Self-Regulatory Organizations; NYSE Amex LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Expanding the Delta Hedging Exemption Available for Equity Options Position Limits and Adopting a Delta Hedging Exemption From Certain Index Options Position Limits, 71777-71781 [2010-29592]
Download as PDF
<![CDATA[
Federal Register / Vol. 75, No. 226 / Wednesday, November 24, 2010 / Notices
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–63337; File No. SR–
NYSEAmex–2010–104]
Self-Regulatory Organizations; NYSE
Amex LLC; Notice of Filing and
All submissions should refer to File
Immediate Effectiveness of Proposed
Number SR–NYSEArca-2010–99. This
Rule Change Expanding the Delta
file number should be included on the
subject line if e-mail is used. To help the Hedging Exemption Available for
Equity Options Position Limits and
Commission process and review your
Adopting a Delta Hedging Exemption
comments more efficiently, please use
only one method. The Commission will From Certain Index Options Position
post all comments on the Commission’s Limits
Internet Web site (https://www.sec.gov/
November 18, 2010.
rules/sro.shtml). Copies of the
Pursuant to Section 19(b)(1) of the
submission, all subsequent
Securities Exchange Act of 1934 (the
amendments, all written statements
‘‘Act’’),1 and Rule 19b–4 thereunder,2
with respect to the proposed rule
notice is hereby given that on November
change that are filed with the
5, 2010, NYSE Amex LLC (the
Commission, and all written
‘‘Exchange’’ or ‘‘NYSE Amex’’) filed with
communications relating to the
the Securities and Exchange
proposed rule change between the
Commission (the ‘‘Commission’’) the
Commission and any person, other than proposed rule change as described in
those that may be withheld from the
Items I and II below, which Items have
public in accordance with the
been prepared by the self-regulatory
provisions of 5 U.S.C. 552, will be
organization. The Commission is
available for inspection and copying in
publishing this notice to solicit
the Commission’s Public Reference
comments on the proposed rule change
Room on official business days between from interested persons.
the hours of 10 a.m. and 3 p.m. Copies
I. Self-Regulatory Organization’s
of such filing also will be available for
Statement of the Terms of Substance of
website viewing and printing at the
the Proposed Rule Change
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–NYSEArca-2010–99 and
should be submitted on or before
December 15, 2010.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–29593 Filed 11–23–10; 8:45 am]
WReier-Aviles on DSKGBLS3C1PROD with NOTICES
BILLING CODE 8011–01–P
The Exchange proposes to (i) expand
the delta hedging exemption available
for equity options position limits and
(ii) adopt a delta hedging exemption
from certain index options position
limits. The text of the proposed rule
change is available at the Exchange, the
Commission’s Public Reference Room,
on the Commission’s Web site at
https://www.sec.gov, and https://
www.nyse.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, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of 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.
1 15
33 17
CFR 200.30–3(a)(12).
VerDate Mar<15>2010
15:30 Nov 23, 2010
2 17
Jkt 223001
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00112
Fmt 4703
Sfmt 4703
71777
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 March 4, 2008,3 the Exchange
submitted a proposed rule change with
the Commission establishing an
exemption from equity options position
and exercise limits for positions held by
Exchange members, member
organizations and certain of their
affiliates, that are ‘‘delta neutral’’ 4 under
a ‘‘Permitted Pricing Model,’’ 5 subject to
certain conditions (‘‘Exemption’’). The
Exchange is proposing to amend certain
of its rules to expand its exemption from
equity options position and exercise
limits and adopt a delta hedging
exemption from certain index options
position limits.6
The ‘‘options contract equivalent of
the net delta’’ of a hedged equity option
position is subject to the position limits
under Rule 904, Commentary .10,
subject to the availability of other
exemptions.7 Currently, the Exemption
only is available for securities that
directly underlie the applicable option
3 See Securities Exchange Act Release No. 57502
(March 14, 2008), 73 FR 15225 (March 21, 2008)
(SR–Amex–2008–18).
4 The term ‘‘delta neutral’’ is defined in Rule 904,
Commentary .10(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.
5 Permitted Pricing Model is defined in Rule 904,
Commentary .10(e).
