Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Delta Hedge Exemptions, 42797-42801 [2010-17926]

Download as PDF Federal Register / Vol. 75, No. 140 / Thursday, July 22, 2010 / Notices sroberts on DSKD5P82C1PROD with NOTICES to the concern that the proposal is unnecessary because abuses have not been witnessed, the Commission notes that its oversight of the securities arbitration process is directed at ensuring that it is fair and efficient. The Commission believes that FINRA’s proactive approach in proposing this rule change is consistent with ensuring a fair and efficient arbitration process for all persons involved in arbitration, including non-party witnesses. Moreover, the Commission believes the concern that the proposal would reduce control by arbitrators, add confusion and protract the process will be mitigated by Amendment No. 1. Under the proposal, as modified by Amendment No. 1, the role of attorneys for non-party witnesses will generally be limited to asserting recognized privileges on behalf of the non-party witness; however, the arbitration panel will maintain overall control over the proceeding, including the ability to determine the appropriate level of attorney representation at a hearing. Further, FINRA has committed to alerting arbitrators to concerns regarding delayed or protracted proceedings. Finally, the Commission does not agree that FINRA has not adequately justified its basis for the proposal. The Commission believes that FINRA’s justification of enhancing fairness in the arbitration process by ensuring that a non-party witness may be represented by counsel during his or her testimony is consistent with the requirements of the Act. V. Accelerated Approval The Commission finds goods cause, pursuant to Section 19(b)(2) of the Act,26 for approving the proposed rule change, as modified by Amendment No. 1 thereto, prior to the 30th day after publication of Amendment No.1 in the Federal Register. The changes proposed in Amendment No.1 respond to specific concerns raised by commenters. In particular, Amendment No. 1 proposes to limit the role of a non-party witness attorney, unless otherwise authorized by the arbitration panel, to the assertion of recognized privileges such as the attorney-client and work product privilege and the privilege against selfincrimination. Accordingly, the Commission finds that good cause exists to approve the proposal, as modified by Amendment No. 1, on an accelerated basis. VI. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether Amendment No. 1 to 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–FINRA–2010–006 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–FINRA–2010–006. 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 Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. 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–FINRA–2010–006 and should be submitted on or before August 12, 2010. VII. Conclusions It is therefore ordered, pursuant to Section 19(b)(2) of the Act,27 that the proposed rule change (SR–FINRA– 2010–006), as modified by Amendment No. 1, be, and hereby is, approved on an accelerated basis. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.28 Florence E. Harmon, Deputy Secretary. [FR Doc. 2010–17931 Filed 7–21–10; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–62504; File No. SR–Phlx– 2010–93] Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Delta Hedge Exemptions July 15, 2010. 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 June 30, 2010, NASDAQ OMX PHLX, Inc. (‘‘Phlx’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. 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 (i) expand the delta hedging exemption available for equity options positions limits, (ii) amend the reporting requirements applicable to members relying on the delta hedging exemption and (iii) adopt a delta hedging exemption from certain index options position limits. The text of the proposed rule change is available on the Exchange’s Web site at https://www.nasdaqtrader.com/ micro.aspx?id=PHLXRulefilings, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed 28 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 26 15 U.S.C. 78s(b)(2). VerDate Mar<15>2010 18:46 Jul 21, 2010 27 15 Jkt 220001 PO 00000 U.S.C. 78s(b)(2). Frm 00120 Fmt 4703 Sfmt 4703 42797 E:\FR\FM\22JYN1.SGM 22JYN1 42798 Federal Register / Vol. 75, No. 140 / Thursday, July 22, 2010 / Notices 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. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change sroberts on DSKD5P82C1PROD with NOTICES 1. Purpose I. Expansion of Delta-Based Equity Hedge Exemption On December 14, 2007,3 the Commission approved a proposed rule change establishing an exemption from equity options position and exercise limits for positions held by the Chicago Board Options Exchange (‘‘CBOE’’) members, and certain of their affiliates, that are ‘‘delta neutral’’ 4 under a ‘‘permitted pricing model’’, subject to certain conditions (‘‘Exemption’’). NASDAQ OMX PHLX filed a rule filing to establish an exemption similar to CBOE’s filing.5 CBOE expanded its exemption from equity options position and exercise limits, amended reporting requirements and adopted a delta hedging exemption from certain index options position limits.6 The Exchange is proposing to amend Exchange Rules 1001, and 1001A as well as Option Floor Procedure Advice F–15 to make similar amendments.7 The ‘‘options contract equivalent of the net delta’’ of a hedged equity option position is subject to the position limits under Exchange Rule 1001, subject to the availability of other exemptions.8 3 See Securities Exchange Act Release No. 56970 (December 14, 2007), 72 FR 72428 (December 20, 2007) (SR–CBOE–2007–99). The exemption was extended to certain customers whose accounts are carried by a member. See Securities Exchange Act Release No. 60555 (August 21, 2009), 74 FR 43741 (August 27, 2009) (SR–CBOE–2009–039). 4 The term ‘‘delta neutral’’ is defined in Commentary .09(a) to Exchange Rule 1001 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. 5 See Securities Exchange Act Release No. 57359 (February 20, 2008), 73 FR 11178 (February 29, 2008) (SR–Phlx–2008–07). 6 See Securities Exchange Act Release No. 62190 (May 27, 2010), 75 FR 31826 (June 4, 2010) (SR– CBOE–2010–021). 7 This proposed rule filing is being done pursuant to an industry-wide initiative, under the auspices of the Intermarket Surveillance Group (‘‘ISG’’), to establish comparable delta-hedge exemption rules among exchanges. 