[Federal Register Volume 79, Number 25 (Thursday, February 6, 2014)]
[Notices]
[Pages 7239-7243]
[FR Doc No: 2014-02504]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71458; File No. SR-CBOE-2014-003]

Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of Proposed Rule Change To List and
Trade CBOE Short-Term Volatility Index Options

January 31, 2014.
    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 January 27, 2014, the Chicago Board Options Exchange, Incorporated
(``Exchange'' or ``CBOE'') 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 prepared by the self-
regulatory organization. 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

    CBOE proposes to amend certain of its rules to provide for the
listing and trading of options that overlie the CBOE Short-Term
Volatility Index (``VXST''). VXST options would be cash-settled
contracts with European-style exercise that expire every week. 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
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this proposed rule change is to permit the Exchange
to list and trade options that overlie the CBOE Short-Term Volatility
Index (``VXST''). VXST options would be cash-settled contracts with
European-style exercise that expire every week.
    The Exchange created the VXST index in response to market demand
for an option contract on a short-term volatility index that expires
each week. The VXST index is designed to measure investors' consensus
view of future (nine day) expected stock market volatility. The
proposed new VXST options would trade alongside existing CBOE
Volatility Index (``VIX'') options (which expire on a monthly basis and
measure a 30 day period of implied volatility) and on one Wednesday
each month, the Exchange plans to calculate two exercise settlement
values based on different S&P 500 index options (one

expiring in 30 days and one expiring in nine days) to settle expiring
VIX and VXST options.\3\
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    \3\ CBOE Futures Exchange, LLC (``CFE'') plans to launch trading
VXST futures during the first quarter in 2014 and prior to launching
VXST options on CBOE.
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Index Design and Calculation
    The calculation of VXST is based on the VIX methodology applied to
option series on the S&P 500 index that expire on every Friday,
including standard S&P 500 index option series (i.e., third Friday
expirations).\4\ Similar to VIX and VIX options, the cash (spot) VXST
value is calculated using premium quotations and the exercise
settlement value for VXST options will be calculated using the actual
opening premium prices of the constituent S&P 500 index options on the
expiration day of the respective VXST option. The VXST index was
introduced by CBOE on October 1, 2013 and has been disseminated at
least once a day on every trading day since that time.
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    \4\ The VXST index is calculated in the same manner as other
volatility indexes, e.g., VIX, upon which options have been based
and previously approved by the SEC. A more detailed explanation of
the method used to calculate VIX may be found on the CBOE's Web site
at: http://www.cboe.com/micro/vix/vixwhite.pdf.
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    The VXST index measures a nine day period of expected (implied)
volatility and is calculated based on real-time prices of options on
the S&P 500 index that expire in nine days. Specifically, the
constituent S&P 500 index options that expire on a Friday (i.e., nine
days from the VXST expiration date, which is typically a Wednesday in
the preceding week) may include the following types of options on the
S&P 500 index: Standard monthly options, End-of-Week (``EOW'')
expirations \5\ and Quarterly Index (``QIX'') expirations.\6\ The chart
below illustrates the different types of S&P 500 index options that
would be used to calculate the VXST index:
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    \5\ Listed under Rule 24.9(e).
    \6\ Listed under Rule 24.9(c).
    [GRAPHIC] [TIFF OMITTED] TN06FE14.000

    Because some of the constituent options used to calculate the VXST
index are A.M.-settled and some are P.M.-settled, the amount of time
covered by a specific contract will vary slightly depending on the type
of series used for any given A.M.-settled VXST option. For a VXST
option contract calculated using A.M.-settled standard S&P 500 index
options, the period of implied volatility covered by the contract will
be exactly nine days. For a VXST option contract calculated using P.M.-
settled EOW or QIX on the S&P 500 index, the period of implied
volatility covered by the contract will be nine days, plus 390
minutes.\7\
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    \7\ P.M.-settled, expiring EOWs and QIX stop trading at 3:00
p.m. (Chicago time) on their last day of trading. See Rules
24.9(e)(4) and 24.6.01. The additional 390 minutes reflects that the
constituent options trade for six and a half hours on their
expiration date until 3:00 p.m. (Chicago time).
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    The VXST calculation generally uses nearby and second nearby option
expirations with at least 1 day left to expiration and then weights
them to yield a constant, nine-day measure of the expected volatility
of the S&P 500 index. The quantity of S&P 500 index option series used
to calculate the VXST at any given time will range from an average of
60 series at settlement to 120 or more series at other times.
    For each VXST contract expiration, CBOE will determine the at-the-
money strike price. The Exchange will then select the at-the-money and
out-of-the money series with non-zero bid prices and determine the
midpoint of the bid-ask quote for each of these series. The midpoint
quote of each series is then weighted so that the further away that
series is from the at-the-money strike, the less weight that is
accorded to the quote. Then, to compute the index level, CBOE will
calculate a volatility measure for the nearby options and then for the
second nearby options. This is done using the weighted mid-point of the
prevailing bid-ask quotes for all included option series with the same
expiration date. These volatility measures are then interpolated to
arrive at a single, constant nine-day measure of volatility.
    CBOE will compute values for VXST underlying option series on a
real-time basis throughout each trading day, from approximately 8:30
a.m. (Chicago time) until approximately 3:15 p.m. (Chicago time). VXST
levels will be calculated by CBOE and generally disseminated at 15-
second intervals to major market data vendors.\8\
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    \8\ When VIX options and VXST options expire on the same day, as
the calculator of volatility indexes, CBOE would not begin
disseminating the spot (cash) values for any volatility index that
CBOE calculates until the S&P 500 index option (SPX) series that
CBOE will use to calculate the exercise settlement value for VIX
options have opened. On all other VXST option expiration days, as
the calculator of volatility indexes, CBOE would not begin
disseminating the spot (cash) values for any volatility index that
CBOE calculates until the S&P 500 index option series that CBOE will
use to calculate the exercise settlement value for VXST options have
opened. See CBOE Information Circular IC13-068, which CBOE will
revise prior to the launch of trading VXST futures and VXST options.
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Options Trading
    VXST options would be quoted in index points and fractions and one
point will equal $100. The minimum tick size for series trading below
$3 would be 0.05 ($5.00) and above $3 will