6 The amendments proposed herein are similar to
changes approved for the Chicago Board Options
Exchange (‘‘CBOE’’). See Securities Exchange Act
Release No. 62190 (May 27, 2010), 75 FR 31826
(June 4, 2010) (SR–CBOE–2010–021). See also
Securities Exchange Act Release No. 56970
(December 14, 2007), 72 FR 72428 (December 20,
2007) (SR–CBOE–2007–099). 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). 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.
7 The term ‘‘options contract equivalent of the net
delta’’ is defined in Rule 904, Commentary .10(c) as
the net delta divided by the number of shares
underlying the option contract. The term ‘‘net delta’’
is defined in the same rule 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.
E:\FR\FM\24NON1.SGM
24NON1
WReier-Aviles on DSKGBLS3C1PROD with NOTICES
71778
Federal Register / Vol. 75, No. 226 / Wednesday, November 24, 2010 / Notices
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.8
Accordingly, the Exchange proposes
to expand the Exemption by amending
Rule 904, Commentary .10(a) 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
8 However, this would not include baskets of
securities for purposes of the Exemption.
VerDate Mar<15>2010
15:30 Nov 23, 2010
Jkt 223001
respective option class based on offsets
realized from the grouping as a whole.
The Exchange proposes to amend the
definition of ‘‘net delta’’ in Rule 904,
Commentary .10(b) to mean, at any time,
the number of shares and/or other units
of trade 9 (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’’ to mean the net delta divided by
the number of shares that equate to one
option contract on a delta basis.
II. Delta-Based Index Hedge Exemption
Most index options traded on the
Exchange are subject to position and
exercise limits, as provided under Rules
904C(b) and 905C(c).10 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.11
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 is
substantially similar to the delta-based
equity hedge exemption under Rule 904,
Commentary .10. 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
9 ‘‘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.
10 Rules 904C(b) and 904C(c) provide position
limits for Broad Stock Index Group Options and
Stock Index Industry Group Options, respectively.
11 See Commentary .01–.03 to Rule 904C.
PO 00000
Frm 00113
Fmt 4703
Sfmt 4703
are properly delta hedged in accordance
with the requirements of the exemption.
Proposed Exemption. The Exchange
proposes to adopt an exemption from
broad stock index group options
position and exercise limits 12 for
positions held by members, member
organizations and certain of their nonmember affiliates that are ‘‘delta neutral’’
(as defined below) under a ‘‘Permitted
Pricing Model’’ (as defined below),
subject to certain conditions (‘‘Index
Exemption’’). The Index Exemption
under proposed Rule 904C,
Commentary .06 would also apply to
Industry Index Options under proposed
Rule 904C, Commentary .07.
The term ‘‘delta neutral’’ is defined in
proposed Rule 904C, Commentary .06(a)
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.13
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.14
In addition, members and member
organizations 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
12 Exchange Rule 905C establishes exercise limits
for an index option at the same level as the index
option’s position limit under index options position
limit rules, therefore no changes are proposed to
Rule 905C.
13 See supra note 8.
14 Under proposed Rule 904C, Commentary
.06(b), 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.
E:\FR\FM\24NON1.SGM
24NON1
Federal Register / Vol. 75, No. 226 / Wednesday, November 24, 2010 / Notices
WReier-Aviles on DSKGBLS3C1PROD with NOTICES
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 Rule 904C, Commentary .06(c)
to have the same meaning as defined in
Rule 904, Commentary .10(e), namely,
(i) The pricing model maintained and
operated by the Options Clearing
Corporation (‘‘OCC’’); and the pricing
models maintained and used by (ii) a
member subject to consolidated
supervision by the SEC pursuant to
Appendix E of SEC Rule 15c3–1; (iii) 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; 15
(iv) an SEC registered OTC derivatives
dealer; 16 and (v) a national bank.17
15 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 member organization or affiliate
of a member or member organization 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 member organization
or affiliate of a member or member organization
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 subparagraph (c) of proposed
Rule 904C, Commentary .06, which incorporates
Rule 904, Commentary .10(e).
16 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 or member organization) would be able to
rely on this part of the Exemption. See
subparagraph (c) of proposed Rule 904C,
Commentary .06, which incorporates Rule 904,
Commentary .10(e).
