

[Federal Register: December 20, 2007 (Volume 72, Number 244)]
[Notices]               
[Page 72428-72429]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20de07-105]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56970; File No. SR-CBOE-2007-99]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change, as 
Modified by Amendment Nos. 1 and 2 Thereto, Relating to a Delta Hedging 
Exemption From Equity Options Position Limits

December 14, 2007.
    On August 21, 2007, the Chicago Board Options Exchange, 
Incorporated (``CBOE'' or ``Exchange'') 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 create a delta hedging 
exemption from equity options position limits. On October 4, 2007, the 
Exchange filed Amendment No. 1 to the proposed rule change. The 
Commission published the proposed rule change, as amended by Amendment 
No. 1, for comment in the Federal Register on October 15, 2007.\3\ On 
October 24, 2007, the Exchange filed Amendment No. 2 to the proposed 
rule change.\4\ The Commission received no comments on the proposed 
rule change. This order approves the proposed rule change as modified 
by Amendment Nos. 1 and 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 56631 (October 9, 
2007), 72 FR 58341.
    \4\ In Amendment No. 2, CBOE made a technical revision to the 
proposal. This is a technical amendment and is not subject to notice 
and comment. In Amendment No. 2, CBOE noted that the effective date 
of the proposal will be February 1, 2008, or such later date as may 
be necessary to ensure completion of the required technology changes 
by the Options Clearing Corporation and the Securities Industry 
Automation Corporation.
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    Under the proposal, the Exchange would provide an exemption from 
equity options \5\ position and exercise limits \6\ for positions held 
by CBOE members and certain non-member affiliates \7\ that are ``delta 
neutral'' \8\ under a ``permitted pricing model.'' \9\ The options 
contract equivalent of the net delta \10\ of a hedged options position 
still would be subject to the position limits in Rule 4.11 (subject to 
the availability of any other position limit exemptions).\11\ A member 
that intends to employ, or whose non-member affiliate intends to 
employ, this exemption would be required to provide a written 
certification to CBOE stating that the member and/or its affiliate will 
use a permitted pricing model.\12\ In addition, members that carry an 
account that includes an equity option position for a non-member 
affiliate would be required to obtain a written statement from the non-
member affiliate confirming that the affiliate: (1) Is relying on this 
exemption; (2) will use only a permitted pricing model for purposes of 
calculating the net delta of its option positions for purposes of this 
exemption; (3) will promptly notify the member if it ceases to rely on 
this exemption; (4) authorizes the member, upon request, to provide to 
the Exchange or the Options Clearing Corporation such information 
regarding positions of the non-member affiliate as part of the 
Exchange's confirmation or verification of the accuracy of the net 
delta calculation under this exemption; and (5) if the non-member 
affiliate is using the Options Clearing Corporation model, has duly 
executed and delivered to the Exchange such documents as the Exchange 
may require as a condition to reliance on this exemption.\13\
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    \5\ Equity options for purposes of this proposed rule change 
includes stock options and options on exchange-traded funds.
    \6\ CBOE Rule 4.12 establishes exercise limits for an option at 
the same level as the option's position limit under Rule 4.11. 
Therefore, no changes are proposed to Rule 4.12.
    \7\ The Commission notes that only those non-member affiliates 
identified in the definition of ``permitted pricing model'' would be 
eligible to rely on the delta hedging exemption. See infra note 9.
    \8\ The term ``delta neutral'' would be defined in proposed Rule 
4.11.04(c)(A) as referring to an equity option position that is 
hedged, in accordance with a permitted pricing model, by a position 
in the underlying security or one or more instruments relating to 
the underlying security, for the purpose of offsetting the risk that 
the value of the option position will change with incremental 
changes in the price of the security underlying the option position.
    \9\ ``Permitted pricing model'' for purposes of this exemption 
would be a pricing model used by: (1) A member or its non-member 
affiliate, using a pricing model maintained and operated by the 
Options Clearing Corporation; (2) a member or its non-member 
affiliate subject to consolidated supervision by the Commission 
pursuant to Appendix E of Rule 15c3-1 under the Act (i.e., a 
