Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Create a Delta Hedging Exemption from Equity Options Position Limits, 11170-11173 [E8-3842]
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Federal Register / Vol. 73, No. 41 / Friday, February 29, 2008 / Notices
Market-Makers holding an appointment
and submitting electronic quotations in
the same class, provided CBOE uses an
allocation algorithm in the class that
does not allocate electronic trades, in
whole or in part, in an equal percentage
based on the number of market
participants quoting at the best bid or
offer; or (b) affiliated Market-Makers
holding an appointment in the same
class for purposes of trading in open
outcry.
• Proposed new subparagraph (4) of
CBOE Rule 8.3(c)(vii) simply restates
the multiple aggregation unit pilot
program currently applicable to RMMs
(see CBOE Rule 8.4(c)(ii)) and MarketMakers (see CBOE Rule 8.3(c)(viii)).
CBOE also proposes to extend for an
additional year, until March 14, 2009,
the pilot program. CBOE believes that
the pilot program has been successful,
and CBOE has not experienced any
negative effects with respect to the pilot
program.
With regard to the obligations of
Market-Makers, CBOE proposes to
amend CBOE Rule 8.7 to delete
references to RMMs and other outdated
references to appointed trading stations.
Additionally, CBOE proposes to delete
reference to DPMs representing orders
as agent in CBOE Rule 8.7(d)(i)(C), as
DPMs cannot act as an agent for orders
(see Rule 8.85(c)).
CBOE also proposes to update CBOE
Rule 8.3A pertaining to CQLs. CBOE
proposes to amend paragraph (a) to state
that the DPM and e-DPMs (if applicable)
assigned to a product and MarketMakers who hold an appointment in the
product are entitled to quote
electronically in the product for as long
as they maintain an appointment in the
product. CBOE proposes to amend
paragraphs (b) and (c) to delete
reference to March 18, 2005, and also to
provide that any Market-Maker holding
an appointment in a product prior to its
addition to the Hybrid 2.0 Platform or
Hybrid Trading System, respectively,
will be entitled to quote electronically
in the product. Finally, CBOE proposes
to delete existing Interpretation .02, as
it is outdated.
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2. Statutory Basis
The Exchange believes the rule
proposal is consistent with the Act and
the rules and regulations thereunder
applicable to a national securities
exchange and, in particular, the
requirements of Section 6(b) of the Act.7
Specifically, the Exchange believes that
the proposed rule change is consistent
with the requirements under Section
6(b)(5) of the Act 8 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.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange 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
The Exchange neither solicited nor
received comments on the proposal.
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 CBOE 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.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CBOE–2007–120 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–CBOE–2007–120. 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 (https://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 the filing also will be available
for inspection and copying at the
principal office of the Exchange. 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–2007–120 and
should be submitted on or before March
21, 2008.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.9
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–3798 Filed 2–28–08; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–57360; File No. SR–ISE–
2008–06]
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Notice of Filing and Immediate
Effectiveness of Proposed Rule
Change To Create a Delta Hedging
Exemption from Equity Options
Position Limits
February 20, 2008.
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 February
1, 2008, the International Securities
9 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
7 15
U.S.C. 78f(b).
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Federal Register / Vol. 73, No. 41 / Friday, February 29, 2008 / Notices
Exchange, LLC (‘‘ISE’’ 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 ISE. The
Exchange has filed the proposal as a
‘‘non-controversial’’ rule change
pursuant to Section 19(b)(3)(A) of the
Act 3 and Rule 19b–4(f)(6) thereunder,4
which renders it effective upon filing
with the Commission. The Commission
is publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to create a
delta hedging exemption from equity
options position limits pursuant to ISE
Rule 413 (Exemptions from Position
Limits). The text of the proposed rule
change is available at ISE, the
Commission’s Public Reference Room,
and https://www.ise.com.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, ISE
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 these statements
may be examined at the places specified
in Item IV below. ISE has prepared
summaries, set forth in Sections A, B,
and C below, of the most significant
aspects of such statements.
6 See
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
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All options traded on the Exchange
are subject to position and exercise
limits, as provided under ISE Rules 412
and 413.5 Position limits are imposed,
generally, to maintain fair and orderly
markets for options and other securities
by limiting the amount of control one or
more affiliated persons or entities may
have over one particular options class or
the security or securities that underlie
that options class. Exchange rules also
contain various hedge exemptions to
allow certain hedged positions in excess
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6).