17 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
VerDate Mar<15>2010
15:30 Nov 23, 2010
Jkt 223001
Aggregation of Accounts. Members,
member organizations 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, member organization or
their non-member 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,
as defined in Rule 904, Commentary .08,
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.18 The
Exchange has set forth in Regulatory
Circular Reg 2008–14 the conditions
under which it will deem no control
relationship to exist between affiliated
broker-dealers and between separate
and distinct trading units within the
same broker-dealer.
Any member, member organization 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,
member organization or non-member
affiliate relying on the Index Exemption
for purposes of compliance with
Exchange position or exercise limits.19
Obligations of Members, Member
Organizations and Affiliates. Any
member or member organization 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. In addition, by such
of the Comptroller of the Currency. Only a national
bank and no other affiliated entity (including a
member or member organization) would be able to
rely on this part of the Exemption. See
subparagraph (c) of proposed Rule 904C,
Commentary .06, which incorporates Rule 904,
Commentary .10(e).
18 See subparagraph (d) of proposed Rule 904C,
Commentary .06.
19 See proposed Rule 904C, Commentary
.06(d)(3).
PO 00000
Frm 00114
Fmt 4703
Sfmt 4703
71779
reliance, such member or member
organization would authorize any other
person carrying for such member or
member organization an account
including, or with whom such member
or member organization 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.20
The index option positions of a nonmember affiliate relying on the Index
Exemption must be carried by a member
or member organization with which it is
affiliated. A member or member
organization 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 nonmember affiliate a written certification
that it is using a Permitted Pricing
Model as defined in the rule for
purposes of the index Exemption.21
Reporting. Under proposed Rule
904C, Commentary .06(f), each member
or member organization relying on the
Index Exemption would be required to
report, in accordance with Rule 906,22
(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 Rule 904C,
Commentary .06(d), for each such
account that holds an index option
position subject to the Index Exemption
in excess of the levels specified in Rule
20 See subparagraph (e) of proposed Rule 904C,
Commentary .06.
21 In addition, the member or member
organization 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 or member organization if it
ceases to rely on the Index Exemption; (d)
authorizes the member or member organization 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 subparagraph (e)(3) of
proposed Rule 904C, Commentary .06.
22 Exchange Rule 906 requires, among other
things, that members and member organizations
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.
E:\FR\FM\24NON1.SGM
24NON1
71780
Federal Register / Vol. 75, No. 226 / Wednesday, November 24, 2010 / Notices
WReier-Aviles on DSKGBLS3C1PROD with NOTICES
904C(b) (and Rule 904C(c), in the case
of Stock Index Industry Group Options)
the net delta and the options contract
equivalent of the net delta of such
position.
Records. Under proposed Rule 904C,
Commentary .06(g), each member or
member organization 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 or member organization 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.23
Reliance on Federal Oversight. As
provided under proposed Rule 904C,
Commentary .06(c), a Permitted Pricing
Model includes proprietary pricing
models used by members, member
organizations 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, member
organization’s or non-member affiliate’s
use of a proprietary pricing model is
appropriate or yielding accurate results.
The Exchange will announce the
effective date of the proposed rule
change in a regulatory circular to be
published no later than 60 days after
Commission approval. The effective
date shall be no later than 30 days after
publication of the regulatory circular.
2. Statutory Basis
The Exchange believes that this
proposed rule change is consistent with
Section 6(b) of the Securities Exchange
Act of 1934 (‘‘Act’’),24 in general, and
furthers the objectives of Section 6(b)(5)
of the Act 25 in particular, in that it is
designed to prevent fraudulent and
manipulative acts and practices,
promote just and equitable principles of
trade, 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
23 A member or member organization would be
authorized to report position information of its nonmember affiliate pursuant to the written statement
required under proposed Rule 904C, Commentary
.06(e)(3)(B)(iv).
24 15 U.S.C. 78f(b).
25 15 U.S.C. 78f(b)(5).
VerDate Mar<15>2010
15:30 Nov 23, 2010
Jkt 223001
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 Rule 904,
Commentary .10. Also, the Commission
has previously stated its support for
recognizing options positions hedged on
a delta neutral basis as properly
exempted from positions limits.26
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
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
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 27 and Rule 19b–
4(f)(6) thereunder.28
A proposed rule change filed under
19b–4(f)(6) normally may not become
operative prior to 30 days after the date
of filing.29 However, Rule 19b–
4(f)(6)(iii) 30 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
26 See Securities Exchange Act Release No. 40594
(October 23, 1998), 63 FR 59362, 59380 (November
3, 1998) (adopting rules relating to OTC Derivatives
Dealers).
