Federal Register / Vol. 77, No. 66 / Thursday, April 5, 2012 / Notices 20673 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 17 CFR 240.19b–4(f)(6). 

4FLEX Options provide investors with the ability 

to customize basic option features including size, 

expiration date, exercise style, and certain exercise 

prices. FLEX Options can be FLEX Index Options 

or FLEX Equity Options. In addition, other products 

are permitted to be traded pursuant to the FLEX 

trading procedures. For example, credit options are 

eligible for trading as FLEX Options pursuant to the 

FLEX rules in Chapters XXIVA and XXIVB. See 

CBOE Rules 24A.1(e) and (f), 24A.4(b)(1) and (c)(1), 

24B.1(f) and (g), 24B.4(b)(1) and (c)(1), and 28.17. 

The rules governing the trading of FLEX Options on 

the FLEX Request for Quote (‘‘RFQ’’) System 

platform are contained in Chapter XXIVA. The rules 

governing the trading of FLEX Options on the FLEX 

Hybrid Trading System platform are contained in 

Chapter XXIVB. 

5Securities Exchange Act Release Nos. 61439 

(January 28, 2010), 75 FR 5831 (February 4, 2010) 

(SR–CBOE–2009–087) (Approval Order); 61676 

(March 9, 2010), 75 FR 13191 (March 18, 2010) (SR– 

CBOE–2010–026) (technical rule change to include 

original pilots’ conclusion date of March 28, 2011 

in the rule text); and 64110 (March 24, 2011), 76 

FR 17463 (March 29, 2011) (SR–CBOE–2011–024) 

(extending the pilots through March 30, 2012). 

6See Rules 24A.4(b)(3) and 24B.4(b)(3); see also 

Securities Exchange Act Release No. 31920 

(February 24, 1993), 58 FR 12280 (March 3, 1993) 

(SR–CBOE–92–17). The Exchange has determined 

to limit the averaging parameters to three 

alternatives: the average of the opening and closing 

index values; the average of the intra-day high and 

low index values; and the average of the opening, 

closing, and intra-day high and low index values. 

Any changes to the averaging parameters 

established by the Exchange would be announced 

to Trading Permit Holders via circular. 

7For example, prior to the pilot, the exercise 

settlement value of a FLEX Index Option that 

expires on the Tuesday before Expiration Friday 

could have an a.m., p.m. or specified average 

settlement. However, the exercise settlement value 

of a FLEX Index Option that expires on the 

Wednesday before Expiration Friday could only 

have an a.m. settlement. 

8No change was necessary or requested with 

respect to FLEX Equity Options. Regardless of the 

expiration date, FLEX Equity Options are settled by 

physical delivery of the underlying. 

9See Securities Exchange Act Release No. 57429 

(March 4, 2008), 73 FR 13058 (March 11, 2008) (SR– 

CBOE–2006–36) (approval of rule change that, 

among other things, established a one-and-a-half 

Continued 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66701; File No. SR–CBOE– 

2012–027] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Notice of Filing and 

Immediate Effectiveness of Proposed 

Rule Change To Extend Pilot Programs 

Relating to FLEX Exercise Settlement 

Values and Minimum Value Sizes 

March 30, 2012. 

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 March 27, 

2012, the Chicago Board Options 

Exchange, Incorporated (‘‘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 Exchange has 

designated the proposed rule change as 

constituting a rule change under Rule 

19b–4(f)(6) under the Act,3 which 

renders the proposal effective upon 

filing with the Commission. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange is proposing to extend 

the operation of its pilot programs 

regarding permissible exercise 

settlement values and the elimination of 

minimum value sizes for Flexible 

Exchange Options (‘‘FLEX Options’’),4

which pilot programs are currently set 

to expire on March 30, 2012, through 

the earlier of November 2, 2012 or the 

date on which the respective pilot 

program is approved on a permanent 

basis. The text of the proposed rule 

change is available on the Exchange’s 

Web site (www.cboe.org/Legal), 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 

Exchange 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 

On January 28, 2010, the Exchange 

received approval of a rule change that 

established two pilot programs 

regarding permissible exercise 

settlement values and the elimination of 

minimum value sizes for FLEX Options. 

The pilot programs are currently set to 

expire on March 30, 2012, unless 

otherwise extended or made 

permanent.5 The purpose of this rule 

change filing is to extend the two pilot 

programs through the earlier of 

November 2, 2012 or the date on which 

the respective pilot program is approved 

on a permanent basis. This filing does 

not propose any substantive changes to 

the pilot programs and contemplates 

that all other terms of FLEX Options 

will remain the same. 