5 Position limits for index options are provided
separately under Rules 2004, 2005, and 2006.
4 17
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Rule 413.
e.g., Securities Exchange Act Release Nos.
56493 (September 21, 2007), 72 FR 55266
(September 28, 2007); 56263 (August 15, 2007), 72
FR 47105 (August 22, 2007); and 56020 (July 6,
2007), 72 FR 38109 (July 12, 2007).
8 To illustrate, a stock option contract with a delta
of .5 will move $0.50 for every $1.00 move in the
underlying stock.
9 Rule 414 establishes exercise limits for an
option at the same level as the option’s position
limit under Rule 412; therefore, no changes are
proposed to Rule 414.
10 The term ‘‘delta neutral’’ is defined in proposed
Rule 413(a)(7)(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.
11 The Exchange intends to submit a separate
proposed rule change to adopt a delta neutral based
hedge exemption for certain index options and to
expand the delta neutral-based hedge exemption for
ETF options to allow highly correlated instruments
to be included in any ETF option net delta
calculation.
7 See,
1. Purpose
3 15
of the applicable standard position
limit.6
Over the years, ISE has increased the
size of options position and exercise
limits, as well as the size and scope of
available hedge exemptions to the
applicable position limits.7 These hedge
exemptions generally require a one-toone hedge (i.e., one stock option
contract must be hedged by the number
of shares underlying the options
contract, typically 100 shares). In
practice, however, many firms do not
hedge their options positions in this
manner. Instead, these firms engage in
what is commonly known as ‘‘delta
hedging.’’ Delta hedging varies the
number of shares of the underlying
security used to hedge an options
position based upon the relative
sensitivity of the value of the option
contract to a change in the price of the
underlying security.8 Delta hedging is a
widely accepted method for risk
management.
Delta Neutral-Based Equity Hedge
Exemption. The Exchange proposes to
adopt a new exemption from equity
options position and exercise limits 9 for
positions held by ISE members and
certain of their affiliates that are ‘‘delta
neutral’’ 10 under a ‘‘permitted pricing
model’’ (as defined below), subject to
certain conditions (‘‘Exemption’’). The
proposed Exemption would apply only
to equity options (stock options and
options on exchange-traded funds
(‘‘ETFs’’)).11
Any equity option position that is not
delta neutral would be subject to
position and exercise limits, subject to
the availability of other exemptions.
Only the ‘‘option contract equivalent of
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the net delta’’ of such position would be
subject to the appropriate position
limit.12
Only financial instruments relating to
the security underlying an equity
options position could be included in
any determination of an equity options
position’s net delta or whether the
options position is delta neutral. In
addition, members could not use the
same equity or other financial
instrument position in connection with
more than one hedge exemption.
Therefore, a stock position used as part
of a delta hedging strategy could not
also serve as the basis for any other
equity hedge exemption.
Permitted Pricing Model. Under the
proposed rule, the calculation of the
delta for any equity option position, and
the determination of whether a
particular equity option position is delta
neutral, must be made using a permitted
pricing model. A ‘‘permitted pricing
model’’ is defined in proposed Rule
413(a)(7)(C) to mean the pricing model
maintained and operated by The
Options Clearing Corporation (‘‘OCC’’)
and the pricing models used by (i) a
member or its affiliate subject to
consolidated supervision by the
Commission pursuant to Appendix E of
Rule 15c3–1; (ii) 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; 13 (iii) an
12 Under proposed Rule 413(a)(7)(B), the term
‘‘options contract equivalent of the net delta’’ is
defined as the net delta divided by the number of
shares underlying the option contract, and the term
‘‘net delta’’ is defined as, 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, as
determined in accordance with a permitted pricing
model.
13 The pricing model of an FHC or of an affiliate
of an FHC would have to be consistent with: (i) The
requirements of the Board of Governors of the
Federal Reserve System (‘‘FRB’’), as amended from
time to time, in connection with the calculation of
risk-based adjustments to capital for market risk
under capital requirements of the FRB, provided
that the member or affiliate of a member relying on
this exemption in connection with the use of such
model is an entity that is part of such company’s
consolidated supervised holding company group; or
(ii) the standards published by the Basel Committee
on Banking Supervision, as amended from time to
time and as implemented by such company’s
principal regulator, in connection with the
calculation of risk-based deductions or adjustments
to or allowances for the market risk capital
requirements of such principal regulator applicable
to such company—where ‘‘principal regulator’’
means a member of the Basel Committee on
Banking Supervision that is the home country
consolidated supervisor of such company—
provided that the member or affiliate of a member
relying on this exemption in connection with the
use of such model is an entity that is part of such
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SEC registered OTC derivatives
dealer; 14 and (iv) a national bank.15
Aggregation of Accounts. Members
and non-member affiliates relying on
the Exemption would be required to
ensure that the permitted pricing model
is applied to all positions in or relating
to the security underlying the relevant
options position that are owned or
controlled by the member, or its
affiliates.
