
[Federal Register: May 13, 2009 (Volume 74, Number 91)]
[Notices]               
[Page 22613-22615]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13my09-97]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59876; File No. SR-CBOE-2008-55]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change, as Modified 
by Amendment No. 1, Related to Margin Requirements

May 6, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 2, 2008, the Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'' or ``SEC'') the proposed rule change as 
described in Items I, II, and III below, which Items have been 
substantially prepared by the Exchange. On May 3, 2009, CBOE filed 
Amendment No. 1. The Commission is publishing this notice, as amended, 
to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to modify its margin requirements to 
facilitate, under certain circumstances, the ability of account holders 
to use vested and currently exercisable compensatory employee stock 
options (``Vested Employee Options'') issued by publicly traded 
companies as collateral for writing call options that have the same 
underlying security as the Vested Employee Options. Specifically, the 
proposal would allow account holders to sell, as a hedge, listed equity 
call options on the same underlying security as the account holder's 
Vested Employee Options without the requirement of margin. The text of 
the proposed rule change is available on the Exchange's Web site 
(http://www.cboe.org/Legal), at the Office of the Secretary, CBOE 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 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 Exchange proposes to amend its margin requirements to 
facilitate, under certain circumstances, the ability of account holders 
to use Vested Employee Options issued by publicly traded companies 
(``Issuers'') as collateral for writing call options that have the same 
underlying security as the Vested Employee Options. Specifically, the 
proposal would allow account holders to sell, as a hedge, listed equity 
call options on the same underlying security as the account holder's 
Vested Employee Options without the requirement of margin (the 
``Transactions'').\3\ The proposal would permit account holders to 
engage in the Transactions using their Vested Employee Options as 
collateral. Currently, such Transactions would be deemed ``naked'' for 
purposes of margin rules and subject to a deposit of cash margin, 
effectively making the strategies cost prohibitive and impractical. The 
Exchange believes that enabling employees who hold Vested Employee 
Options to generate income and liquidity on their otherwise illiquid 
asset through the listed options markets will benefit investors by 
providing greater transparency and liquidity.
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    \3\ Absent relief from the Securities and Exchange Commission, 
broker-dealers would need to take a capital charge for the amount of 
unsecured margin debt.
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    Under Section 220.12(f)(1) of Regulation T,\4\ the Exchange, as a 
registered national securities exchange, is permitted to recognize the 
type of transactions described below as eligible

[[Page 22614]]