8 The term ‘‘options contract equivalent of the net delta’’ is defined in Commentary .09 (b)(1) of VerDate Mar<15>2010 18:46 Jul 21, 2010 Jkt 220001 Currently, the Exemption only is available for securities that directly underlie the applicable option position. This means that with respect to options on exchange-traded funds (‘‘ETF options’’), index options overlying the same index on which the ETF is based currently cannot be combined with the ETF options to calculate a net delta for purposes of the Exemption. Many ETF options overlie exchangetraded funds that track the performance of an index. For example, options on Standard & Poor’s Depositary Receipts (‘‘SPY’’) track the performance of the S&P 500 index. Market participants often hedge SPY options with options on the S&P 500 Index (‘‘SPX options’’) or with other financial instruments based on the S&P 500 Index for risk management purposes. The Exchange believes that in order for eligible market participants to more fully benefit from the Exemption as it relates to ETF options, securities and other instruments that are based on the same underlying ETF or the same index on which the ETF is based should also be included in any determination of an ETF option position’s net delta or whether the options position is hedged delta neutral.9 Accordingly, the Exchange proposes to expand the Exemption by amending Exchange Rule 1001 to permit equity option positions for which the underlying security is an ETF that is based on the same index as an index option to be combined with an index option position for calculation of the delta-based equity hedge exemption. The proposed rule would allow financial products such as securities index options, index futures, and options on index futures to be included along with the ETF in an equity option’s net delta calculation. So for example, the proposed rule would allow SPY options to be hedged not only with SPY shares, but with S&P 500 options, S&P 500 futures, options on S&P 500 futures or any other instrument that tracks the performance of or is based on the S&P 500 index. This would be accomplished by including such positions with a related index option position in accordance with the Delta-Based Index Hedge Exemption rule proposed below. Exchange Rule 1001 as the net delta divided by the number of shares underlying the option contract. The term ‘‘net delta’’ is defined at Commentary .09(b)(2) of the Exchange Rule 1001 to mean, at any time, the number of shares (either long or short) required to offset the risk that the value of an equity option position will change with incremental changes in the price of the security underlying the option position, as determined in accordance with a permitted pricing model. 9 However, this would not include baskets of securities for purposes of the Exemption. PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 Index options and equity options (i.e., ETF options) that are eligible to be combined for computing a delta-based hedge exemption, along with all securities and/or other instruments that are based on or track the performance of the same underlying security or index, will be grouped and the net delta and options contract equivalent of the net delta will be calculated for each respective option class based on offsets realized from the grouping as a whole. The Exchange proposes to amend the definition of ‘‘net delta’’ at Commentary .09(b)(2) of Exchange Rule 1001 to mean, at any time, the number of shares and/or other units of trade 10 (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. The Exchange proposes to amend the definition of the ‘‘option contract equivalent of the net delta’’ at Commentary .09(b)(1) of Exchange Rule 1001 to mean the net delta divided by the number of shares that equate to one option contract on a delta basis. II. Reporting Requirements Exchange Rule 1001 Commentary .09(f) sets forth the reporting requirements applicable to Exchange members who rely on the Exemption. The Exchange proposes to amend Exchange Rule 1001 Commentary .09(f) to exempt from the reporting requirements Exchange marketmakers 11 relying on the Exemption who use the Options Clearing Corporation (‘‘OCC’’) pricing model, because marketmaker positions and delta information can be accessed through the Exchange’s market surveillance systems. This proposed exemption is consistent with similar exemptions from the reporting 10 Other units of trade would include, for example, options or futures contracts hedging the relevant option position. When determining whether an ETF option hedged with other instruments such as ETF or index options is delta neutral, the relative size of the ETF option when compared to the other product is taken into consideration. For example, SPX options are ten (10) times larger than SPY options thus 1 SPX delta is equivalent to .10 SPY deltas. 11 Exchange market-makers include Registered Option Traders and Specialists. A Registered Option Trader (‘‘ROT’’) is defined in Exchange Rule 1014(b) as a regular member or a foreign currency options participant of the Exchange located on the trading floor who has received permission from the Exchange to trade in options for his own account. A ROT includes a Streaming Quote Trader (‘‘SQT’’) as defined in 1014(b)(ii)(A), a Remote Streaming Quote Trader (‘‘RSQT’’) as defined in 1014(b)(ii)(B) and a Non-SQT, which by definition is neither a SQT or a RSQT. See Exchange Rule 1014 (b)(i) and (ii). A Specialist is an Exchange member who is registered as an options specialist pursuant to Rule 1020(a). E:\FR\FM\22JYN1.SGM 22JYN1 Federal Register / Vol. 75, No. 140 / Thursday, July 22, 2010 / Notices requirements under Exchange Rule 1001A(c) applicable to broad-based (market) index options and narrowbased (industry) index options. III. Delta-Based Index Hedge Exemption Index options traded on the Exchange are subject to position and exercise limits, as provided under Exchange Rules 1001A and 1002A.12 Position limits are imposed, generally, to prevent the establishment of options positions that can be used or might create incentives to manipulate or disrupt the underlying market so as to benefit the holder of the options position. Index options are often used by market participants such as institutional investors to hedge large portfolios. Exchange rules include hedge exemptions to allow certain positions in index options in excess of the applicable standard position limit if hedged with an Exchange-approved qualified portfolio. Under Rule 1001A Commentary .01, Index Hedge Exemption, a qualified portfolio must be previously established and the options must be carried in an account with an Exchange member. Securities used as a hedge pursuant to this provision may not be used to hedge other option positions.13 The Exchange believes that any limit on the ability of market participants to use index options to hedge their portfolios exposes market participants to unnecessary risk on the unhedged portion of their portfolios. The Exchange proposes to adopt a deltabased exemption from index option position and exercise limits that are substantially similar to the delta-based equity hedge exemption under Exchange Rule 1001. A delta-based index hedge exemption would provide market participants the ability to accumulate an unlimited number of index options contracts provided that such contracts are properly delta hedged in accordance with the requirements of the exemption. Proposed Exemption. The Exchange proposes to adopt an exemption from index options position and exercise limits 14 for positions held by Exchange members and certain of their affiliates that are ‘‘delta neutral’’ (as defined below) under a ‘‘permitted pricing sroberts on DSKD5P82C1PROD with NOTICES 12 See Exchange Rule 1001A, which provides position limits for broad-based index options and narrow-based index options. 