However, the net delta of an options
position held by an entity entitled to
rely on the Exemption, or by a separate
and distinct trading unit of such entity,
may be calculated without regard to
positions in or relating to the security
underlying the option position held by
an affiliated entity or by another trading
unit within the same entity, provided
that: (i) The entity demonstrates to the
Exchange’s satisfaction that no control
relationship, as defined in Rule 412(f),
exists between such affiliates or trading
units, and (ii) the entity has provided
the Exchange written notice in advance
that it intends to be considered separate
and distinct from any affiliate, or, as
applicable, which trading units within
the entity are to be considered separate
and distinct from each other for
purposes of the Exemption.16
Any member or non-member affiliate
relying on the Exemption must
designate, by prior written notice to the
Exchange, each trading unit or entity
whose options positions are required by
Exchange rules to be aggregated with the
options positions of such member or
non-member affiliate relying on the
Exemption for purposes of compliance
with Exchange position or exercise
limits.17
Obligations of Members and
Affiliates. Any member relying on the
Exemption would be required to
provide a written certification to the
Exchange that it is using a permitted
company’s consolidated supervised holding
company group. See proposed Rule 413(a)(7)(C)(3).
14 The pricing model of a Commission-registered
OTC derivatives dealer would have to be consistent
with the requirements of Appendix F to Rules
15c3–1 and 15c3–4 under the Act, as amended from
time to time, in connection with the calculation of
risk-based deductions from capital for market risk
thereunder. Only an OTC derivatives dealer and no
other affiliated entity (including a member) would
be able to rely on this part of the Exemption. See
proposed Rule 413(a)(7)(C)(4).
15 The pricing model of a national bank would
have to be consistent with the requirements of the
Office of the Comptroller of the Currency, as
amended from time to time, in connection with the
calculation of risk-based adjustments to capital for
market risk under capital requirements of the Office
of the Comptroller of the Currency. Only a national
bank and no other affiliated entity (including a
member) would be able to rely on this part of the
Exemption. See proposed Rule 413(a)(7)(C)(5).
16 See proposed Rule 413(a)(7)(D)(2).
17 See proposed Rule 413(a)(7)(D)(3).
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pricing model as defined in the rule for
purposes of the Exemption. In addition,
by such reliance, such member would
authorize any other person carrying for
such member an account including, or
with whom such member has entered
into, a position in or relating to a
security underlying the relevant option
position to provide to the Exchange or
OCC such information regarding such
account or position as the Exchange or
OCC may request as part of the
Exchange’s confirmation or verification
of the accuracy of any net delta
calculation under this Exemption.18
The options positions of a nonmember affiliate relying on the
Exemption must be carried by a member
with which it is affiliated. A member
carrying an account that includes an
equity option position for a non-member
affiliate that intends to rely on the
Exemption would be required to obtain
from such non-member affiliate a
written certification that it is using a
permitted pricing model as defined in
the rule for purposes of the
Exemption.19
Reporting. Under proposed Rule
413(a)(7)(F), each member relying on the
Exemption would be required to report,
in accordance with Rule 41520 (i) all
equity option positions (including those
that are delta neutral) that are reportable
thereunder, and (ii) on its own behalf or
on behalf of a designated aggregation
unit pursuant to Rule 413(a)(7)(F), for
each such account that holds an equity
option position subject to the
Exemption in excess of the levels
specified in Rule 413, the net delta and
the options contract equivalent of the
net delta of such position.
