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Notice of Filing of Proposed Rule Change to List and Trade Options on the MSCI EAFE Index and on the MSCI Emerging Markets Index

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Notice of Filing of Proposed Rule Change to List and Trade Options on the MSCI EAFE Index and on the MSCI Emerging Markets Index SECURITIES AND EXCHANGE COMMISSION (Release No. 34-74430; File No. SR-CBOE-2015-023) March 4, 2015 Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of Proposed Rule Change to List and Trade Options on the MSCI EAFE Index and on the MSCI Emerging Markets Index Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act” or “Exchange Act”),1 and Rule 19b-4 thereunder,2 notice is hereby given that on February 26, 2015, the 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. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change CBOE proposes to list and trade options that overlie the MSCI EAFE Index and the MSCI Emerging Markets Index (“EAFE options” and “EM options”). EAFE and EM options would be P.M., cash-settled contracts with European-style exercise. The text of the proposed rule change is available on the Exchange’s Web site (http://www.cboe.com/AboutCBOE/CBOELegal RegulatoryHome.aspx), at the Exchange’s Office of the Secretary, and at the Commission. 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 self-regulatory organization included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. received on the proposed rule change. The text of those 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 parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of this proposed rule change is to permit the Exchange to list and trade options that overlie the MSCI EAFE Index and the MSCI Emerging Markets Index (“EAFE options” and “EM options”). EAFE and EM options would be P.M., cash-settled contracts with European-style exercise.3 MSCI EAFE Index Design, Methodology and Dissemination The MSCI EAFE Index (Europe, Australasia, Far East) is a free, [sic] float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. The MSCI EAFE Index consists of large and midcap components, has 910 constituents and “covers 3 CBOE’s proposed rule change is substantially similar to approved filings made by NASDAQ OMX Phlx (“Phlx”) in 2011 and 2012 to list and trade EM and EAFE options, respectively. See Securities Exchange Act Release Nos. 66420 (February 17, 2012), 77 FR 11177 (February 24, 2012) (approving SR-Phlx-2011-179 to list EM options) and 66861 (April 26, 2012), 77 FR 26056 (May 2, 2012) (approving SR-Phlx-2012-28 to list EAFE options). 2 approximately 85% of the free float-adjusted market capitalization in each country.4” The MSCI EAFE Index was launched on December 31, 1969 and is calculated by MSCI Inc. (“MSCI”), which is a provider of investment support tools. The MSCI EAFE Index is calculated in U.S. dollars on a real-time basis from the open of the first market on which the components are traded to the closing of the last marked [sic] on which the components are traded. The methodology used to calculate the MSCI EAFE Index is similar to the methodology used to calculate the value of other benchmark market-capitalization weighted indexes. Specifically, the MSCI EAFE Index is based on the MSCI Global Investable Market Indexes (“GIMI”) Methodology.5 The level of the MSCI EAFE 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 MSCI EAFE Index by the index divisor. The MSCI EAFE Index is monitored and maintained by MSCI. Adjustments to the MSCI EAFE Index are made on a daily basis with respect to corporate events and dividends. MSCI reviews the MSCI EAFE Index quarterly (February, May, August and November) “with the objective of reflecting change in the underlying equity markets in a timely manner, while limiting undue index turnover. During the May and November reviews, the [MSCI EAFE Index] is rebalanced and the large and mid capitalization cutoff points are recalculated.6” Real-time data is distributed approximately every 15 seconds while the index is being 4 See MSCI EAFE Index fact sheet (dated December 31, 2014) located at: http://www.msci.com/resources/factsheets/index_fact_sheet/msci-eafe-index-usd- price.pdf. 5 Summary and comprehensive information about the GIMI methodology may be reviewed at: http://www.msci.com/products/indexes/size/all_cap/methodology.html. 6 See MSCI EAFE Index fact sheet (dated December 31, 2014) located at: http://www.msci.com/resources/factsheets/index_fact_sheet/msci-eafe-index-usd- price.pdf. 3 calculated using MSCI’s real-time calculation engine to Bloomberg L.P. (“Bloomberg”), FactSet Research Systems, Inc. (“FactSet”) and Thomson Reuters (“Reuters”). End of day data is distributed daily to clients through MSCI as well as through major quotation vendors, including Bloomberg, FactSet, and Reuters. The Exchange notes that the iShares MSCI EAFE exchange traded fund (“ETF”) is an actively traded product. CBOE also lists options overlying that ETF (“EFA options”) and those options are actively traded as well. MSCI EAFE Mini Index (“EAFE”) futures contracts are listed for trading on the Intercontinental Exchange, Inc. (“ICE”)7 and other derivatives contracts on the MSCI EAFE Index are listed for trading in Europe. EM Index Design and Calculation The MSCI EM Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI EM Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. The MSCI EM Index consists of large and midcap components, has 834 constituents and “covers approximately 85% of the free float-adjusted market capitalization in each country.8” The MSCI EM Index was launched on June 30, 1988 and is calculated by MSCI. The MSCI EM Index is calculated in U.S. dollars on a real-time basis from the open of the first 7 See EAFE futures contract specifications located at: https://globalderivatives.nyx.com/ node/10864. 8 See MSCI EM Index fact sheet (dated December 31, 2014) located at: http://www.msci.com/resources/factsheets/index_fact_sheet/msci-emerging-markets- index-usd-price.pdf. 4 market on which the components are traded to the closing of the last marked [sic] on which the components are traded. The methodology used to calculate the MSCI EM Index is similar to the methodology used to calculate the value of other benchmark market-capitalization weighted indexes. Specifically, the MSCI EM Index is based on the MSCI GIMI Methodology.9 The level of the MSCI EM 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 MSCI EM Index by the index divisor. The MSCI EM Index is monitored and maintained by MSCI. Adjustments to the MSCI EM Index are made on a daily basis with respect to corporate events and dividends. MSCI reviews the MSCI EM Index quarterly (February, May, August and November) “with the objective of reflecting change in the underlying equity markets in a timely manner, while limiting undue index turnover. During the May and November reviews, the [MSCI EM Index] is rebalanced and the large and mid capitalization cutoff points are recalculated.10” Real-time data is distributed approximately every 15 seconds using MSCI’s real-time calculation engine to Bloomberg, FactSet and Reuters. End of day data is distributed daily to clients through MSCI as well as through major quotation vendors, including Bloomberg, FactSet, and Reuters. The Exchange notes that the iShares MSCI Emerging Markets ETF is an actively traded product. CBOE also lists options overlying that ETF (“EEM options”) and those options are actively traded as well. MSCI Emerging Markets Mini Index (“EM”) futures contracts are listed 9 Summary and comprehensive information about the GIMI methodology may be reviewed at: http://www.msci.com/products/indexes/size/all_cap/methodology.html. 10 See MSCI EM Index fact sheet (dated December 31, 2014) located at: http://www.msci.com/resources/factsheets/index_fact_sheet/msci-emerging-markets- index-usd-price.pdf. 5 for trading on ICE11 and other derivatives contracts on the MSCI EM Index are listed for trading in Europe. Initial and Maintenance Listing Criteria The MSCI EAFE Index and MSCI EM Index each meet the definition of a broad-based index as set forth in Rule 24.1(i)(1).12 In addition, the Exchange proposes to create specific initial and maintenance listing criteria for options on the MSCI EAFE Index and on the MSCI EM Index.
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