31826 Federal Register / Vol. 75, No. 107 / Friday, June 4, 2010 / Notices 

9 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 61785 

(March 25, 2010), 75 FR 16888. 

4Amendment No. 1 deleted the word ‘‘or’’ from 

the rule text of the proposal and deleted a footnote 

from the purpose section and Exhibit 1 of the 

proposal. Because the amendment does not affect 

the substance of the rule filing, the amendment 

does not require notice and comment. 

5 ‘‘Delta neutral’’ is defined as a precise term for 

purposes of the Equity Exemption in Rule 

4.11.04(c)(A). 6Under Rule 4.11.04(c)(C), ‘‘permitted pricing 

model’’ for purposes of the Equity Exemption is a 

pricing model: (1) Maintained and operated by the 

Options Clearing Corporation (‘‘OCC Model’’); (2) 

maintained and used by a member or its nonmember affiliate subject to consolidated supervision 

by the Commission pursuant to Appendix E of Rule 

15c3–1, 17 CFR 240.15c3–1, under the Act; (3) 

maintained and used by 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; (4) maintained and 

used by a Commission-registered OTC derivatives 

dealer; or (5) used by a national bank under the 

National Bank Act. 

7See Securities Exchange Act Release No. 56970 

(December 14, 2007), 72 FR 72428 (December 20, 

2007) (SR–CBOE–2007–99) (‘‘Exemption Approval 

Order’’). In August 2009, the Commission approved 

a CBOE proposal to extend the Equity Exemption 

to customers. See Securities Exchange Act Release 

No. 60555 (August 21, 2009), 74 FR 43741 (August 

27, 2009) (SR–CBOE–2009–39). The Commission 

notes that the Equity Exemption is not currently 

available to customers. See Securities Exchange Act 

Release No. 61857 (April 7, 2010), 75 FR 18931 

(April 13, 2010) (SR–CBOE–2010–30). 

8 ‘‘Net delta’’ is defined as a precise term for the 

purposes of the Equity Exemption in Rule 

4.11.04(c)(B). 

9However, this would not include baskets of 

securities for purposes of the delta hedging 

exemptions. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 35 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve such proposed 

rule change, or 

(B) Institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–FINRA–2010–026 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–FINRA–2010–026. 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 (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. Copies of such filing 

also will be available for inspection and 

copying at the principal office of 

FINRA. All comments received will be 

posted without change; the Commission 

does not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–FINRA–2010–026 and 

should be submitted on or before June 

25, 2010. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.9

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–13460 Filed 6–3–10; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–62190; File No. SR–CBOE– 

2010–021] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Order Approving 

Proposed Rule Change as Modified by 

Amendment No. 1 Thereto Relating to 

Correlated Instrument Delta Hedge 

Exemption 

May 27, 2010. 

On March 19, 2010, the Chicago 

Board Options Exchange, Incorporated 

(‘‘Exchange’’ or ‘‘CBOE’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change to 

(i) expand the delta hedging exemption 

available for equity options position 

limits; (ii) amend the reporting 

requirements applicable to members 

relying on the delta hedging exemption; 

and (iii) adopt a delta hedging 

exemption from certain index options 

position limits. The proposed rule 

change was published for comment in 

the Federal Register on April 2, 2010.3

On May 19, 2010, CBOE filed 

Amendment No. 1 to the proposal.4 The 

Commission received no comment 

letters on the proposal. This order 

approves the proposed rule change, as 

modified by Amendment No. 1. 

In December 2007, the Commission 

approved a CBOE proposal to create an 

exemption from position and exercise 

limits applicable to equity options 

(stock options and options on exchangetraded funds) for positions held by 

CBOE members and certain nonmember affiliates that are delta neutral 5

under a ‘‘permitted pricing model’’ 6

(‘‘Equity Exemption’’).7 When a position 

is not delta neutral, only the option 

contract equivalent of the net delta 8 of 

the position remains subject to the 

position limits in Rule 4.11. Currently, 

the Equity Exemption is available only 

for securities that directly underlie the 

applicable option position. For example, 

with respect to options on exchangetraded 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 

Equity Exemption. 

The proposed rule change would 

expand the Equity Exemption by 

permitting 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 any 

position in the underlying ETF as well 

as any position in an index option and/ 

or a correlated instrument for 

calculation of the Equity Exemption.9

The term ‘‘correlated instrument’’ would 


srobinson on DSKHWCL6B1PROD with NOTICES
Federal Register / Vol. 75, No. 107 / Friday, June 4, 2010 / Notices 31827 

10For example, the proposed rule would allow 

options on Standard & Poor’s Depositary Receipts 

(‘‘SPY’’), which tracks the performance of the S&P 

500 index, 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. 

11Exchange Rule 24.5 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 24.5. 