Background on the Pilots 

Exercise Settlement Values Pilot for 

FLEX Index Options 

Under Rules 24A.4, Terms of FLEX 

Options, and 24B.4, Terms of FLEX 

Options, FLEX Options may expire on 

any business day specified as to day, 

month and year, not to exceed a 

maximum term of fifteen years. In 

addition, the exercise settlement value 

for FLEX Index Options can be specified 

as the index value determined by 

reference to the reported level of the 

index as derived from the opening or 

closing prices of the component 

securities (‘‘a.m. settlement’’ or ‘‘p.m. 

settlement,’’ respectively) or as a 

specified average, provided that the 

average index value must conform to the 

averaging parameters established by the 

Exchange.6 However, prior to the 

initiation of the exercise settlement 

values pilot, only a.m. settlements were 

permitted if a FLEX Index Option 

expires on, or within two business days 

of, a third-Friday-of-the-month 

expiration (‘‘Expiration Friday’’).7

Under the exercise settlement values 

pilot, this restriction on p.m. and 

specified average price settlements in 

FLEX Index Options was eliminated.8

The exercise settlement values pilot is 

operating on a pilot basis, which pilot 

is currently set to expire on March 30, 

2012. 

Minimum Value Size Pilot for All FLEX 

Options 

Prior to the initiation of the pilot 

eliminating the minimum value size 

requirements, the minimum value size 

requirements under Rules 24A.4(a)(4) 

and 24B.4(a)(5) were as follows: 

• For opening transactions in any 

FLEX series in which there is no open 

interest at the time a FLEX RFQ or FLEX 

Order, as applicable, is submitted, the 

minimum value size was (i) for FLEX 

Equity Options, the lesser of 250 

contracts or the number of contracts 

overlying $1 million in the underlying 

securities; and (ii) for FLEX Index 

Options, $10 million Underlying 

Equivalent Value. Under a prior pilot 

program (which was superseded by the 

minimum value size pilot program), the 

‘‘250 contracts’’ component above had 

been reduced to ‘‘150 contracts.’’ 9


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20674 Federal Register / Vol. 77, No. 66 / Thursday, April 5, 2012 / Notices 

year pilot program that reduced the minimum 

number of contracts required for a FLEX Equity 

Option opening transaction in a new series). 

10The provisions in Rules 24A.9(b) and 24B.9(c) 

that provide that every FLEX Quote entered by a 

FLEX Appointed Market-Maker or a FLEX Qualified 

Market-Maker shall meet or exceed the minimum 

value size parameters set forth in Rules 

24A.4(a)(4)(iv) and 24B.4(a)(5)(iv), respectively, 

have not been/are not applicable during the 

duration of the pilot program. This is because all 

minimum value size requirements under Rules 

24A.4(a)(4) and 24B.4(a)(5) have been eliminated 

under the pilot program. 

11The annual report also contained pilot period 

and pre-pilot period analyses of volume and open 

interest for Expiration Friday, a.m.-settled FLEX 

Index series and Expiration Friday Non-FLEX Index 

series overlying the same index as an Expiration 

Friday, p.m.-settled FLEX Index option. 

12For example, a position in a pm-settled FLEX 

Index Option series that expires on Expiration 

Friday in January 2015 could be established during 

the exercise settlement values pilot. If the pilot 

program were not extended (or made permanent), 

then the position could continue to exist. However, 

the Exchange notes that any further trading in the 

series would be restricted to transactions where at 

least one side of the trade is a closing transaction. 

As another example, a 10-contract FLEX Equity 

Option opening position that overlies less than $1 

million in the underlying security and expires in 

January 2015 could be established during the 

minimum value size pilot. If the pilot program were 

not extended (or made permanent), then the 

position could continue to exist and any further 

trading in the series would be subject to the 

minimum value size requirements for continued 

trading in that series. See Approval Order, supra 

note 6, footnotes 9 and 10. 

13 15 U.S.C. 78f(b). 

14 15 U.S.C. 78f(b)(5). 

• For a transaction in any currentlyopened FLEX series resulting from an 

RFQ or from trading against the 

electronic book (other than FLEX 

Quotes responsive to a FLEX Request for 

Quotes and FLEX Orders submitted to 

rest in the electronic book), the 

minimum value size was (i) for FLEX 

Equity Options, the lesser of 100 

contracts or the number of contracts 

overlying $1 million in the underlying 

securities in the case of opening 

transactions, and 25 contracts in the 

case of closing transactions; and (ii) for 

FLEX Index Options, $1 million 

Underlying Equivalent Value in the case 

of both opening and closing 

transactions; or (iii) in either case the 

remaining underlying size or 

Underlying Equivalent Value on a 

closing transaction, whichever is less. 

