlement amount if the settlement
value of the underlying broad-based index is at or above the exercise
price at expiration (i.e., in- or at-the-money). Also, the term ``put
binary option'' is defined to mean an option that returns an exercise
settlement amount if the settlement value of the underlying broad-based
index is below the exercise price at expiration (i.e., in-the-money).
    Further, the term ``settlement value'' would be defined to mean the
value of the underlying broad-based index that is used to determine
whether a binary option is in, at, or out of the money. For a binary
option on a broad-based index on which traditional options on the same
broad-based index are a.m.-settled, the ``settlement value'' is the
reported opening level of such index as derived from the prices of the
underlying securities on such day and as reported by the reporting
authority for the index. For a binary option on a broad-based index on
which traditional options on the same broad-based index are p.m.-
settled, the ``settlement value'' is the reported closing level of such
index as derived from the prices of the underlying securities on such
day and as reported by the reporting authority for the index.
(2) Days and Hours of Business (Proposed Rule 22.2 and Amendment to
Rule 6.1)
    Proposed Rule 22.2 and an amendment to Rule 6.1, Days and Hours of
Business, would provide that transactions in binary options overlying
any broad-based index may be effected during normal Exchange option
trading hours on any business day for other options on the same broad-
based index.
(3) Designation of Binary Option Contracts and Maintenance Listing
Standards (Proposed Rules 22.3 and 22.4)
    Proposed Rule 22.3, Designation of Binary Options Contracts,
provides that the Exchange may from time to time approve for listing
and trading on the Exchange binary options on a broad-based index which
has been selected in accordance with Rule 24.2. Binary options would be
a class separate from other options overlying the same broad-based
index. Proposed Rule 22.3 also would provide that only binary option
contracts approved by the Exchange and currently open for trading on
the Exchange could be purchased or sold on the Exchange. Binary options
dealt in on the Exchange would be designated as to expiration date,
exercise price, exercise settlement value, contract multiplier, and
underlying index. Binary options on a broad-based index for which
traditional options on the same broad-based index are a.m.-settled
would also be a.m.-settled, and binary options on a broad-based index
for which traditional options on the same broad-based index are p.m.-
settled (i.e., S&P 100 Index (``OEX'')) would be p.m.-settled.
    To the extent possible, the Exchange would recognize and treat
binary options like existing standardized options. Standardized systems
for listing, trading, transmitting, clearing, and settling options,
including systems used by the OCC, would be employed in connection with
binary options. In addition, binary options would have a symbology
based on the current system, so that symbols are created that represent
the expiration date, exercise price, exercise settlement value, and
underlying index.
    Proposed Rule 22.3 would provide that, after a particular binary
option has been approved for listing and trading on the Exchange, the
Exchange could open for trading series of options on that class. Binary
option series could be designated to expire from one day up to 36
months from the time that they are listed. The Exchange could add new
series of options of the same class as provided for in Rule 24.9 and
the related Interpretations and Policies. Additional series of the same
binary option class could be opened for trading on the Exchange when
the Exchange deems it necessary to maintain an orderly market or to
meet customer demand. The opening of a new series of binary options on
the Exchange would not affect any other series of options of the same
class previously opened.
    Proposed Rule 22.4, Maintenance Listing Standards, would provide
that the maintenance listing standards set forth in Rule 24.2 and the
Interpretations and Policies thereunder would be applicable to binary
options on broad-based indexes.
(4) Margin Requirements (Amendment to Rule 12.3)
    The Exchange is proposing to amend Rule 12.3, Margin Requirements,
to include requirements applicable to binary options. Under the
proposed requirements, for a Margin Account, no binary option carried
for a customer shall be considered of any value for purposes of
computing the margin required in the account of such customer. The
initial and maintenance margin required on any binary option carried
long in a customer's account is 100% of the purchase price of such
binary option (i.e., the premium). In connection with a short position
in binary options, the customer margin required is the exercise
settlement amount. As for spreads, no margin is required on a binary
call option (put option) carried short in a customer's account that is
offset by a long binary call option (put option) for the same