13 See Commentary .01(b), Exchange Rule 1001A. 14 Exchange Rule 1002A establishes exercise limits for an index option at the same level as the index option’s position limit under index options position limit rules in Exchange Rules 1001A, therefore no changes are proposed to Exchange Rule 1002A. VerDate Mar<15>2010 18:46 Jul 21, 2010 Jkt 220001 model’’ (as defined below), subject to certain conditions (‘‘Index Exemption’’). The term ‘‘delta neutral’’ is defined in proposed Commentary .04(A) of Exchange Rule 1001A as referring to an index option position that is hedged, in accordance with a permitted pricing model, by a position in one or more correlated instruments for the purpose of offsetting the risk that the value of the option position will change with incremental changes in the value of the underlying index. Correlated instruments would be defined to mean securities and/or other instruments that track the performance of or are based on the same underlying index as the index underlying the option position. These definitions would allow financial products such as ETF options, index futures, options on index futures and ETFs that track the performance of or are based on the same underlying index to be included in an index option’s net delta calculation. Any index option position that is not delta neutral would be subject to position and exercise limits, subject to the availability of other exemptions. Only the ‘‘options contract equivalent of the net delta’’ of such position would be subject to the appropriate position limit.15 In addition, members could not use the same positions in correlated instruments in connection with more than one hedge exemption. Therefore, a position in correlated instruments used as part of a delta hedging strategy could not also serve as the basis for any other index hedge exemption. Permitted Pricing Model. Under the proposed rule, the calculation of the delta for any index option position, and the determination of whether a particular index option position is hedged delta neutral, must be made using a permitted pricing model. A ‘‘permitted pricing model’’ is defined in proposed Exchange Rule 1001A to have the same meaning as defined in Exchange Rule 1001, namely, the pricing model maintained and operated by OCC and the pricing models used by (i) a member or its affiliate subject to consolidated supervision by the SEC pursuant to Appendix E of SEC Rule 15c3–1; (ii) a financial holding company 15 Under proposed Commentary .04(B) of Exchange Rule 1001A, the term ‘‘options contract equivalent of the net delta’’ is defined as the net delta divided by units of trade that equate to one option contract on a delta basis, and the term ‘‘net delta’’ is defined as, at any time, the number of shares and/or other units of trade (either long or short) required to offset the risk that the value of an index option position will change with incremental changes in the value of the underlying index, as determined in accordance with a permitted pricing model. PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 42799 (‘‘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;16 (iii) an SEC registered OTC derivatives dealer; 17 and (iv) a national bank.18 Aggregation of Accounts. Members and non-member affiliates relying on the Index Exemption would be required to ensure that the permitted pricing model is applied to all positions in correlated instruments hedging the relevant option position that are owned or controlled by the member, or its affiliates. However, the net delta of an index option position held by an entity entitled to rely on the Index Exemption, or by a separate and distinct trading unit of such entity, may be calculated without regard to positions in correlated instruments 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, 16 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 (‘‘Fed’’), 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 Fed, 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 Commentary .09(c)(3), Exchange Rule 1001. 17 The pricing model of an SEC registered OTC derivatives dealer would have to be consistent with the requirements of Appendix F to SEC Rule 15c3– 1 and SEC Rule 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 Commentary .09(c)(4), Exchange Rule 1001. 18 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 Commentary .09(c)(5), Exchange Rule 1001. E:\FR\FM\22JYN1.SGM 22JYN1 42800 Federal Register / Vol. 75, No. 140 / Thursday, July 22, 2010 / Notices as defined in Commentary .06 to Exchange Rule 1001, 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 Index Exemption.19 Any member or non-member affiliate relying on the Index 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 Index Exemption for purposes of compliance with Exchange position or exercise limits.20 The Exchange previously issued a Memorandum to the membership which discussed, among other things, control relationships.21 Obligations of Members and Affiliates. Any member relying on the Index 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 Index Exemption.22 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 a correlated instrument hedging 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.23 The index option positions of a nonmember affiliate relying on the Index Exemption must be carried by a member with which it is affiliated.24 A member carrying an account that includes an index option position for a non-member affiliate that intends to rely on the Index Exemption would be required to obtain from such non-member affiliate a written certification that it is using a sroberts on DSKD5P82C1PROD with NOTICES 19 See proposed Commentary .04(D)(2), Exchange Rule 1001A. 20 See proposed Commentary .04(D)(3), Exchange Rule 1001A. 21 See Memorandum No. 0025–08 dated January 7, 2008. 22 See proposed Commentary .04(E)(1)(i), Exchange Rule 1001A. 23 See proposed Commentary .04(E)(1)(ii), Exchange Rule 1001A. 24 See proposed Commentary .04(E)(2), Exchange Rule 1001A. VerDate Mar<15>2010 18:46 Jul 21, 2010 Jkt 220001 permitted pricing model as defined in the rule for purposes of the Index Exemption.25 Reporting. Under proposed Exchange Rule 1001A each member (other than an Exchange market-maker using the OCC Model) relying on the Index Exemption would be required to report, in accordance with Exchange Rule 1003: 26 (i) All index 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 Commentary .04(D) to Exchange Rule 1001A for each such account that holds an index option position subject to the Index Exemption in excess of the levels specified in Exchange Rule 1001A the net delta and the options contract equivalent of the net delta of such position. Records. Under proposed Commentary .04(G), Exchange Rule 1001A each member relying on the Index 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 Index 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.27 Reliance on Federal Oversight. As provided under proposed Exchange Rule Commentary .04(C), Exchange Rule 1001A a permitted pricing model includes proprietary pricing models used by members and affiliates that have been approved by the SEC, the Fed 25 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 Index Exemption; (b) will use only a permitted pricing model for purposes of calculating the net delta of its option positions for purposes of the Index Exemption; (c) will promptly notify the member if it ceases to rely on the Index 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 Index 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 proposed Commentary .04(E)(3), Exchange Rule 1001A. 26 Exchange Rule 1003 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. 