Document ID: SEC-2015-2127-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.,
Posted Date: 2015-12-23T05:00Z

[Federal Register Volume 80, Number 246 (Wednesday, December 23, 2015)]
[Notices]
[Pages 79963-79966]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-32190]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76676; File No. SR-CBOE-2015-099]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of a Proposed Rule Change, as 
Modified by Amendment Nos. 1 and 2, To List and Trade Options That 
Overlie a Reduced Value of the FTSE China 50 Index

December 17, 2015.

I. Introduction

    On October 30, 2015, 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 
thereunder,\2\ a proposed rule change to list and trade options that 
overlie a reduced value of the FTSE China 50 Index. The proposed rule 
change was published for comment in the Federal Register on November 
10, 2015.\3\ The Commission received no comments on the proposed rule 
change. On December 14, 2015, the Exchange filed Amendment No. 1 to the 
proposed rule change.\4\ On December 16, 2015, the Exchange filed 
Amendment No. 2 to the proposed rule change.\5\ This order grants 
approval of the proposed rule

[[Page 79964]]

change, as modified by Amendment Nos. 1 and 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 76354 (November 4, 
2015), 80 FR 69741 (``Notice'').
    \4\ Amendment No. 1 makes certain technical modifications to 
Exhibit 5, and the corresponding cross references in the Form 19b-4, 
due to the recent approval of another proposed rule change (See SR-
CBOE-2015-100, Securities Exchange Act Release No. 76626 (December 
11, 2015), 80 FR 78793 (December 17, 2015)), and to remove a 
reference to ``(1/100th)'' that was inadvertently included. 
Amendment No. 1 conforms a phrase in Exhibit 3 relating to when the 
official closing value of the FTSE China 50 Index is reported by 
FTSE International Limited (``FTSE'') to the corresponding 
description in Form 19b-4. As described in Form 19b-4, the official 
closing value, due to the time zone in Hong Kong and as explained in 
more detail in the rest of the filing and rule text, is on the day 
that the contract expires. Amendment No. 1 also revises rule text to 
make an additional technical edit. As the changes made by Amendment 
No. 1 are technical in nature and do not materially alter the 
substance of the proposed rule change or raise any novel regulatory 
issues, Amendment No. 1 is not subject to notice and comment.
    \5\ Amendment No. 2 corrects a typographical error in Exhibit 4 
of Amendment No. 1. As the change made by Amendment No. 2 is 
technical in nature and does not materially alter the substance of 
the proposed rule change or raise any novel regulatory issues, 
Amendment No. 2 is not subject to notice and comment.
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade A.M. cash-settled, 
European-style options on the FTSE China 50 Index.\6\ According to the 
Exchange, the FTSE China 50 Index is a free float-adjusted market 
capitalization index that is designed to measure the performance of 50 
of the largest and most liquid Chinese stocks listed and trading on the 
Stock Exchange of Hong Kong (``SEHK'').\7\ The Exchange states that the 
index is monitored and maintained by FTSE International Limited 
(``FTSE'').\8\ Adjustments to the index could be made on a daily basis 
with respect to corporate events and dividends, and FTSE reviews the 
index quarterly.
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    \6\ The Exchange proposes to list up to twelve near-term 
expiration months at any one time for the FTSE China 50 Index 
options. The Exchange also proposes to list up to ten expirations in 
Long-Term Index Option Series (LEAPS) on the reduced value of the 
FTSE China 50 Index Options. The Exchange proposes that options on 
the FTSE China 50 Index would be eligible for all other expirations 
permitted for other broad-based indexes (e.g., End of Week/End of 
Month Expirations, Short Term Option Series, and Quarterly Options 
Series). In addition, the Exchange proposes to designate the FTSE 
China 50 Index as eligible for trading as FLEX options.
    \7\ The Exchange states that the FTSE China 50 Index meets the 
definition of a broad-based index as set forth in Exchange Rule 
24.1(i)(1).
    \8\ The Exchange proposes to designate FTSE as the reporting 
authority for the FTSE China 50 Index.
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    According to the Exchange, the FTSE China 50 Index is calculated in 
Hong Kong dollars on a real-time basis during Hong Kong trading hours. 
The methodology used to calculate the FTSE China 50 Index is similar to 
the methodology used to calculate the value of other benchmark market-
capitalization weighted indexes.\9\ Real-time data is distributed at 
least every 15 seconds while the index is being calculated using FTSE's 
real-time calculation engine to Bloomberg L.P. (``Bloomberg''), Thomson 
Reuters (``Reuters'') and other major vendors. End of day data is 
distributed daily to clients through FTSE as well as through major 
quotation vendors, including Bloomberg and Reuters.
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    \9\ Specifically, the FTSE China 50 Index is governed by the 
FTSE Ground Rules for the FTSE China 50 Index. The level of the FTSE 
China 50 Index reflects the free float-adjusted market value of the 
component stocks relative to a particular base date and is computed 
by dividing the total market value of the companies in the FTSE 
China 50 Index by the index divisor. Further detail regarding this 
methodology can be found in the Notice, supra note 3, at n.7 and 