27 15 U.S.C. 78s(b)(3)(A).
28 17 CFR 240.19b–4(f)(6).
29 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.
30 Id.
PO 00000
Frm 00115
Fmt 4703
Sfmt 4703
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 has approved
a substantially similar proposal filed by
the Chicago Board Options Exchange,
Incorporated,31 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.32
At any time within 60 days of the
filing of such proposed rule change the
Commission summarily may
temporarily suspend 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–NYSEAmex–2010–104 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–NYSEAmex–2010–104.
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
31 See Securities Exchange Act Release No. 62190
(May 27, 2010), 75 FR 31826 (June 4, 2010) (SR–
CBOE–2010–21). See also Securities Exchange Act
Release Nos. 62504 (July 15, 2010), 75 FR 42797
(July 22, 2010) (SR–PHLX–2010–93); and 63077
(October 12, 2010), 75 FR 63870 (October 18, 2010)
(SR–ISE–2010–97).
32 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).
E:\FR\FM\24NON1.SGM
24NON1
Federal Register / Vol. 75, No. 226 / Wednesday, November 24, 2010 / Notices
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 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–NYSEAmex–2010–104 and
should be submitted on or before
December 15, 2010.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–29592 Filed 11–23–10; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
WReier-Aviles on DSKGBLS3C1PROD with NOTICES
Self-Regulatory Organizations; EDGX
Exchange, Inc.; Notice of Filing of
Proposed Rule Change To Amend
EDGX Rules 11.9(b)(1)(C) and 11.5(c)(7)
Regarding Step-Up Orders
November 18, 2010
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on November
8, 2010, EDGX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGX’’) 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.
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
VerDate Mar<15>2010
17:53 Nov 23, 2010
Jkt 223001
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
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
self-regulatory organization has
prepared summaries, set forth in
Sections A, B and C below, of the most
significant aspects of such statements.
1. Purpose
[Release No. 34–63336; File No. SR–EDGX–
2010–17]
1 15
The Exchange proposes to amend
EDGX Rule 11.9(b)(1)(C) regarding the
description of the Step-up order type.
The Exchange also proposes to modify
Rule 11.5(c)(7) to allow Mid-Point
Match orders entered in response to
Step-up orders to be processed pursuant
to Rule 11.9(b)(1)(C). The text of the
proposed rule change is available on the
Exchange’s Internet website at https://
www.directedge.com, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
BILLING CODE 8011–01–P
33 17
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Exchange Rule 11.5(c)(11) defines a
Step-up order as a ‘‘market or limit order
with the instruction that the System
display the order to Users at or within
the NBBO price pursuant to Rule
11.9(b)(1)(C).’’ Exchange Rule
11.9(b)(1)(C), in turn, states that orders
shall be displayed to Users 3 (hereinafter
referred to as ‘‘Members’’),4 in a manner
that is separately identifiable from other
Exchange orders, at or within the NBBO
price for a period of time not to exceed
five hundred milliseconds as
determined by the Exchange (the ‘‘Stepup Display Period’’). The Step-up
Display Period is currently set at 25
milliseconds.
The Exchange proposes to amend
Rule 11.9(b)(1)(C) to add language to the
rule text which will provide that at the
conclusion of the Step-up Display
3 Exchange Rule 11.9(b)(1) provides that (prior to
display of an order to a User), an incoming order
shall first attempt to be matched for execution
against orders in the EDGX Book.
4 Exchange Rule 1.5(cc) defines a User as ‘‘any
Member or Sponsored Participant who is
authorized to obtain access to the System pursuant
to Rule 11.3.’’
PO 00000
Frm 00116
Fmt 4703
Sfmt 4703
71781
Period, the Step-up order shall execute
against responsive User orders priced at
or within the NBBO, prevailing at the
end of the Step-up Display Period on a
price/time priority basis consistent with
Rule 11.8(a)(1) and (2). Rules 11.8(a)(1)
and (2), in turn, provide that orders of
Users shall be ranked and maintained in
the EDGX Book based on the following
priority: (i) The highest-priced order to
buy (or lowest-priced order to sell) shall
have priority over all other orders to buy
(or orders to sell); (ii) where orders to
buy (or sell) are made at the same price,
the order clearly established as the first
entered into the System at such
particular price shall have precedence at
that price, up to the number of shares
of stock specified in the order.
