Self-Regulatory Organizations; NYSE Arca, Inc.; 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, 71773-71777 [2010-29593]

Download as PDF Federal Register / Vol. 75, No. 226 / Wednesday, November 24, 2010 / Notices to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: [FR Doc. 2010–29594 Filed 11–23–10; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–63338; File No. SR– NYSEArca–2010–99] 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–2010–158 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. WReier-Aviles on DSKGBLS3C1PROD with NOTICES For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.9 Florence E. Harmon, Deputy Secretary. Self-Regulatory Organizations; NYSE Arca, Inc.; 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 Arca, Inc. (the All submissions should refer to File ‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with Number SR–Phlx-2010–158. This file the Securities and Exchange number should be included on the subject line if e-mail is used. To help the Commission (the ‘‘Commission’’) the proposed rule change as described in Commission process and review your Items I and II below, which Items have comments more efficiently, please use only one method. The Commission will been prepared by the self-regulatory post all comments on the Commission’s organization. The Commission is publishing this notice to solicit Internet Web site (https://www.sec.gov/ comments on the proposed rule change rules/sro.shtml). Copies of the from interested persons. submission, all subsequent amendments, all written statements I. Self-Regulatory Organization’s with respect to the proposed rule Statement of the Terms of Substance of change that are filed with the the Proposed Rule Change Commission, and all written The Exchange proposes to (i) expand communications relating to the the delta hedging exemption available proposed rule change between the Commission and any person, other than for equity options position limits and (ii) adopt a delta hedging exemption those that may be withheld from the from certain index options position public in accordance with the limits. The text of the proposed rule provisions of 5 U.S.C. 552, will be change is available at the Exchange, the available for Web site viewing and Commission’s Public Reference Room, printing in the Commission’s Public on the Commission’s Web site at Reference Room, 100 F Street, NE., https://www.sec.gov, and https:// Washington, DC 20549, on official www.nyse.com. business days between the hours of 10 a.m. and 3 p.m. Copies of the filing II. Self-Regulatory Organization’s also will be available for inspection and Statement of the Purpose of, and copying at the principal office of the Statutory Basis for, the Proposed Rule Exchange. All comments received will Change be posted without change; the In its filing with the Commission, the Commission does not edit personal self-regulatory organization included identifying information from statements concerning the purpose of, submissions. You should submit only and basis for, the proposed rule change information that you wish to make and discussed any comments it received available publicly. All submissions should refer to File Number SR–Phlx– 9 17 CFR 200.30–3(a)(12). 2010–158 and should be submitted on 1 15 U.S.C. 78s(b)(1). or before December 15, 2010. 2 17 CFR 240.19b–4. VerDate Mar<15>2010 15:30 Nov 23, 2010 Jkt 223001 PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 71773 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 Expansion of Delta-Based Equity Hedge Exemption On February 5, 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 OTP Holders, OTP Firms, 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 6.8, subject to the availability of other exemptions.7 3 See Securities Exchange Act Release No. 57358 (February 20, 2008), 73 FR 11173 (February 29, 2008) (SR–NYSEArca–2008–17). 4 The term ‘‘delta neutral’’ is defined in Rule 6.8, Commentary .07(iii)(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 6.8, Commentary .07(iii)(c). 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 6.8, Commentary .07(iii)(b) 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 E:\FR\FM\24NON1.SGM Continued 24NON1 WReier-Aviles on DSKGBLS3C1PROD with NOTICES 71774 Federal Register / Vol. 75, No. 226 / Wednesday, November 24, 2010 / Notices 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.8 Accordingly, the Exchange proposes to expand the Exemption by amending Rule 6.8, Commentary .07(iii)(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 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. 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 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 6.8, Commentary .07(iii)(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. Delta-Based Index Hedge Exemption Most index options traded on the Exchange are subject to position and exercise limits, as provided under Exchange Rules 5.15 and 5.16(a).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 Under Rule 5.17(a) (Broad-Based Index Hedge Exemption), a qualified portfolio may consist of common stocks or securities readily convertible to common stock, and/or index futures contracts, options on index futures contracts, or long or short positions in index options or index warrants that meet certain standards. Under Rule 5.17(b) (Industry Index 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 5.15 and 5.16(a) provide position limits for Broad-Based Index Options and Industry Index Options, respectively. 11 See Rule 5.17(a) (Broad-Based Index Hedge Exemption) and Rule 5.17(b) (Industry Index Hedge Exemption). PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 Hedge Exemption), a qualified portfolio may consist only of underlying component stocks or in securities readily convertible to such component stocks. In the case of both hedge exemptions, the maximum size of the exempt position is set at a specified maximum number of contracts. 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 6.8, Commentary .07(iii). 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-based index options position and exercise limits12 for positions held by OTP Holders, OTP Firms, 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’’). The Index Exemption under proposed Rule 5.17(d) would also apply to Industry Index Options under proposed Rule 5.17(e). The term ‘‘delta neutral’’ is defined in proposed Rule 5.17(d)(1) 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 12 Exchange Rule 5.18 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 5.18. 