[Federal Register Volume 75, Number 179 (Thursday, September 16, 2010)]
[Notices]
[Pages 56628-56631]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-23107]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62880; File No. SR-CBOE-2010-080]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change, as Modified by 
Amendment No. 1, To Trade Options on Leveraged Exchange-Traded Notes 
and To Broaden the Definition of ``Futures-Linked Securities''

September 9, 2010.
    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 August 31, 2010, 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. On September 9, 2010, the Exchange filed Amendment No. 1 
to the proposed rule change. The Commission is publishing this notice 
to solicit comments on the proposed rule change, as modified by 
Amendment No. 1, 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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[[Page 56629]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend Interpretation and Policy .13 to Rule 5.3 
to: (a) permit trading options on leveraged (multiple or inverse) 
exchange-traded notes, and (b) broaden the definition of ``Futures-
Linked Securities.'' The text of the rule proposal is available on the 
Exchange's Web site (http://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 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
    Amendment 1 replaces the original filing in its entirety. The 
purpose of Amendment 1 is to make technical corrections to rule 
references in Item 1 and Item 3. No changes to the proposed rule text 
that was submitted in the original filing are being proposed by this 
Amendment 1.
    The Exchange proposes to amend Interpretation and Policy .13 to 
Rule 5.3 to: (a) Permit trading options on leveraged (multiple or 
inverse) exchange-traded notes (``ETNs''), and (b) broaden the 
definition of ``Futures-Linked Securities.'' ETNs are also known as 
``Index-Linked Securities,'' which are designed for investors who 
desire to participate in a specific market segment by providing 
exposure to one or more identifiable underlying securities, 
commodities, currencies, derivative instruments or market indexes of 
the foregoing. Index-Linked Securities are the non-convertible debt of 
an issuer that have a term of at least one (1) year but not greater 
than thirty (30) years. Despite the fact that Index-Linked Securities 
are linked to an underlying index, each trade as a single, exchange-
listed security. Accordingly, rules pertaining to the listing and 
trading of standard equity options apply to Index-Linked Securities.
Leveraged ETN Options
    The Exchange proposes to amend Rule 5.3.13 to permit the listing of 
options on leveraged (multiple or inverse) ETNs. Multiple leveraged 
ETNs seek to provide investment results that correspond to a specified 
multiple of the percentage performance on a given day of a particular 
Reference Asset. Inverse leveraged ETNs seek to provide investment 
results that correspond to the inverse (opposite) of the percentage 
performance on a given day of a particular Reference Asset by a 
specified multiple. Multiple leveraged ETNs and inverse leveraged ETNs 
differ from traditional ETNs in that they do not merely correspond to 
the performance of a given Reference Asset, but rather attempt to match 
a multiple or inverse of a Reference Asset's performance.
    The Barclays Long B Leveraged S&P 500 TR ETN (``BXUB''), the 
Barclays Long C Leveraged S&P 500 TR ETN (``BXUC'') and the UBS AG 2x 
Monthly Leveraged Long Exchange Traded Access Securities (``E-TRACS'') 
linked to the Alerian MLP Infrastructure Index due July 9, 2040 
(``MLPL'') currently trade on the NYSE Arca Stock Exchange and are 
examples of multiple leveraged ETNs. In addition, the Barclays ETN + 
Inverse S&P 500 VIX Short-Term Futures ETN (``XXV'') currently trades 
