Source: http://www.thefederalregister.com/d.p/2003-11-26-03-29577
Timestamp: 2013-05-21 22:53:09
Document Index: 326531942

Matched Legal Cases: ['art 7114', 'art 3944', 'art 6726', 'art 140', 'art 5250', 'art 1739', 'art 30206', 'art 514', 'art 9740', 'art 180']

14 CFR Part 7114 CFR Part 3944 CFR Part 6726 CFR Part 140 CFR Part 5250 CFR Part 1739 CFR Part 30206 CFR Part 514 CFR Part 9740 CFR Part 180	Federal Register: November 26, 2003 (Volume 68, Number 228)
DOCID: FR Doc 03-29577
DOCUMENT ID: [Release No. 34-48807; File No. SR-CBOE-2003-40]
SUBJECT CATEGORY: November 19, 2003. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on September 12, 2003, the Chicago Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I, II and III below, which Items have been prepared by the CBOE. On November 18, 2003, the CBOE filed Amendment No. 1 to the proposed rule change.\3\ The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. DOCUMENT SUMMARY: --------------------------------------------------------------------------- \1\ U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b4.
\3\ See letter from Jim Flynn, Attorney, CBOE, to Florence
Harmond, Senior Special Counsel, Division of Market Regulation
(``Division''), Commission, dated November 18, 2003 (``Amendment No.
1''). Amendment No. 1 revises the original rule filing by defining
the reporting authority and terms of these index option contracts,
including that the interval between strike prices shall be no less
than $2.50, and accordingly replaces CBOE's original Exhibit A.
I. SelfRegulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange hereby proposes to amend certain of its rules to
provide for the listing and trading of options on several volatility
indexes; specifically: the CBOE Volatility Index (``VIX''); the CBOE
Nasdaq 100'' Volatility Index (``VXN''); and the CBOE Dow Jones
Industrial Average'' Volatility Index (``VXD''). Options on each index would [[Page 66517]]
be cashsettled and will have Europeanstyle expiration. The text of
the proposed rule change is available at the Office of the Secretary, CBOE, and at the Commission.
II. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the CBOE included statements
to list and trade cashsettled, Europeanstyle options on the VIX, VXN,
and VXD. The calculation of each index is based on a recently developed
methodology that builds upon the calculation of the original CBOE
Market Volatility Index, which is based on S&P 100'' Index option
(``OEX'') quotes. Introduced by CBOE in September 2003, the revised VIX
is an index that uses the quotes of certain S&P 500 Index[reg]
(``SPX''[reg]) option series to derive a measure of the volatility of
the U.S. equity market. It provides investors with uptotheminute
market estimates of expected volatility by extracting implied
volatilities from realtime index option bid/ask quotes. The VIX is
quoted in percentage points per annum. For example, an index level of
30.34 (the closing value from December 31, 2002) represents an
annualized volatility of 30.34%. This new methodology will also be used to calculate VXN and VXD values.
Each indexVIX, VXN, and VXDwill be calculated using realquotes
of the nearby and second nearby index puts and calls of the SPX, the
Nasdaq 100 Index (``NDX'''), and the Dow Jones Industrial Index
(``DJX'''), respectively. For options on each respective volatility
index, the nearby index option series are defined as the series with
the shortest time to expiration, but with at least eight (8) calendar
days to expiration. The second nearby index option series are the
series for the subsequent expiration month. Thus, with eight days left
to expiration, an index will ``roll'' to the second and third contract months. For each contract month, CBOE will determine the atthemoney
strike price. It will then select the atthemoney and outofthe money
series with nonzero bid prices and determine the midpoint of the bid
ask quote for each of these series. The midpoint quote of each series
is then weighted so that the further away that series is from the at
themoney strike, the less weight that is accorded to the quote. Then,
to compute the index level, CBOE will calculate a volatility measure
for the nearby options and then for the second nearby options. This is
done using the weighted midpoint of the prevailing bidask quotes for
all included option series with the same expiration date. These
volatility measures are then interpolated to arrive at a single, constant 30day measure of volatility. As described above, each volatility index option will be structured
as an option on a group of securities, namely options on the SPX, NDX,
or DJX indexes and by extension the stocks underlying each respective
index. The CBOE will use the actual quotes of specific index options to
derive each corresponding volatility index. The underlying index
options themselves are securities and are based on an index of the
broader number of underlying securities.\4\ Thus, the pricing
components underlying the Index options will include the SPX, NDX, or
DJX options and, by extension, the component stocks of each index.
These pricing components will provide a measure of the volatility of
price movements of the SPX, NDX, or DJX stock indexes. This structure
is similar to the approach used by CBOE for its interest rate
options.\5\ Those products use the quotes of debt securities to derive
an interest rate yield, which is converted into a measure that serves
as the underlying for options. In the case of Index options, quotes
from index option securities, which reflect a measure of stock price
movements of the SPX, NDX and DJX stocks, will be used to derive a
measure of volatility that will be the underlying for the respective volatility index options.
\4\ 500 securities in the SPX, 100 securities in the NDX, etc.