be 0.10 ($10.00). The Exchange would be permitted to list up to 12
near-term VXST option expiration weeks and new series would be
permitted to be added up to and including on the last day of trading
for an expiring VXST option contract.\9\ The trading hours for VXST
options would be from 8:30 a.m. to 3:15 p.m. (Chicago time). Exhibit 3
presents contract specifications for VXST options.
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    \9\ See proposed amendments to Rule 24.9(a)(2) and 24.9.01(c).
The Exchange is proposing to permit new VXST series to be added up
to and on the last day of trading for expiring contracts. This is
similar to the series setting schedule for short-term (weekly)
options, which may be added up to and including on their expiration
date. See Rules 5.5(d)(4) and 24.9(a)(2)(A)(iv).
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    The Exchange is proposing to establish a strike price setting
regime for VXST options similar to what is permitted for VIX options
and, in part, what is permitted for short term option series (or weekly
options) on volatility based-exchange traded products.\10\
Specifically, the Exchange proposes to permit $0.50 strike price (or
greater) intervals for VXST options where the strike price is less than
$75 because the Exchange believes that more granular strike price
intervals will provide investors with greater flexibility by allowing
them to establish positions that are better tailored to meet their
investment objectives. Fifty cent strike price (or greater) intervals
are currently permitted for VIX (and other volatility index) options
where the strike price is less than $75.\11\ In addition, $0.50 strike
price (or greater) intervals are permitted for short term options
series (or weekly options) on volatility based exchange-traded
products.\12\ Next, the Exchange proposes to permit $1 strike price (or
greater) intervals for VXST options where the strike price is $200 or
less. The Exchange notes that $1 strike price (or greater) intervals
where the strike price is $200 or less are permitted for VIX options
pursuant to Rule 24.9.01(l). Finally, the Exchange proposes to permit
$5 strike price (or greater) intervals for VXST options whether [sic]
the strike price is greater than $200. The Exchange notes that $5
strike price (or greater) intervals where the strike price is more than
$200 are permitted for VIX options pursuant to Rule 24.9.01(l).
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    \10\ See proposed Interpretation and Policy .01(i) to Rule 24.9
permitting the described strike price interval setting regime.
    \11\ VIX options are used to calculate the CBOE VVIX index (aka
``VIX of VIX'' index). Because VIX options are used to calculate a
volatility index, $0.50 strike price intervals are permitted for VIX
options where the strike price is less than $75. See Rule 24.9.12.
    \12\ The strike price interval for standard options on exchange-
traded products (``ETPs''), such as exchange-traded funds and
exchange-traded notes, is $1 or greater where the strike price is
$200 or less. See Rules 5.5.08 and 5.5.09. The strike price interval
for ETP options that are in the short-term option series program (or
weeklys program) may be $0.50 or greater where the strike price is
less than $75. See Rule 5.5(d)(5). For example, $0.50 strike price
intervals are permitted for weekly options on the iPath S&P 500 VIX
Short-Term Futures ETN (``VXX''). The Exchange is not proposing to
harmonize the strike price setting parameters for VXST options with
weekly options, but instead is proposing to adopt a strike price
setting regime similar to VIX options. The Exchange believes that
market participants will expect the strikes price intervals for VXST
options to be the same as permitted for VIX options. In addition,
the Exchange believes that [sic] is desirable to have harmonized
strike price interval rules for all of its volatility index options.
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    The Exchange is proposing to set forth the above described strike
interval setting regime for VXST options in new Interpretation and
Policy .01(i) to Rule 24.9. The Exchange is also proposing to add new
Interpretation and Policy .23 to Rule 5.5, Series of Option Contracts
Open for Trading, which would be an internal cross reference stating
that the intervals between strike prices for VXST option series will be
