Self-Regulatory Organizations; National Association of Securities Dealers, Inc. (n/k/a Financial Industry Regulatory Authority Inc.); Order Granting Approval of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Expand the Class of Entities Permitted To Use the Delta Hedging Exemption From Equity Options Position Limits, 70627-70628 [E7-24044]

Download as PDF Federal Register / Vol. 72, No. 238 / Wednesday, December 12, 2007 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56900; File No. SR–CHX– 2007–22] Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Order Granting Approval of Proposed Rule Change to Amend Rules Relating to the Execution of Odd Lot Market Orders December 5, 2007. On October 2, 2007, the Chicago Stock Exchange, Inc. (‘‘CHX’’ 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 amend rules relating to the execution of odd lot market orders. The proposed rule change was published for comment in the Federal Register on October 31, 2007.3 The Commission received no comments on the proposal. This order approves the proposed rule change. Under CHX’s existing rules, odd lot orders execute in the Matching System without regard to the protected quotations of other markets.4 The Exchange states that this is because such orders are not subject to the Regulation NMS Order Protection Rule 5 and can trade through better prices in other markets.6 Through this filing, the Exchange proposes to amend its rules to provide that market odd lot orders would execute like round lot orders (i.e., they would execute as if they were subject to the Regulation NMS Order Protection Rule), while odd lot limit orders and odd lot crosses could continue to execute through better prices on other markets.7 The Exchange believes that this proposal will provide appropriate protections to odd lot market orders, while allowing participants to choose to U.S.C. 78s(b)(1). CFR 240.19b-4. 3 See Securities Exchange Act Release No. 56703 (October 25, 2007), 72 FR 61696. 4 See CHX Rules, Article 20, Rule 5(b). 5 17 CFR 242.611. 6 The Exchange states that its handling of the execution of odd lot orders is consistent with the requirements of Regulation NMS. See Division of Market Regulation: Responses to Frequently Asked Questions Concerning Rule 611 and Rule 610 of Regulation NMS, FAQ 7.03 (confirming that Rule 611 does not apply to odd lot orders). 7 The Exchange believes that a participant that submits an odd lot cross seeks to have that order executed at a particular price, without regard to prices in other markets. Similarly, if a participant submits an odd lot limit order, that participant likely only seeks the protection of the order’s limit price and does not anticipate that the order would be protected against better prices in other markets. have odd lot limit orders and odd lot crosses executed at other prices.8 After a careful review of the proposed rule change, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the regulations thereunder applicable to a national securities exchange,9 in particular, Section 6(b)(5) of the Act,10 which requires that the rules of an exchange be designed 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 believes that the proposed rule change promotes just and equitable principles of trade and will benefit investors and the public interest by providing additional trade-through protection, beyond the requirements of the Order Protection Rule, for investors’ odd lot market orders that are submitted to the Exchange. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,11 that the proposed rule change (SR–CHX–2007– 22) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.12 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–23965 Filed 12–11–07; 8:45 am] BILLING CODE 8011–01–P mstockstill on PROD1PC66 with NOTICES 15:54 Dec 11, 2007 Jkt 214001 Release No. 34–56916; File No. SR–NASD– 2007–044] Self-Regulatory Organizations; National Association of Securities Dealers, Inc. (n/k/a Financial Industry Regulatory Authority Inc.); Order Granting Approval of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Expand the Class of Entities Permitted To Use the Delta Hedging Exemption From Equity Options Position Limits December 6, 2007. On June 29, 2007, the National Association of Securities Dealers, Inc. (‘‘NASD’’) (n/k/a Financial Industry Regulatory Authority, Inc.) 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 amend Rule 2860 to expand the class of entities permitted to use the delta hedging exemption from equity options position limits.3 The Commission published the proposed rule change for comment in the Federal Register on August 13, 2007.4 On October 15, 2007, FINRA filed Amendment No. 1 to the proposed rule change.5 The Commission received one comment letter on the proposed rule change.6 This order approves the proposed rule change as modified by Amendment No. 1. In 2004, the Commission approved amendments to Rule 2860 that provide a delta hedging exemption from stock U.S.C. 78s(b)(1). CFR 240.19b-4. 3 On July 26, 2007, the Commission approved a proposed rule change filed by NASD to amend NASD’s Certificate of Incorporation to reflect its name change to Financial Industry Regulatory Authority Inc., or FINRA, in connection with the consolidation of the member firm regulatory functions of NASD and NYSE Regulation, Inc. See Securities Exchange Act Release No. 56146 (July 26, 2007), 72 FR 42190 (August 1, 2007). 4 See Securities Exchange Act Release No. 56207 (August 6, 2007), 72 FR 45284. 5 In Amendment No. 1, FINRA made technical revisions to the proposal. This is a technical amendment and is not subject to notice and comment. In Amendment No. 1, FINRA 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. 6 See letter to Nancy M. Morris, Secretary, Commission, from John R. Vitha, Esq., Chairman, Derivative Products Committee, Securities Industry and Financial Markets Association, dated September 25, 2007. The commenter supported the proposed rule change. 2 17 2 17 VerDate Aug<31>2005 SECURITIES AND EXCHANGE COMMISSION 1 15 1 15 8 Odd lot market orders that would trade through the protected quotations of other markets would be rejected from the Exchange’s Matching System and either routed to another appropriate market or, if designated as ‘‘do not route,’’ automatically cancelled. See CHX Rules, Article 20, Rule 5(a). 9 In approving the proposed rule change, the Commission notes that it as considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 10 15 U.S.C. 78f(b)(5). 11 15 U.S.C. 78s(b)(2). 12 17 CFR 200.30–3(a)(12). PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 70627 E:\FR\FM\12DEN1.SGM 12DEN1 70628 Federal Register / Vol. 72, No. 238 / Wednesday, December 12, 2007 / Notices mstockstill on PROD1PC66 with NOTICES options position and exercise limits 7 for positions held by affiliates of FINRA members approved by the Commission as ‘‘OTC derivatives dealers.’’ 