consolidated supervised entity or ``CSE''); (3) a financial holding 
company (``FHC'') or a company treated as an FHC under the Bank 
Holding Company Act of 1956, or its affiliate subject to 
consolidated holding company group supervision; (4) a Commission 
registered OTC derivatives dealer; and (5) a national bank under the 
National Bank Act. See proposed Rule 4.11.04(c)(C).
    \10\ ``Net delta'' would be defined to mean, at any time, the 
number of shares (either long or short) required to offset the risk 
that the value of an equity option position will change with 
incremental changes in the price of the security underlying the 
option position. See proposed Rule 4.11.04(c)(B).
    ``Options contract equivalent of the net delta'' would be 
defined to mean the net delta divided by the number of shares 
underlying the options contract. See proposed Rule 4.11.04(c)(B).
    \11\ See proposed Rule 4.11.04(c)(B). The Commission notes that 
Rule 4.11.04 provides for multiple, independent hedge exemptions. Of 
course, to the extent that a position is used to hedge for the 
purpose of one exemption from position limit requirements, such as 
the delta hedge exemption, such position cannot be used to take 
advantage of another exemption from position limit requirements.
    \12\ See proposed Rule 4.11.04(c)(E)(1) and (E)(3)(i)
    \13\ See proposed Rule 4.11.04(c)(E)(3)(ii).
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    Furthermore, any member would be required to report, in accordance 
with Rule 4.13, all equity options positions (including those that are 
delta neutral) that are reportable under that rule, and also would be 
required to report on its own behalf or on behalf of a designated 
aggregation unit \14\ the net delta and options contract equivalent of 
the net delta of such positions for each account that holds an equity 
option position subject to the delta hedging exemption in excess of the 
levels specified in Rule 4.11.\15\ Each member relying on the exemption 
would be required to retain, and undertake reasonable efforts to ensure 
that its non-member affiliates relying on the exemption retain, a list 
of the options, securities, and other instruments underlying each 
option position net delta calculation reported to the Exchange; and to 
produce such information to the Exchange upon request.\16\ In addition, 
the options positions of a non-member relying on the exemption would be 
required to be carried by a member with which it is affiliated.\17\
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    \14\ See proposed Rule 4.11.04(c)(D), which provides, under 
certain conditions, that the net delta of an options position held 
by an entity entitled to rely on the exemption could be calculated 
without regard to positions in or relating to the security 
underlying the option position held by an affiliated entity or 
another trading unit within the same entity, provided that, among 
other things, no control relationship exists between such affiliates 
or trading units and the entity has designated in writing in advance 
the affiliates or trading units that are to be considered separate 
and distinct from each other.
    \15\ See proposed Rule 4.11.04(c)(F).
    \16\ See proposed Rule 4.11.04(c)(G).
    \17\ See proposed Rule 4.11.04(c)(E)(2).
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    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder that are applicable to a national securities exchange.\18\ 
In particular, the Commission believes that the proposed rule change is 
consistent with section

[[Page 72429]]

6(b)(5) of the Act,\19\ which requires, among other things, that CBOE 
rules 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. The Commission has previously stated its support for 
recognizing options positions hedged on a delta neutral basis as 
properly exempted from position limits.\20\
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-CBOE-2007-99), as modified 
by Amendment Nos. 1 and 2, be, and it hereby is, approved.
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    \18\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78f(b)(5).
    \20\ See Securities Exchange Act Release No. 40594 (October 23, 
1998), 63 FR 59362, 59380 (November 3, 1998) (File No. S7-30-97) 
(adopting rules relating to OTC derivatives dealers). The Commission 
notes that it recently approved a proposal by the National 
Association of Securities Dealers, Inc. (n/k/a Financial Industry 
Regulatory Authority, Inc.) to expand the class of entities 
permitted to use the delta hedging exemption from equity options 
position limits. See Securities Exchange Act Release No. 56916 
(December 6, 2007), 72 FR 70627 (December 12, 2007) (SR-NASD-2007-
044).
    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-24723 Filed 12-19-07; 8:45 am]

BILLING CODE 8011-01-P