underlying security or instrument that expires at the same time and has
an exercise price that is less than (greater than) the exercise price
of the short call (put). The long call (put) must be paid for in full.
As for a straddle/combination, when a binary call option is carried
short in a customer's account and there is also carried a short binary
put option that expires at the same time and has an exercise price that
is less than or equal to the exercise price of the short call, the
initial and maintenance margin required is the exercise settlement
amount applicable to one contract.
    For a cash account, a binary option carried short in a customer's
account would be deemed a covered position, and eligible for the cash
account, if either one of the following is held in the account at the
time the option is written or is received into the account promptly
thereafter: (1) Cash or cash equivalents equal to 100% of the exercise
settlement amount; or (2) a long binary option of the same type (put or
call) for the same underlying security or instrument that is paid for
in full and expires at the same time, and has an exercise price that is
less than the exercise price of the short in the case of a call or
greater than the exercise price of the short in the case of a put; or
(3) an escrow agreement. The escrow agreement must certify that the
bank holds for the account of the customer as security for the
agreement cash, cash equivalents, one or more qualified equity
securities, or a combination thereof having an aggregate market value
of not less than 100% of the exercise settlement amount, and that the
bank would promptly pay the member organization the cash settlement
amount in the event the account is assigned an exercise notice. The
Exchange believes that these proposed levels are appropriate because
risk exposure is limited with binary options and the proposed customer
initial and maintenance margin would be equal to the maximum risk
exposure.\5\
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    \5\ In accordance with Rule 12.10, Margin Required is Minimum,
the Exchange has the ability to determine at any time to impose
higher margin requirements than those described above in respect of
any binary option position when it deems such higher margin
requirements are appropriate.
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(5) Limitations of Liability of Exchange and of Reporting Authority
(Proposed Rule 22.5)
    The Exchange proposes in Rule 22.5 to state expressly that Rule
6.7, Exchange Liability, shall apply to binary options. Proposed Rule
22.5 also would provide that the rule in CBOE's Index Options rules
that disclaims liability on behalf of each reporting authority that is
the source of values of any index underlying any class of index
options--Rule 24.14--would be applicable with respect to reporting
authorities for indexes that underlie binary options.
(6) Position Limits, Position Reporting Requirements, No Exercise
Limits, and Other Restrictions (Proposed Rules 22.6 to 22.10)
    The Exchange is proposing a two-pronged approach to determine
position limits for binary options. In determining compliance with Rule
4.11, the Exchange proposes a fixed position limit of 15,000 contracts
for binary options on a broad-based index for which traditional options
on the same broad-based index have no position limit, provided that the
exercise settlement amount is $10,000. For binary options that have an
exercise settlement amount that is not equal to $10,000, the position
limit would be 15,000 times the ratio of 10,000 to the exercise
settlement amount (e.g., if the binary option exercise settlement
amount is $1,000, then the position limit is 150,000 contracts. If the
binary option exercise settlement amount is $12,000, then the position
limit is 12,500 contracts).
    The Exchange proposed a formulaic position limit for binary options
on a broad-based index for which traditional options on the same broad-
based index have a position limit. The formulaic position limit would
be calculated in accordance with the following methodology: (1)
Determine the Market Capitalization of the S&P 500 Index; (2) determine
the Market Capitalization of the broad-based index underlying the
binary option; and (3) calculate the Market Capitalization Ratio of the
broad-based index underlying the binary option to the Market
Capitalization of the S&P 500 Index. The position limit for binary
options subject to a formulaic limit with an exercise settlement amount
of $10,000 would be: (1) 10,000 contracts if the Market Capitalization
Ratio is greater than or equal to 0.50; (2) 5,000 contracts if the
Market Capitalization Ratio is less than 0.50 but greater than or equal
to 0.25; and (3) 2,500 contracts if the Market Capitalization Ratio is
less than 0.25 but greater than or equal to 0.10. The Exchange would
seek Commission approval prior to establishing position limits for
binary options on broad-based indexes that have a Market Capitalization
Ratio that is less then 0.10. For binary options that have an exercise
settlement amount that is not equal to $10,000, the position limit
would be the ratio of 10,000 to the exercise settlement amount
multiplied by the applicable formulaic limit.
    Proposed Rule 22.6 also would provide that positions in binary
options on the same broad-based index that have different exercise
settlement amounts would be aggregated. In determining compliance with
the position limits set forth in proposed Rule 22.6, binary option
contracts would not be aggregated with non-binary option contracts on
the same or similar underlying security or broad-based index. In
addition, binary option contracts on broad-based indexes would not be
aggregated with non-binary option contracts on an underlying stock or
stocks included within such broad-based index, and binary options on
one broad-based index shall not be aggregated with binary options on
any other broad-based index.
    For purposes of the position limits established under proposed Rule
22.6, a long position in a binary put option and a short position in a
binary call option would be considered to be on the same side of the
market; and a short position in a binary put option and a long position
in a binary call option would be considered to be on the same side of
the market. Binary options would not be subject to the hedge exemption
to the standard position limits found in Rule 4.11. Under proposed Rule
22.6, the following qualified hedge exemption strategies and positions
would be exempt from the established binary option position limits: (1)
A binary option position ``hedged'' or ``covered'' by an appropriate
amount of cash to meet the settlement obligation (e.g., $1,000 for a
binary option with an exercise settlement amount of $1,000); (2) a
binary option position ``hedged'' or ``covered'' by a sufficient amount
of a related or similar security to meet the settlement obligation; or
(3) a binary option position ``hedged'' or ``covered'' by a traditional
option covering the same underlying broad-based index sufficient to
meet the settlement obligation.
    Binary options would not be subject to exercise limits due to the
fact that they are European-style options and would be automatically
exercised at expiration if the settlement value of the underlying index
is equal to or greater than the exercise price of a binary call option
or less than the exercise price in the case of a binary put option.
Proposed Rule 22.7 confirms this.
    Proposed Rule 22.8, Reports Related to Position Limits and
Liquidation of Positions, would state that references in Rules 4.13,
Reports Related to Position Limits, and 4.14, Liquidation of Positions,
to Rule 4.11 in connection