accompanying text.
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    The Exchange proposes that trading hours for FTSE China 50 Index 
options would be from 8:30 a.m. (Chicago time) to 3:15 p.m. (Chicago 
time).
    The Exchange proposes that FTSE China 50 Index options would expire 
on the third Friday of the expiration month.\10\ The exercise 
settlement value would be one-hundredth (1/100th) of the official 
closing value of the FTSE China 50 Index as reported by FTSE on the 
last trading day of the expiring contract, which occurs between 
approximately 3:00 a.m. and 4:00 a.m. (Chicago time). The exercise 
settlement amount would be equal to the difference between the 
exercise-settlement value and the exercise price of the option, 
multiplied by the contract multiplier ($100).\11\ Exercise would result 
in delivery of cash on the business day following expiration.
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    \10\ According to the Exchange, when the last trading day/
expiration date is moved because of an Exchange holiday or closure, 
the last trading day/expiration date for expiring options would be 
the immediately preceding business day.
    \11\ According to the Exchange, if the exercise settlement value 
is not available or the normal settlement procedure cannot be 
utilized due to a trading disruption or other unusual circumstance, 
the settlement value would be determined in accordance with the 
rules and bylaws of The Options Clearing Corporation.
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    The Exchange proposes to create specific initial and maintenance 
listing criteria for options on the reduced value of the FTSE China 50 
Index. Specifically, the Exchange proposes to add new Interpretation 
and Policy .03(a) to Rule 24.2 to provide that the Exchange may trade 
FTSE China 50 Index options if each of the following conditions is 
satisfied: (1) the index is broad-based, as defined in Rule 24.1(i)(1); 
(2) options on the index are designated as A.M.-settled index options; 
(3) the index is capitalization-weighted, price-weighted, modified 
capitalization-weighted or equal dollar-weighted; (4) the index 
consists of 45 or more component securities; (5) each of the component 
securities of the index will have a market capitalization of greater 
than $100 million; (6) no single component security accounts for more 
than fifteen percent (15%) of the weight of the index, and the five 
highest weighted component securities in the index do not, in the 
aggregate, account for more than fifty percent (50%) of the weight of 
the index; (7) non-U.S. component securities (stocks or ADRs) that are 
not subject to comprehensive surveillance agreements do not, in the 
aggregate, represent more than twenty percent (20%) of the weight of 
the index; (8) the Exchange may continue to trade FTSE China 50 Index 
options after trading in all component securities has closed for the 
day and the index level is no longer widely disseminated at least once 
every fifteen (15) seconds by one or more major market data vendors, 
provided that FTSE China 50 futures contracts are trading and prices 
for those contracts may be used as a proxy for the current index value; 
(9) the Exchange reasonably believes it has adequate system capacity to 
support the trading of options on the index, based on a calculation of 
the Exchange's current Independent System Capacity Advisor allocation 
and the number of new messages per second expected to be generated by 
options on such index; and (10) the Exchange has written surveillance 
procedures in place with respect to surveillance of trading of options 
on the index.
    Additionally, the Exchange proposes to add new Interpretation and 
Policy .03(b) to Rule 24.2 to set forth the following maintenance 
listing standards for options on the FTSE China 50 Index: (1) the 
conditions set forth in subparagraphs .03(a) (1), (2), (3), (4), (7), 
(8), (9) and (10) must continue to be satisfied, the conditions set 
forth in subparagraphs .03(a)(5) and (6) must be satisfied only as of 
the first day of January and July in each year; and (2) the total 
number of component securities in the index may not increase or 
decrease by more than ten percent (10%) from the number of component 
securities in the index at the time of its initial listing. In the 
event a class of index options listed on the Exchange pursuant to 
Interpretation and Policy .03(b) fails to satisfy these maintenance 
listing standards, the Exchange shall not open for trading any 
additional series of options of that class unless the continued listing 
of that class of index options has been approved by the Commission 
under Section 19(b)(2) of the Act.
    The contract multiplier for the FTSE China 50 Index options would 
be $100. The FTSE China 50 Index options would be quoted in index 
points and one point would equal $100. The Exchange proposes that the 
minimum tick size for series trading below $3 would be 0.05 ($5.00), 
and at or above $3 would be 0.10 ($10.00). The Exchange also proposes 
that the strike price interval for FTSE China 50 Index options would be 
no less than $5, except that the strike price interval would be no less 
than $2.50 if the strike price is less than $200.
    The Exchange proposes to apply the default position limits for 
broad-based index options of 25,000 contracts on the same side of the 
market (and 15,000 contracts near-term limit) to FTSE China 50 Index 
options. All position limit hedge exemptions would apply. The exercise 
limits for FTSE China 50 Index options would be equivalent to the 
position limits for those options. In

