Document ID: SEC-2010-1689-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2010-11-03T04:00Z

[Federal Register Volume 75, Number 212 (Wednesday, November 3, 2010)]
[Notices]
[Pages 67794-67796]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-27768]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63202; File No. SR-CBOE-2010-080]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of a 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''

October 28, 2010.

I. Introduction

    On August 31, 2010, the Chicago Board Options Exchange (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities 
Exchange Act of 1934 (``Act''), and Rule 19b-4 thereunder,\2\ a 
proposed rule change to: (a) Permit the trading of options on leveraged 
(multiple or inverse) exchange-traded notes (``ETNs''), and (b) broaden 
the definition of ``Futures-Linked Securities.'' On September 9, 2010, 
the Exchange filed Amendment No. 1 to the proposed rule change. The 
proposed rule change, as modified by Amendment No. 1, was published for 
comment in the Federal Register on September 16, 2010.\3\ The 
Commission received no comment letters on the proposed rule change. 
This order approves the proposed rule change as modified by Amendment 
No. 1.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Release No. 62880 (September 9, 
2010), 75 FR 56628.
---------------------------------------------------------------------------

II. Description of the Proposal

    The purpose of CBOE's proposed rule change is to amend 
Interpretation and Policy .13 to Rule 5.3 to: (a) Permit the trading of 
options on leveraged (multiple or inverse) ETNs,\4\ and (b) broaden the 
definition of ``Futures-Linked Securities.''
---------------------------------------------------------------------------

    \4\ 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 non-convertible debt of an issuer that have a term of 
at least one year but not greater than thirty years. Index-Linked 
Securities are traded as a single, exchange-listed security. As 
such, rules pertaining to the listing and trading of standard equity 
options apply to Index-Linked Securities.
---------------------------------------------------------------------------

Leveraged ETN Options

    Multiple leveraged ETNs seek to provide investment results that 
correspond to a specified multiple of the percentage performance of a 
particular Reference Asset on a given day. Inverse leveraged ETNs seek 
to provide investment results that correspond to the inverse (opposite) 
of the percentage performance of a particular Reference Asset by a 
specified multiple on a given day. 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.
    Currently, Interpretation and Policy .13 to Rule 5.3 provides that 
securities deemed appropriate for options trading

[[Page 67795]]

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:
     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'');
     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'');
     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'');
     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'');
     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
     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 Assets, Currency Reference 
Assets, Fixed Income Reference Assets, Futures Reference Assets 
together with 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'' stocks 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 makes 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 \5\ or 
margin.\6\
---------------------------------------------------------------------------

    \5\ See Rules 4.11, Position Limits, and 4.12, Exercise Limits.
    \6\ See Rule 12.3, Margin Requirements.
---------------------------------------------------------------------------

    The Exchange has represented 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.

Definition of ``Futures-Linked Securities''

    The second change being proposed by the Exchange's filing is to 
amend the definition of ``Futures-Linked Securities'' set forth in Rule 
5.3.13(1)(E). Rule 5.3 sets forth generic listing criteria for 
securities that may serve as underlyings for listed options. 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

[[Page 67796]]

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. The Exchange is proposing to revise the definition of 
``Futures-Linked Securities'' to provide that they are securities that 
pay at maturity 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''). All ETNs eligible for options trading must still be 
principally traded on a national securities exchange and an ``NMS 
Stock.''

III. Commission Findings

    After careful consideration, the Commission finds that the proposed 
rule changes are consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange,\7\ and in particular, the requirements of Section 6(b) of the 
Act.\8\ Specifically, the Commission finds that the proposed rule 
changes are consistent with Section 6(b)(5) of the Act,\9\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \7\ 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).
    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Leveraged ETN Options

    The Commission notes that the Exchange has represented that, 
similar to its imposition of higher margin requirements for options on 
leveraged ETFs,\10\ the Exchange will impose higher margin requirements 
for leveraged ETNs, as allowed under CBOE Rules 12.3(h) and 12.10. The 
Exchange will also issue a Regulatory Circular announcing the new 
margin requirements prior to listing and trading options on leveraged 
ETNs.
---------------------------------------------------------------------------

    \10\ See CBOE Regulatory Circulars RG09-97 (August 31, 2009), 
RG09-132 (November 20, 2009). See also FINRA Regulatory Notices 09-
53 (August 2009), 09-65 (November 2009).
---------------------------------------------------------------------------

    In addition, pursuant to the proposed rule change, the Exchange 
represented that the current listing standards for ETN options will 
continue to apply. The Exchange has also represented that its existing 
surveillance procedures applicable to trading options are adequate to 
properly monitor trading of options on leveraged ETNs.
    The Commission believes that these representations are adequate to 
protect investors. Furthermore, the Commission believes that the 
ability to trade options on leveraged ETNs will provide investors with 
additional risk management tools. Therefore, the Commission believes 
that this proposed rule change is appropriate.

Broaden the Definition of ``Futures-Linked Securities''

    The Commission believes that this proposal will provide a more 
efficient process for the Exchange to list and trade options on ETNs. 
The Exchange will be able to list and trade options overlying newly 
introduced ETNs that do not fall within the current definition of 
``Futures-Linked Securities,'' without first filing a rule change 
proposal with the Commission to change the definition of ``Futures-
Linked Securities'' to include each specific new product. The 
Commission notes that all ETNs that underlie options traded on the 
Exchange must still be principally traded on a national securities 
exchange and must be an ``NMS stock.'' In addition, pursuant to the 
proposed rule change, the Exchange represented that the current listing 
standards for options on ETNs will continue to apply to options on ETNs 
that fall within the proposed definition of ``Futures-Linked 
Securities.'' The Exchange has also represented that its existing 
surveillance procedures applicable to trading options are adequate to 
properly monitor trading of options on ETNs. Therefore, the Commission 
believes that this proposed rule change is appropriate.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the propose rule change (SR-CBOE-2010-080), as modified 
by Amendment No. 1, be, and is hereby, approved.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Florence E. Harmon,
Deputy Secretary.
---------------------------------------------------------------------------

    \12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. 2010-27768 Filed 11-2-10; 8:45 am]
BILLING CODE 8011-01-P