The Exchange and other selfregulatory organizations are working on
modifying the Large Options Position
18 See
proposed Rule 413(a)(7)(E).
addition, the member would be required to
obtain from such non-member affiliate a written
statement confirming that such non-member
affiliate: (a) Is relying on the Exemption; (b) will use
only a permitted pricing model for purposes of
calculating the net delta of its option positions for
purposes of the Exemption; (c) will promptly notify
the member if it ceases to rely on the Exemption;
(d) authorizes the member to provide to the
Exchange or the OCC such information regarding
positions of the non-member affiliate as the
Exchange or OCC may request as part of the
Exchange’s confirmation or verification of the
accuracy of any net delta calculation under the
Exemption; and (e) if the non-member affiliate is
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. See subparagraph (E)(3) of proposed
Rule 413(a)(7).
20 Rule 415 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.
19 In
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Report system and/or OCC reports to
allow a member to indicate that an
equity options position is delta neutral.
Records. Under proposed Rule
413(a)(7)(G), each member relying on
the Exemption would be required to (i)
retain, and would be required to
undertake reasonable efforts to ensure
that any non-member affiliate of the
member relying on the exemption
retains, a list of the options, securities
and other instruments underlying each
options position net delta calculation
reported to the Exchange hereunder,
and (ii) produce such information to the
Exchange upon request.21
Reliance on Federal Oversight. As
provided under proposed Rule 413, a
permitted pricing model includes
proprietary pricing models used by
members and affiliates that have been
approved by the Commission, the FRB
or another federal financial regulator. In
adopting the proposed Exemption, the
Exchange would be relying upon the
rigorous approval processes and
ongoing oversight of a federal financial
regulator. The Exchange notes that it
would not be under any obligation to
verify whether a member’s or its
affiliate’s use of a proprietary pricing
model is appropriate or yielding
accurate results.
The Exchange will issue a regulatory
circular stating the operative date and
describing the substantive terms of the
proposed rule change no later than 60
days after the Commission issues notice
of the proposed rule change. The
operative date shall be such date as may
be necessary to ensure that necessary
technology changes to The Options
Clearing Corporation and the Securities
Industry Automation Corporation
reports used for position limit
surveillance have been completed.22
2. Statutory Basis
The Exchange believes the rule
proposal is consistent with the Act and
the rules and regulations thereunder
applicable to a national securities
exchange and, in particular, the
requirements of Section 6(b) of the
Act.23 Specifically, the Exchange
believes that the proposed rule change
is consistent with the Section 6(b)(5)24
Act requirements that the rules of an
exchange be designed to promote just
21 A member would be authorized to report
position information of its non-member affiliate
pursuant to the written statement required under
proposed Rule 413(a)(7)(E)(3)(ii)(d).
22 Telephone conversation between John
Rademacher, Assistant General Counsel, ISE, and
Ira Brandriss, Special Counsel, Division of Trading
and Markets, Commission, on February 19, 2008.
23 15 U.S.C. 78f(b).
24 15 U.S.C. 78f(b)(5).
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Federal Register / Vol. 73, No. 41 / Friday, February 29, 2008 / Notices
and equitable principles of trade, to
prevent fraudulent and manipulative
acts and, in general, to protect investors
and the public interest. The Exchange
believes the proposed delta neutralbased hedge exemption from equity
options position and exercise limits is
appropriate in that it is based on a
widely accepted risk management
method used in options trading. Also,
the Commission has previously stated
its support for recognizing options
positions hedged on a delta neutral
basis as properly exempted from
position limits.25
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is 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
The Exchange has not solicited, and
does no intend to solicit, comments on
this proposed rule change. The
Exchange has not received any
unsolicited written comments from
members or other interested parties.
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III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing rule change
does not: (1) Significantly affect the
protection of investors or the public
interest; (2) impose any significant
burden on competition; and (3) become
operative for 30 days after the date of
this filing, or such shorter time as the
Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act26 and Rule 19b–
4(f)(6) thereunder.27
A proposed rule change filed under
19b–4(f)(6) normally may not become
operative prior to 30 days after the date
of filing.28 However, Rule 19b–
4(f)(6)(iii)29 permits the Commission to
25 See Securities Exchange Act Release No. 40594
(October 23, 1998), 63 FR 59362, 59380 (November
3, 1998) (adopting rules relating to OTC Derivatives
Dealers).
26 15 U.S.C. 78s(b)(3)(A).
27 CFR 240.19b–4(f)(6).
28 17 CFR 240.19b–4(f)(6)(iii). In addition, Rule
19b–4(f)(6)(iii) requires that a self-regulatory
organization submit to the Commission written
notice of its intent to file the proposed rule change,
along with a brief description and text of the
proposed rule change, at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied the fiveday pre-filing notice requirement.