with position limits would be deemed, in the case of binary options, to
be to Rule 22.6. As such, in accordance with Rule 4.13(a), a position
in binary options would have to be reported to the Exchange via the
Large Option Positions Report when an account establishes an aggregate
same side of the market position of 200 or more binary options. In
computing reportable binary options under existing Rule 4.13: (1)
Positions in binary options that have different exercise settlement
amounts would be aggregated; (2) a position in a binary option would
not be aggregated with a non-binary position in a option on the same or
similar underlying security or broad-based index; (3) a position in a
binary option on a broad-based index would not be aggregated with a
position in a non-binary option on an underlying stock or stocks
included within such broad-based index; and (4) a position in a binary
option on one broad-based index would not be aggregated with a position
in a binary option on any other broad-based index. The Exchange
believes that the reporting requirements and the surveillance
procedures for hedged positions would enable the Exchange to closely
monitor sizable positions and corresponding hedges.
    Proposed Rule 22.9 would provide that binary options are not
subject to Rule 4.16(b) and Interpretation and Policy .01 under Rule
4.16; this is because Rule 4.16(b) is relevant only for American-style
options and Interpretation and Policy .01 under Rule 4.16 is relevant
only for options that are settled by delivery of an underlying
security. Paragraph (a) of Rule 4.16, which provides the Exchange's
Board with the power to impose restrictions on transactions in one or
more series of options of any class dealt in on the Exchange, as the
Board in its judgment determines advisable in the interests of
maintaining a fair and orderly market or otherwise deems advisable in
the public interest, is applicable to binary options.
(7) Determination of Exercise Price (Proposed Rule 22.10)
    The Exchange proposes in Rule 22.10 to provide that the
determination of whether binary options are in, at, or out of the money
at expiration would be a function of the settlement value of the
underlying broad-based index in relation to the type of binary option
(i.e., put or call) and the exercise price.
(8) Trading Mechanics for Binary Options (Proposed Rules 22.11 to
22.16)
    The Exchange intends to trade binary options similar to the manner
in which it trades other index options. Under the proposed rules,
trading in binary options would be conducted in the following manner:
     Trading Rotations (Proposed Rule 22.11): Trading rotations
generally would be conducted through use of the Hybrid Opening System
(``HOSS''), which is described in existing Rule 6.2B. In addition,
Rules 6.2, Trading Rotations, 6.2A, Rapid Opening System, and 24.13,
Trading Rotations, would apply to binary options.
     Trading Halts and Suspension of Trading (Proposed Rule
22.12): The trading halt procedures contained in existing Rules 6.3 and
6.3B and 24.7 would apply to binary options.
     Premium Bids and Offers; Minimum Increments; Priority and
Allocation (Proposed Rule 22.13): All bids and offers would be deemed
to be for one contract unless a specific number of option contracts is
expressed in the bid or offer. A bid or offer for more than one option
contract which is not made all-or-none would be deemed to be for that
amount or any lesser number of options contracts. An all-or-none bid or
offer would be deemed to be made only for the amount stated. All bids
and offers made for binary option contracts related to an underlying
index would be governed by Rules 6.41, Meaning of Premium Bids and
Offers; 6.42, Minimum Increments for Bids and Offers; 6.44, Bids and
