VIX

So, am I understanding this correctly that they were aiming to extend definitions to make enforcement easier with respects to manipulation of the VIX vis-a-vis the SOQ?

Also, this is an interesting section of that article describing the theoretical way in which settlement could be traded to replicate delivery of 'shares' with respects to the VIX (all the way down to settlement in shares of SPX components 30 days later). Also provides a very good context in which VIX should be traded and allows you to identify specific exposures that can be addressed with the VIX products:

The volatility index settlement process is patterned after the process used to calculate the exercise settlement value of SPX options. On the days SPX options expire, S&P calculates an SOQ of the S&P 500 Index using the opening prices of the component stocks in their primary markets. Market participants can replicate the exposure of their expiring SPX options by entering orders to buy and sell the component stocks of the S&P 500 Index at their opening prices. If they are successful, market participants can effectively construct a portfolio that matches the value of the SOQ. At this point, the derivatives and cash markets converge.
In a very similar way, the exercise settlement value for volatility index derivatives is an SOQ of the volatility index using opening prices of the constituent options used to determine the value of the index. With respect to VIX, the VIX exercise settlement value is calculated using the opening prices of SPX options that expire approximately 30 days later. Analogous to the settlement process for SPX options, market participants can replicate the exposure of their expiring VIX derivatives by entering buy and sell orders in constituent SPX options. If they are successful, market participants can effectively construct a portfolio of SPX options whose value matches the value of the VIX SOQ. By doing so, market participants may make or take delivery of the SPX options that will be used to calculate the exercise settlement value of their VIX derivatives.
A tradable settlement creates the opportunity to convert the exposure of an expiring VIX derivative into the portfolio of SPX options that will be used to calculate the exercise settlement value of the expiring contract. Specifically, some market participants may desire to maintain the vega, or volatility, risk exposure of expiring VIX derivatives. Since VIX derivatives expire 30 days prior to the SPX options used to calculate their settlement value, a market participant may have a vega risk from its portfolio of index positions that the participant wants to continue to hedge after the participant’s VIX derivatives expire. To continue that vega coverage following expiration of a VIX derivative, a market participant may determine to trade the portfolio of SPX options used to calculate the exercise settlement value of an expiring VIX derivative, since those SPX options still have 30 more days to expiration. This trade essentially replaces the uncovered vega exposure “hole” created by an expiring VIX derivative.
Since the VIX settlement value converges with the value of the portfolio of SPX options used to calculate that VIX settlement value, trading this SPX option portfolio mitigates settlement risk.5 This is because, if done properly, the vega exposure obtained in the SPX option portfolio will replicate the vega exposure of the expiring VIX derivative. Because a market participant is converting vega exposure from one instrument (expiring VIX derivative) to another (portfolio of SPX options expiring in 30 days), the market participant is likely to be indifferent to the settlement price received for the expiring VIX derivative. Importantly, trading the next VIX derivative expiration (i.e., rolling) will not accomplish the conversion of vega exposure since that VIX derivative contract would necessarily cover a different period of expected volatility and would be based on an entirely different portfolio of SPX options.
To replicate expiring volatility index derivatives on their expiration dates with portfolios of constituent options, market participants generally submit strategy orders to participate in the modified HOSS procedure on exercise settlement value determination dates...
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That begins on page 6 of the link above.
 
beerntrading said:
Also, this is an interesting section of that article describing the theoretical way in which settlement could be traded to replicate delivery of 'shares' with respects to the VIX
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As an alternative to the actual delivery of the strip (which is a pain), they could just make VIX futures settle into a variance futures position. They already have them listed and semi-functional, just need to modify the definitions a little bit.

A side benefit for CBOE would be increased liquidity in the variance futures which they have been trying to achieve forever.
 
Secret Santa said:
A side benefit for CBOE would be increased liquidity in the variance futures which they have been trying to achieve forever.
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With so many new product failures I’m surprised how people keep their jobs. I shouldn’t be saying this in public but I am truly appalled at some of their leadership. I have attended many of their “industry” parties and let me tell you that for a public company that’s looking to grow its product line they are really stuck in the past and completely unreceptive to change. It’s almost as if the organization is plagued by ex government bureaucrats.
 
ajacobson said:
The Cboe quietly dropped a proposal to amend its interpretation of rule 6.2, which you might know better as "stuff pertaining to VIX settlement." The proposed rule change expands/clarifies the exchange's interpretation of "strategy orders" and "non-strategy orders" to better determine whether or not someone is gaming the settlement calculation.
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Was wondering what happened to that proposal. Didn't know how they were going to enforce it anyway. Most likely CBOE came up with that proposal to quell down the criticism and avoid any lawsuits by showing some due diligence on their part.
 
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