80 FR 44403 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Granting Approval of Proposed Rule Change To Expire CBOE Volatility Index Options Every Week

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 143 (July 27, 2015)

[Federal Register Volume 80, Number 143 (Monday, July 27, 2015)]
[Notices]
[Pages 44403-44405]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-18274]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75501; File No. SR-CBOE-2015-050]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change To Expire 
CBOE Volatility Index Options Every Week

July 21, 2015.

I. Introduction

    On June 1, 2015, 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 expire CBOE Volatility Index 
(``VIX'') options every week. The proposed rule change was published 
for comment in the Federal Register on June 12, 2015.\3\ The Commission 
received no comments on the proposed rule change. This order grants 
approval of the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 75120 (June 8, 
2015), 80 FR 33574 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    In February 2006, CBOE began trading options that expire monthly on 
the VIX, which measures a 30-day period of implied volatility. 
Currently, standard VIX options expire once a month. CBOE now proposes 
to expire 30-day VIX options every week. According to CBOE, VIX options 
would continue to trade as they do today and they would be subject to 
all of the same rules that they are subject to today, except as 
proposed to be modified by the proposed rule change.\4\
---------------------------------------------------------------------------

    \4\ See Notice, supra note 3, at 33574.
---------------------------------------------------------------------------

    CBOE notes that, in its capacity as the Reporting Authority, it 
enhanced the VIX Index (cash/spot value) to include P.M.-settled S&P 
500 Index End-of-Week expirations (``SPXWs'') in 2014.\5\ According to 
CBOE, the inclusion of SPXWs allows the VIX Index to be calculated with 
SPX option series that most precisely match the 30-day target timeframe 
for expected volatility that the VIX Index is intended to represent. 
CBOE further states that using SPX options with more than 23 days and 
less than 37 days to expiration ensures that the VIX Index will always 
reflect an interpolation of two points along the S&P 500 Index 
volatility term structure.\6\
---------------------------------------------------------------------------

    \5\ See Notice, supra note 3, at 33574-75. CBOE notes that this 
enhancement did not impact the exercise settlement value for VIX 
options and futures, which continue to use the same VIX Index 
formula and the opening prices of standard (i.e., third Friday 
expiration) S&P 500 Index (``SPX'') option series with 30 days to 
expiration. See id. at 33575, n.5.
    \6\ See Notice, supra note 3, at 33574-75. See also the VIX 
White Paper available at https://www.cboe.com/micro/vix/vixwhite.pdf 
for a detailed description about the VIX Index methodology.
---------------------------------------------------------------------------

    The last trading day for expiring standard VIX options is the 
business day immediately prior to their expiration date. The expiration 
date for VIX options is pegged to the standard (third Friday) SPX 
option expiration in the subsequent month. According to CBOE, the 
expiration date is on the Wednesday that is 30 days prior to the third 
Friday of the calendar month immediately following the month in which 
the VIX option expires.\7\ CBOE (as the Reporting Authority for VIX 
options) calculates the exercise settlement value for expiring VIX 
options on their expiration date.\8\
---------------------------------------------------------------------------

    \7\ See Notice, supra note 3, at 33575. If the Friday in the 
subsequent month is an Exchange holiday this standard Wednesday VIX 
option expiration is changed to be the business day that is thirty 
days prior to the Exchange business day immediately preceding that 
Friday. See id.
    \8\ See CBOE Rule 24.9(a)(5) (setting forth the method of 
determining the day on which the exercise settlement value will be 
calculated for VIX options and determining the expiration date and 
last trading day for VIX options). See also Notice, supra note 3, at 
33575.

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

[[Page 44404]]

    The Exchange now proposes to expire VIX options each Wednesday.\9\ 
According to CBOE, the new VIX expirations would be series of the 
existing VIX option class. Similar to the CBOE Short-Term Volatility 
Index (``VXST''),\10\ however, different types of SPX options would be 
used to calculate and settle VIX options. Specifically, CBOE states 
that, as today, the standard (monthly) VIX option expirations would be 
calculated using A.M.-settled SPX options that expire on the third 
Friday in the subsequent month and the period of implied volatility 
covered by these contracts would be exactly 30 days. The new weekly VIX 
option expirations would be calculated using P.M.-settled SPXWs that 
expire in 30 days and the period of implied volatility by these 
contracts would be 30 days, plus 390 minutes.\11\
---------------------------------------------------------------------------

    \9\ CBOE notes that it is currently unable to list weekly VIX 
options under its other weekly option programs because those 
programs require that weekly options expire on Fridays and VIX 
options expire on Wednesdays. See Notice, supra note 3 at 33575, 
n.8.
    \10\ CBOE introduced weekly expiring options on the VXST, which 
measures a nine-day implied volatility period, in 2014. See 
Securities Exchange Act Release No. 71764 (March 21, 2014), 79 FR 
17212 (March 27, 2014) (SR-CBOE-2014-003) (Order Granting Approval 
of Proposed Rule Change to List and Trade CBOE Short-Term Volatility 
Index Options).
    \11\ P.M.-settled, expiring SPXWs stop trading at 3:00 p.m. 
(Chicago time) on their last day of trading. See Rule 24.9(e)(4). 
The additional 390 minutes reflects that these constituent options 
trade for six and a half hours on their expiration date until 3:00 
p.m. (Chicago time).
---------------------------------------------------------------------------

    In order to allow for the weekly expiration of 30-day VIX options, 
CBOE is also proposing to amend its rules relating to volatility index 
options in several ways. CBOE proposes to add new language relating to 
VIX options specifying that the exercise settlement value of a VIX 
option will be calculated on the specific date (usually a Wednesday) 
identified in the option symbol for the series. If that Wednesday or 
the Friday that is 30 days following that Wednesday is an Exchange 
holiday, the exercise settlement value shall be calculated on the 
business day immediately preceding that Wednesday.\12\
---------------------------------------------------------------------------