Commencing on the six month
anniversary of {Insert Commission
approval date of this rule filing}, the
orders eligible for executing against
Step-up orders shall be expanded to
include User orders priced better but
not outside the NBBO at the end of the
Step-up Display Period (such orders,
‘‘Eligible Book Orders’’).
In effect, Step-up orders permit a
Member to initiate a price auction of
such orders by displaying order
solicitation information to other
Members simultaneously, provided
such other Members have elected to
receive such order information (each
such Member, an ‘‘Electing Member’’).
After the passage of the Step-up Display
Period, the Step-up orders are executed
against responses and, commencing on
the six month anniversary of {Insert
Commission approval date of this rule
filing}, Eligible Book Orders, on a price/
time priority basis in accordance with
Rule 11.8(a)(1) and (2). Responses are
accumulated for the Step-up Display
Period by the Exchange, rather than
processed at arrival time. Eligible Book
Orders will continue to be eligible for
execution against the EDGX Book
during the Step-up Display Period.
For example, assume the NBBO
(national best bid/offer) is 10.10 x 10.12.
If Member A enters a Step-up order to
buy 500 shares of ABC security at the
prevailing national best offer ($10.12)
and such Step-up order cannot execute
against the EDGX Book then Electing
Members will receive a solicitation to
sell 500 shares of ABC security at $10.12
or lower. If Electing Members X, Y, and
Z transmit an order to sell 500 shares (or
less) of ABC security at the prevailing
national best offer or lower (i.e, $10.12
or lower), within the Step-up Display
Period, they would all participate in a
price auction, which would be awarded
at the end of the Step-up Display Period
on a price/time priority basis based on
the prevailing NBBO at the end of such
E:\FR\FM\24NON1.SGM
24NON1
]]>Agencies
[Federal Register Volume 75, Number 226 (Wednesday, November 24, 2010)]
[Notices]
[Pages 71777-71781]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-29592]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63337; File No. SR-NYSEAmex-2010-104]
Self-Regulatory Organizations; NYSE Amex LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Expanding the Delta
Hedging Exemption Available for Equity Options Position Limits and
Adopting a Delta Hedging Exemption From Certain Index Options Position
Limits
November 18, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on November 5, 2010, NYSE Amex LLC (the ``Exchange'' or ``NYSE
Amex'') 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 self-regulatory
organization. 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 position limits and (ii) adopt a delta
hedging exemption from certain index options position limits. The text
of the proposed rule change is available at the Exchange, the
Commission's Public Reference Room, on the Commission's Web site at
https://www.sec.gov, and https://www.nyse.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, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of 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 March 4, 2008,\3\ the Exchange submitted a proposed rule change
with the Commission establishing an exemption from equity options
position and exercise limits for positions held by Exchange members,
member organizations and certain of their affiliates, that are ``delta
neutral'' \4\ under a ``Permitted Pricing Model,'' \5\ subject to
certain conditions (``Exemption''). The Exchange is proposing to amend
certain of its rules to expand its exemption from equity options
position and exercise limits and adopt a delta hedging exemption from
certain index options position limits.\6\
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 57502 (March 14,
2008), 73 FR 15225 (March 21, 2008) (SR-Amex-2008-18).
\4\ The term ``delta neutral'' is defined in Rule 904,
Commentary .10(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.
\5\ Permitted Pricing Model is defined in Rule 904, Commentary
.10(e).
\6\ The amendments proposed herein are similar to changes
approved for the Chicago Board Options Exchange (``CBOE''). See
Securities Exchange Act Release No. 62190 (May 27, 2010), 75 FR
31826 (June 4, 2010) (SR-CBOE-2010-021). See also Securities
Exchange Act Release No. 56970 (December 14, 2007), 72 FR 72428
(December 20, 2007) (SR-CBOE-2007-099). 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). 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 Rule
904, Commentary .10, subject to the availability of other
exemptions.\7\ Currently, the Exemption only is available for
securities that directly underlie the applicable option
[[Page 71778]]
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.