8 Under the proposal, FINRA would expand eligibility for its delta hedging exemption beyond OTC derivatives dealers by allowing members and certain non-member affiliates 9 to rely on this exemption if its position in standardized and/or conventional equity options is delta neutral under a ‘‘Permitted Pricing Model.’’ 10 The options contract equivalent of the net delta 11 of a hedged options position still would be subject to the position limits in Rule 2860 (subject to the availability of any other position limit exemptions).12 A member that intends 7 The proposed rule change does not expressly amend FINRA’s options exercise limits in Rule 2860(b)(4) because such exercise limits apply only to the extent Rule 2860(b)(3) imposes position limits. Thus, as delta neutral positions would be exempt from position limits under the proposed rule change, such positions also would be exempt from exercise limits. See NASD Notice to Members 94–46 (June 1994) at 2 (‘‘* * * exercise limits correspond to position limits, such that investors in options classes on the same side of the market are allowed to exercise * * * only the number of options contracts set forth as the applicable position limit for those options classes.’’). Similarly, for positions held that are not delta neutral, only the option contract equivalent of the net delta of such positions would be subject to exercise limits. 8 See Securities Exchange Act Release No. 50748 (November 29, 2004), 69 FR 70485 (December 6, 2004) (SR–NASD–2004–153). 9 The Commission notes that only those nonmember affiliates identified in the definition of ‘‘Permitted Pricing Model’’ would be eligible to rely on the delta hedging exemption. See infra note 10. 10 ‘‘Permitted Pricing Model’’ for purposes of this exemption would be a pricing model used by: (1) A member or its 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’’); (2) 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; (3) a Commission registered OTC derivatives dealer; (4) a national bank under the National Bank Act; and (5) a member, or non-member affiliate (that is part of a CSE or FHC), using a pricing model maintained and operated by the Options Clearing Corporation. See proposed Rule 2860(b)(3)(A)(vii)(b)(1). 11 ‘‘Net delta’’ would be defined to mean ‘‘the number of shares that must be maintained (either long or short) to offset the risk that the value of an equity options position will change with incremental changes in the price of the security underlying the options position.’’ See proposed changes to Rule 2860(b)(2)(GG). ‘‘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 2860(b)(2)(LL). 12 See proposed Rule 2860(b)(3)(A)(vii)(b). The Commission notes that Rule 2860(b)(3)(A)(vii) 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. VerDate Aug<31>2005 15:54 Dec 11, 2007 Jkt 214001 to employ, or whose non-member affiliate intends to employ, this exemption would be required to provide a written certification to FINRA stating that the member and/or its affiliate will use a Permitted Pricing Model, and that if an affiliate ceases to hedge stock options positions in accordance with such systems and models, it will provide immediate written notice to the member.13 Furthermore, any member or designated aggregation unit would be required to report any aggregate position of 200 or more contracts on the same side of the market and the options contract equivalent of the net delta of a position representing 200 or more contracts.14 In addition, the options positions of a non-member relying on this exemption would be required to be carried by a member with which it is affiliated.15 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 association.16 In particular, the Commission believes that the proposed rule change is consistent with Section 15A(b)(6) of the Act,17 which requires, among other things, that FINRA 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.18 It is therefore ordered, pursuant to Section 19(b)(2) of the Act,19 that the proposed rule change (SR–NASD–2007– 044), as modified by Amendment No. 1, be, and it hereby is, approved. 13 See proposed Rule 2860(b)(3)(A)(vii)(b)(3). proposed Rule 2860(b)(3)(A)(vii)(b)(4). 15 See proposed Rule 2860(b)(3)(A)(vii)(b)(3). 16 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). 17 15 U.S.C. 78o-3(b)(6). 18 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). 19 15 U.S.C. 78s(b)(2). 20 17 CFR 200.30–3(a)(12). 14 See PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 For the Commission, by the Division of Trading and Markets pursuant to delegated authority.20 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–24044 Filed 12–11–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56910; File No. SR– NASDAQ–2007–071] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment Nos. 1, 2, and 3 Thereto, Relating to Generic Listing and Trading Rules for Securities Linked to the Performance of Indexes, Commodities, and Currencies December 5, 2007. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on August 3, 2007, The NASDAQ Stock Market LLC (‘‘NASDAQ’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which items have been substantially prepared by the Exchange. On October 5, 2007, the Exchange filed Amendment No. 1 to the proposed rule change. On November 29, 2007, the Exchange filed Amendment No. 2 to the proposed rule change. On December 4, 2007, the Exchange filed Amendment No. 3 to the proposed rule change. This order provides notice of and approves the proposed rule change, as modified by Amendment Nos. 1, 2, and 3 thereto, on an accelerated basis. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to: (1) Amend NASDAQ Rule 4420(m) to (a) permit the listing and trading of commodity-linked securities (‘‘Commodity-Linked Securities,’’ and, together with Equity Index-Linked Securities,3 collectively, ‘‘Linked Securities’’), and (b) conform 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Currently, NASDAQ Rule 4420(m) relates only to the listing and trading of ‘‘Index-Linked Securities’’ that provide for the payment at maturity of a cash amount based on the performance of an underlying index or indexes of equity securities. See NASDAQ Rule 4420(m). For purposes of the proposed rule change, however, the Exchange seeks to modify the name of such securities to be ‘‘Equity Index-Linked Securities,’’ among other proposed changes described herein. 2 17 E:\FR\FM\12DEN1.SGM 12DEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 72, Number 238 (Wednesday, December 12, 2007)]
[Notices]
[Pages 70627-70628]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-24044]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