13 See supra note 8. E:\FR\FM\24NON1.SGM 24NON1 Federal Register / Vol. 75, No. 226 / Wednesday, November 24, 2010 / Notices WReier-Aviles on DSKGBLS3C1PROD with NOTICES 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, OTP Holders and OTP Firms 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 Rule 5.17(d)(3) to have the same meaning as defined in Rule 6.8, Commentary .07(iii)(c), namely, (i) the pricing model maintained and operated by the Options Clearing Corporation (‘‘OCC’’); and the pricing models maintained and used by (ii) an OTP Holder or OTP Firm 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 Aggregation of Accounts. OTP Holders and OTP Firms (and affiliates thereof) 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 OTP Holder or OTP Firm (or affiliate thereof). 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 6.8, Commentary .07(iii)(d)(2)(1), 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 an Exchange issued Option Regulatory Bulletin (‘‘RBO’’) 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. 14 Under proposed Rule 5.17(d)(2), 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. 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 OTP Holder or OTP Firm or affiliate of an OTP Holder or OTP Firm 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 riskbased 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 OTP Holder or OTP Firm or affiliate of an OTP Holder or OTP Firm 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 (3) of proposed Rule 5.17(d), which incorporates Rule 6.8, Commentary .07(iii)(c). 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 an OTP Holder or OTP Firm) would be able to rely on this part of the Exemption. See subparagraph (3) of proposed Rule 5.17(d), which incorporates Rule 6.8, Commentary .07(iii)(c). 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 an OTP Holder or OTP Firm) would be able to rely on this part of the Exemption. See subparagraph (3) of proposed Rule 5.17(d), which incorporates Rule 6.8, Commentary .07(iii)(c). 18 See subparagraph (4) of proposed Rule 5.17(d). VerDate Mar<15>2010 15:30 Nov 23, 2010 Jkt 223001 PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 71775 Any OTP Holder or OTP Firm (or affiliate thereof) 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 OTP Holder or OTP Firm (or affiliate thereof) relying on the Index Exemption for purposes of compliance with Exchange position or exercise limits.19 Obligations of OTP Holders, OTP Firms and Affiliates. Any OTP Holder or OTP Firm 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 OTP Holder or OTP Firm would authorize any other person carrying for such OTP Holder or OTP Firm an account including, or with whom such OTP Holder or OTP Firm 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 nonOTP Holder or non-OTP Firm relying on the Index Exemption must be carried by an OTP Holder or OTP Firm with which it is affiliated. An OTP Holder or OTP Firm carrying an account that includes an index option position for an affiliate that intends to rely on the Index Exemption would be required to obtain from such affiliate a written certification that it is using a permitted pricing model as defined in the rule for purposes of the index Exemption.21 19 See proposed Rule 5.17(d)(4)(C). subparagraph (5) of proposed Rule 5.17(d). 21 In addition, the OTP Holder or OTP Firm would be required to obtain from such affiliate a written statement confirming that such 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 OTP Holder or OTP Firm if it ceases to rely on the Index Exemption; (d) authorizes the OTP Holder or OTP Firm to provide to the Exchange or the OCC such information regarding positions of the 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 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 (5)(C) of proposed Rule 5.17(d). 20 See E:\FR\FM\24NON1.SGM 24NON1 71776 Federal Register / Vol. 75, No. 226 / Wednesday, November 24, 2010 / Notices Reporting. Under proposed Rule 5.17(d)(6), each OTP Holder or OTP Firm relying on the Index Exemption would be required to report, in accordance with Rule 6.6,22 (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 5.17(d)(4), for each such account that holds an index option position subject to the Index Exemption in excess of the levels specified in Rule 5.15 (and Rule 5.16(a), in the case of Industry Index Options) the net delta and the options contract equivalent of the net delta of such position. Records. Under proposed Rule 5.17(d)(7), each OTP Holder or OTP Firm relying on the Index Exemption would be required to (i) retain, and would be required to undertake reasonable efforts to ensure that any affiliate of the OTP Holder or OTP Firm 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 5.17(3), a permitted pricing model includes proprietary pricing models used by OTP Holders, OTP Firms 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 an OTP Holder’s or OTP Firm’s (or affiliate thereof) 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. WReier-Aviles on DSKGBLS3C1PROD with NOTICES 2. Statutory Basis The Exchange believes that this proposed rule change is consistent with 22 Exchange Rule 6.6 requires, among other things, that OTP Holders and OTP Firms 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. 23 An OTP Holder or OTP Firm would be authorized to report position information of its affiliate pursuant to the written statement required under proposed Rule 5.17(d)(5)(C)(ii)(d). VerDate Mar<15>2010 15:30 Nov 23, 2010 Jkt 223001 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 6.8, Commentary .07(iii). 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 24 15 U.S.C. 78f(b). 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). 27 15 U.S.C. 78s(b)(3)(A). 28 17 CFR 240.19b–4(f)(6). 25 15 PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 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 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–NYSEArca-2010–99 on the subject line. 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). E:\FR\FM\24NON1.SGM 24NON1 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

