Federal Register / Vol. 75, No. 23 / Thursday, February 4, 2010 / Notices 5831 

17 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3A FLEX option is a customized option that 

provides parties to the transaction with the ability 

to fix terms including the exercise style, expiration 

date, and certain exercise prices. See CBOE Rule 

24A.4(a). A FLEX Option may be either a FLEX 

Index Option or a FLEX Equity Option. 

4See Securities Exchange Act Release No. 61183 

(December 16, 2009), 74 FR 68435 (‘‘Notice’’). 

5See Letter to Elizabeth M. Murphy, Secretary, 

Commission, from Mark E. White, Assistant 

Superintendent, Regulation Sector, Office of the 

Superintendent of Financial Institutions Canada, 

dated January 7, 2010 (noting that the Office did 

‘‘not feel comfortable making comments on the 

particular proposal,’’ but wanted to ‘‘provide some 

information related to variable annuity products 

that the SEC may find helpful when considering the 

CBOE’s submission.’’). 

6See Submissions via SEC WebForm from Miller 

Blew, CEO, Safe Haven Advisors, LLC, dated 

January 12, 2010 (supporting proposal to eliminate 

minimum size requirements); Charles L. Gilbert, 

President, Nexus Risk Management, dated January 

8, 2010 (supporting the elimination of the p.m. 

settlement restriction and minimum size 

requirements as a means to enable insurers to more 

effectively hedge their risks); Ram Kelkar, Capital 

Markets and Trading, Milliman, Inc., dated January 

8, 2010 (the ability to use FLEX Options as a 

hedging tool for life insurers ‘‘should be enhanced 

by reducing the minimum size requirements and by 

allowing p.m. settlements for all days of the 

month’’); Kannoo Ravindran, dated January 14, 2010 

(stating that the elimination of the p.m. settlement 

restriction and minimum size requirements will 

contribute to more effective risk management by 

institutions); Donald C. Smyth, dated January 12, 

2010 (noting that ‘‘the more flexibility/granulatity 

we have in terms of FLEX option dates with p.m. 

expirations and small minimum notionals 

(preferably $0), the more effectively we can [tailor] 

and use FLEX options for our [equity indexed 

annuity] hedging needs.’’). 7A third-Friday-of-the-month expiration is 

generally referred to as ‘‘Expiration Friday’’. 8The annual report would also contain analyses 

of volume and open interest for Expiration Friday 

Non-FLEX Index series, where a broad-based NonFLEX Index class overlies the same index as an 

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

See Notice, supra note 4, 74 FR at 68436. 

9See Notice, supra note 4, 74 FR at 68437. Any 

positions established under the pilot would not be 

impacted by the expiration of the pilot. For 

example, a position in a p.m.-settled FLEX Index 

Option series that expires on Expiration Friday in 

January 2015 could be established during the 14- 

month pilot. If the pilot program were not extended, 

then the position could continue to exist. However, 

any further trading in the series would be restricted 

to transactions where at least one side of the trade 

is a closing transaction. The Exchange stated that 

it would notify members of this restriction in a 

circular to members. See Notice, supra note 4, 74 

FR at 68436. 

Number SR–NASDAQ–2010–007 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–NASDAQ–2010–007. 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 such 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 publicly available. All 

submissions should refer to File 

Number SR–NASDAQ–2010–007 and 

should be submitted on or before 

February 25, 2010. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.17

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–2337 Filed 2–3–10; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–61439; File No. SR–CBOE– 

2009–087] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Order Approving 

Proposed Rule Change To Establish a 

Pilot Program To Modify FLEX Option 

Exercise Settlement Values and 

Minimum Value Sizes 

January 28, 2010. 