Release No. 34-56916; File No. SR-NASD-2007-044]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc. (n/k/a Financial Industry Regulatory Authority Inc.); 
Order Granting Approval of Proposed Rule Change, as Modified by 
Amendment No. 1 Thereto, To Expand the Class of Entities Permitted To 
Use the Delta Hedging Exemption From Equity Options Position Limits

 December 6, 2007.
    On June 29, 2007, the National Association of Securities Dealers, 
Inc. (``NASD'') (n/k/a Financial Industry Regulatory Authority, Inc.) 
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 
amend Rule 2860 to expand the class of entities permitted to use the 
delta hedging exemption from equity options position limits.\3\ The 
Commission published the proposed rule change for comment in the 
Federal Register on August 13, 2007.\4\ On October 15, 2007, FINRA 
filed Amendment No. 1 to the proposed rule change.\5\ The Commission 
received one comment letter on the proposed rule change.\6\ This order 
approves the proposed rule change as modified by Amendment No. 1.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On July 26, 2007, the Commission approved a proposed rule 
change filed by NASD to amend NASD's Certificate of Incorporation to 
reflect its name change to Financial Industry Regulatory Authority 
Inc., or FINRA, in connection with the consolidation of the member 
firm regulatory functions of NASD and NYSE Regulation, Inc. See 
Securities Exchange Act Release No. 56146 (July 26, 2007), 72 FR 
42190 (August 1, 2007).
    \4\ See Securities Exchange Act Release No. 56207 (August 6, 
2007), 72 FR 45284.
    \5\ In Amendment No. 1, FINRA made technical revisions to the 
proposal. This is a technical amendment and is not subject to notice 
and comment. In Amendment No. 1, FINRA 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.
    \6\ See letter to Nancy M. Morris, Secretary, Commission, from 
John R. Vitha, Esq., Chairman, Derivative Products Committee, 
Securities Industry and Financial Markets Association, dated 
September 25, 2007. The commenter supported the proposed rule 
change.
---------------------------------------------------------------------------