---------------------------------------------------------------------------
\7\ The term ``options contract equivalent of the net delta'' is
defined in Rule 904, Commentary .10(c) as the net delta divided by
the number of shares underlying the option contract. The term ``net
delta'' is defined in the same rule 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.\8\
---------------------------------------------------------------------------
\8\ However, this would not include baskets of securities for
purposes of the Exemption.
---------------------------------------------------------------------------
Accordingly, the Exchange proposes to expand the Exemption by
amending Rule 904, Commentary .10(a) 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'' in
Rule 904, Commentary .10(b) to mean, at any time, the number of shares
and/or other units of trade \9\ (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'' to mean the net delta divided by
the number of shares that equate to one option contract on a delta
basis.
---------------------------------------------------------------------------
\9\ ``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. Delta-Based Index Hedge Exemption
Most index options traded on the Exchange are subject to position
and exercise limits, as provided under Rules 904C(b) and 905C(c).\10\
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.
---------------------------------------------------------------------------
\10\ Rules 904C(b) and 904C(c) provide position limits for Broad
Stock Index Group Options and Stock Index Industry Group Options,
respectively.
---------------------------------------------------------------------------
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.\11\
---------------------------------------------------------------------------
\11\ See Commentary .01-.03 to Rule 904C.
---------------------------------------------------------------------------
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 is
substantially similar to the delta-based equity hedge exemption under
Rule 904, Commentary .10. 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 broad stock index group options position and exercise limits \12\
for positions held by members, member organizations and certain of
their non-member affiliates that are ``delta neutral'' (as defined
below) under a ``Permitted Pricing Model'' (as defined below), subject
to certain conditions (``Index Exemption''). The Index Exemption under
proposed Rule 904C, Commentary .06 would also apply to Industry Index
Options under proposed Rule 904C, Commentary .07.
---------------------------------------------------------------------------
\12\ Exchange Rule 905C establishes exercise limits for an index
option at the same level as the index option's position limit under
index options position limit rules, therefore no changes are
proposed to Rule 905C.
---------------------------------------------------------------------------
The term ``delta neutral'' is defined in proposed Rule 904C,
Commentary .06(a) 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.\13\
---------------------------------------------------------------------------
\13\ See supra note 8.
---------------------------------------------------------------------------
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.\14\
---------------------------------------------------------------------------
\14\ Under proposed Rule 904C, Commentary .06(b), 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 and member organizations 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
[[Page 71779]]
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 Rule 904C, Commentary .06(c) to have the
same meaning as defined in Rule 904, Commentary .10(e), namely, (i) The
pricing model maintained and operated by the Options Clearing
Corporation (``OCC''); and the pricing models maintained and used by
(ii) a member subject to consolidated supervision by the SEC pursuant
to Appendix E of SEC Rule 15c3-1; (iii) 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; \15\ (iv) an SEC registered OTC derivatives dealer;
\16\ and (v) a national bank.\17\
---------------------------------------------------------------------------
\15\ 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 member organization or
affiliate of a member or member organization 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 member organization or affiliate of a member or member
organization 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 subparagraph (c) of proposed
Rule 904C, Commentary .06, which incorporates Rule 904, Commentary
.10(e).
\16\ 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 or member organization) would be able to rely on this part of
the Exemption. See subparagraph (c) of proposed Rule 904C,
Commentary .06, which incorporates Rule 904, Commentary .10(e).
\17\ 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 or member organization) would be able to rely on
this part of the Exemption. See subparagraph (c) of proposed Rule
904C, Commentary .06, which incorporates Rule 904, Commentary
.10(e).
---------------------------------------------------------------------------
Aggregation of Accounts. Members, member organizations 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, member organization or their non-
member 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, as defined in Rule 904, Commentary .08, 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.\18\ The
Exchange has set forth in Regulatory Circular Reg 2008-14 the
conditions under which it will deem no control relationship to exist
between affiliated broker-dealers and between separate and distinct
trading units within the same broker-dealer.
---------------------------------------------------------------------------
\18\ See subparagraph (d) of proposed Rule 904C, Commentary .06.