12The Index Exemption would apply to broadbased index options as well as industry index 

options. See proposed Rules 24.4.05 and Rule 

24.4A.03. 

13The term ‘‘delta neutral’’ would be defined 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. The 

term ‘‘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. See proposed Rules 24.4.05(A). 

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. 

14The terms ‘‘delta neutral,’’ ‘‘permitted pricing 

model,’’ and ‘‘options contract equivalent of the net 

delta’’ would be defined for the Index Exemption 

similar to the way these terms are defined for the 

Equity Exemption; with appropriate adjustments. 

See id. and infra note 15. 

15For purposes of the Index Exemption, the term 

‘‘options contract equivalent of the net delta’’ would 

be 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’’ would be 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. 

16See proposed Rule 24.4.05(B). The Commission 

notes that Rule 24.4 provides for multiple, 

independent hedge exemptions. Of course, to the 

extent that a position is used to hedge for the 

purpose of one exemption from position limit 

requirements, such as the Index Exemption, such 

position cannot be used to take advantage of 

another exemption from position limit 

requirements. 

17See proposed Rule 24.4.05(E)(1)(i), (3)(i), and 

(4)(i). The Commission notes that customers relying 

on the Index Exemption would be permitted to 

hedge their positions only in accordance with the 

OCC Model. See proposed Rule 24.4.05(A). In 

addition, the Commission notes that, consistent 

with the Equity Exemption, the Exchange will not 

make the Index Exemption available to customers 

until the Exchange provides a representation to the 

Commission’s Office of Compliance Inspections and 

Examinations that it can adequately surveil for such 

a customer exemption. Telephone conversation 

between Andrew Spiwak, Director Legal Division 

and Chief Enforcement Attorney, CBOE, and 

Theodore S. Venuti, Special Counsel, Division of 

Trading and Markets, Commission, on May 27, 

2010. See also supra note 7. 

18See proposed Rule 24.4.05(E)(3)(ii). 

19See proposed Rule 24.4.05(E)(4)(ii). 

20See proposed Rule 24.4.05(D), which provides, 

under certain conditions, that the net delta of an 

options position held by an entity entitled to rely 

on the exemption could be calculated without 

regard to positions in correlated instruments held 

by an affiliated entity or another trading unit within 

the same entity, provided that, among other things, 

no control relationship exists between such 

Continued 

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. Thus, 

the proposed rule change 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.10

To accommodate the use of index 

options and correlated instruments in 

the calculation of the Equity Exemption, 

the Exchange proposes to amend the 

definition of ‘‘net delta’’ in Rule 

4.11.04(c)(B) to mean, 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 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 

also 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. 

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. 

In another aspect of the proposal, 

CBOE proposes to relieve Exchange 

Market-Makers and Designated Primary 

Market-Makers (‘‘DPMs’’) using the OCC 

Model from the reporting requirements 

of the Equity Exemption because, as 

explained by CBOE, Market-Maker and 

DPM position and delta information can 

be accessed through the Exchange’s 

market surveillance systems. The 

Exchange noted that this proposal is 

consistent with similar exemptions from 

the reporting requirements under Rule 

4.13 and those applicable to broadbased index options and FLEX options. 

Finally, CBOE proposes to adopt an 

exemption from position and exercise 

limits 11 for positions in index options 12

held by CBOE members, certain of their 

affiliates, and customers that are delta 

neutral 13 under a permitted pricing 

model (‘‘Index Exemption’’).14 The 

options contract equivalent of the net 

delta 15 of such position would be 

subject to the appropriate position limit 

(subject to the availability of any other 

position limit exemptions).16

A member that intends to employ, or 

whose non-member affiliate or customer 

intends to employ, the Index Exemption 

would be required to provide a written 

certification to CBOE stating that the 

member, its affiliate, and/or its customer 

will use a permitted pricing model.17 In 

addition, members that carry an account 

that includes an index option position 

for a non-member affiliate would be 

required to obtain and provide to the 

Exchange a written statement from the 

non-member affiliate confirming that 

the affiliate: (1) Is relying on this 

exemption; (2) will use only a permitted 

pricing model for purposes of 

calculating the net delta of its option 

positions for purposes of this 

exemption; (3) will promptly notify the 

member if it ceases to rely on this 

exemption; (4) authorizes the member, 

upon request, to provide to the 

Exchange or the Options Clearing 

Corporation such information regarding 

positions of the non-member affiliate as 

part of the Exchange’s confirmation or 

verification of the accuracy of the net 

delta calculation under this exemption; 

and (5) if the non-member affiliate is 

using the OCC Model, has duly 

executed and delivered to the member 

such documents as the Exchange may 

require as a condition to reliance on this 

exemption.18 Members that carry an 

account that includes an index option 

position for a customer would be 

required to obtain and provide to the 

Exchange a written statement from the 

customer confirming that the customer: 