    In 2004, the Commission approved amendments to Rule 2860 that 
provide a delta hedging exemption from stock

[[Page 70628]]

options position and exercise limits \7\ for positions held by 
affiliates of FINRA members approved by the Commission as ``OTC 
derivatives dealers.'' \8\ Under the proposal, FINRA would expand 
eligibility for its delta hedging exemption beyond OTC derivatives 
dealers by allowing members and certain non-member affiliates \9\ to 
rely on this exemption if its position in standardized and/or 
conventional equity options is delta neutral under a ``Permitted 
Pricing Model.'' \10\ The options contract equivalent of the net delta 
\11\ of a hedged options position still would be subject to the 
position limits in Rule 2860 (subject to the availability of any other 
position limit exemptions).\12\ 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 FINRA stating that the 
member and/or its affiliate will use a Permitted Pricing Model, and 
that if an affiliate ceases to hedge stock options positions in 
accordance with such systems and models, it will provide immediate 
written notice to the member.\13\ Furthermore, any member or designated 
aggregation unit would be required to report any aggregate position of 
200 or more contracts on the same side of the market and the options 
contract equivalent of the net delta of a position representing 200 or 
more contracts.\14\ In addition, the options positions of a non-member 
relying on this exemption would be required to be carried by a member 
with which it is affiliated.\15\
---------------------------------------------------------------------------

    \7\ The proposed rule change does not expressly amend FINRA's 
options exercise limits in Rule 2860(b)(4) because such exercise 
limits apply only to the extent Rule 2860(b)(3) imposes position 
limits. Thus, as delta neutral positions would be exempt from 
position limits under the proposed rule change, such positions also 
would be exempt from exercise limits. See NASD Notice to Members 94-
46 (June 1994) at 2 (``* * * exercise limits correspond to position 
limits, such that investors in options classes on the same side of 
the market are allowed to exercise * * * only the number of options 
contracts set forth as the applicable position limit for those 
options classes.''). Similarly, for positions held that are not 
delta neutral, only the option contract equivalent of the net delta 
of such positions would be subject to exercise limits.
    \8\ See Securities Exchange Act Release No. 50748 (November 29, 
2004), 69 FR 70485 (December 6, 2004) (SR-NASD-2004-153).
    \9\ 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 10.
    \10\ ``Permitted Pricing Model'' for purposes of this exemption 
would be a pricing model used by: (1) A member or its 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''); (2) 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; (3) a Commission registered OTC 
derivatives dealer; (4) a national bank under the National Bank Act; 
and (5) a member, or non-member affiliate (that is part of a CSE or 
FHC), using a pricing model maintained and operated by the Options 
Clearing Corporation. See proposed Rule 2860(b)(3)(A)(vii)(b)(1).
    \11\ ``Net delta'' would be defined to mean ``the number of 
shares that must be maintained (either long or short) to offset the 
risk that the value of an equity options position will change with 
incremental changes in the price of the security underlying the 
options position.'' See proposed changes to Rule 2860(b)(2)(GG).
    ``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 2860(b)(2)(LL).
    \12\ See proposed Rule 2860(b)(3)(A)(vii)(b). The Commission 
notes that Rule 2860(b)(3)(A)(vii) 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.
    \13\ See proposed Rule 2860(b)(3)(A)(vii)(b)(3).
    \14\ See proposed Rule 2860(b)(3)(A)(vii)(b)(4).
    \15\ See proposed Rule 2860(b)(3)(A)(vii)(b)(3).
---------------------------------------------------------------------------

    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 
association.\16\ In particular, the Commission believes that the 
proposed rule change is consistent with Section 15A(b)(6) of the 
Act,\17\ which requires, among other things, that FINRA 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.\18\
---------------------------------------------------------------------------

    \16\ 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).
    \17\ 15 U.S.C. 78o-3(b)(6).
    \18\ 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).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-NASD-2007-044), as modified 
by Amendment No. 1, be, and it hereby is, approved.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78s(b)(2).
    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets 
pursuant to delegated authority.\20\
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-24044 Filed 12-11-07; 8:45 am]
BILLING CODE 8011-01-P

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