
[Federal Register: August 27, 2009 (Volume 74, Number 165)]
[Notices]               
[Page 43741-43742]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27au09-107]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60555; File No. SR-CBOE-2009-039]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving Proposed Rule Change, as Modified by 
Amendment No. 1, To Extend the Delta Hedging Exemption From Equity 
Options Position Limits to Customers

August 21, 2009.

    On June 19, 2009, the 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 extend the delta hedging 
exemption from equity option position limits to positions of customers 
who hedge those positions in accordance with a pricing model maintained 
and operated by The Options Clearing Corporation (``OCC''). On July 8, 
2009, CBOE filed Amendment No. 1 to the proposed rule change. The 
proposed rule change was published for comment in the Federal Register 
on July 17, 2009.\3\ The Commission received no comment letters on the 
proposal. This order approves the proposed rule change, as modified by 
Amendment No. 1.
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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. 60271 (July 9, 
2009), 74 FR 34842.
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    In December 2007, the Commission approved a CBOE proposal to create 
an exemption from position and exercise limits \4\ applicable to equity 
options (stock options and options on exchange-traded funds) for 
positions held by CBOE members and certain non-member affiliates that 
are ``delta neutral'' \5\ under a ``permitted pricing model'' \6\ 
(``Exemption'').\7\ When a position is not delta neutral, only the 
option contract equivalent of the net delta \8\ of the position remains 
subject to the position limits in Rule 4.11.\9\
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    \4\ Rule 4.12 establishes exercise limits for an option at the 
same level as the option's position limit under Rule 4.11.
    \5\ The term ``delta neutral'' is defined in 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.
    \6\ Under Rule 4.11.04(c)(C), ``permitted pricing model'' for 
purposes of the Exemption is a pricing model: (1) Maintained and 
operated by the OCC (``OCC Model''); (2) maintained and used by a 
member or its non-member affiliate subject to consolidated 
supervision by the Commission pursuant to Appendix E of Rule 15c3-1, 
17 CFR 240.15c3-1, under the Act; (3) maintained and used by 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) maintained 
and used by a Commission-registered OTC derivatives dealer; or (5) 
used by a national bank under the National Bank Act. See Rule 
4.11.04(c)(C).
    \7\ See Securities Exchange Act Release No. 56970 (December 14, 
2007), 72 FR 72428 (December 20, 2007) (SR-CBOE-2007-99) 
(``Exemption Approval Order'').
    \8\ ``Net delta'' means, 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. ``Options 
contract equivalent of the net delta'' means the net delta divided 
by the number of shares underlying the options contract. See Rule 
4.11.04(c)(B).
    \9\ The Commission notes that CBOE 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. See Exemption Approval Order, 
supra note 7, at note 11.

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[[Page 43742]]

    CBOE now proposes to amend Rule 4.11.04(c) to extend the Exemption 
to positions of customers of members. Under the proposal, to avail 
themselves of the Exemption, such customers would be able to hedge 
their positions only in accordance with the OCC Model.
    In connection with this amendment, CBOE proposes to add new 
subparagraph (4) to Rule 4.11.04(c)(E) to set forth the obligations of 
a member carrying an account that includes an equity option position 
for a customer who intends to rely on the Exemption. Specifically, the 
member would be required to obtain from the customer a written 
certification to the Exchange that the customer is using the OCC Model. 
In addition, the member would be required to obtain from the customer a 
written statement confirming that such customer: (a) Is relying on the 
Exemption; (b) will use only the OCC Model for purposes of calculating 
the net delta of the customer's option positions for purposes of the 
Exemption; (c) will promptly notify the member if the customer ceases 
to rely on the Exemption; and (d) in connection with using the OCC 
Model, has duly executed and delivered to the Exchange such documents 
as the Exchange may require to be executed and delivered to the 
Exchange as a condition to reliance on the Exemption.
    As under the current Exemption, each member that holds or carries 
an account that relies on the Exemption is required to report, in 
accordance with Rule 4.13,\10\ all equity option positions (including 
those that are delta neutral) that are reportable under that rule, and 
also is required to report on its own behalf or on behalf of a 
designated aggregation unit \11\ the net delta and the 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.\12\ Members carrying a 
customer account that relies on the Exemption would be subject to this 
requirement.
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    \10\ Rule 4.13 requires, among other things, that members report 
to the Exchange aggregate long or short positions on the same side 
of the market of 200 or more contracts of any single class of 
options contracts dealt in on the Exchange.
    \11\ See 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.
    \12\ See Rule 4.11.04(c)(F).
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    In addition, the Exchange proposes to amend Rule 4.11.04(c)(G) 
governing records so that it extends to members carrying customer 
accounts. Each member relying on the Exemption would be required to 
retain, and undertake reasonable efforts to ensure that its customers 
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.\13\
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    \13\ See Rule 4.11.04(c)(G).
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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.\14\ 
In particular, the Commission believes that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\15\ 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.
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    \14\ 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).
    \15\ 15 U.S.C. 78f(b)(5).
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    In approving the current Exemption, the Commission noted its 
previous statement in support of recognizing options positions hedged 
on a delta neutral basis as properly exempted from position limits.\16\ 
The Commission believes that it is appropriate and consistent with the 
Act to extend the current Exemption to customers.
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    \16\ 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), cited in 
Exemption Approval Order, supra note 7.
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    The Commission notes that the Exchange has added provisions to Rule 
4.11.04(c)(E)(4), specifically with respect to customers that seek to 
rely on the Exemption, that obligate members carrying accounts for 
those customers to obtain from them certain certifications and 
assurances as described above, including a written statement to the 
Exchange that the customer has duly executed and delivered to the 
member such documents as the Exchange may require to be executed and 
delivered to it.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-CBOE-2009-039), as modified 
by Amendment No. 1, be, and it hereby is, approved.
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    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-20655 Filed 8-26-09; 8:45 am]

BILLING CODE 8010-01-P
