Document ID: SEC-2014-1229-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2014-07-22T04:00Z

[Federal Register Volume 79, Number 140 (Tuesday, July 22, 2014)]
[Notices]
[Pages 42616-42619]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-17145]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72621; File No. SR-CBOE-2014-057]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the Customized Option Pricing Service

July 16, 2014.
    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 July 3, 2014, Chicago Board Options Exchange, Incorporated (the 
``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change 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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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Chicago Board Options Exchange, Incorporated (the ``Exchange'' or 
``CBOE'') proposes various changes to the Customized Option Pricing 
Service (``COPS''). The text of the proposed rule change is available 
on the Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

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 Exchange 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 these 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 aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to describe various 
changes to COPS\3\. The Exchange is not proposing to change the fees 
for COPS data.
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    \3\ See Securities Exchange Act Release No. 67813 (September 10, 
2012), 77 FR 56903 (September 14, 2012) (SR-CBOE-2012-083), 
Securities Exchange Act Release No. 67928 (September 26, 2012), 77 
FR 60161 (October 2, 2012) (SR-CBOE-2012-090), Securities Exchange 
Act Release No. 70705 (October 17, 2013), 78 FR 63265 (October 23, 
2013) (SR-CBOE-2013-097), and Securities Exchange Act Release No. 
70845 (November 12, 2013), 78 FR 69168 (November 18, 2013) (SR-CBOE-
2013-104).
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Background
    COPS provides market participants with an ``end-of-day'' \4\ file 
and ``historical'' \5\ files of valuations for Flexible Exchange 
(``FLEX'')\6\ options and certain over-the-counter (``OTC'') options 
(collectively, ``COPS Data''). Market Data Express, LLC (``MDX''), an 
affiliate of CBOE, offers COPS Data for sale to all market 
participants. COPS Data is available to ``Subscribers'' for internal 
use and internal distribution only, and to ``Customers'' who, pursuant 
to a written vendor agreement between MDX and a Customer, may 
distribute the Data externally (i.e., act as a vendor) and/or use and 
distribute the Data internally.
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    \4\ ``End of day'' refers to data that is distributed prior to 
the opening of the next trading day.
    \5\ ``Historical'' COPS data consists of COPS data that is over 
one month old (i.e., copies of the ``end-of-day'' COPS file that are 
over one month old).
    \6\ FLEX options are exchange traded options that provide 
investors with the ability to customize basic option features 
including size, expiration date, exercise style, and certain 
exercise prices.
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    COPS Data consists of indicative \7\ values for three categories of 
``customized'' options. The first category of options is all open 
series of FLEX options listed on any exchange that offers FLEX options 
for trading.\8\ The second category is OTC options that have the same 
degree of customization as FLEX options. The third category includes 
options with strike prices expressed in percentage terms. Values for 
such options are expressed in percentage terms and are theoretical 
values.\9\
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    \7\ ``Indicative'' values are indications of potential market 
prices only and as such are neither firm nor the basis for a 
transaction.
    \8\ Current FLEX options open interest spans over 2,000 series 
on over 300 different underlying securities.
    \9\ These values are theoretical in that they are indications of 
potential market prices for options that have not traded (i.e. do 
not yet exist). Market participants sometimes express option values 
in percentage terms rather than in dollar terms because they find it 
is easier to assess the change, or lack of change, in the 
marketplace from one day to the next when values are expressed in 
percentage terms.

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[[Page 42617]]