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 75, Number 226 (Wednesday, November 24, 2010)]
[Notices]
[Pages 71773-71777]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-29593]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63338; File No. SR-NYSEArca-2010-99]


Self-Regulatory Organizations; NYSE Arca, Inc.; 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 Arca, Inc. (the ``Exchange'' or ``NYSE 
Arca'') 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
Expansion of Delta-Based Equity Hedge Exemption
    On February 5, 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 OTP 
Holders, OTP Firms, 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. 57358 (February 20, 
2008), 73 FR 11173 (February 29, 2008) (SR-NYSEArca-2008-17).
    \4\ The term ``delta neutral'' is defined in Rule 6.8, 
Commentary .07(iii)(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 6.8, Commentary 
.07(iii)(c).
    \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 
6.8, subject to the availability of other exemptions.\7\

[[Page 71774]]

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.
---------------------------------------------------------------------------

    \7\ The term ``options contract equivalent of the net delta'' is 
defined in Rule 6.8, Commentary .07(iii)(b) 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 6.8, Commentary .07(iii)(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 6.8, Commentary .07(iii)(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.
---------------------------------------------------------------------------

    Delta-Based Index Hedge Exemption
    Most index options traded on the Exchange are subject to position 
and exercise limits, as provided under Exchange Rules 5.15 and 
5.16(a).\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 5.15 and 5.16(a) provide position limits for Broad-
Based Index Options and Industry Index 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\ Under Rule 5.17(a) (Broad-
Based Index Hedge Exemption), a qualified portfolio may consist of 
common stocks or securities readily convertible to common stock, and/or 
index futures contracts, options on index futures contracts, or long or 
short positions in index options or index warrants that meet certain 
standards. Under Rule 5.17(b) (Industry Index Hedge Exemption), a 
qualified portfolio may consist only of underlying component stocks or 
in securities readily convertible to such component stocks. In the case 
of both hedge exemptions, the maximum size of the exempt position is 
set at a specified maximum number of contracts.
---------------------------------------------------------------------------

    \11\ See Rule 5.17(a) (Broad-Based Index Hedge Exemption) and 
Rule 5.17(b) (Industry Index Hedge Exemption).
---------------------------------------------------------------------------

    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 6.8, Commentary .07(iii). 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-based index options position and exercise limits\12\ for 
positions held by OTP Holders, OTP Firms, 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''). The Index Exemption under proposed 
Rule 5.17(d) would also apply to Industry Index Options under proposed 
Rule 5.17(e).
---------------------------------------------------------------------------

    \12\ Exchange Rule 5.18 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 5.18.
---------------------------------------------------------------------------

    The term ``delta neutral'' is defined in proposed Rule 5.17(d)(1) 
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.