determined in accordance with proposed new Interpretation and Policy
.01(i) to Rule 24.9.
    The Exchange is proposing to make a technical change to Rule
24.9.12, which permits $0.50 and $1 strike price intervals for index
options used to calculate volatility indexes. Specifically, the
Exchange is proposing to add ``and $150'' to the rule text as those two
words were inadvertently omitted from the proposed rule text changes to
Rule 24.9.12 contained in original rule filing, but were described in
detail in the purpose section.\13\
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    \13\ See Securities Exchange Act Release 64189 (April 5, 2011),
76 FR 20066 (April 11, 2011) (order granting approval of proposed
rule change to permit the listing of series within [sic] $0.50 and
$1 strike price increments on certain options used to calculate
volatility indexes) (SR-CBOE-2011-008).
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Exercise Settlement Value, Expiration Date and Last Trading Day
    The Exchange proposes to set forth in new subparagraph (a)(6) to
Rule 24.9 that the exercise settlement value for the proposed VXST
options would be calculated on the specific date (usually a Wednesday)
identified in the option symbol for the series.\14\ If that Wednesday
or the Friday in the business week following that Wednesday (i.e., nine
days away) is an Exchange holiday, the exercise settlement value would
be calculated on the business day immediately preceding the Wednesday.
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    \14\ Options symbols are made up of 17 to 21 characters,
depending on the length of the symbol representing the underlying
security. Symbols are constructed as follows: Symbol + Expiration
Date (Year, Month, Day) + Call or Put + Strike Price (in dollars to
three decimal places).
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    On the day the exercise settlement value is calculated for VXST
options, modified Hybrid Opening System (``HOSS'') opening procedures
would be used to calculate the exercise settlement value for VXST
options.\15\ The Exchange recently amended Rule 6.2B.08 to establish
modified HOSS opening procedures for all Hybrid classes and series used
to calculate volatility indexes.\16\ The Exchange notes that Rule
6.2B.01 sets forth similar procedures for Hybrid 3.0 classes that are
used to calculate volatility indexes. As explained in more detail in
SR-CBOE-2013-102, the different types of options on the S&P 500 index
that will be used to calculate the VXST trade on different platforms,
e.g., standard S&P 500 index options are Hybrid 3.0 series and EOW on
the S&P 500 index are Hybrid series. As a result, Rules 6.2B.01 and
6.2B.08 would apply to the constituent option series in the VXST, as
relevant. Accordingly, CBOE is proposing to amend each of those rules
to reflect this fact.
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    \15\ The main feature of the modified HOSS opening procedures is
the strategy order cut-off time for the constituent option series
that will be used to calculate the exercise settlement value of a
volatility index.
    \16\ Securities Exchange Act Release No. 71073 (December 13,
2013), 78 FR 76664 (December 18, 2013) (order approving SR-CBOE-
2013-102).
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    The exercise settlement value of a VXST option would be calculated
by the Exchange as a Special Opening Quotation (``SOQ'') of VXST using
the sequence of opening prices of the options that comprise the VXST
index. The opening price for any series in which there is no trade
would be the average of that option's bid price and ask price as
determined at the opening of trading. The ``time to expiration'' used
to calculate the SOQ shall account for the actual number of days and
minutes until expiration for the constituent option series. For
example, if the Exchange announces that the opening of trading in the
constituent option series is delayed, the amount of time until
expiration for the constituent option series used to calculate the
exercise settlement value would be reduced to reflect the actual
opening time of the constituent option series. Another example would be
when the Exchange is closed on a Wednesday due to an Exchange holiday,
the amount of time until expiration for the constituent option series
used to calculate the exercise settlement value would be increased to
reflect the extra day of trading in the constituent option series.