Offers in Relation to Units of Trading; 6.45, Priority of Bids and
Offers--Allocation of Trades; 6.45B, Priority and Allocation of Trades
in Index Options and Options on ETFs on the CBOE Hybrid System; and
24.8, Meaning of Premium Bids and Offers, as applicable. The minimum
price variation (``MPV'') would be established on a class-by-class
basis by the Exchange and would not be less than $0.01. The rules of
priority and order allocation procedures set forth in Rule 6.45A,
Priority and Allocation of Equity Option Trades on the CBOE Hybrid
System, would apply to binary options.\6\
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    \6\ Proposed Rule 22.13 would conform to Article XIV, Section 3A
of OCC's By-Laws with respect to adjustments of binary options. See
Securities Exchange Act Release No. 56875 (November 30, 2007), 72 FR
69274 (December 7, 2007) (SR-OCC-2007-08).
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     Maximum Bid-Ask Differentials; Market-Maker Appointments &
Obligations (Proposed Rule 22.14): Proposed Rule 22.14 would provide
that a market maker is expected to bid and offer so as to create
differences of no more than 25% of the designated exercise settlement
value between the bid and offer for each binary option contract or
$5.00, whichever amount is wider, except during the last trading day
prior to the expiration where the maximum permissible price
differential for binary options may be 50% or $5.00, whichever amount
is wider. Proposed Rule 22.14 also would provide that the market maker
appointment process for binary option classes would be the same as the
appointments for other options, as set out in existing Rules 8.3,
Appointment of Market-Makers; 8.4, Remote Market-Makers; 8.14, Index
Hybrid Trading System Classes: Market-Maker Participants; 8.15, Lead
Market-Makers and Supplemental Market-Makers in Non-Hybrid and Hybrid
3.0 Classes; 8.15A, Lead Market-Makers in Hybrid Classes; and 8.95,
Allocation of Securities and Location of Trading Crowds and DPMs.
     Automatic Exercise of Binary Option Contracts (Proposed
Rule 22.15): Proposed Rule 22.15 would provide that a binary option
would be automatically exercised at expiration if the settlement value
of the underlying broad-based index is equal to or greater than the
exercise price of a binary call option or less than the exercise price
in the case of a binary put option. Rules 11.2 and 11.3 would not apply
to binary options.
     FLEX Trading Rules (Proposed Rule 22.16): Proposed Rule
22.16 would provide that, in addition to Hybrid, binary options would
be eligible for trading as Flexible Exchange Options as provided for in
Chapter XXIVA and XXIVB. For purposes of Rules 24A.4 and 24B.4, the
applicable exercise settlement amount would be designated by the
parties to the contract, the parties to the contract cannot designate
an Exercise Style other than European-style, and the term ``index
multiplier'' as used in those rules would refer to the ``contract
multiplier'' as defined in Chapter XXII. Rules 24A.7 and 24B.7 would
not apply to binary options and the position limit methodology set
forth in Rule 22.6 would apply. Rules 24A.9 and 24B.9, regarding
minimum quote width, would not apply to binary options and the minimum
quote width set forth in Rule 22.14 would apply.
OCC Rule Filing; Options Disclosure Document
    The OCC has amended its By-Laws and Rules to accommodate the
listing and trading of binary options.\7\ In addition, CBOE understands
that the OCC has submitted to the Commission a proposed Supplement to
the Options Disclosure Document (``ODD'') to accommodate binary options
on board based indexes.
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    \7\ See Securities Exchange Act Release No. 56875 (November 30,
2007), 72 FR 69274 (December 7, 2007) (SR-OCC-2007-08).