27 A member would be authorized to report position information of its non-member affiliate pursuant to the written statement required under proposed Commentary .04E(3)(ii)(d), Exchange Rule 1001A. PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 or another Federal financial regulator. In adopting the proposed Index 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 also proposes to amend Option Floor Procedure Advice (‘‘OFPA’’) F–15, Minor Infractions of Position/Exercise Limits and Hedge Exemptions, to clarify the application of Exchange Rule 1001A, Position Limits, and Exchange Rule 1002A, Exercise Limits to OFPA F–15. The Exchange will issue a regulatory circular upon publication of the notice of this filing regarding the proposal herein. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act 28 in general, and furthers the objectives of Section 6(b)(5) of the Act 29 in particular, in that it is 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 Exchange believes that allowing correlated instruments to be included in the calculation of an equity option’s net delta would enable eligible market participants to more fully realize the benefit of the delta based equity hedge exemption. The proposed delta-based index hedge exemption would be substantially similar to the delta-based equity hedge exemption under Exchange Rule 1001. Also, the Commission has previously stated its support for recognizing options positions hedged on a delta neutral basis as properly exempted from position limits.30 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. 28 15 U.S.C. 78f(b). U.S.C. 78f(b)(5). 30 See Securities Exchange Act Release No. 40594 (October 23, 1998), 63 FR 59362, 59380 (November 3, 1998) (adopting rules relating to OTC Derivatives Dealers). 29 15 E:\FR\FM\22JYN1.SGM 22JYN1 Federal Register / Vol. 75, No. 140 / Thursday, July 22, 2010 / Notices C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. 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 31 and Rule 19b– 4(f)(6) thereunder.32 A proposed rule change filed under 19b–4(f)(6) normally may not become operative prior to 30 days after the date of filing.33 However, Rule 19b– 4(f)(6)(iii) 34 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. The Commission notes that it recently approved a substantially similar proposal filed by the Chicago Board Options Exchange, Incorporated,35 and therefore believes that no significant purpose is served by a 30-day operative delay. For these reasons, the Commission designates the proposed rule change to be operative upon filing with the Commission.36 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 31 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). 33 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 this requirement. 34 Id. 35 See Securities Exchange Act Release No. 62190 (May 27, 2010), 75 FR 31826 (June 4, 2010) (SR– CBOE–2010–21). 36 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). sroberts on DSKD5P82C1PROD with NOTICES 32 17 VerDate Mar<15>2010 18:46 Jul 21, 2010 Jkt 220001 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–Phlx–2010–93 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. 42801 2010–93 and should be submitted on or before August 12, 2010. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.38 Florence E. Harmon, Deputy Secretary. [FR Doc. 2010–17926 Filed 7–21–10; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–62506; File No. SR–ISE– 2010–67] Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Fee Changes With Respect to Foreign Currency Options Orders July 15, 2010. 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 June 25, 2010, the International Securities All submissions should refer to File Exchange, LLC (‘‘Exchange’’ or ‘‘ISE’’) Number SR–Phlx–2010–93. This file filed with the Securities and Exchange number should be included on the Commission (‘‘Commission’’) the subject line if e-mail is used. To help the proposed rule change, as described in Commission process and review your Items I, II, and III below, which items comments more efficiently, please use have been prepared by the selfonly one method. The Commission will regulatory organization. The post all comments on the Commission’s Commission is publishing this notice to Internet Web site (https://www.sec.gov/ solicit comments on the proposed rule rules/sro.shtml). Copies of the change from interested persons. 37 all subsequent submission, I. Self-Regulatory Organization’s amendments, all written statements Statement of the Terms of Substance of with respect to the proposed rule the Proposed Rule Change change that are filed with the Commission, and all written The ISE is proposing to amend its communications relating to the Schedule of Fees. The text of the proposed rule change between the proposed rule change is available on the Commission and any person, other than Exchange’s Web site (https:// those that may be withheld from the www.ise.com, at the principal office of public in accordance with the the Exchange, and at the Commission’s provisions of 5 U.S.C. 552, will be Public Reference Room. available for inspection and copying in II. Self-Regulatory Organization’s the Commission’s Public Reference Room on official business days between Statement of the Purpose of, and Statutory Basis for, the Proposed Rule the hours of 10 a.m. and 3 p.m. Copies Change of such filing also will be available for In its filing with the Commission, the inspection and copying at the principal self-regulatory organization included office of the Exchange. All comments received will be posted without change; statements concerning the purpose of, and basis for, the proposed rule change the Commission does not edit personal and discussed any comments it received identifying information from on the proposed rule change. The text submissions. You should submit only of these statements may be examined at information that you wish to make the places specified in Item IV below. available publicly. All submissions The self-regulatory organization has should refer to File Number SR–Phlx– 37 The text of the proposed rule change is available on the Commission’s Web site at https:// www.sec.gov/rules/sro.shtml. PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 38 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\22JYN1.SGM 22JYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 75, Number 140 (Thursday, July 22, 2010)]
[Notices]
[Pages 42797-42801]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-17926]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62504; File No. SR-Phlx-2010-93]


Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Delta Hedge Exemptions

July 15, 2010.
    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 June 30, 2010, NASDAQ OMX PHLX, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to (i) expand the delta hedging exemption 
available for equity options positions limits, (ii) amend the reporting 
requirements applicable to members relying on the delta hedging 
exemption and (iii) adopt a delta hedging exemption from certain index 
options position limits.
    The text of the proposed rule change is available on the Exchange's 
Web site at https://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
at the principal office of the Exchange, and at the Commission's Public 
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed

[[Page 42798]]

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. 
The Exchange has prepared summaries, set forth in sections A, B, and C 
below, of the most significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    I. Expansion of Delta-Based Equity Hedge Exemption
    On December 14, 2007,\3\ the Commission approved a proposed rule 
change establishing an exemption from equity options position and 
exercise limits for positions held by the Chicago Board Options 
Exchange (``CBOE'') members, and certain of their affiliates, that are 
``delta neutral'' \4\ under a ``permitted pricing model'', subject to 
certain conditions (``Exemption''). NASDAQ OMX PHLX filed a rule filing 
to establish an exemption similar to CBOE's filing.\5\ CBOE expanded 
its exemption from equity options position and exercise limits, amended 
reporting requirements and adopted a delta hedging exemption from 
certain index options position limits.\6\ The Exchange is proposing to 
amend Exchange Rules 1001, and 1001A as well as Option Floor Procedure 
Advice F-15 to make similar amendments.\7\
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 56970 (December 14, 
2007), 72 FR 72428 (December 20, 2007) (SR-CBOE-2007-99). The 
exemption was extended to certain customers whose accounts are 
carried by a member. See Securities Exchange Act Release No. 60555 
(August 21, 2009), 74 FR 43741 (August 27, 2009) (SR-CBOE-2009-039).
    \4\ The term ``delta neutral'' is defined in Commentary .09(a) 
to Exchange Rule 1001 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.
    \5\ See Securities Exchange Act Release No. 57359 (February 20, 
2008), 73 FR 11178 (February 29, 2008) (SR-Phlx-2008-07).
    \6\ See Securities Exchange Act Release No. 62190 (May 27, 
2010), 75 FR 31826 (June 4, 2010) (SR-CBOE-2010-021).
    \7\ This proposed rule filing is being done pursuant to an 
industry-wide initiative, under the auspices of the Intermarket 
Surveillance Group (``ISG''), to establish comparable delta-hedge 
exemption rules among exchanges.
---------------------------------------------------------------------------

    The ``options contract equivalent of the net delta'' of a hedged 
equity option position is subject to the position limits under Exchange 
Rule 1001, subject to the availability of other exemptions.\8\ 
Currently, the Exemption only is available for securities that directly 
underlie the applicable option position. This means that with respect 
to options on exchange-traded funds (``ETF options''), index options 
overlying the same index on which the ETF is based currently cannot be 
combined with the ETF options to calculate a net delta for purposes of 
the Exemption.
---------------------------------------------------------------------------

    \8\ The term ``options contract equivalent of the net delta'' is 
defined in Commentary .09 (b)(1) of Exchange Rule 1001 as the net 
delta divided by the number of shares underlying the option 
contract. The term ``net delta'' is defined at Commentary .09(b)(2) 
of the Exchange Rule 1001 to mean, at any time, the number of shares 
(either long or short) required to offset the risk that the value of 
an equity option position will change with incremental changes in 
the price of the security underlying the option position, as 
determined in accordance with a permitted pricing model.
---------------------------------------------------------------------------