    The Exchange uses values produced by CBOE registered market-makers 
to produce COPS Data. Participating CBOE market-makers submit values to 
MDX on options series specified by MDX on a daily basis. These values 
are generated by the market-maker's internal pricing models. The 
valuations that MDX ultimately publishes are an average of multiple 
contributions of values from participating CBOE market-makers. For each 
value provided by MDX through COPS, MDX includes a corresponding 
indication of the number of market-maker contributors that factored 
into that value.
    CBOE market-makers that meet the following objective qualification 
criteria are allowed to contribute values to MDX for purposes of 
producing COPS Data. Interested CBOE market-makers must be approved by 
the Exchange, have the ability to provide valuations to MDX in a timely 
manner each day after the close of trading, and sign a services 
agreement with CBOE. Interested CBOE market-makers must also have the 
ability to provide valuations on several different types of options, 
including (i) options on all open FLEX series traded on any exchange 
that offers FLEX options for trading, (ii) options on any potential new 
FLEX options series, (iii) OTC options that have the same degree of 
customization as FLEX options, and (iv) customized options where the 
strike price is expressed in percentage terms (the valuations provided 
to MDX must also be expressed in percentage terms). In addition, 
interested CBOE market-makers must participate in a testing phase with 
MDX. The values submitted by a market-maker during the testing phase 
and in live production must meet MDX's quality control standards 
designed to ensure the integrity and accuracy of COPS Data. MDX has 
implemented procedures including monthly performance reviews to help 
ensure the integrity and accuracy of COPS Data.
    To help ensure that MDX receives numerous values from multiple 
market-makers on a consistent basis, MDX shares revenue from the sale 
of COPS Data with participating CBOE market-makers. The amount of 
revenue that MDX shares with participating market-makers does not 
exceed thirty percent (30%) of the total revenue received by MDX from 
the sale of COPS Data. The revenue sharing is based on the following 
table:

------------------------------------------------------------------------
Number of participating market-   Total revenue   Rev. share per market-
            makers               share (percent)           maker
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3.............................                21  7%
4.............................                24  6%
5 or more.....................                30  30% divided by the
                                                   number of
                                                   participating market-
                                                   makers
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    If only three market-makers participate, MDX shares 21% of total 
revenue with each market-maker receiving a 7% share. If four market-
makers participate, MDX shares 24% of total revenue with each market-
maker receiving a 6% share. If five or more market-makers participate, 
MDX shares 30% of total revenue divided equally among the market-
makers. There are currently three participating market-makers.\10\
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    \10\ In order to help ensure that participating market-makers 
submit values to MDX on 100% of the series to be valued, a market-
maker's revenue share is reduced as follows:
    There is one ``grace day'' per month, i.e., if a market-maker 
does not submit values for 100% of the series on just one day within 
a given month, that market-maker will not lose any portion of its 
revenue share for that month.
    If a market-maker submits values for less than 100% of the 
series on any two days within a month, that market-maker will 
forfeit 10% of its revenue share for that month.
    If a market-maker submits values for less than 100% of the 
series on any three days within a month, that market-maker will 
forfeit 25% of its revenue share for that month.
    If a market-maker submits values for less than 100% of the 
series on any four days within a month, that market-maker will 
forfeit 50% of its revenue share for that month.
    If a market-maker submits values for less than 100% of the 
series on any five days within a month, that market-maker will 
forfeit 75% of its revenue share for that month.
    If a market-maker submits values for less than 100% of the 
series on any six or more days within a month, that market-maker 
will forfeit 100% of its revenue share for that month.
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    The fees that MDX charges for COPS Data are set forth on the Price 
List on the MDX Web site (www.marketdataexpress.com) (``MDX Web 
site''). MDX currently charges a fee per option per day for ``end-of-
day'' COPS data. The amount of the fee is reduced based on the number 
of options purchased. MDX charges Customers and Subscribers $1.25 per 
option per day for each option purchased up to 50 options, $1.00 per 
option per day for each option purchased from 51 to 100 options, $0.75 
per option per day for each option purchased from 101 to 500 options, 
and $0.50 per option per day for each option purchased over 500 
options. MDX charges Customers and Subscribers $75 per day for 
``historical'' COPS data. Customers are not currently charged any fees 
for their external distribution of COPS Data.
Proposal
    The Exchange proposes a number of changes to COPS for the purpose 
of improving COPS to potentially make it more appealing to a wider 
group of users. First, the Exchange proposes to provide additional data 
through COPS. Specifically, COPS would also provide indicative values 
for ``exotic'' options. Exotic options are options which are generally 
traded OTC and are more complex than standard options, usually relating 
to determination of payoff.\11\ An exotic option may also include a 
non-standard underlying instrument, developed for a particular client 
or for a particular market. In addition to exotic option values, the 
Exchange also proposes to provide an implied volatility value with each 
option value provided by COPS.
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    \11\ For example, the payoff at expiration of an exotic option 
may depend not just on the value of the underlying instrument at 
expiration, but at its value at several times during the contract's 
life.
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    Second, the Exchange proposes to allow any CBOE Trading Permit 
Holder (``TPH'') that meets the COPS qualification criteria to 
contribute values to MDX for purposes of producing COPS Data. Third, 
the Exchange proposes to amend the COPS qualification criteria to add 
new criteria. Specifically, interested CBOE TPHs must also have the 
ability to provide valuations on exotic options and an implied 
volatility value with each option value provided.
    Fourth, the Exchange proposes to specify a daily deadline for COPS 
customers to submit requests for new options series to be priced by 
COPS that day. Currently, COPS customers may request pricing for 
options that are not already priced by COPS by submitting an email 
request to MDX. The request must be submitted by a specified time each 
day in order for the requested option to be priced by COPS that day 
(currently, this deadline is 11:00 a.m.