on the NYSE Arca Stock Exchange and is an example of an inverse 
leveraged ETN. The NYSE Arca Stock Exchange also lists several other 
inverse leveraged ETNs for trading.\3\
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    \3\ These ETNs include: the Barclays Short B Leveraged Inverse 
S&P 500 TR ETN (``BXDB''), the Barclays Short C Leveraged Inverse 
S&P 500 TR ETN (``BXDC'') and the Barclays Short D Leveraged Inverse 
S&P 500 TR ETN (``BXDD'').
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    Currently, Interpretation and Policy .13 to Rule 5.3 provides that 
securities deemed appropriate for options trading shall include shares 
or other securities (``Equity Index-Linked Securities,'' ``Commodity-
Linked Securities,'' ``Currency-Linked Securities,'' ``Fixed Income 
Index-Linked Securities,'' ``Futures-Linked Securities,'' and 
``Multifactor Index-Linked Securities,'' collectively known as ``Index-
Linked Securities'') that are principally traded on a national 
securities exchange and an ``NMS Stock'' (as defined in Rule 600 of 
Regulation NMS under the Securities Exchange Act of 1934), and 
represent ownership of a security that provides for the payment at 
maturity, as described below:
    <bullet> Equity Index-Linked Securities are securities that provide 
for the payment at maturity of a cash amount based on the performance 
of an underlying index or indexes of equity securities (``Equity 
Reference Asset'');
    <bullet> Commodity-Linked Securities are securities that provide 
for the payment at maturity of a cash amount based on the performance 
of one or more physical commodities or commodity futures, options on 
commodities, or other commodity derivatives or Commodity-Based Trust 
Shares or a basket or index of any of the foregoing (``Commodity 
Reference Asset'');
    <bullet> Currency-Linked Securities are securities that provide for 
the payment at maturity of a cash amount based on the performance of 
one or more currencies, or options on currencies or currency futures or 
other currency derivatives or Currency Trust Shares (as defined in 
Interpretation and Policy .06 to this Rule 5.3), or a basket or index 
of any of the foregoing (``Currency Reference Asset'');
    <bullet> Fixed Income Index-Linked Securities are securities that 
provide for the payment at maturity of a cash amount based on the 
performance of one or more notes, bonds, debentures or evidence of 
indebtedness that include, but are not limited to, U.S. Department of 
Treasury securities (``Treasury Securities''), government-sponsored 
entity securities (``GSE Securities''), municipal securities, trust 
preferred securities, supranational debt and debt of a foreign country 
or a subdivision thereof or a basket or index of any of the foregoing 
(``Fixed Income Reference Asset'');
    <bullet> Futures-Linked Securities are securities that provide for 
the payment at maturity of a cash amount based on the performance of an 
index of (a) futures on Treasury Securities, GSE Securities, 
supranational debt and debt of a foreign country or a subdivision 
thereof, or options or other derivatives on any of the foregoing; or 
(b) interest rate futures or options or derivatives on the foregoing in 
this subparagraph (b); or (c) CBOE Volatility Index (VIX) futures 
(``Futures Reference Asset''); and
    <bullet> Multifactor Index-Linked Securities are securities that 
provide for the payment at maturity of a cash amount based on the 
performance of any combination of two or more Equity Reference Assets, 
Commodity Reference Assets, Currency Reference Assets, Fixed Income 
References Assets, or Futures Reference Assets (``Multifactor Reference 
Asset'').
    For purposes of Interpretation and Policy .13 to this Rule 5.3, 
Equity Reference Assets, Commodity Reference Asset, Currency Reference 
Assets, Fixed Income Reference Assets, Futures Reference Assets 
together with