29 Id.
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designate a shorter time if such action
is consistent with the protection of
investors and the public interest. The
Exchange has requested that the
Commission waive the 30-day operative
delay. The Commission believes that
waiving the 30-day operative delay is
consistent with the protection of
investors and the public interest
because such waiver would allow the
Exchange to implement the delta
hedging exemption from equity options
position limits without needless delay.
The Commission notes that it recently
approved a substantially similar
proposal filed by the Chicago Board
Options Exchange, Incorporated.30 The
Commission believes that ISE’s proposal
to create a delta hedging exemption
from equity options position limits
raises no new issues. For these reasons,
the Commission designates the
proposed rule change to be operative
upon filing with the Commission.31
At any time within 60 days of the
filing of such proposed rule change the
Commission may summarily abrogate
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors
or otherwise in furtherance of the
purposes of the Act.
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.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–ISE–2008–06 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–ISE–2008–06. This file
number should be included on the
subject line if e-mail is used. To help the
30 See Securities Exchange Act Release No. 56970
(December 14, 2007), 72 FR 72428 (December 20,
2007) (SR–CBOE–2007–99).
31 For the purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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11173
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 (https://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 the filing also will be available
for inspection and copying at the
principal office of ISE. 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–ISE–
2008–06 and should be submitted on or
before March 21, 2008.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–3842 Filed 2–28–08; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–57358; File No. SR–
NYSEArca–2008–17]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Create a Delta
Hedging Exemption From Equity
Options Position Limits
February 20, 2008.
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 February
6, 2008, NYSE Arca, Inc. (‘‘NYSE Arca’’
or ‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
32 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
115
E:\FR\FM\29FEN1.SGM
29FEN1
]]>Agencies
[Federal Register Volume 73, Number 41 (Friday, February 29, 2008)]
[Notices]
[Pages 11170-11173]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-3842]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57360; File No. SR-ISE-2008-06]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change To Create a Delta Hedging Exemption from Equity Options Position
Limits
February 20, 2008.
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 February 1, 2008, the International Securities
[[Page 11171]]
Exchange, LLC (``ISE'' 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 ISE. The Exchange has filed the proposal as a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A) of the Act
\3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders it effective upon
filing with the Commission. The Commission is publishing this notice 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.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to create a delta hedging exemption from
equity options position limits pursuant to ISE Rule 413 (Exemptions
from Position Limits). The text of the proposed rule change is
available at ISE, the Commission's Public Reference Room, and https://
www.ise.com.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, ISE 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 these statements may be examined at the places specified in
Item IV below. ISE has prepared summaries, set forth in Sections A, B,
and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
All options traded on the Exchange are subject to position and
exercise limits, as provided under ISE Rules 412 and 413.\5\ Position
limits are imposed, generally, to maintain fair and orderly markets for
options and other securities by limiting the amount of control one or
more affiliated persons or entities may have over one particular
options class or the security or securities that underlie that options
class. Exchange rules also contain various hedge exemptions to allow
certain hedged positions in excess of the applicable standard position
limit.\6\
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\5\ Position limits for index options are provided separately
under Rules 2004, 2005, and 2006.
\6\ See Rule 413.
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Over the years, ISE has increased the size of options position and
exercise limits, as well as the size and scope of available hedge
exemptions to the applicable position limits.\7\ These hedge exemptions
generally require a one-to-one hedge (i.e., one stock option contract
must be hedged by the number of shares underlying the options contract,
typically 100 shares). In practice, however, many firms do not hedge
their options positions in this manner. Instead, these firms engage in
what is commonly known as ``delta hedging.'' Delta hedging varies the
number of shares of the underlying security used to hedge an options
position based upon the relative sensitivity of the value of the option
contract to a change in the price of the underlying security.\8\ Delta
hedging is a widely accepted method for risk management.
---------------------------------------------------------------------------
\7\ See, e.g., Securities Exchange Act Release Nos. 56493
(September 21, 2007), 72 FR 55266 (September 28, 2007); 56263
(August 15, 2007), 72 FR 47105 (August 22, 2007); and 56020 (July 6,
2007), 72 FR 38109 (July 12, 2007).
\8\ To illustrate, a stock option contract with a delta of .5
will move $0.50 for every $1.00 move in the underlying stock.