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Systems Capacity
    CBOE represents that it believes the Exchange and the Options Price
Reporting Authority have the necessary systems capacity to handle the
additional traffic associated with the listing and trading of binary
options as proposed herein. CBOE does not anticipate that there would
be any additional quote mitigation strategy necessary to accommodate
the trading of binary options.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations under the Act applicable to a
national securities exchange and, in particular, the requirements of
Section 6(b) of the Act. Specifically, the Exchange believes the
proposed rule change is consistent with the Section 6(b)(5) \8\
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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    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change would impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.

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

    The Exchange neither solicited nor received comments on the
proposal.

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

    Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
    (A) By order approve 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 e-mail to<EMAIL_ADDRESS>Please include
File Number SR-CBOE-2006-105 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2006-105. This file
number should be included on the subject line if e-mail 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 inspection and
copying in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. 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-2006-105 and should be
submitted on or before May 8, 2008.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\9\
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    \\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-8232 Filed 4-16-08; 8:45 am]

BILLING CODE 8010-01-P


[Federal Register Volume 81, Number 51 (Wednesday, March 16, 2016)]
[Notices]
[Pages 14163-14166]
[FR Doc No: 2016-05855]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77340; File No. SR-NYSEArca-2015-93]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting
Proceedings To Determine Whether to Approve or Disapprove a Proposed
Rule Change, as Modified by Amendment No. 1 Thereto, Relating To
Listing and Trading of Shares of the Cumberland Municipal Bond ETF
Under NYSE Arca Equities Rule 8.600

March 10, 2016.

I. Introduction

    On November 24, 2015, NYSE Arca, Inc. (``Exchange'') filed with the
Securities and Exchange Commission

(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to list and trade shares
(``Shares'') of the Cumberland Municipal Bond ETF (``Fund''), a series
of the ETFis Series Trust I (``Trust''). The proposed rule change was
published for comment in the Federal Register on December 14, 2015.\3\
On December 29, 2015, the Exchange submitted Amendment No. 1 to the
proposed rule change.\4\ On January 21, 2016, pursuant to Section
19(b)(2) of the Act,\5\ 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.\6\ The Commission received no
comments on the proposed rule change. This order institutes proceedings
under Section 19(b)(2)(B) of the Act \7\ to determine whether to
approve or disapprove the proposed rule change, as modified by
Amendment No. 1 thereto.
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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. 76590 (Dec. 8,
2015), 80 FR 77384 (``Notice'').
    \4\ In Amendment No. 1, the Exchange clarified that each
Municipal Bond (as defined herein) held by the Fund must be a
constituent of a deal where the deal's original offering amount was
at least $100 million, clarified whether certain securities would be
exchange-traded or over-the-counter (``OTC''), deleted a statement
relating to redemption of Shares, clarified pricing information for
certain assets, and corrected a typographical error. Because
Amendment No. 1 to the proposed rule change is technical in nature
and does 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
original proposal in its entirety, is available on the Commission's
Web site at: http://www.sec.gov/comments/sr-nysearca-2015-93/nysearca201593-1.pdf.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 76955, 81 FR 4724
(Jan. 27, 2016). The Commission designated March 11, 2016 as the
date by which the Commission shall either approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change. See Securities Exchange Act Release No. 76955A
(Mar. 2, 2016), 81 FR 12174 (Mar. 8, 2016) (correcting the date to
``March 11, 2016'' as the date by which the Commission shall either
approve or disapprove, or institute proceedings to determine whether
to disapprove, the proposed rule change).
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares of the Fund, an
actively managed exchange-traded fund (``ETF''), under NYSE Arca
Equities Rule 8.600, which governs the listing and trading of Managed
Fund Shares on the Exchange. The Fund is a series of the Trust.\8\ The
investment adviser to the Fund will be Virtus ETF Advisers LLC
(``Adviser''), and the Fund's sub-adviser will be Cumberland Advisors
Inc. (``Sub-Adviser'').\9\ Virtus ETF Solutions LLC will serve as the
Fund's operational administrator. ETF Distributors LLC will serve as
the distributor of the Shares on an agency basis. The Bank of New York
Mellon (``Administrator'') will serve as the administrator, custodian,
transfer agent and fund accounting agent for the Fund. The Exchange has
made the following representations and statements in describing the
Fund and its investment strategy, including the Fund's portfolio
holdings and investment restrictions.\10\
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    \8\ The Exchange represents that the Trust is registered under
the Investment Company Act of 1940 (``1940 Act''). On May 20, 2015,
the Trust filed with the Commission an amendment to its registration
statement on Form N-1A under the Securities Act of 1933 and under
the 1940 Act relating to the Fund (File Nos. 333-187668 and 811-
22819) (``Registration Statement''). The Exchange further states
that the Trust has obtained certain exemptive relief under the 1940
Act. See Investment Company Act Release No. 30607 (Jul. 23, 2013)
(File No. 812-14080).
    \9\ According to the Exchange, the Adviser and Sub-Adviser are
not registered as broker-dealers. The Adviser (but not the Sub-
Adviser) is affiliated with one or more broker-dealers, and the
Adviser has implemented and will maintain a fire wall with respect
to each broker-dealer affiliate regarding access to information
concerning the composition and changes to the portfolio. In the
event (a) the Adviser or Sub-Adviser become registered broker-
dealers or newly affiliated with a broker-dealer, or (b) any new
adviser or sub-adviser is a registered broker-dealer or becomes
affiliated with a broker-dealer, it will implement a fire wall with
respect to its relevant personnel or its broker-dealer affiliate
regarding access to information concerning the composition and
changes to the portfolio, and will be subject to procedures designed
to prevent the use and dissemination of material, non-public
information regarding such portfolio.
    \10\ The Commission notes that additional information regarding
the Fund, the Trust, and the Shares, including investment
strategies, risks, creation and redemption procedures, fees,
portfolio holdings disclosure policies, calculation of net asset
value (``NAV''), distributions, and taxes, among other things, can
be found in the Notice, Amendment No. 1 to the proposed rule change,
and the Registration Statement, as applicable. See supra notes 3, 4,
and 8, respectively.
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A. Exchange's Description of the Fund's Principal Investments