[[Page 42618]]

CT). The Exchange proposes that MDX may change this deadline from time 
to time by publishing the deadline and notice of changes to the 
deadline on the MDX Web site.
    Finally, in order to attract new TPH contributors to COPS, and in 
light of significantly increased responsibilities such as pricing 
exotic options, the Exchange proposes to amend the compensation paid to 
COPS contributors. The Exchange proposes to temporarily change COPS 
contributor compensation from the revenue sharing plan described above 
to a fixed payment structure.\12\ MDX would pay a maximum of five 
contributing TPHs a monthly fixed amount for the first six months of 
the enhanced COPS program, or until annual COPS revenue exceeds 
$1,000,000, whichever comes first. MDX would pay each of the three 
current COPS contributors $12,000 per month and each of two new 
contributors $7,000 per month. The purpose of the fixed monthly fee 
would be to help contributors offset the cost of development work they 
would likely need to complete in order to price exotic options. The 
three current contributors would receive a higher monthly payment than 
the new contributors because the current contributors have been a part 
of the COPS program since its inception and have been working with MDX 
to build the program. The Exchange proposes to limit the number of COPS 
contributors to five during this initial period because the Exchange 
believes five contributors is an ideal number to provide significant 
price discovery yet not too dilutive as to diminish interest among TPHs 
in participating in COPS.
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    \12\ The Exchange is not proposing to eliminate the revenue 
share plan, only to suspend it temporarily as described herein.
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    The three current contributors would be ``grandfathered'' into the 
enhanced COPS program and the new compensation structure. The two new 
contributor positions would be open to all TPHs (announced via 
regulatory circular) and filled during a trial period. Of all the TPHs 
that try out for the two new positions, the top two TPHs that have the 
highest weighted average \13\ contributions over the course of the 
trial period would be added to the program, assuming continued 
adherence to COPS quality control standards.
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    \13\ MDX would publish on its Web site a description of the 
methodology used for averaging the values submitted by TPHs to 
produce a single publishable value (which methodology may change 
from time to time). MDX intends to use a weighted average 
methodology. A weighted average is an average in which each quantity 
to be averaged (in this case each value submitted by a contributor) 
is assigned a weight. These weightings determine the relative 
importance of each quantity on the average.
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    MDX would transition back to the original revenue share plan 
described above after this initial six month period (or until annual 
COPS revenue exceeds $1,000,000, whichever comes first), unless annual 
COPS revenue exceeds $2,000,000, in which case the percentage of total 
COPS revenue shared with contributors would increase from 30% to 32% if 
a new contributor is added to COPS.\14\ In subsequent years, if the 
previous year's COPS revenue increases by $1,000,000 or more, the 
percentage of total COPS revenue shared with contributors would 
increase by 2% if an additional contributor is added to COPS. The total 
number of COPS contributors would ultimately be limited to fifteen. The 
Exchange believes limiting the number of contributors to fifteen would 
help keep the revenue share of each TPH at a level sufficient to 
maintain TPH interest in participating in COPS and incent them to 
produce high quality valuations. The Exchange further believes that the 
value of additional contributor prices beyond fifteen would be very 
limited.
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    \14\ The addition of new contributors would be accomplished 
through the same try out mechanism described above. This try out 
mechanism would also be used if a contributor is removed from COPS, 
or voluntarily leaves the program.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\15\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \16\ requirements that the rules of an exchange be 
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 regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, 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. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \17\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
    \17\ Id.
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    In adopting Regulation NMS, the Commission granted self-regulatory 
organizations and broker-dealers increased authority and flexibility to 
offer new and unique market data to the public. It was believed that 
this authority would expand the amount of data available to consumers, 
and also spur innovation and competition for the provision of market 
data. The Exchange believes the proposal to provide exotic option and 
implied volatility values through COPS is in keeping with those 
principles by promoting increased transparency through the 
dissemination of useful data and also by clarifying its availability to 
market participants.
    The Exchange believes the proposed rule change is not designed to 
permit unfair discrimination between CBOE TPHs because it would allow 
any CBOE TPH that meets the COPS qualification criteria to participate 
in COPS (assuming continued adherence to COPS quality control 
standards). Expanding eligibility for COPS to all CBOE TPHs may result 
in more contributors, which should help improve the quality of COPS 
Data.
    The Exchange believes the proposal to add new COPS qualification 
criteria is consistent with the protection of investors and the public 
interest in that it would help ensure that only TPHs who are able to 
produce quality valuations for all categories of COPS Data are allowed 
to participate in the program.
    The Exchange believes the proposal to specify a daily deadline for 
customers to submit requests for new options series to be priced by 
COPS is consistent with just and equitable principles of trade because 
it would provide MDX and contributors with enough time to price the new 
options series the same day.
    The Exchange believes the proposal to grandfather the three current 
contributors into the enhanced COPS program and pay them a higher fixed 
monthly fee than new contributors for a limited period of time is not 
unfairly discriminatory because the current contributors have been a 
part of COPS since its inception and have helped MDX build the program. 
For example, in advance of the COPS launch in January 2013, the current 
contributors participated in trial runs with MDX to help ensure their 
values were in line with MDX's expectations. The current contributors 
also helped MDX work out the flow of the daily file transfer process 
(MDX delivers to contributors a file of options series to be priced, 
the contributors return the file including their option values). In 
addition,