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Delta Neutral-Based Equity Hedge Exemption. The Exchange proposes
to adopt a new exemption from equity options position and exercise
limits \9\ for positions held by ISE members and certain of their
affiliates that are ``delta neutral'' \10\ under a ``permitted pricing
model'' (as defined below), subject to certain conditions
(``Exemption''). The proposed Exemption would apply only to equity
options (stock options and options on exchange-traded funds
(``ETFs'')).\11\
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\9\ Rule 414 establishes exercise limits for an option at the
same level as the option's position limit under Rule 412; therefore,
no changes are proposed to Rule 414.
\10\ The term ``delta neutral'' is defined in proposed Rule
413(a)(7)(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.
\11\ The Exchange intends to submit a separate proposed rule
change to adopt a delta neutral based hedge exemption for certain
index options and to expand the delta neutral-based hedge exemption
for ETF options to allow highly correlated instruments to be
included in any ETF option net delta calculation.
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Any equity option position that is not delta neutral would be
subject to position and exercise limits, subject to the availability of
other exemptions. Only the ``option contract equivalent of the net
delta'' of such position would be subject to the appropriate position
limit.\12\
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\12\ Under proposed Rule 413(a)(7)(B), the term ``options
contract equivalent of the net delta'' is defined as the net delta
divided by the number of shares underlying the option contract, and
the term ``net delta'' is defined as, 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,
as determined in accordance with a permitted pricing model.
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Only financial instruments relating to the security underlying an
equity options position could be included in any determination of an
equity options position's net delta or whether the options position is
delta neutral. In addition, members could not use the same equity or
other financial instrument position in connection with more than one
hedge exemption. Therefore, a stock position used as part of a delta
hedging strategy could not also serve as the basis for any other equity
hedge exemption.
Permitted Pricing Model. Under the proposed rule, the calculation
of the delta for any equity option position, and the determination of
whether a particular equity option position is delta neutral, must be
made using a permitted pricing model. A ``permitted pricing model'' is
defined in proposed Rule 413(a)(7)(C) to mean the pricing model
maintained and operated by The Options Clearing Corporation (``OCC'')
and the pricing models used by (i) a member or its affiliate subject to
consolidated supervision by the Commission pursuant to Appendix E of
Rule 15c3-1; (ii) 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;
\13\ (iii) an
[[Page 11172]]
SEC registered OTC derivatives dealer; \14\ and (iv) a national
bank.\15\
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\13\ The pricing model of an FHC or of an affiliate of an FHC
would have to be consistent with: (i) The requirements of the Board
of Governors of the Federal Reserve System (``FRB''), as amended
from time to time, in connection with the calculation of risk-based
adjustments to capital for market risk under capital requirements of
the FRB, provided that the member or affiliate of a member relying
on this exemption in connection with the use of such model is an
entity that is part of such company's consolidated supervised
holding company group; or (ii) the standards published by the Basel
Committee on Banking Supervision, as amended from time to time and
as implemented by such company's principal regulator, in connection
with the calculation of risk-based deductions or adjustments to or
allowances for the market risk capital requirements of such
principal regulator applicable to such company--where ``principal
regulator'' means a member of the Basel Committee on Banking
Supervision that is the home country consolidated supervisor of such
company--provided that the member or affiliate of a member relying
on this exemption in connection with the use of such model is an
entity that is part of such company's consolidated supervised
holding company group. See proposed Rule 413(a)(7)(C)(3).
\14\ The pricing model of a Commission-registered OTC
derivatives dealer would have to be consistent with the requirements
of Appendix F to Rules 15c3-1 and 15c3-4 under the Act, as amended
from time to time, in connection with the calculation of risk-based
deductions from capital for market risk thereunder. Only an OTC
derivatives dealer and no other affiliated entity (including a
member) would be able to rely on this part of the Exemption. See
proposed Rule 413(a)(7)(C)(4).
\15\ The pricing model of a national bank would have to be
consistent with the requirements of the Office of the Comptroller of
the Currency, as amended from time to time, in connection with the
calculation of risk-based adjustments to capital for market risk
under capital requirements of the Office of the Comptroller of the
Currency. Only a national bank and no other affiliated entity
(including a member) would be able to rely on this part of the
Exemption. See proposed Rule 413(a)(7)(C)(5).