    The Fund will seek to provide a competitive level of current income
exempt from federal income tax, while preserving capital. The Fund,
under normal market conditions,\11\ will invest at least 80% of its net
assets in debt securities whose interest is, in the opinion of bond
counsel for the issuer at the time of issuance, exempt from U.S.
federal income tax (``Municipal Bonds''). The Sub-Adviser will invest
the Fund's assets using a barbell strategy, which means that the Sub-
Adviser will overweight the Fund's investments in Municipal Bonds with
maturities on the short and long ends of the fixed income yield curve,
while underweighting exposure to Municipal Bonds with intermediate
maturities.
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    \11\ The term ``under normal market conditions'' includes, but
is not limited to, the absence of extreme volatility or trading
halts in the fixed income markets or the financial markets
generally; operational issues causing dissemination of inaccurate
market information; or force majeure type events such as systems
failure, natural or man-made disaster, act of God, armed conflict,
act of terrorism, riot or labor disruption, or any similar
intervening circumstance.
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    Municipal Bonds in which the Fund may invest include one or more of
the following: General obligation bonds, which are typically backed by
the full faith, credit, and taxing power of the issuer; revenue bonds,
which are typically secured by revenues generated by the issuer;
discount bonds, which may be originally issued at a discount to par
value or sold at market price below par value; premium bonds, which are
sold at a premium to par value; zero coupon bonds, which are issued at
an original issue discount, with the full value, including accrued
interest, paid at maturity; and private activity bonds, which are
typically issued by or on behalf of local or state government for the
purpose of financing the project of a private user.
    The Fund will have no target duration for its investment portfolio,
and the Sub-Adviser may target a shorter or longer average portfolio
duration based on the Sub-Adviser's forecast of interest rates and view
of fixed-income markets generally.\12\ The Sub-Adviser will generally
apply a heavier weight toward Municipal Bonds with shorter maturities
during periods of high interest rates and longer maturities during
periods of lower interest rates.\13\
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    \12\ Duration measures the interest rate sensitivity of a debt
security by assessing and weighting the present value of the
security's payment pattern. Generally, the longer the maturity, the
greater the duration and, therefore, the greater effect interest
rate changes have on the price of the security.
    \13\ According to the Exchange, under normal market conditions,
each Municipal Bond held by the Fund must be a constituent of a deal
where the deal's original offering amount was at least $100 million.
In addition, no Municipal Bond held by the Fund will exceed 30% of
the Fund's net assets, and the five most heavily weighted Municipal
Bonds held by the Fund will not in the aggregate account for more
than 50% of the Fund's assets. Further, the Fund will hold Municipal
Bonds of a minimum of 13 non-affiliated issuers.
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    With respect to credit quality, under normal market conditions, at
least 90% of the Fund's assets invested in Municipal Bonds will be in
Municipal Bonds rated ``A'' or better by at least one major credit
rating agency or, if unrated, deemed to be of comparable quality by the
Sub-Adviser. From time to time, the