On December 3, 2009, Chicago Board 

Options Exchange, Incorporated 

(‘‘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 thereunder,2 a 

proposed rule change to establish a pilot 

program to modify exercise settlement 

values and minimum value sizes for 

Flexible Exchange Options (‘‘FLEX 

Options’’).3 The proposed rule change 

was published for comment in the 

Federal Register on December 24, 

2009.4 The Commission received six 

comments regarding the proposal. One 

commenter provided background 

information about financial derivatives 

as they related to variable annuity 

products,5 and five commenters 

supported the proposed rule change.6

The Exchange is proposing two pilots 

with this proposed rule change. First, 

CBOE is proposing to implement a 

fourteen-month pilot program to permit 

p.m. and specified average price 

settlements of FLEX Index Options that 

expire on, or within two business days 

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

expiration (‘‘Blackout Period’’).7 Under 

current FLEX Option rules, only a.m. 

settlements based on opening prices of 

the underlying components of an index 

can be used to settle a FLEX Index 

Option if it expires within the Blackout 

Period. In its proposal, CBOE has stated 

that, at least two months prior to the 

expiration of the pilot program, it will 

provide the Commission with 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.8 The annual 

report will also contain information and 

analysis of FLEX Options trading 

patterns, and index price volatility and 

underlying share trading activity for 

each broad-based index class overlying 

an Expiration Friday, p.m.-settled FLEX 

Index Option that exceeds certain 

minimum open interest parameters.9

The Exchange will also provide to the 

Commission, on a periodic basis, 

interim reports of volume and open 

interest. 

CBOE also proposes to eliminate the 

minimum value size requirements for 

all FLEX Options on a fourteen-month 

pilot basis. CBOE will submit a pilot 

program report if it elects to extend or 

expand the pilot program, or to make 

the program permanent. The pilot 

program report would include data and 

analysis of open interest and trading 

volume, and analysis of the types of 

investors that initiated opening FLEX 


srobinson on DSKHWCL6B1PROD with NOTICES
5832 Federal Register / Vol. 75, No. 23 / Thursday, February 4, 2010 / Notices 

10Any positions established under this pilot 

would not be impacted by the expiration of the 

pilot. For 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 14- 

month pilot. If the pilot program were not extended, 

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 Notice, supra note 4, 74 

FR at 68437. 

11 In approving this proposed rule change, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition, and capital 

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

12 15 U.S.C. 78f(b)(5). 

13See Securities Exchange Act Release No. 31920 

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

(SR–CBOE–92–17). 

14 Id. 

15See Securities Exchange Act Release No. 59417 

(February 18, 2009), 74 FR 8591 (February 25, 2009) 

(SR–CBOE–2008–115). 

16See CBOE Rule 24A.7; CBOE Rule 24B.7; see 

also CBOE Rule 4.13. 

17As to the changes allowing settlement values to 

be a specified average price, the Commission notes 

that when it originally allowed for FLEX Options 

to expire with a.m. settlements in the Blackout 

Period, it was unsure what potential market impact 

specified averages would have because CBOE had 

not established any average price parameters. In the 

current proposal, CBOE states that average 

parameters would be limited to three alternatives. 

18See Securities Exchange Act Release No. 57429 

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

CBOE–2006–36). 

19See, e.g., Submission via SEC WebForm from 

Ram Kelkar, Capital Markets and Trading, 

Milliman, Inc., dated January 8, 2010 (supporting 

the reduction of minimum size requirements and 

noting that ‘‘[t]he ability to hedge the risk for 

smaller notional amounts is vital for small and 

medium-size insurance companies and for smaller 

sized liability portfolios for large insurers.’’). 

20See Securities Exchange Act Release No. 59417 

(February 18, 2009), 74 FR 8591 (February 25, 2009) 

(SR–CBOE–2008–115). 

21See Securities Exchange Act Release No. 31920 

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

(SR–CBOE–92–17). 

22 17 CFR 200.30–3(a)(12). 

Equity and Index Options 

transactions.10

The Commission has carefully 

reviewed CBOE’s proposed rule change 

and finds that it is consistent with the 

requirements of the Act and the rules 

and regulations thereunder applicable to 

a national securities exchange 11 and, in 

particular, Section 6(b)(5) of the Act,12

which requires that an exchange have 

rules designed to promote just and 

equitable principles of trade, remove 

impediments to and perfect the 

mechanism of a free and open market 

and a national market system, and to 

protect investors and the public interest, 

to allow CBOE to conduct limited, and 

carefully monitored, pilots as proposed. 