---------------------------------------------------------------------------
Aggregation of Accounts. Members and non-member affiliates relying
on the Exemption would be required to ensure that the permitted pricing
model is applied to all positions in or relating to the security
underlying the relevant options position that are owned or controlled
by the member, or its affiliates.
However, the net delta of an options position held by an entity
entitled to rely on the Exemption, or by a separate and distinct
trading unit of such entity, may be calculated without regard to
positions in or relating to the security underlying the option position
held by an affiliated entity or by another trading unit within the same
entity, provided that: (i) The entity demonstrates to the Exchange's
satisfaction that no control relationship, as defined in Rule 412(f),
exists between such affiliates or trading units, and (ii) the entity
has provided the Exchange written notice in advance that it intends to
be considered separate and distinct from any affiliate, or, as
applicable, which trading units within the entity are to be considered
separate and distinct from each other for purposes of the
Exemption.\16\
---------------------------------------------------------------------------
\16\ See proposed Rule 413(a)(7)(D)(2).
---------------------------------------------------------------------------
Any member or non-member affiliate relying on the Exemption must
designate, by prior written notice to the Exchange, each trading unit
or entity whose options positions are required by Exchange rules to be
aggregated with the options positions of such member or non-member
affiliate relying on the Exemption for purposes of compliance with
Exchange position or exercise limits.\17\
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\17\ See proposed Rule 413(a)(7)(D)(3).
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Obligations of Members and Affiliates. Any member relying on the
Exemption would be required to provide a written certification to the
Exchange that it is using a permitted pricing model as defined in the
rule for purposes of the Exemption. In addition, by such reliance, such
member would authorize any other person carrying for such member an
account including, or with whom such member has entered into, a
position in or relating to a security underlying the relevant option
position to provide to the Exchange or OCC such information regarding
such account or position as the Exchange or OCC may request as part of
the Exchange's confirmation or verification of the accuracy of any net
delta calculation under this Exemption.\18\
---------------------------------------------------------------------------
\18\ See proposed Rule 413(a)(7)(E).
---------------------------------------------------------------------------
The options positions of a non-member affiliate relying on the
Exemption must be carried by a member with which it is affiliated. A
member carrying an account that includes an equity option position for
a non-member affiliate that intends to rely on the Exemption would be
required to obtain from such non-member affiliate a written
certification that it is using a permitted pricing model as defined in
the rule for purposes of the Exemption.\19\
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\19\ In addition, the member would be required to obtain from
such non-member affiliate a written statement confirming that such
non-member affiliate: (a) Is relying on the Exemption; (b) will use
only a permitted pricing model for purposes of calculating the net
delta of its option positions for purposes of the Exemption; (c)
will promptly notify the member if it ceases to rely on the
Exemption; (d) authorizes the member to provide to the Exchange or
the OCC such information regarding positions of the non-member
affiliate as the Exchange or OCC may request as part of the
Exchange's confirmation or verification of the accuracy of any net
delta calculation under the Exemption; and (e) if the non-member
affiliate is 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. See subparagraph (E)(3) of proposed Rule 413(a)(7).
---------------------------------------------------------------------------
Reporting. Under proposed Rule 413(a)(7)(F), each member relying on
the Exemption would be required to report, in accordance with Rule
415\20\ (i) all equity option positions (including those that are delta
neutral) that are reportable thereunder, and (ii) on its own behalf or
on behalf of a designated aggregation unit pursuant to Rule
413(a)(7)(F), for each such account that holds an equity option
position subject to the Exemption in excess of the levels specified in
Rule 413, the net delta and the options contract equivalent of the net
delta of such position.
---------------------------------------------------------------------------
\20\ Rule 415 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.
---------------------------------------------------------------------------
The Exchange and other self-regulatory organizations are working on
modifying the Large Options Position Report system and/or OCC reports
to allow a member to indicate that an equity options position is delta
neutral.
Records. Under proposed Rule 413(a)(7)(G), each member relying on
the Exemption would be required to (i) retain, and would be required to
undertake reasonable efforts to ensure that any non-member affiliate of
the member relying on the exemption retains, a list of the options,
securities and other instruments underlying each options position net
delta calculation reported to the Exchange hereunder, and (ii) produce
such information to the Exchange upon request.\21\
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\21\ A member would be authorized to report position information
of its non-member affiliate pursuant to the written statement
required under proposed Rule 413(a)(7)(E)(3)(ii)(d).