[[Page 79965]]

addition, the Exchange proposes that the position limits for FLEX 
options on the FTSE China 50 Index would be equal to the position 
limits for non-FLEX options on the FTSE China 50 Index. The exercise 
limits for FLEX options on the FTSE China 50 Index would be equivalent 
to the position limits for those options.
    The Exchange states that, except as modified by the proposal, 
Exchange Rules in Chapters I through XIX, XXIV, XXIVA, and XXIVB would 
equally apply to FTSE China 50 Index options. The Exchange also states 
that FTSE China 50 Index options would be subject to the same rules 
that currently govern other CBOE index options, including sales 
practice rules, margin requirements,\12\ and trading rules.\13\
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    \12\ The Exchange states that FTSE China 50 Index options would 
be margined as broad-based index options.
    \13\ See, e.g., Exchange Rule Chapters IX (Doing Business with 
the Public), XII (Margins), IV (Business Conduct), VI (Doing 
Business on the Exchange Floor), VIII (Market-Makers, Trading Crowds 
and Modified Trading Systems), and XXIV (Index Options).
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    The Exchange represents that it has an adequate surveillance 
program in place for FTSE China 50 Index options and intends to use the 
same surveillance procedures currently utilized for each of the 
Exchange's other index options to monitor trading in the proposed 
options. The Exchange also states that it is a member of the 
Intermarket Surveillance Group, is an affiliate member of the 
International Organization of Securities Commissions, and has entered 
into various comprehensive surveillance agreements and/or Memoranda of 
Understanding with various stock exchanges, including SEHK. Finally, 
the Exchange represents that it believes it and the Options Price 
Reporting Authority (``OPRA'') have the necessary systems capacity to 
handle the additional traffic associated with the listing of new series 
that would result from the introduction of FTSE China 50 Index 
options.\14\
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    \14\ For a complete description of the Exchange's proposal, 
please see the Notice, supra note 3.
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III. Discussion and Commission Findings