Fund may concentrate (i.e., invest more than 25% of its total assets)
in particular sectors. The Fund may sell investments for a variety of
reasons, such as to adjust the portfolio's average maturity, duration,
or overall credit quality, or to shift assets into and out of higher-
yielding or lower-yielding securities or certain sectors.
    According to the Exchange, under normal market conditions, at least
80% of the Fund's income will be exempt from federal income taxes.
However, a significant portion of the Fund's income could be derived
from securities subject to the alternative minimum tax.

B. Exchange's Description of the Fund's Other Investments

    While the Fund, under normal market conditions, will invest at
least 80% of its assets in Municipal Bonds, as described above, the
Fund may invest its remaining assets in other assets and financial
instruments, as described below.
    The Fund may invest in equity securities, both directly and
indirectly through investment in shares of ETFs,\14\ other investment
companies, and other types of securities and instruments described
below. The equity portion of the Fund's portfolio may include common
stocks traded on securities exchanges or in the OTC market. In addition
to common stocks, the equity portion of the Fund's portfolio may also
include exchange-traded and OTC preferred stocks, and exchange-traded
and OTC warrants.\15\
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    \14\ The ETFs in which the Fund may invest will be registered
under the 1940 Act and include Investment Company Units (as
described in NYSE Arca Equities Rule 5.2(j)(3)); Portfolio
Depositary Receipts (as described in NYSE Arca Equities Rule 8.100);
and Managed Fund Shares (as described in NYSE Arca Equities Rule
8.600). Such ETFs all will be listed and traded in the U.S. on
registered exchanges.
    \15\ With respect to its exchange-traded equity securities
investments, the Fund will normally invest in equity securities that
are listed and traded on a U.S. exchange or in markets that are
members of the Intermarket Surveillance Group (``ISG'') or parties
to a comprehensive surveillance sharing agreement with the Exchange.
In any case, not more than 10% of the net assets of the Fund in the
aggregate invested in equity securities (except for non-exchange-
traded investment company securities) will consist of equity
securities whose principal market is not a member of ISG or a market
with which the Exchange does not have a comprehensive surveillance
sharing agreement.
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    The Fund may purchase taxable municipal bonds when the Sub-Adviser
believes they offer opportunities for the Fund, or variable rate demand
notes (``VRDNs'') that pay interest monthly or quarterly based on a
floating rate that is reset daily or weekly based on an index of short-
term municipal rates. The Fund also may invest in exchange-traded and
OTC securities convertible into common stock. These securities will be
convertible bonds and convertible preferred stocks.\16\
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    \16\ The criteria above also will apply to exchange-traded
convertible preferred stocks and exchange-traded stocks into which
convertible bonds may be converted. See supra note 15.
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    The Fund may invest directly and indirectly in cash equivalents,
namely, money market instruments that are the following: U.S.
Government obligations or corporate debt obligations (including those
subject to repurchase agreements), banker's acceptances \17\ and
certificates of deposit \18\ of domestic branches of banks, commercial
paper,\19\ and master notes.\20\
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    \17\ Banker's acceptances are time drafts drawn on and
``accepted'' by a bank. When a bank ``accepts'' such a time draft,
it assumes liability for its payment. When the Fund acquires a
banker's acceptance, the bank that ``accepted'' the time draft is
liable for payment of interest and principal when due. The banker's
acceptance carries the full faith and credit of such bank.
    \18\ A certificate of deposit is an unsecured, interest bearing
debt obligation of a bank.
    \19\ Commercial paper is an unsecured, short-term debt
obligation of a bank, corporation, or other borrower. Commercial
paper maturity generally ranges from two to 270 days and is usually
sold on a discounted basis rather than as an interest-bearing
instrument. The Fund will invest directly in commercial paper only
if it is rated in one of the top two rating categories by Moody's,
S&P or Fitch or, if not rated, is of equivalent quality in the
Adviser's opinion. Commercial paper may include master notes of the
same quality. Master notes are unsecured obligations which are
redeemable upon demand of the holder and which permit the investment
of fluctuating amounts at varying rates of interest.
    \20\ Master notes may be acquired by the Fund through the master
note program of the Fund's custodian bank.
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    In order to maintain sufficient liquidity, to implement investment
strategies, or for temporary defensive purposes, the Fund may invest a
significant portion of its assets in shares of one or more money market
funds. The Fund may also invest in the securities of other non-
exchange-traded investment company securities in compliance with the
1940 Act and the rules thereunder.
    The Fund may write U.S. exchange-traded call and put options on
securities, ETFs, or security indexes to seek income, or may purchase
or write U.S. exchange-traded put or call options for hedging purposes.
    The Fund may purchase securities on a when-issued basis or for
settlement at a future date (forward commitment), if the Fund holds
sufficient liquid assets to meet the purchase price.

