cuOE FUTURES EXCHANGE

May 25, 2006

Via Electronic Mail

Ms. Jean A. Webb

Secretary

Commodity Futures Trading Commission
Three Lafayette Centre

1155 21st Street, N.W.

Washington, D.C. 20581

WISWIIYIZS BW 40 "940

Re CBOE Futures Exchange, LLC Rule Certification
Submission Number CFE-2006-09

Dear Ms. Webb:

Pursuant to Section 5c(c)(1) of the Commodity Exchange Act, as amended ("Act"), and
§40.6(a) of the regulations promulgated by the Commodity Futures Trading Commission
("Commission") under the Act, CBOE Futures Exchange, LLC ("CFE” or "Exchange”) hereby
submits this rule change ("Amendment") to amend CFE Rule !202(d) to change the position limit
in CBOE Volatility Index ("VIX") futures and to amend CFE Rule 1202(n) to change the
reportable position in VIX futures.

The Amendment changes the position limit in VIX futures from 5,000 to 10.000 contracts
net long or net short in all VIX futures contract months combined and also provides for a position
limit in the expiring VIX futures contract month. Specifically, the Amendment includes a
position limit of 5,000 contracts net long or net short in the expiring VIX futures contract month
commencing on the Wednesday prior to the final settlement date of the expiring VIX futures
contract month. CFE is taking an incremental approach to increasing the position limit in VIX
futures by initially coupling the increase in the all months combined limit with a spot month limit
instead of simply moving to a higher all months combined limit. CFE intends to evaluate its
experience with the limits provided for in the Amendment and may then determine to eliminate

the spot month limit.

CFE took the following into consideration in determining to change the position limit in
VIX futures in the manner set forth in the Amendment.

The VIX future is a futures contract on a broad-based security index in that the VIX
satisfies the conditions of the Joint Order Excluding Indexes Comprised of Certain Index Options
from the Definition of Narrow-Based Security Index pursuant to Section 1a(25)(BXvi) of the
Commodity Exchange Act and Section 3(a55)(C)(vi) of the Securities Exchange Act of 1934
issued by the Commodity Futures Trading Commission and Securities and Exchange
Commission on March 25, 2004 in Release No. 34-49469 (69 FR 16900, March 31, 2004).

Average daily volume and open interest in VIX futures have been at record levels. The

average daily volume in VIX futures to date in May 2006 exceeds 2.500 contracts per day and
open interest in VIX futures currently exceeds 31,000 contracts.

400 South LaSalle Street Chicago, Illinois 60605-1023 www.cboe.com/cfe

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Ms. Jean A. Webb
Page 2 of 3

Additionally, in equivalent risk terms, the average daily volume in Standard & Poor's
("S&P") 500 Index ("SPX") options (which are used to calculate the VIX) is much greater than
the average daily volume in VIX futures. The SPX option market is the most liquid domestic
index options market. Average daily volume in SPX options during the past six months (from
November 2005 through April 2006) exceeded 338,000 contracts per day.

SPX options settle based on a special calculation of the S&P 500 Index level, using the
opening prices of the 500 stocks included in the S&P 500 Index. VIX futures settle based on a
special calculation of the VIX index level, using traded prices and quotations of S&P $00 Index
options. Although the two contracts settle based on different underlying values. they share
exposure to a common risk, namely changes in the volatility of the S&P 500 Index implied by
current option prices. In options market parlance. this risk is known as Vega and is usually
expressed as the change in value of a particular options contract for a change in the level of
implied volatility. For example, an at-the-money SPX option with one month to go before
expiration recently had a Vega of around 1.33. Therefore, for a change of }% in the level of
implied volatility, the option premium would change by $1.33 and the option would change in
value by $1,330 ($100 times the change in premium). The Vega of an SPX option ean vary and
is mainly dependant upon the time to maturity of the option and its strike price. VIX futures have
a constant Vega exposure of $1,000 for every |% change in implied volatility.

In equivalent terms (measured by exposure to changes in implied volatility). SPX option
volume would equate to an average daily volume in VIX futures of approximately 35,000
contracts per day. Allowing a position limit of 10,000 contracts, with no more than 5.000
contracts during the last week before settlement in the expiring contract month. would equate to
allowing a market participant to assume a VIX futures position equivalent to less than 15% of the
daily SPX volume in terms of Vega risk.

The Amendment also changes the reportable position in VIX futures from 25 to 200
contracts. This change is consistent with Commission Regulation 15.03(b) which provides for a
reporting level of 200 contracts for futures on broad-based securities indexes like VIX futures.
CFE also notes that, consistent with the Commission's published guidance with respect to large
trader reporting, a reporting level of 200 contracts in VIX futures would cover in excess of 70%
of the total open interest in VIX futures. Specifically, based on data from May 16, 2006, a
reporting level of 200 contracts in VIX futures would have covered 92% of the long open interest
in VIX futures (31,110 out of 33,705) and 95% of the short open interest in VIX futures (31.912
out of 33,705).

The Amendment will become effective on May 30, 2006.

CFE is not aware of any substantive opposing views to the Amendment. CFE hereby
certifies that the Amendment complies with the Act and the regulations thereunder.

The Amendment, marked to show additions in underlined text and deletions in
[bracketed] text, consists of the following:

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Rule 1202. CBOE Volatility Index Futures Contract Specifications

RRR


Ms. Jean A. Webb
Page 3 of 3

(d) Position Limits. A person may not own or control at any time more than 10,000 [5,000]
contracts net long or net short in all VIX futures contract months combined. Commencing on the
Wednesday prior to the final settlement date of the expiring VIX futures contract month, a person
may not_own or control more than 5,000 contracts net long or net short in the expiring VIX
futures contract month.

For the purposes of this rule, the positions of all accounts directly or indirectly owned or
controlled by a person or persons, and the positions of all accounts of a person or persons acting
pursuant to an expressed or implied agreement or understanding shall be cumulated.

The foregoing position limits shall not apply to positions that are subject to a position limit
exemption meeting the requirements of Commission Regulations and CFE Rules.

Hoe te ee

(n) Reportable Position. Pursuant to Commission Regulation §15.03 and Commission
Regulation Part 17, the position level that is required to be reported to the Commission is any
open position in VIX futures contracts at the close of trading on any trading day equal to or in
excess of 200 [twenty-five] contracts on either side of the market.

RRR

Questions regarding this submission may be directed to Arthur Reinstcin at (312) 786-
7570. Please reference our submission number CFE-2006-09 in any related correspondence.

CBOE Futures Exchange, LLC

fatrick J. Fay
Managing Director

cc: Thomas Leahy
Steven Benton
Mark Baumgardner (OCC)
Edward Dasso (NFA)