---------------------------------------------------------------------------
Any member, member organization 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, member organization or non-member affiliate relying on
the Index Exemption for purposes of compliance with Exchange position
or exercise limits.\19\
---------------------------------------------------------------------------
\19\ See proposed Rule 904C, Commentary .06(d)(3).
---------------------------------------------------------------------------
Obligations of Members, Member Organizations and Affiliates. Any
member or member organization 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. In addition, by such reliance, such member or
member organization would authorize any other person carrying for such
member or member organization an account including, or with whom such
member or member organization 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.\20\
---------------------------------------------------------------------------
\20\ See subparagraph (e) of proposed Rule 904C, Commentary .06.
---------------------------------------------------------------------------
The index option positions of a non-member affiliate relying on the
Index Exemption must be carried by a member or member organization with
which it is affiliated. A member or member organization 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.\21\
---------------------------------------------------------------------------
\21\ In addition, the member or member organization 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 or member organization if it ceases to rely on the Index
Exemption; (d) authorizes the member or member organization 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 subparagraph (e)(3) of
proposed Rule 904C, Commentary .06.
---------------------------------------------------------------------------
Reporting. Under proposed Rule 904C, Commentary .06(f), each member
or member organization relying on the Index Exemption would be required
to report, in accordance with Rule 906,\22\ (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 Rule 904C, Commentary .06(d), for each
such account that holds an index option position subject to the Index
Exemption in excess of the levels specified in Rule
[[Page 71780]]
904C(b) (and Rule 904C(c), in the case of Stock Index Industry Group
Options) the net delta and the options contract equivalent of the net
delta of such position.
---------------------------------------------------------------------------
\22\ Exchange Rule 906 requires, among other things, that
members and member organizations 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 Rule 904C, Commentary .06(g), each member
or member organization 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 or member
organization 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.\23\
---------------------------------------------------------------------------
\23\ A member or member organization would be authorized to
report position information of its non-member affiliate pursuant to
the written statement required under proposed Rule 904C, Commentary
.06(e)(3)(B)(iv).
---------------------------------------------------------------------------
Reliance on Federal Oversight. As provided under proposed Rule
904C, Commentary .06(c), a Permitted Pricing Model includes proprietary
pricing models used by members, member organizations 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,
member organization's or non-member affiliate's use of a proprietary
pricing model is appropriate or yielding accurate results.
The Exchange will announce the effective date of the proposed rule
change in a regulatory circular to be published no later than 60 days
after Commission approval. The effective date shall be no later than 30
days after publication of the regulatory circular.
2. Statutory Basis
The Exchange believes that this proposed rule change is consistent
with Section 6(b) of the Securities Exchange Act of 1934 (``Act''),\24\
in general, and furthers the objectives of Section 6(b)(5) of the Act
\25\ in particular, in that it is designed to prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, 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 Rule 904,
Commentary .10. Also, the Commission has previously stated its support
for recognizing options positions hedged on a delta neutral basis as
properly exempted from positions limits.\26\
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(5).
\26\ 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 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
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
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 \27\ and Rule 19b-4(f)(6) thereunder.\28\
---------------------------------------------------------------------------
\27\ 15 U.S.C. 78s(b)(3)(A).
\28\ 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.\29\
However, Rule 19b-4(f)(6)(iii) \30\ 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 has approved a substantially similar proposal filed by the
Chicago Board Options Exchange, Incorporated,\31\ 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.\32\
---------------------------------------------------------------------------
\29\ 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.
\30\ Id.
\31\ See Securities Exchange Act Release No. 62190 (May 27,
2010), 75 FR 31826 (June 4, 2010) (SR-CBOE-2010-21). See also
Securities Exchange Act Release Nos. 62504 (July 15, 2010), 75 FR
42797 (July 22, 2010) (SR-PHLX-2010-93); and 63077 (October 12,
2010), 75 FR 63870 (October 18, 2010) (SR-ISE-2010-97).
\32\ 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 summarily may temporarily suspend 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-NYSEAmex-2010-104 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-NYSEAmex-2010-104. 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
[[Page 71781]]
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 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-NYSEAmex-2010-104 and should
be submitted on or before December 15, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
---------------------------------------------------------------------------
\33\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29592 Filed 11-23-10; 8:45 am]
BILLING CODE 8011-01-P