    Many ETF options overlie exchange-traded funds that track the 
performance of an index. For example, options on Standard & Poor's 
Depositary Receipts (``SPY'') track the performance of the S&P 500 
index. Market participants often hedge SPY options with options on the 
S&P 500 Index (``SPX options'') or with other financial instruments 
based on the S&P 500 Index for risk management purposes. The Exchange 
believes that in order for eligible market participants to more fully 
benefit from the Exemption as it relates to ETF options, securities and 
other instruments that are based on the same underlying ETF or the same 
index on which the ETF is based should also be included in any 
determination of an ETF option position's net delta or whether the 
options position is hedged delta neutral.\9\
---------------------------------------------------------------------------

    \9\ However, this would not include baskets of securities for 
purposes of the Exemption.
---------------------------------------------------------------------------

    Accordingly, the Exchange proposes to expand the Exemption by 
amending Exchange Rule 1001 to permit equity option positions for which 
the underlying security is an ETF that is based on the same index as an 
index option to be combined with an index option position for 
calculation of the delta-based equity hedge exemption. The proposed 
rule would allow financial products such as securities index options, 
index futures, and options on index futures to be included along with 
the ETF in an equity option's net delta calculation. So for example, 
the proposed rule would allow SPY options to be hedged not only with 
SPY shares, but with S&P 500 options, S&P 500 futures, options on S&P 
500 futures or any other instrument that tracks the performance of or 
is based on the S&P 500 index. This would be accomplished by including 
such positions with a related index option position in accordance with 
the Delta-Based Index Hedge Exemption rule proposed below.
    Index options and equity options (i.e., ETF options) that are 
eligible to be combined for computing a delta-based hedge exemption, 
along with all securities and/or other instruments that are based on or 
track the performance of the same underlying security or index, will be 
grouped and the net delta and options contract equivalent of the net 
delta will be calculated for each respective option class based on 
offsets realized from the grouping as a whole.
    The Exchange proposes to amend the definition of ``net delta'' at 
Commentary .09(b)(2) of Exchange Rule 1001 to mean, at any time, the 
number of shares and/or other units of trade \10\ (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. The Exchange proposes to amend the 
definition of the ``option contract equivalent of the net delta'' at 
Commentary .09(b)(1) of Exchange Rule 1001 to mean the net delta 
divided by the number of shares that equate to one option contract on a 
delta basis.
---------------------------------------------------------------------------

    \10\ Other units of trade would include, for example, options or 
futures contracts hedging the relevant option position. When 
determining whether an ETF option hedged with other instruments such 
as ETF or index options is delta neutral, the relative size of the 
ETF option when compared to the other product is taken into 
consideration. For example, SPX options are ten (10) times larger 
than SPY options thus 1 SPX delta is equivalent to .10 SPY deltas.
---------------------------------------------------------------------------

II. Reporting Requirements

    Exchange Rule 1001 Commentary .09(f) sets forth the reporting 
requirements applicable to Exchange members who rely on the Exemption. 
The Exchange proposes to amend Exchange Rule 1001 Commentary .09(f) to 
exempt from the reporting requirements Exchange market-makers \11\ 
relying on the Exemption who use the Options Clearing Corporation 
(``OCC'') pricing model, because market-maker positions and delta 
information can be accessed through the Exchange's market surveillance 
systems. This proposed exemption is consistent with similar exemptions 
from the reporting

[[Page 42799]]

requirements under Exchange Rule 1001A(c) applicable to broad-based 
(market) index options and narrow-based (industry) index options.
---------------------------------------------------------------------------

    \11\ Exchange market-makers include Registered Option Traders 
and Specialists. A Registered Option Trader (``ROT'') is defined in 
Exchange Rule 1014(b) as a regular member or a foreign currency 
options participant of the Exchange located on the trading floor who 
has received permission from the Exchange to trade in options for 
his own account. A ROT includes a Streaming Quote Trader (``SQT'') 
as defined in 1014(b)(ii)(A), a Remote Streaming Quote Trader 
(``RSQT'') as defined in 1014(b)(ii)(B) and a Non-SQT, which by 
definition is neither a SQT or a RSQT. See Exchange Rule 1014 (b)(i) 
and (ii). A Specialist is an Exchange member who is registered as an 
options specialist pursuant to Rule 1020(a).
---------------------------------------------------------------------------

III. Delta-Based Index Hedge Exemption

    Index options traded on the Exchange are subject to position and 
exercise limits, as provided under Exchange Rules 1001A and 1002A.\12\ 
Position limits are imposed, generally, to prevent the establishment of 
options positions that can be used or might create incentives to 
manipulate or disrupt the underlying market so as to benefit the holder 
of the options position.
---------------------------------------------------------------------------

    \12\ See Exchange Rule 1001A, which provides position limits for 
broad-based index options and narrow-based index options.
---------------------------------------------------------------------------