    The Commission finds that the proposed rule change, as modified by 
Amendment Nos. 1 and 2, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange.\15\ Specifically, the Commission finds that the 
proposed rule change, as modified by Amendment Nos. 1 and 2, is 
consistent with Section 6(b)(5) of the Act,\16\ 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.
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    \15\ In approving this proposed rule change, as modified by 
Amendments Nos. 1 and 2, the Commission has considered the proposed 
rule's impact on efficiency, competition, and capital formation. See 
15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the listing and trading of FTSE China 
50 Index options will broaden trading and hedging opportunities for 
investors by providing an options instrument based on an index designed 
to measure the performance of 50 of the largest and most liquid Chinese 
stocks listed and trading on SEHK. Moreover, the Exchange states that 
FTSE China 50 ETFs, such as the iShares China Large-Cap exchange traded 
fund (``FXI''), are actively-traded products. The Exchange also lists 
actively-traded options overlying those ETFs and states that those 
options are actively traded as well.
    Because the FTSE China 50 Index is a broad-based index composed of 
actively-traded, well-capitalized stocks, the trading of options on the 
index does not raise unique regulatory concerns. The Commission 
believes that the listing standards, which are created specifically and 
exclusively for the index, are consistent with the Act, for the reasons 
discussed below.
    The Commission notes that proposed Interpretation and Policy .03 to 
Exchange Rule 24.2 would require that the FTSE China 50 Index consist 
of 45 or more component securities. Further, for options on the FTSE 
China 50 Index to trade, each of the minimum of 45 component securities 
would need to have a market capitalization of greater than $100 
million.
    The Commission notes that the proposed listing standards for 
options on the FTSE China 50 Index would not permit any single 
component security to account for more than 15% of the weight of the 
index, and would not permit the five highest weighted component 
securities to account for more than 50% of the weight of the index in 
the aggregate. The Commission believes that, in view of the requirement 
on the number of securities in the index and on each security's market 
capitalization, this concentration standard is consistent with the Act. 
As noted above, the Exchange represents that it has an adequate 
surveillance program in place for FTSE China 50 Index options and 
intends to use the same surveillance procedures currently utilized for 
each of the Exchange's other index options to monitor trading in the 
proposed options.
    The Commission notes that, consistent with the Exchange's generic 
listing standards for broad-based index options, non-U.S. component 
securities of the FTSE China 50 Index that are not subject to 
comprehensive surveillance agreements will not, in the aggregate, 
represent more than 20% of the weight of the index.
    The Exchange states that, because trading in the components of the 
FTSE China 50 Index starts at approximately 8:30 p.m. (Chicago time) 
(prior day) and ends at approximately 3:00 a.m. (Chicago time) (next 
day), there will not be a current FTSE China 50 Index level calculated 
and disseminated while FTSE China 50 Index options would be traded 
(from approximately 8:30 a.m. (Chicago time) to 3:15 p.m. (Chicago 
time)). However, the listing standards state that the Exchange may 
continue to trade FTSE China 50 Index options after trading in all 
component securities has closed for the day and the index level is no 
longer widely disseminated at least once every 15 seconds by one or 
more major market data vendors, provided that FTSE China 50 futures 
contracts are trading and prices for those contracts may be used as a 
proxy for the current index value. The Exchange states that during time 
that the options would be trading on the exchange, E-Mini FTSE China 50 
Index futures contracts will be trading and that the futures prices 
would be a proxy for the current FTSE China 50 Index level during this 
time period.\17\
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    \17\ The Exchange states that E-Mini FTSE China 50 Index futures 
contracts are listed for trading on the Chicago Mercantile Exchange 
Inc.
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    In addition, the proposed listing standards require the Exchange to 
reasonably believe that it has adequate system capacity to support the 
trading of options on the FTSE China 50 Index. As noted above, the 
Exchange represents that it believes it and the OPRA have the necessary 
systems capacity to handle the additional traffic associated with the 
listing of new series that would result from the introduction of FTSE 
China 50 Index options.
    As a national securities exchange, the Exchange is required, under 
Section 6(b)(1) of the Act,\18\ to enforce compliance by its members, 
and persons associated with its members, with the provisions of the 
Act, Commission rules and regulations thereunder, and its own

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rules. As noted above, the Exchange states that, except as modified by 
the proposal, Exchange Rules in Chapters I through XIX, XXIV, XXIVA, 
and XXIVB would equally apply to FTSE China 50 Index options. The 
Exchange also states that FTSE China 50 Index options would be subject 
to the same rules that currently govern other CBOE index options, 
including sales practice rules, margin requirements, and trading rules.
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    \18\ 15 U.S.C. 78f(b)(1).
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    The Commission further believes that the Exchange's proposed 
position and exercise limits, trading hours, margin, strike price 
intervals, minimum tick size, series openings, and other aspects of the 
proposed rule change, as modified by Amendment Nos. 1 and 2, are 
appropriate and consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-CBOE-2015-099), as modified 
by Amendment Nos. 1 and 2, be, and hereby is, approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-32190 Filed 12-22-15; 8:45 am]
BILLING CODE 8011-01-P