    The expiration date of a VXST option would be on the same day that
the exercise settlement value of the VXST option is calculated. The
last trading day for a VXST option would be the business day
immediately preceding the expiration date of the VXST option (typically
a Tuesday). For example, the Dec 10 14 VXST option would expire on
Wednesday, December 10, 2014 and trading in that expiring contract
would cease at 3:15 p.m. (Chicago time) on Tuesday, December 9, 2014.
When the last trading day is moved because of an Exchange holiday, the
last trading day for an expiring VXST option contract would be the day
immediately preceding the last regularly scheduled trading day.
    Exercise would result in delivery of cash on the business day
following expiration. VXST options would be A.M.-settled.\17\ The
exercise-settlement amount would be equal to the difference between the
exercise-settlement value and the exercise price of the option,
multiplied by $100.
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    \17\ See proposed amendment to Rule 24.9(a)(4) (adding VXST to
the list of A.M.-settled index options approved for trading on the
Exchange). The Exchange is also proposing to make a technical change
to this rule to distinguish existing 30-day volatility period
contracts from VXST options.
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Position and Exercise Limits
    The Exchange is not proposing to establish any position and
exercise limits for VXST options.\18\ Because the VXST is calculated
using options on the S&P 500 Index (for which there are no position and
exercise limits) the Exchange believes that VXST options should
similarly have not [sic] position and exercise limits. In addition, the
Exchange notes that VIX options also do not have position and exercise
limits. Exercise limits for VXST options would be the equivalent to the
proposed position limits. VXST options will be subject to the same
reporting requirements triggered for other options dealt in on the
Exchange.\19\
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    \18\ See proposed amendment to Rules 24.4, Position Limits for
Broad-Based Index Options, and 24.5, Exercise Limits (adding VXST to
the list of products for which there are no position limits and no
exercise limits, respectively).
    \19\ See proposed amendments to Interpretations and Policies
.03, Reporting Requirement, and .04, Margin and Clearing Firm
Requirements, to Rule 24.4 (adding VXST to each of these
provisions).
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Margin
    The Exchange proposes that VXST options be margined as ``broad-
based index'' options, and under CBOE rules, especially, Rule
12.3(c)(5)(A), the margin requirement for a short put or call shall be
100% of the current market value of the contract plus up to 15% of the
``product of the current index group value and the applicable index
multiplier.'' Additional margin may be required pursuant to Rules
12.3(h) and 12.10, Margin Required is Minimum.
Exchange Rules Applicable
    Except as modified herein, the rules in Chapters I through XIX and
Chapter XXIV would equally apply to VXST options.
Capacity
    CBOE has analyzed its capacity and represents that it believes the
Exchange and the Options Price Reporting Authority (``OPRA'') have the
necessary systems capacity to handle the additional traffic associated
with the listing of new series that would result from the introduction
of VXST options. The Exchange notes that VXST options would expire
weekly and the Exchange is proposing to permit the listing of up to 12
expirations at one time. In comparison, over 300 classes participate in
the industry wide weekly option series program and the Exchange and
OPRA have been able to handle and absorb the traffic associated with
that program (which continues to expand and increase). Because the
proposal is limited to a single class and a maximum number of
expirations that may be listed at one time, the Exchange believes that
the additional traffic that would be generated from VXST options will
be manageable.
Surveillance
    The Exchange would use the same surveillance procedures currently
utilized for each of the Exchange's other index options to monitor
trading in VXST options. The Exchange would also utilize enhanced
surveillance procedures at expiration, several of which would be
automated. The Exchange further represents that these surveillance
procedures shall be adequate to monitor trading in VXST options. For
surveillance purposes, the Exchange would 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.\20\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \21\ 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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    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes that there is an unmet market
demand for options that expire each week that measure a short-term
volatility period. As described above, VXST options are designed to
respond to that unmet market demand and CBOE believes that VXST options
will provide an opportunity for investors to hedge or speculate on the
market risk associated with change in implied volatility that measure a
nine day period.
    The success of CBOE's VIX options that measure a 30 day period
illustrate the prominence that volatility products have taken over the
past several years. CBOE seeks to enlarge its suite of volatility
products by introducing a new volatility index option that will provide
investors with a contract that expires every week that measures a
shorter volatility duration than existing VIX options. CBOE believes
that VXST options will provide investors with additional opportunities
to manage volatility risk that ranges over different time periods.
    CBOE has many years of history and experience in conducting
surveillance for volatility index options trading to draw from in order
to detect manipulative trading in the proposed VXST options.
Additionally, the Exchange represents that it has the necessary systems
capacity to support the introduction of VXST options.
    The Exchange believes that the proposed strike interval setting
regime is designed to promote just and equitable principles of trade
and is consistent with the strike interval setting regimes for other
volatility index options and, in part, for other weekly products. In
fact, the Exchange believes that the establishment of the proposed
ability to list $.50 (or greater) strike price intervals where the
strike price is less than $75 is needed for competitive reasons because
it will allow the Exchange to list strike price intervals for VXST
options at the same level of granularity permitted for competitor
products, such as weekly VXX options. Additionally, the Exchange
believes that it [sic] desirable to have strike price setting regimes
that are harmonized for all volatility index options.

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 a new volatility index option product will enhance
competition among market participants and will provide a new type of
weekly expiration that can compete with products such as VXX weekly
options to the benefit of investors and the marketplace.

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-2014-003 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2014-003. 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 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-2014-003 and should be
submitted on or before February 27, 2014.
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    \22\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-02504 Filed 2-5-14; 8:45 am]
BILLING CODE 8011-01-P