[[Page 42619]]

contributors have assisted MDX with promotion of COPS. Through these 
efforts, the current contributors have helped MDX lay the ground work 
for new contributors to join COPS. The Exchange believes limiting the 
number of COPS contributors to five initially, and ultimately to 
fifteen, is not unfairly discriminatory because all TPHs would be 
eligible to try out for the limited COPS contributor positions and to 
be selected if they perform best during a trial period.

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 that is not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change would 
allow the Exchange, through MDX, to disseminate COPS Data on a 
voluntary basis. COPS is voluntary on the part of the Exchange, which 
is not required to offer such services, and voluntary on the part of 
prospective customers who are not required to use it. The Exchange 
notes there are at least a small number of market data vendors that 
produce option value data that is similar to COPS Data and market data 
users may elect to buy these other products if they choose.\18\ The 
Options Clearing Corporation (``OCC'') also produces FLEX option value 
data that is similar to the FLEX option value data that is included in 
COPS.\19\ The Exchange believes the proposed COPS enhancements may help 
attract new customers to COPS and new order flow to the Exchange, 
thereby improving the Exchange's ability to compete in the market for 
options order flow and executions.
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    \18\ These vendors include SuperDerivatives, Markit, Prism, and 
Bloomberg's BVAL service.
    \19\ The OCC makes this data available on its Web site at http://www.theocc.com/webapps/flex-reports.
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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 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing rule does not (i) significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest, provided that the self-regulatory organization 
has given the Commission written notice of its intent to file the 
proposed rule change at least five business days prior to the date of 
filing of the proposed rule change or such shorter time as designated 
by the Commission,\20\ the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \21\ and Rule 19b-4(f)(6) 
thereunder.\22\ At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
such rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act. If 
the Commission takes such action, the Commission will institute 
proceedings to determine whether the proposed rule change should be 
approved or disapproved.
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    \20\ The Exchange has fulfilled this requirement.
    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f)(6).
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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

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2014-057 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2014-057. This file 
number should be included on the subject line if email 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 
10:00 a.m. and 3:00 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-2014-057 and should be 
submitted on or before August 12, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-17145 Filed 7-21-14; 8:45 am]
BILLING CODE 8011-01-P