Since the Commission approved the 

initial listing and trading of FLEX 

Options in 1993,13 it has been 

concerned about the adverse effects and 

impact of p.m. settlements upon market 

volatility and the operation of fair and 

orderly markets on the underlying cash 

market at or near the close of trading. 

For example, FLEX Index Options were 

initially approved by the Commission 

with the restriction that they could not 

expire during the Blackout Period, 

which the Commission believed would 

‘‘diminish the impact that FLEX Options 

could have on the market.’’ 14 When the 

Commission approved a proposed rule 

change allowing a.m.-settled FLEX 

Options to expire during the Blackout 

Period, it noted that requiring FLEX 

Index Options expiring during the 

Blackout Period to be a.m.-settled would 

‘‘reduce the potential for adverse effects 

on the underlying component 

securities.’’ 15

The Commission’s concern about the 

effect upon market volatility of p.m. 

settlements for FLEX Index Options 

during the Blackout Period remains. 

Nevertheless, the Commission agrees 

with the Exchange that allowing p.m. 

and averaged price settlements for FLEX 

Index Options during the Blackout 

Period may allow more market 

participants to benefit from trading 

customized-type options in the 

Exchange’s FLEX Options market rather 

than the OTC market. 

Moreover, the Commission believes 

that CBOE’s proposed fourteen-month 

pilot will allow for the CBOE and the 

Commission to monitor the potential for 

adverse market effects. In particular, the 

Commission notes that CBOE will 

provide the Commission with both 

annual and interim reports analyzing 

volume and open interest for each 

broad-based FLEX Index Options class 

overlying an Expiration Friday, p.m.- 

settled FLEX Index Options series. The 

annual report will also contain 

information and analysis of FLEX 

Options trading patterns, and index 

price volatility and underlying share 

trading activity for series that exceed 

certain minimum interest parameters. 

This information will enable the 

Commission to evaluate whether 

allowing p.m. settlements for FLEX 

Index Options during the Blackout 

Period has resulted in increased market 

and price volatility in the underlying 

component stocks. Further, the 

Exchange’s position reporting 

requirements,16 along with the ongoing 

analysis of the pilot, should help the 

Exchange to monitor any potential risk 

from large p.m.-settled positions and 

take appropriate action if warranted.17

The Commission also believes that 

CBOE’s proposal to eliminate minimum 

size requirements for all FLEX Options 

on a pilot basis is consistent with the 

Act. Historically, the intended 

customers of FLEX Options were 

institutional and high net worth 

customers, rather than retail 

customers.18 Although eliminating 

minimum size requirements raises the 

possibility that retail customers will 

access the FLEX Options market, the 

Commission received several comment 

letters noting that this proposal would 

assist institutional customers, such as 

insurance companies.19

As noted above, the Exchange will be 

monitoring the type of customers 

initiating opening FLEX Options 

transactions as part of the minimum size 

pilot over its fourteen-month period. In 

the event the Exchange elects to extend, 

expand or make the minimum-size pilot 

permanent, this information will enable 

the Commission to evaluate how market 

participants have responded to this 

proposal, and what types of customers 

are using the FLEX Options market. 

Finally, we note that the combination 

of eliminating restrictions on settlement 

values during the Blackout Period, 

together with reducing the minimum 

size, increases the potential for the 

FLEX Options market to act as a 

surrogate for the non-FLEX Options 

market. The Commission has previously 

expressed concern that the FLEX 

Options market not act as a surrogate for 

trading in standardized options, 

especially because the standardized 

options market contains certain 

protections for investors. For example, 

because the FLEX Options market is 

designed to contain the benefits of an 

auction market with the features of 

negotiated transactions, continuous 

quotes may not always be available.20 In 

addition, due to their customized 

nature, FLEX Options do not have 

trading rotations at either the opening or 

closing of trading.21 The p.m. settlement 

and minimum size pilot information 

should help the Commission assess the 

impact on these markets as well as on 

the standardized market and determine 

whether other changes are necessary. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act, that the 

proposed rule change (SR–CBOE–2009– 

087) be, and it hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.22

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–2336 Filed 2–3–10; 8:45 am] 

BILLING CODE 8011–01–P 


srobinson on DSKHWCL6B1PROD with NOTICES