    \12\ See Notice, supra note 3, at 33575.
---------------------------------------------------------------------------

    CBOE notes that expiring 30-day VIX options weekly would result in 
the Modified Opening Procedures being used more frequently for the 
constituent options series used to calculate the exercise settlement 
values for the proposed new 30-day VIX weekly expirations.\13\
---------------------------------------------------------------------------

    \13\ See id.
---------------------------------------------------------------------------

    The Exchange also proposes to add detailed information about the 
``time to expiration'' input for VIX options volatility index options 
(including standard (monthly) and weekly VIX options) that will be 
used. Specifically, under the proposal, the ``time to expiration'' used 
to calculate the Special Opening Quotation will account for the actual 
number of days and minutes until expiration for the constituent options 
series.\14\
---------------------------------------------------------------------------

    \14\ See id.
---------------------------------------------------------------------------

    The Exchange also notes that it currently is permitted to list up 
to 12 standard (monthly) VIX expirations.\15\ The Exchange proposes to 
retain the ability to list 12 standard (monthly) VIX expirations and 
proposes to permit the Exchange to list up to six weekly expirations in 
VIX options. According to the Exchange, the six weekly expirations 
would be for the nearest weekly expirations from the actual listing 
date and weekly expirations would not be permitted to expire in the 
same week in which standard (monthly) VIX options expire. Standard 
(monthly) expirations in VIX options would not be counted as part of 
the maximum six weekly expirations permitted for VIX options.\16\
---------------------------------------------------------------------------

    \15\ The Exchange calculates the CBOE VVIX Index, which measures 
the expected volatility of the 30-day forward price of the VIX Index 
and is calculated using VIX options. Because CBOE calculates a 
volatility index using VIX options, the Exchange is permitted to 
list up to 12 expirations at any one time for VIX options. See 
Notice, supra note 3, at 33576, n.13.
    \16\ See Notice, supra note 3, at 33576 (providing a chart 
summarizing the maximum listing ability under the proposed rule 
change).
---------------------------------------------------------------------------

    The Exchange notes that currently it may list new series in VIX 
options up to the fifth business day prior to expiration. The Exchange 
proposes to amend CBOE Rule 24.9 to permit new series to be added up to 
and including on the last day of trading for an expiring VIX option 
contract. The Exchange notes that this listing ability is similar to 
the series setting schedule for other types of weekly expirations, 
including VXST options.\17\
---------------------------------------------------------------------------

    \17\ See existing Rule 24.9.01(c). See also Rules 5.5(d)(4) and 
24.9(a)(2)(A)(iv) which permit series to be added up to and 
including on their expiration date for short-term (weekly) options.
---------------------------------------------------------------------------

    Finally, the Exchange proposes to break out VIX options separately 
from other volatility index options under new subparagraph (ii) to CBOE 
Rule 24.9.01(1) and to specify that the interval between strike prices 
for CBOE Volatility Index (VIX) options will be $0.50 or greater where 
the strike price is less than $75, $1 or greater where the strike price 
is $200 or less and $5 or greater where the strike price is more than 
$200.
    The Exchange notes that the strike setting parameters set forth in 
the proposed paragraph are already permitted for VIX options.\18\ The 
Exchange believes that separating VIX options from other volatility 
index options in this section to the CBOE Rulebook would benefit market 
participants since it would be easier to identify the strike setting 
parameters for VIX options by breaking them out as proposed.
---------------------------------------------------------------------------

    \18\ See Rule 24.9(l) and Rule 24.9.12, which permits $0.50 and 
$1 strike price intervals for options that are used to calculate 
volatility indexes. The Exchange calculates the CBOE VVIX Index, 
which measures the expected volatility of the 30-day forward price 
of the VIX Index and is calculated using VIX options.
---------------------------------------------------------------------------

    The Exchange proposes several clarifying changes to the rule titles 
and various subheadings to reflect the substantive changes the Exchange 
is proposing. In addition, the Exchange is proposing various clarifying 
non-substantive changes to ensure consistency and parallel structure 
among various Exchange rules.
    CBOE represents that it has analyzed its capacity and represents 
that it believes the Exchange 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 expiring VIX options weekly. CBOE further notes that because 
the proposal is limited to a single class, the Exchange believes that 
the additional traffic that would be generated from the introduction of 
weekly 30-Day VIX option series would be manageable.

III. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\19\ 
Specifically, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\20\ 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. Specifically, the Commission believes that expiring VIX 
options weekly will

[[Page 44405]]

provide investors with an additional trading and hedging mechanism and 
may provide investors with additional opportunities to manage 30-day 
volatility risk each week.
---------------------------------------------------------------------------

    \19\ 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).
    \20\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange has represented that it has many years of history and 
experience in conducting surveillance for volatility index options 
trading to draw from in order to detect manipulative trading in the 
proposed 30-day weekly VIX series.\21\ In approving the proposed weekly 
expiring VIX options, the Commission has also relied on the Exchange's 
representation that it and OPRA have the necessary systems capacity to 
handle the additional traffic associated with the listing of new series 
that would result from the weekly expiration of VIX options.\22\
---------------------------------------------------------------------------

    \21\ See Notice, supra note 3, at 33577.
    \22\ See id.
---------------------------------------------------------------------------

IV. Conclusion

    IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-CBOE-2015-050) be, and 
hereby is, approved.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
---------------------------------------------------------------------------

    \24\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-18274 Filed 7-24-15; 8:45 am]
BILLING CODE 8011-01-P