C. Exchange's Description of the Fund's Investment Restrictions

    The Fund may, from time to time, take temporary defensive positions
that are inconsistent with its principal investment strategies in an
attempt to respond to adverse market, economic, political, or other
conditions. In such circumstances, the Fund may hold up to 100% of its
portfolio in cash and cash equivalent positions.
    The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
consistent with Commission guidance. The Fund will monitor its
portfolio liquidity on an ongoing basis to determine whether, in light
of current circumstances, an adequate level of liquidity is being
maintained, and will consider taking appropriate steps in order to
maintain adequate liquidity if, through a change in values, net assets,
or other circumstances, more than 15% of the Fund's net assets are held
in illiquid assets. Illiquid assets include securities subject to
contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with
Commission staff guidance.
    The Fund's investments will be consistent with its investment
objective and will not be used to provide multiple returns of a
benchmark or to produce leveraged returns.

II. Proceedings to Determine Whether to Approve or Disapprove SR-
NYSEArca-2015-93 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \21\ to determine whether the proposed rule
change, as modified by Amendment No. 1 thereto, should be approved or
disapproved. Institution of such proceedings is appropriate at this
time in view of the legal and policy issues raised by the proposed rule
change. Institution of proceedings does not indicate that the
Commission has reached any conclusions with respect to any of the
issues involved. Rather, as described below, the Commission seeks and
encourages interested persons to provide comments on the proposed rule
change.
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    \21\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\22\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act, 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,'' and ``to protect investors and the public
interest.'' \23\
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    \22\ Id.
    \23\ 15 U.S.C. 78f(b)(5).
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III. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) or any other provision of the Act, or
the rules and regulations thereunder. Although there do not appear to
be any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\24\
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    \24\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by April 6, 2016. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by April 20,
2016. The Commission asks that commenters address the sufficiency of
the Exchange's statements in support of the proposal, which are set
forth in the Notice \25\ and in Amendment No. 1 to the proposed rule
change,\26\ in addition to any other comments they may wish to submit
about the proposed rule change.
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    \25\ See supra note 3.
    \26\ See supra note 4.
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    The Exchange provides that the Fund may invest in one or more of
the following broad categories of Municipal Bonds: (a) General
obligation bonds; (b) revenue bonds; (c) discount bonds; (d) premium
bonds; (e) zero coupon bonds; and (f) private activity bonds. Moreover,
the Exchange represents that: (i) Each Municipal Bond held by the Fund
must be a constituent of a deal where the deal's original offering
amount was at least $100 million; (ii) no Municipal Bond held by the
Fund will exceed 30% of the Fund's net assets, and the five most
heavily weighted Municipal Bonds held by the Fund will not in the
aggregate account for more than 50% of the Fund's assets; and (iii) the
Fund will hold Municipal Bonds of a minimum of 13 non-affiliated
issuers. Apart from these broad representations, the Exchange provides
no other information about the kinds of municipal bonds in which the
Fund may invest. Accordingly, the Commission seeks comment on whether
the Exchange's representations relating to the Municipal Bonds to be
held by the Fund are sufficiently clear in their application to
municipal bonds, specifically, and are consistent with the requirements
of Section 6(b)(5) of the Act, which, among other things, requires that
the rules of an exchange be designed to prevent fraudulent and
manipulative acts and practices.
    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-NYSEArca-2015-93 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 Numbers SR-NYSEArca-2015-93. 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 these filings also will be available
for inspection and copying at the principal office of the Exchange. 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-NYSEArca-2015-93 and should
be submitted on or before April 6, 2016. Rebuttal comments should be
submitted by April 20, 2016.
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    \27\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-05855 Filed 3-15-16; 8:45 am]
 BILLING CODE 8011-01-P