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[[Page 71775]]

    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 5.17(d)(2), 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, OTP Holders and OTP Firms 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 Rule 5.17(d)(3) to have the same meaning 
as defined in Rule 6.8, Commentary .07(iii)(c), namely, (i) the pricing 
model maintained and operated by the Options Clearing Corporation 
(``OCC''); and the pricing models maintained and used by (ii) an OTP 
Holder or OTP Firm 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 OTP Holder or OTP Firm or affiliate of an 
OTP Holder or OTP Firm 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 OTP 
Holder or OTP Firm or affiliate of an OTP Holder or OTP Firm 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 (3) of proposed Rule 
5.17(d), which incorporates Rule 6.8, Commentary .07(iii)(c).
    \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 an OTP 
Holder or OTP Firm) would be able to rely on this part of the 
Exemption. See subparagraph (3) of proposed Rule 5.17(d), which 
incorporates Rule 6.8, Commentary .07(iii)(c).
    \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 an OTP Holder or OTP Firm) would be able to rely on this 
part of the Exemption. See subparagraph (3) of proposed Rule 
5.17(d), which incorporates Rule 6.8, Commentary .07(iii)(c).
---------------------------------------------------------------------------

    Aggregation of Accounts. OTP Holders and OTP Firms (and affiliates 
thereof) 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 OTP Holder or OTP Firm (or affiliate 
thereof).
    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 6.8, Commentary .07(iii)(d)(2)(1), 
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 an Exchange issued Option 
Regulatory Bulletin (``RBO'') 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 (4) of proposed Rule 5.17(d).
---------------------------------------------------------------------------

    Any OTP Holder or OTP Firm (or affiliate thereof) 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 OTP Holder or OTP Firm (or affiliate thereof) relying on the 
Index Exemption for purposes of compliance with Exchange position or 
exercise limits.\19\
---------------------------------------------------------------------------

    \19\ See proposed Rule 5.17(d)(4)(C).
---------------------------------------------------------------------------

    Obligations of OTP Holders, OTP Firms and Affiliates. Any OTP 
Holder or OTP Firm 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 OTP Holder or OTP 
Firm would authorize any other person carrying for such OTP Holder or 
OTP Firm an account including, or with whom such OTP Holder or OTP Firm 
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 (5) of proposed Rule 5.17(d).
---------------------------------------------------------------------------

    The index option positions of a non-OTP Holder or non-OTP Firm 
relying on the Index Exemption must be carried by an OTP Holder or OTP 
Firm with which it is affiliated. An OTP Holder or OTP Firm carrying an 
account that includes an index option position for an affiliate that 
intends to rely on the Index Exemption would be required to obtain from 
such 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 OTP Holder or OTP Firm would be required 
to obtain from such affiliate a written statement confirming that 
such 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 OTP Holder or OTP Firm if it ceases to 
rely on the Index Exemption; (d) authorizes the OTP Holder or OTP 
Firm to provide to the Exchange or the OCC such information 
regarding positions of the 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 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 (5)(C) of proposed 
Rule 5.17(d).

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

[[Page 71776]]

    Reporting. Under proposed Rule 5.17(d)(6), each OTP Holder or OTP 
Firm relying on the Index Exemption would be required to report, in 
accordance with Rule 6.6,\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 5.17(d)(4), for each such account that holds an index 
option position subject to the Index Exemption in excess of the levels 
specified in Rule 5.15 (and Rule 5.16(a), in the case of Industry Index 
Options) the net delta and the options contract equivalent of the net 
delta of such position.
---------------------------------------------------------------------------

    \22\ Exchange Rule 6.6 requires, among other things, that OTP 
Holders and OTP Firms 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 5.17(d)(7), each OTP Holder or OTP 
Firm relying on the Index Exemption would be required to (i) retain, 
and would be required to undertake reasonable efforts to ensure that 
any affiliate of the OTP Holder or OTP Firm 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\ An OTP Holder or OTP Firm would be authorized to report 
position information of its affiliate pursuant to the written 
statement required under proposed Rule 5.17(d)(5)(C)(ii)(d).
---------------------------------------------------------------------------

    Reliance on Federal Oversight. As provided under proposed Rule 
5.17(3), a permitted pricing model includes proprietary pricing models 
used by OTP Holders, OTP Firms 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 an OTP Holder's or OTP Firm's (or 
affiliate thereof) 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 6.8, 
Commentary .07(iii). 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).
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    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\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\
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    \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).
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    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-NYSEArca-2010-99 on the subject line.

[[Page 71777]]

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-NYSEArca-2010-99. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filing also will be available for website viewing and printing 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-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\
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    \33\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29593 Filed 11-23-10; 8:45 am]
BILLING CODE 8011-01-P

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