---------------------------------------------------------------------------
Reliance on Federal Oversight. As provided under proposed Rule 413,
a permitted pricing model includes proprietary pricing models used by
members and affiliates that have been approved by the Commission, the
FRB or another federal financial regulator. In adopting the proposed
Exemption, the Exchange would be relying upon the rigorous approval
processes and ongoing oversight of a federal financial regulator. The
Exchange notes that it would not be under any obligation to verify
whether a member's or its affiliate's use of a proprietary pricing
model is appropriate or yielding accurate results.
The Exchange will issue a regulatory circular stating the operative
date and describing the substantive terms of the proposed rule change
no later than 60 days after the Commission issues notice of the
proposed rule change. The operative date shall be such date as may be
necessary to ensure that necessary technology changes to The Options
Clearing Corporation and the Securities Industry Automation Corporation
reports used for position limit surveillance have been completed.\22\
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\22\ Telephone conversation between John Rademacher, Assistant
General Counsel, ISE, and Ira Brandriss, Special Counsel, Division
of Trading and Markets, Commission, on February 19, 2008.
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2. Statutory Basis
The Exchange believes the rule proposal is consistent with the Act
and the rules and regulations thereunder applicable to a national
securities exchange and, in particular, the requirements of Section
6(b) of the Act.\23\ Specifically, the Exchange believes that the
proposed rule change is consistent with the Section 6(b)(5)\24\ Act
requirements that the rules of an exchange be designed to promote just
[[Page 11173]]
and equitable principles of trade, to prevent fraudulent and
manipulative acts and, in general, to protect investors and the public
interest. The Exchange believes the proposed delta neutral-based hedge
exemption from equity options position and exercise limits is
appropriate in that it is based on a widely accepted risk management
method used in options trading. Also, the Commission has previously
stated its support for recognizing options positions hedged on a delta
neutral basis as properly exempted from position limits.\25\
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\23\ 15 U.S.C. 78f(b).
\24\ 15 U.S.C. 78f(b)(5).
\25\ See Securities Exchange Act Release No. 40594 (October 23,
1998), 63 FR 59362, 59380 (November 3, 1998) (adopting rules
relating to OTC Derivatives Dealers).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is 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
The Exchange has not solicited, and does no intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing rule change does not: (1) Significantly
affect the protection of investors or the public interest; (2) impose
any significant burden on competition; and (3) become operative for 30
days after the date of this filing, or such shorter time as the
Commission may designate, it has become effective pursuant to Section
19(b)(3)(A) of the Act\26\ and Rule 19b-4(f)(6) thereunder.\27\
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\26\ 15 U.S.C. 78s(b)(3)(A).
\27\ CFR 240.19b-4(f)(6).
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A proposed rule change filed under 19b-4(f)(6) normally may not
become operative prior to 30 days after the date of filing.\28\
However, Rule 19b-4(f)(6)(iii)\29\ permits the Commission to designate
a shorter time if such action is consistent with the protection of
investors and the public interest. The Exchange has requested that the
Commission waive the 30-day operative delay. The Commission believes
that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest because such waiver
would allow the Exchange to implement the delta hedging exemption from
equity options position limits without needless delay. The Commission
notes that it recently approved a substantially similar proposal filed
by the Chicago Board Options Exchange, Incorporated.\30\ The Commission
believes that ISE's proposal to create a delta hedging exemption from
equity options position limits raises no new issues. For these reasons,
the Commission designates the proposed rule change to be operative upon
filing with the Commission.\31\
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\28\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to
the Commission written notice of its intent to file the proposed
rule change, along with a brief description and text of the proposed
rule change, at least five business days prior to the date of filing
of the proposed rule change, or such shorter time as designated by
the Commission. The Exchange has satisfied the five-day pre-filing
notice requirement.
\29\ Id.
\30\ See Securities Exchange Act Release No. 56970 (December 14,
2007), 72 FR 72428 (December 20, 2007) (SR-CBOE-2007-99).
\31\ For the purposes only of waiving the 30-day operative
delay, the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of such proposed rule
change the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors or otherwise in
furtherance of the purposes of the Act.
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. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-ISE-2008-06 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2008-06. 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 (https://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 the filing also will be available for
inspection and copying at the principal office of ISE. 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-ISE-2008-06 and should be
submitted on or before March 21, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-3842 Filed 2-28-08; 8:45 am]
BILLING CODE 8011-01-P