\5\ See Securities Exchange Act Release Nos. 26938 (June 15,
1989), 54 FR 26285 (June 22, 1989); and 33106 (October 26, 1993), 54 FR 58358 (November 1, 1993). The CBOE will compute each index on a realtime basis throughout
each trading day, from 8:30 AM until 3:15 PM (Chicago Time) CST. CBOE
has calculated historical index values for the new VIX back to January
2, 1990. As of December 31, 2002, the closing values for each
respective index were as follows: (1) VIX: 30.34; (2) VXN: 46.94; and
(3) VXD: 31.81. Volatility index levels will be calculated by CBOE and
disseminated at 15second intervals to market information vendors via the Options Price Reporting Authority (``OPRA'').
Strike prices will be set to bracket the index in 2\1/2\ point
increments; thus, the interval between strike prices will be no less
than $2.50.\6\ The minimum tick size for series trading below $3 will
be 0.05 and for series trading above $3 the minimum tick will be 0.10.
The trading hours for options on the volatility indexes will be from 8:30 a.m. to 3:15 p.m. (Chicago Time) CST.\7\ \6\ See supra note 3.
\7\ See Exhibit B to the proposed rule change filed by CBOE,
presents proposed contract specifications for VIX options, Exhibit C
presents proposed contract specifications for VXN options; and,
Exhibit D presents proposed contract specifications for VXD options, of the proposed rule filing, which set out the contract specifications for each product.
The proposed options on each index will expire 30 days prior to the
expiration date of the options used in the calculation of that index.
For example, September 2003 VIX options would expire on Wednesday,
September 17, 2003, exactly 30 days prior to the expiration of the
October 2003 SPX options, which would be the only options used in the
VIX calculation on that date. Trading in the expiring contract month
will normally cease at 3:15 PM (Chicago Time) (CST) on the last day of
trading. Exercise will result in delivery of cash on the business day
following expiration. VIX, VXN and VXD options will be A.M.settled.
The exercise settlement value will be determined by a Special Opening
Quotation (``SOQ'') of each respective volatility index calculated from
the sequence of opening prices of the options that comprise that index.
The opening price for any series in which there is no trade shall be
the average of that option's bid price and ask price as determined at the opening of trading. The exercisesettlement amount is equal to the difference between
the exercisesettlement value and the exercise price of the option,
multiplied by $100. When the last trading day is moved because of
Exchange holidays, the last trading day for expiring options [[Page 66518]]
will be the day immediately preceding the last regularlyscheduled trading day.
Exchange represents that these surveillance procedures are adequate to
monitor the trading of options on these volatility index. For
surveillance purposes, the Exchange will have complete access to
information regarding trading activity in the pertinent underlying securities.
The Exchange proposes to establish position limits for options on
each volatility indexVIX, VXN and VXDat 25,000 contracts on either
side of the market and no more than 15,000 of such contracts may be in
series in the nearest expiration month.\8\ The Exchange states that
this is consistent with Exchange Rule 24.4 (Position Limits for Broad Based Index Options).
\8\ This is consistent with Exchange 24.4 (Position Limits for BroadBased Index Options).
Except as modified herein, the Exchange Rules in Chapter XXIV will
be applicable to the VIX, VXN, and VXD options. Each volatility index
will be classified as a ``broadbased index'' and, under CBOE margin
rules, specifically, Exchange Rule 12.3(c)(5)(A), the margin
requirement for a short put or call on the respective volatility
indexes shall be 100% of the current market value of the contract plus up to 15% of the respective underlying index value. Additionally, CBOE affirms that it possesses the necessary systems
capacity to support new series that would result from the introduction
of VIX, VXN and VXD options. CBOE also has been informed that OPRA has the capacity to support such new series.\9\
\9\ See Exhibit E to the proposed rule change filed by CBOE,
which set out the contract specifications for each product. 2. Statutory Basis CBOE believes that the proposed rule change, as amended, is
consistent with Section 6(b) of the Act \10\ in general and furthers
the objectives of Section 6(b)(5),\11\ in particular, in that it will
permit trading in options based VIX, VXN, and VXD on the volatility
indices pursuant to rules designed to prevent fraudulent and
manipulative acts and practices and to promote just and equitable
principles of trade, and thereby will provide investors with the ability to invest in options based on an additional index. \10\ 15 U.S.C. 78f(b). \11\ 15 U.S.C. 78f(b)(5).
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the
be appropriate and publishes its reasons for so finding or (ii) as to which the CBOE consents, the Commission will: A. By order approve the proposed rule change, or
change, as amended, is consistent with the Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW, Washington,
DC 205490609. Copies of the submission, all subsequent amendments, all
copying at the Commission's Public Reference Room. Copies of such
principal office of the Exchange. All submissions should refer to File
No. SRCBOE200340 and should be submitted by December 17, 2003.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\12\ \12\ 17 CFR 200.303(a)(12). Margaret H. McFarland, Deputy Secretary. [FR Doc. 0329577 Filed 112503; 8:45 am]
SUMMARY: Chicago Board Options Exchange, Inc., DOCUMENT BODY 2: --------------------------------------------------------------------------- \1\ U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b4.