    Index options are often used by market participants such as 
institutional investors to hedge large portfolios. Exchange rules 
include hedge exemptions to allow certain positions in index options in 
excess of the applicable standard position limit if hedged with an 
Exchange-approved qualified portfolio. Under Rule 1001A Commentary .01, 
Index Hedge Exemption, a qualified portfolio must be previously 
established and the options must be carried in an account with an 
Exchange member. Securities used as a hedge pursuant to this provision 
may not be used to hedge other option positions.\13\
---------------------------------------------------------------------------

    \13\ See Commentary .01(b), Exchange Rule 1001A.
---------------------------------------------------------------------------

    The Exchange believes that any limit on the ability of market 
participants to use index options to hedge their portfolios exposes 
market participants to unnecessary risk on the unhedged portion of 
their portfolios. The Exchange proposes to adopt a delta-based 
exemption from index option position and exercise limits that are 
substantially similar to the delta-based equity hedge exemption under 
Exchange Rule 1001. A delta-based index hedge exemption would provide 
market participants the ability to accumulate an unlimited number of 
index options contracts provided that such contracts are properly delta 
hedged in accordance with the requirements of the exemption.
    Proposed Exemption. The Exchange proposes to adopt an exemption 
from index options position and exercise limits \14\ for positions held 
by Exchange members and certain of their affiliates that are ``delta 
neutral'' (as defined below) under a ``permitted pricing model'' (as 
defined below), subject to certain conditions (``Index Exemption'').
---------------------------------------------------------------------------

    \14\ Exchange Rule 1002A establishes exercise limits for an 
index option at the same level as the index option's position limit 
under index options position limit rules in Exchange Rules 1001A, 
therefore no changes are proposed to Exchange Rule 1002A.
---------------------------------------------------------------------------

    The term ``delta neutral'' is defined in proposed Commentary .04(A) 
of Exchange Rule 1001A as referring to an index option position that is 
hedged, in accordance with a permitted pricing model, by a position in 
one or more correlated instruments for the purpose of offsetting the 
risk that the value of the option position will change with incremental 
changes in the value of the underlying index. Correlated instruments 
would be defined to mean securities and/or other instruments that track 
the performance of or are based on the same underlying index as the 
index underlying the option position. These definitions would allow 
financial products such as ETF options, index futures, options on index 
futures and ETFs that track the performance of or are based on the same 
underlying index to be included in an index option's net delta 
calculation.
    Any index option position that is not delta neutral would be 
subject to position and exercise limits, subject to the availability of 
other exemptions. Only the ``options contract equivalent of the net 
delta'' of such position would be subject to the appropriate position 
limit.\15\
---------------------------------------------------------------------------

    \15\ Under proposed Commentary .04(B) of Exchange Rule 1001A, 
the term ``options contract equivalent of the net delta'' is defined 
as the net delta divided by units of trade that equate to one option 
contract on a delta basis, and the term ``net delta'' is defined as, 
at any time, the number of shares and/or other units of trade 
(either long or short) required to offset the risk that the value of 
an index option position will change with incremental changes in the 
value of the underlying index, as determined in accordance with a 
permitted pricing model.
---------------------------------------------------------------------------

    In addition, members could not use the same positions in correlated 
instruments in connection with more than one hedge exemption. 
Therefore, a position in correlated instruments used as part of a delta 
hedging strategy could not also serve as the basis for any other index 
hedge exemption.
    Permitted Pricing Model. Under the proposed rule, the calculation 
of the delta for any index option position, and the determination of 
whether a particular index option position is hedged delta neutral, 
must be made using a permitted pricing model. A ``permitted pricing 
model'' is defined in proposed Exchange Rule 1001A to have the same 
meaning as defined in Exchange Rule 1001, namely, the pricing model 
maintained and operated by OCC and the pricing models used by (i) a 
member or its affiliate subject to consolidated supervision by the SEC 
pursuant to Appendix E of SEC 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;\16\ (iii) an SEC registered OTC derivatives 
dealer; \17\ and (iv) a national bank.\18\
---------------------------------------------------------------------------

    \16\ 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 (``Fed''), 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 Fed, 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 Commentary .09(c)(3), Exchange Rule 1001.
    \17\ The pricing model of an SEC registered OTC derivatives 
dealer would have to be consistent with the requirements of Appendix 
F to SEC Rule 15c3-1 and SEC Rule 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 
Commentary .09(c)(4), Exchange Rule 1001.
    \18\ 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 Commentary .09(c)(5), Exchange Rule 1001.
---------------------------------------------------------------------------

    Aggregation of Accounts. Members and non-member affiliates relying 
on the Index Exemption would be required to ensure that the permitted 
pricing model is applied to all positions in correlated instruments 
hedging the relevant option position that are owned or controlled by 
the member, or its affiliates.
    However, the net delta of an index option position held by an 
entity entitled to rely on the Index Exemption, or by a separate and 
distinct trading unit of such entity, may be calculated without regard 
to positions in correlated instruments 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,

[[Page 42800]]

as defined in Commentary .06 to Exchange Rule 1001, 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 Index Exemption.\19\ Any 
member or non-member affiliate relying on the Index 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 Index Exemption for purposes of compliance 
with Exchange position or exercise limits.\20\
---------------------------------------------------------------------------

    \19\ See proposed Commentary .04(D)(2), Exchange Rule 1001A.
    \20\ See proposed Commentary .04(D)(3), Exchange Rule 1001A.
---------------------------------------------------------------------------