• The minimum value size for FLEX 

Quotes responsive to an RFQ and FLEX 

Orders (undecremented size) submitted 

to rest in the electronic book was 25 

contracts in the case of FLEX Equity 

Options, and $1 million Underlying 

Equivalent Value in the case of FLEX 

Index Options, or in either case the 

remaining underlying size or 

Underlying Equivalent Value on a 

closing transaction, whichever is less. In 

addition, with respect to FLEX Index 

Appointed Market-Makers, FLEX 

Quotes and FLEX Orders 

(undecremented size) must have been 

for at least $10 million Underlying 

Equivalent Value or the dollar amount 

indicated in the Request for Quote (if 

applicable), whichever is less. 

Under the minimum value size pilot, 

these minimum value size requirements 

were eliminated.10 Like the exercise 

settlement values pilot mentioned 

above, the minimum value size pilot is 

operating on a pilot basis, which pilot 

is currently set to expire on March 30, 

2012. 

Proposal 

CBOE is proposing to extend the two 

pilot programs through the earlier of 

November 2, 2012 or the date on which 

the pilot program is approved on a 

permanent basis. CBOE believes the 

pilot programs have been successful and 

well received by its membership and the 

investing public for the period that they 

have been in operation as pilots. CBOE 

intends to submit one or more separate 

rule changes that would seek permanent 

approval of each pilot. The present 

extension of the pilots is being 

submitted so that the pilots can 

continue without interruption while 

CBOE seeks permanent approval of the 

programs under a separate rule change 

filing(s). 

In support of the proposed extension 

of the pilot programs, and as required by 

the pilot programs’ Approval Order, the 

Exchange has submitted to the 

Commission pilot program reports 

regarding the two pilots, which detail 

the Exchange’s experience with the two 

programs. Specifically, for the 

expiration settlement values pilot, the 

Exchange provided the Commission an 

annual report analyzing volume and 

open interest for each broad-based FLEX 

Index Options class overlying an 

Expiration Friday, p.m.-settled FLEX 

Index Options series.11 The annual 

report also contained information and 

analysis of FLEX Options trading 

patterns. The Exchange also provided 

the Commission, on a periodic basis, 

interim reports of volume and open 

interest. For the minimum value size 

pilot, the Exchange provided the 

Commission an annual report 

containing data and analysis of 

underlying equivalent values, open 

interest and trading volume, and 

analysis of the types of investors that 

initiated opening FLEX Equity and 

Index Options transactions (i.e., 

institutional, high net worth, or retail). 

The reports were provided to the 

Commission on a confidential basis. 

The Exchange believes there is 

sufficient investor interest and demand 

in the pilot programs to warrant their 

extensions. The Exchange believes that 

the programs have provided investors 

with additional means of managing their 

risk exposures and carrying out their 

investment objectives. Furthermore, the 

Exchange has not experienced any 

adverse market effects with respect to 

the pilot programs. 

As noted above, CBOE intends to seek 

permanent approval of the two pilot 

programs under a separate rule change 

filing(s). In the event a pilot program is 

not approved on a permanent basis by 

November 2, 2012, the Exchange will 

submit an additional pilot program 

report covering the extended period of 

the respective pilot. Such report would 

include the details referenced above and 

be consistent with the pilot programs’ 

Approval Order. The Exchange will also 

continue, on a periodic basis, to submit 

interim reports of volume and open 

interest consistent with the terms of the 

exercise settlement values pilot program 

as described in the pilot programs’ 

Approval Order. All such pilot reports 

would continue to be provided on a 

confidential basis. The Exchange will 

also continue, on a periodic basis, to 

gather data and conduct analysis of 

underlying equivalent values, open 

interest and trading volume and to 

conduct analysis of the types of 

investors that initiated opening FLEX 

Equity and Index Options transactions 

consistent with the terms of the 

minimum value size pilot as described 

in the pilot programs’ Approval Order. 