for margin treatment subject to the approval of the Commission.
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    \4\ Section 220.12(f)(1) of Regulation T (12 CFR 220), 
Supplement: Margin Requirements, grants authority to registered 
national securities exchanges to promulgate rules relating to call 
and put margin requirements.
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    There appears to be precedent to create liquidity for holders of 
Vested Employee Options, as indicated by initiatives by Google Inc. 
(``Google'') and Credit Suisse First Boston (``CSFB''). Specifically, 
in the second quarter of 2007, Google implemented a program that 
enables certain employees to sell their Vested Employee Options to 
financial institutions that bid their Vested Employee Options through a 
competitive auction.\5\ Additionally, in March 2004, the SEC's Division 
of Corporation Finance provided CSFB a no-action letter (the ``CSFB No-
Action Letter'') \6\ with respect to CSFB's plan to enable persons 
subject to Section 16 of the Securities Exchange Act of 1934 (the 
``Act''), e.g., directors, officers and 10-percent shareholders 
(``Section 16 insiders''), with substantially in-the-money vested 
employee stock options to use over-the-counter derivatives to limit 
their exposure to fluctuations in the trading price of the underlying 
common stock. Under CSFB's program, Section 16 insiders sell CSFB a 
call option and buy from CSFB a put option on common stock underlying 
their stock options. The exercise prices of the call and put options 
(together, a ``collar'') are determined so as to provide the Section 16 
insiders a measure of protection against a fall in the market value of 
the common stock during the collar's term in return for diminishing the 
ability of the Section 16 insiders to profit from a strong performance 
for the common stock during such period.
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    \5\ See http://www.google.com/intl/en/press/pressrel/ir_
20061212.html.
    \6\ Credit Suisse First Boston, SEC No-Action Letter, 2004 WSB 
0712200401 (March 18, 2004).
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    Unlike Google's program, which will generally truncate the 
remaining term of Google Vested Employee Options to two years upon 
their sale (resulting in holders forfeiting any time value of their 
Vested Employee Options beyond the two-year period), CBOE's proposal 
would allow holders of Vested Employee Options to monetize the entire 
remaining time value of their Vested Employee Options because the term 
of the Vested Employee Options would be unaffected by the listed call 
option.
    Unlike CSFB's program, CBOE's proposal would make it possible for 
not only Section 16 insiders (who would generally be able to meet 
existing listed option margin deposit requirements) but also ``paper 
rich/cash poor'' holders to monetize the value of their Vested Employee 
Options. Also, unlike CSFB's program, the proposal would permit account 
holders to sell call options against their Vested Employee Options in 
the listed options markets, which generally provide more liquidity and 
transparency than the over-the-counter markets.
Description of the Transactions
    The proposal would permit account holders to sell listed call 
options on the same security that underlies their Vested Employee 
Options without the requirement of margin. Given the uncertificated 
nature of employee stock options, in order to secure the account 
holder's obligations under the Transactions, the proposal would 
require:
    1. The account holder to (A) pledge the Vested Employee Options to 
the broker-dealer and (B) provide the broker-dealer with an irrevocable 
power-of-attorney authorizing the broker-dealer to exercise the Vested 
Employee Options on the account holder's behalf if the listed call 
options are assigned or if the broker-dealer determines it is 
necessary. The irrevocable power-of-attorney may also be used in the 
event the account holder wishes to close the listed option position 
prior to its expiration and instructs the broker-dealer to exercise 
that number of Vested Employee Options necessary to cover the cost of 
the closing purchase (the account holder will also have the option of 
depositing additional cash in the account holder's account to cover the 
cost of the closing purchase).
    2. In the event the Vested Employee Options are exercised between 
the date of the Transaction in the listed call options (the 
``Commencement Date'') and the date the Transaction is closed (the 
``Closing Date''), the shares issued upon exercise will be pledged to 
the broker-dealer (thereby replacing the Vested Employee Options that 
had been pledged prior to exercise). For example, during the time a 
Transaction is pending, the account holder may resign from the account 
holder's employment with the Issuer and may be required to exercise the 
Vested Employee Options within a certain timeframe following the 
account holder's departure. In such a scenario, the account holder 
would ask the broker dealer to exercise the Vested Employee Options and 
the stock issued pursuant to the exercise would be pledged to the 
broker-dealer.
    3. The Issuer will promptly deliver the stock upon payment or 
receipt of the exercise notice from the broker-dealer.\7\ The Issuer 
will also agree prior to the Commencement Date to waive any forfeiture 
conditions that otherwise might apply to the Vested Employee Options 
(e.g., upon a termination of the account holder's employment with the 
Issuer) as well as any transfer restrictions that would preclude pledge 
of the Vested Employee Options to the broker-dealer. In addition, the 
Issuer will represent that the Vested Employee Options are covered by 
an effective registration statement on Form S-8. If the registration 
statement becomes ineffective the Issuer will notify the broker-dealer 
immediately.
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    \7\ The Exchange will proscribe a set delivery period, which is 
expected to be no later than three business days following 
assignment of the listed options.
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    4. Because it is essential that the account holder, broker-dealer 
and Issuer cooperate and are each fully informed, agree to and 
acknowledge their own and each other's responsibilities, all 
Transactions will be governed by an agreement (the ``Agreement'') 
entered into by the account holder, broker-dealer and Issuer prior to 
the Commencement Date of the first transaction. The Agreement would 
generally set forth each party's obligations, representations and 
acknowledgements and the terms and conditions governing the 
Transactions and must be in a form acceptable to the Exchange.\8\
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    \8\ In this regard, the Exchange currently intends to recognize 
the Master Vested Stock Option Monetization Agreement, created by 
iOptions Group, LLC, as one acceptable agreement.
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    5. Such other terms and conditions prescribed by the Exchange in 
accordance with such form, formats and procedures as may be established 
by the Exchange from time to time would also apply. In this regard, 
upon approval of the proposed rule change and for a period of one year, 
the Exchange will require that, prior to the Commencement Date, a legal 
opinion with respect to the account holder's and Issuer's legal right 
to enter into the Transactions under the terms of the Issuer's employee 
stock option plan and related documents (the ``Legal Opinion'') be 
obtained in a form acceptable to the Exchange. During the one-year time 
period, the Exchange may determine that such Legal Opinion is no longer 
necessary and will revise its established forms, formats and procedures 
accordingly.
2. Statutory Basis
    The basis under the Act for this proposed rule change is found in 
Section 6(b)(5),\9\ in that the proposed rule change is designed to 
promote just and equitable principles of trade, remove impediments to 
and perfect the mechanisms of a free and open market

[[Page 22615]]

and a national market system, and, in general, to protect investors and 
the public interest. By recognizing that margin should not be required 
for customers for the transactions contemplated by this proposed rule 
change, both investors and the listed equity options markets will 
benefit as a result of greater transparency and liquidity.
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    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Specifically the Commission requests 
comment on the following topics:
     Are there other alternative steps that could be taken that 
would enhance a broker-dealer's legal authority to exercise the Vested 
Employee Options and receive the underlying stock? Please describe any 
such alternatives and why those alternatives may be more consistent 
with the Act.
     If no margin is required for a Transaction, what steps, if 
any, should be taken regarding liquidity or operational risks arising 
from the Transactions? Should the margin rule include a minimum margin 
requirement?
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2008-55 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090

All submissions should refer to File Number SR-CBOE-2008-55. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the CBOE. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2008-55 and should be 
submitted on or before June 3, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-11121 Filed 5-12-09; 8:45 am]

BILLING CODE 8010-01-P