    The Exchange previously issued a Memorandum to the membership which 
discussed, among other things, control relationships.\21\
---------------------------------------------------------------------------

    \21\ See Memorandum No. 0025-08 dated January 7, 2008.
---------------------------------------------------------------------------

    Obligations of Members and Affiliates. Any member relying on the 
Index 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 Index Exemption.\22\ 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 a correlated instrument hedging 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.\23\
---------------------------------------------------------------------------

    \22\ See proposed Commentary .04(E)(1)(i), Exchange Rule 1001A.
    \23\ See proposed Commentary .04(E)(1)(ii), Exchange Rule 1001A.
---------------------------------------------------------------------------

    The index option positions of a non-member affiliate relying on the 
Index Exemption must be carried by a member with which it is 
affiliated.\24\ A member carrying an account that includes an index 
option position for a non-member affiliate that intends to rely on the 
Index 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 Index Exemption.\25\
---------------------------------------------------------------------------

    \24\ See proposed Commentary .04(E)(2), Exchange Rule 1001A.
    \25\ 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 Index Exemption; (b) 
will use only a permitted pricing model for purposes of calculating 
the net delta of its option positions for purposes of the Index 
Exemption; (c) will promptly notify the member if it ceases to rely 
on the Index 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 Index 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 proposed Commentary .04(E)(3), 
Exchange Rule 1001A.
---------------------------------------------------------------------------

    Reporting. Under proposed Exchange Rule 1001A each member (other 
than an Exchange market-maker using the OCC Model) relying on the Index 
Exemption would be required to report, in accordance with Exchange Rule 
1003: \26\ (i) All index 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 
Commentary .04(D) to Exchange Rule 1001A for each such account that 
holds an index option position subject to the Index Exemption in excess 
of the levels specified in Exchange Rule 1001A the net delta and the 
options contract equivalent of the net delta of such position.
---------------------------------------------------------------------------

    \26\ Exchange Rule 1003 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.
---------------------------------------------------------------------------

    Records. Under proposed Commentary .04(G), Exchange Rule 1001A each 
member relying on the Index 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 Index 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.\27\
---------------------------------------------------------------------------

    \27\ A member would be authorized to report position information 
of its non-member affiliate pursuant to the written statement 
required under proposed Commentary .04E(3)(ii)(d), Exchange Rule 
1001A.
---------------------------------------------------------------------------

    Reliance on Federal Oversight. As provided under proposed Exchange 
Rule Commentary .04(C), Exchange Rule 1001A a permitted pricing model 
includes proprietary pricing models used by members and affiliates that 
have been approved by the SEC, the Fed or another Federal financial 
regulator. In adopting the proposed Index 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 also proposes to amend Option Floor Procedure Advice 
(``OFPA'') F-15, Minor Infractions of Position/Exercise Limits and 
Hedge Exemptions, to clarify the application of Exchange Rule 1001A, 
Position Limits, and Exchange Rule 1002A, Exercise Limits to OFPA F-15.
    The Exchange will issue a regulatory circular upon publication of 
the notice of this filing regarding the proposal herein.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \28\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \29\ in particular, in that it is 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.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78f(b).
    \29\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that allowing correlated instruments to be 
included in the calculation of an equity option's net delta would 
enable eligible market participants to more fully realize the benefit 
of the delta based equity hedge exemption. The proposed delta-based 
index hedge exemption would be substantially similar to the delta-based 
equity hedge exemption under Exchange Rule 1001. Also, the Commission 
has previously stated its support for recognizing options positions 
hedged on a delta neutral basis as properly exempted from position 
limits.\30\
---------------------------------------------------------------------------

    \30\ See Securities Exchange Act Release No. 40594 (October 23, 
1998), 63 FR 59362, 59380 (November 3, 1998) (adopting rules 
relating to OTC Derivatives Dealers).
---------------------------------------------------------------------------

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.

[[Page 42801]]

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

    No written comments were either solicited or received.

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 \31\ and Rule 19b-4(f)(6) thereunder.\32\
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78s(b)(3)(A).
    \32\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\33\ 
However, Rule 19b-4(f)(6)(iii) \34\ 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. The Commission notes 
that it recently approved a substantially similar proposal filed by the 
Chicago Board Options Exchange, Incorporated,\35\ and therefore 
believes that no significant purpose is served by a 30-day operative 
delay. For these reasons, the Commission designates the proposed rule 
change to be operative upon filing with the Commission.\36\
---------------------------------------------------------------------------

    \33\ 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 this requirement.
    \34\ Id.
    \35\ See Securities Exchange Act Release No. 62190 (May 27, 
2010), 75 FR 31826 (June 4, 2010) (SR-CBOE-2010-21).
    \36\ 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).
---------------------------------------------------------------------------

    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-Phlx-2010-93 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2010-93. 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,\37\ 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 on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the 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-Phlx-2010-93 and should be submitted on or before August 
12, 2010.
---------------------------------------------------------------------------

    \37\ The text of the proposed rule change is available on the 
Commission's Web site at https://www.sec.gov/rules/sro.shtml.
---------------------------------------------------------------------------

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
---------------------------------------------------------------------------

    \38\ 17 CFR 200.30-3(a)(12).

Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-17926 Filed 7-21-10; 8:45 am]
BILLING CODE 8010-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.