As noted in the pilot programs’ 

Approval Order, any positions 

established under the respective pilot 

program would not be impacted by the 

expiration of the pilot program.12

2. Statutory Basis 

The Exchange believes the proposed 

rule change is consistent with Section 

6(b) of the Act,13 in general, and furthers 

the objectives of Section 6(b)(5) of the 

Act,14 in particular, in that it is designed 

to prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, to foster 

cooperation and coordination with 

persons engaging in facilitating 

transactions in securities, and to remove 

impediments to and perfect the 

mechanism of a free and open market 

and a national market system. 

Specifically, the Exchange believes that 

the proposed extension of the pilot 

programs, which permit additional 

exercise settlement values and eliminate 

minimum value size requirements, 

would provide greater opportunities for 

investors to manage risk through the use 


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Federal Register / Vol. 77, No. 66 / Thursday, April 5, 2012 / Notices 20675 

15 15 U.S.C. 78s(b)(3)(A). 

16 17 CFR 240.19b–4(f)(6). In addition, Rule 19b4(f)(6) requires a self-regulatory organization to give 

the Commission written notice of its intent to file 

the proposed rule change at least five business days 

prior to the date of filing of the proposed rule 

change, or such shorter time as designated by the 

Commission. The Exchange has satisfied this 

requirement. 

17 17 CFR 240.19b–4(f)(6). 

18 17 CFR 240.19b–4(f)(6). 

19For purposes only of waiving the 30-day 

operative delay, the Commission has considered the 

proposed rule’s impact on efficiency, competition, 

and capital formation. See 15 U.S.C. 78c(f). 

20 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

of FLEX Options. Further, the Exchange 

notes that it has not experienced any 

adverse effects from the operation of the 

pilot programs. The Exchange also 

believes that the extension of the 

exercise settlement values pilot and 

minimum value size pilot does not raise 

any unique regulatory concerns. In 

particular, although p.m. settlements 

may raise questions with the 

Commission, the Exchange believes 

that, based on the Exchange’s 

experience in trading FLEX Options to 

date and over the pilot period, market 

impact and investor protection concerns 

will not be raised by this rule change. 

The Exchange also believes that the 

proposed rule change would continue to 

provide Trading Permit Holders and 

investors with additional opportunities 

to trade customized options in an 

exchange environment (which offers the 

added benefits of transparency, price 

discovery, liquidity, and financial 

stability as compared to the over-thecounter market) and subject to 

exchange-based rules, and investors 

would benefit as a result. 

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 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 

Because the proposed rule change 

does not: (i) Significantly affect the 

protection of investors or the public 

interest; (ii) impose any significant 

burden on competition; and (iii) become 

operative prior to 30 days from the date 

on which it was filed, or such shorter 

time as the Commission may designate, 

the proposed rule change has become 

effective pursuant to Section 19(b)(3)(A) 

of the Act 15 and Rule 19b–4(f)(6) 

thereunder.16

A proposed rule change filed 

pursuant to Rule 19b–4(f)(6) under the 

Act 17 normally does not become 

operative for 30 days after the date of its 

filing. However, Rule 19b–4(f)(6) 18

permits the Commission to designate a 

shorter time if such action is consistent 

with the protection of investors and the 

public interest. The Exchange has asked 

the Commission to waive the 30-day 

operative delay so that the proposal may 

become operative immediately upon 

filing. The Commission notes that 

waiving the 30-day operative delay 

would prevent the expiration of the 

pilot programs on March 30, 2012, prior 

to the extension of the pilot programs 

taking effect, and believes that waiving 

the 30-day operative delay is consistent 

with the protection of investors and the 

public interest.19 Therefore, the 

Commission designates the proposal 

operative upon filing. 

At any time within 60 days of the 

filing of the proposed rule change, the 

Commission summarily may 

temporarily suspend such rule change if 

it appears to the Commission that such 

action is necessary or appropriate in the 

public interest, for the protection of 

investors, or otherwise in furtherance of 

the purposes of the Act. 

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 rulecomments@sec.gov. Please include File 

Number SR–CBOE–2012–027 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–2012–027. 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 

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–2012–027 and 

should be submitted on or before April 

26, 2012. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.20

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–8170 Filed 4–4–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66702; File No. SR–CBOE– 

2011–123] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Order Approving 

Proposed Rule Change To Establish an 

Automated Improvement Mechanism 

and a Solicitation Auction Mechanism 

for FLEX Options 

March 30, 2012. 

I. Introduction 

On December 20, 2011, the Chicago 

Board Options Exchange, Incorporated 

(‘‘Exchange’’ or ‘‘CBOE’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 


Tkelley on DSK3SPTVN1PROD with NOTICES