[[Page 56630]]

Multifactor Reference Assets, collectively are referred to as 
``Reference Assets.''
    In addition, Index-Linked Securities must meet the criteria and 
guidelines for underlying Securities set forth in Interpretation and 
Policy .01 to this Rule 5.3.; or the Index-Linked Securities must be 
redeemable at the option of the holder at least on a weekly basis 
through the issuer at a price related to the applicable underlying 
Reference Asset. In addition, the issuing company is obligated to issue 
or repurchase the securities in aggregation units for cash, or cash 
equivalents, satisfactory to the issuer of Index-Linked Securities 
which underlie the option as described in the Index-Linked Securities 
prospectus.
    The Exchange proposes to amend Interpretation and Policy .13 to 
Rule 5.3 to expand the type of Index-Linked Securities that may 
underlie options to include leveraged (multiple or inverse) ETNs. To 
affect this change, the Exchange proposes to amend Rule 5.3.13 by 
adding the phrase, ``or the leveraged (multiple or inverse) 
performance'' to each of the subparagraphs ((A) through (F)) in that 
section which set forth the different eligible Reference Assets.
    The Exchange's current continuing listing standards for ETN options 
will continue to apply. Specifically, under Interpretation and Policy 
.16 to Rule 5.4, ETN options shall not be deemed to meet the Exchange's 
requirements for continued approval, and the Exchange shall not open 
for trading any additional series or option contracts of the class 
covering such Securities whenever the underlying Securities are 
delisted and trading in the Securities is suspended on a national 
securities exchange, or the Securities are no longer an ``NMS Stock'' 
(as defined in Rule 600 of Regulation NMS under the Securities Exchange 
Act of 1934). In addition, the Exchange shall consider the suspension 
of opening transactions in any series of options of the class covering 
Index-Linked Securities in any of the following circumstances: (1) The 
underlying Index-Linked Security fails to comply with the terms of 
Interpretation and Policy .13 to Rule 5.3; (2) in accordance with the 
terms of Interpretation and Policy .01 to Rule 5.4, in the case of 
options covering Index-Linked Securities when such options were 
approved pursuant to Interpretation and Policy .13 to Rule 5.3, except 
that, in the case of options covering Index-Linked Securities approved 
pursuant to Interpretation and Policy .13(3)(B) to Rule 5.3 that are 
redeemable at the option of the holder at least on a weekly basis, then 
option contracts of the class covering such Securities may only 
continue to be open for trading as long as the Securities are listed on 
a national securities exchange and are ``NMS'' stock as defined in Rule 
600 of Regulation NMS; (3) in the case of any Index-Linked Security 
trading pursuant to Interpretation and Policy .13 to Rule 5.3, the 
value of the Reference Asset is no longer calculated; or (4) such other 
event shall occur or condition exist that in the opinion of the 
Exchange make further dealing in such options on the Exchange 
inadvisable. Expanding the eligible types of ETNs for options trading 
under Interpretation and Policy .13 to Rule 5.3 will not have any 
effect on the rules pertaining to position and exercise limits \4\ or 
margin.\5\
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    \4\ See Rules 4.11, Position Limits, and 4.12, Exercise Limits.
    \5\ See Rule 12.3, Margin Requirements.
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    This proposal is necessary to enable the Exchange to list and trade 
options on shares of the BXUB, BXUC, XXV, BXDB, BXDC, BXDD and the 
MLPL. The Exchange believes the ability to trade options on leveraged 
(multiple or inverse) ETNs will provide investors with greater risk 
management tools. The proposed amendment to the Exchange's listing 
criteria for options on ETNs is necessary to ensure that the Exchange 
will be able to list options on the above listed leveraged (multiple 
and inverse) ETNs as well as other leveraged (multiple and inverse) 
ETNs that may be introduced in the future.
    The Exchange represents that its existing surveillance procedures 
applicable to trading in options are adequate to properly monitor the 
trading in leveraged (multiple and inverse) ETN options.
    It is expected that The Options Clearing Corporation will seek to 
revise the Options Disclosure Document (``ODD'') to accommodate the 
listing and trading of leveraged (multiple and inverse) ETN options.
Broaden the Definition of ``Futures-Linked Securities''
    The second change being proposed by this filing is to amend the 
definition of ``Future [sic]-Linked Securities'' set forth in Rule 
5.3.13(1)(E). Currently, the definition of ``Futures-Linked 
Securities'' is limited to securities that provide for the payment at 
maturity of a cash amount based on the performance of an index of (a) 
futures on Treasury Securities, GSE Securities, supranational debt and 
debt of a foreign country or a subdivision thereof, or options or other 
derivatives on any of the foregoing; or (b) interest rate futures or 
options or derivatives on the foregoing in this subparagraph (b); or 
(c) CBOE Volatility Index (VIX) futures.
    Rule 5.3 sets forth generic listing criteria for securities that 
may serve as underlyings for listed options trading. The Exchange 
believes that the current definition of ``Futures-Linked Securities'' 
is unnecessarily restrictive and requires the Exchange to submit a 
filing to amend the definition each time a new ETN is issued that 
tracks the performance of an index of futures/options on futures that 
is not enumerated in the existing rule. To address this issue, the 
Exchange is proposing to revise the definition of ``Futures- Linked 
Securities'' to provide that they are securities that for the payment 
at maturity of a cash amount based on the performance or the leveraged 
(multiple or inverse) performance of an index or indexes of futures 
contracts or options or derivatives on futures contracts (``Futures 
Reference Asset''). The Exchange notes that all ETNs eligible for 
options trading must [sic] principally traded on a national securities 
exchange and an ``NMS Stock.'' As a result, the Exchange believes that 
broadening the definition of ``Futures-Linked Securities'' by no longer 
specifically listing the types of futures and options on futures 
contracts that may be tracked by an ETN is appropriate.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \6\ of the Act, in general, and furthers the 
objectives of Section 6(b)(5),\7\ 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 engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanisms of 
a free and open market and a national market system, and, in general, 
to protect investors and the public interest. The Exchange believes 
that the proposed rules applicable to trading pursuant to generic 
listing and trading criteria serve to foster investor protection.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 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 will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.

[[Page 56631]]

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 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 self-regulatory organization 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

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an e-mail to <a href="/cdn-cgi/l/email-protection#7e0c0b121b531d1113131b100a0d3e0d1b1d50191108"><span class="__cf_email__" data-cfemail="b1c3c4ddd49cd2dedcdcd4dfc5c2f1c2d4d29fd6dec7">[email protected]</span></a>. Please include 
File Number SR-CBOE-2010-080 on the subject line.

Paper Comments

    <bullet> 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-2010-080. 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 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-2010-080 and should be submitted on or before October 7, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
Elizabeth M. Murphy,
Secretary.
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    \8\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2010-23107 Filed 9-15-10; 8:45 am]
BILLING CODE 8010-01-P


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