(1) Is relying on this exemption; (2) will 

use only the OCC Model for purposes of 

calculating the net delta of the 

customer’s options positions for 

purposes of this exemption; (3) will 

promptly notify the member if the 

customer ceases to rely on this 

exemption; and (4) in connection with 

using the OCC Model, has duly 

executed and delivered to the member 

such documents as the Exchange may 

require as a condition to reliance on this 

exemption.19

Furthermore, any member would be 

required to report, in accordance with 

Rule 4.13, all index options positions 

(including those that are delta neutral) 

that are reportable under that rule, and 

also would be required to report on its 

own behalf or on behalf of a designated 

aggregation unit 20 the net delta and 


srobinson on DSKHWCL6B1PROD with NOTICES
31828 Federal Register / Vol. 75, No. 107 / Friday, June 4, 2010 / Notices 

affiliates or trading units and the entity has 

designated in writing in advance the affiliates or 

trading units that are to be considered separate and 

distinct from each other. 21See proposed Rule 24.4.05(F). See also supra 

note 12. 

22See proposed Rule 24.4.05(G). 

23See proposed Rule 24.4.05(E)(2). 

24 In approving this rule, the Commission notes 

that it has considered the proposed rule’s impact on 

efficiency, competition, and capital formation. See 

15 U.S.C. 78c(f). 

25 15 U.S.C. 78f(b)(5). 

26See Securities Exchange Act Release No. 40594 

(October 23, 1998), 63 FR 59362, 59380 (November 

3, 1998) (File No. S7–30–97) (adopting rules 

relating to OTC derivatives dealers), cited in 

Exemption Approval Order, supra note 7. 

27 15 U.S.C. 78s(b)(2). 

28 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 15 U.S.C. 78s(b)(3)(A)(iii). 4 17 CFR 240.19b–4(f)(6). 

options contract equivalent of the net 

delta of such positions for a each 

account that holds an index option 

position subject to the delta hedging 

exemption in excess of the levels 

specified in 24.4 (and Rule 24.4A, in the 

case of industry index options).21 Each 

member relying on the exemption 

would be required to retain, and 

undertake reasonable efforts to ensure 

that its non-member affiliates or 

customers relying on the exemption 

retain, a list of the options, securities, 

and other instruments underlying each 

option position net delta calculation 

reported to the Exchange; and to 

produce such information to the 

Exchange upon request.22 In addition, 

the options positions of a non-member 

relying on the exemption would be 

required to be carried by a member with 

which it is affiliated.23

The Exchange will announce the 

operative date of the proposed rule 

change in a regulatory circular to be 

published no later than 60 days after 

Commission approval. The operative 

date shall be no later than 30 days after 

publication of the regulatory circular. 

The Commission finds that the 

proposed rule change is consistent with 

the requirements of the Act and the 

rules and regulations thereunder that 

are applicable to a national securities 

exchange.24 In particular, the 

Commission believes that the proposed 

rule change is consistent with Section 

6(b)(5) of the Act,25 which requires, 

among other things, that CBOE rules be 

designed to prevent fraudulent and 

manipulative acts and practices, to 

promote just and equitable principles of 

trade, to remove impediments to and 

perfect the mechanism of a free and 

open market and a national market 

system, and, in general, to protect 

investors and the public interest. 

In approving the Equity Exemption, 

the Commission noted its previous 

statement in support of recognizing 

options positions hedged on a delta 

neutral basis as properly exempted from 

position limits.26 The Commission 

believes that it is appropriate and 

consistent with the Act to expand the 

Equity Exemption to allow the use of 

correlated instruments in determining 

whether an ETF options position is 

delta neutral. The Commission further 

believes that it is appropriate and 

consistent with the Act to establish a 

delta based index options hedge 

exemption from position limits. Finally, 

the Commission believes that it is 

reasonable for CBOE to exempt 

Exchange Market-Makers and DPMs 

using the OCC Model from the reporting 

requirements of the Equity Exemption, 

and not to include them as subject to the 

reporting requirements of the Index 

Exemption, because the Exchange can 

access the information through the 

Exchange’s market surveillance systems. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,27 that the 

proposed rule change (SR–CBOE–2010– 

021), as modified by Amendment No. 1, 

be, and it hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.28

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–13439 Filed 6–3–10; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–62192; File No. SR–CBOE– 

2010–052] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Notice of Filing and 

Immediate Effectiveness of Proposed 

Rule Change Related to Trades for 

Less Than $1 

May 28, 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 May 27, 

2010, the Chicago Board Options 

Exchange, Incorporated (‘‘Exchange’’ or 

‘‘CBOE’’) 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 Exchange filed the 

proposal as a ‘‘non-controversial’’ 

proposed rule change pursuant to 

Section 19(b)(3)(A)(iii) of the Act 3 and 

Rule 19b–4(f)(6) thereunder.4 The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange is proposing to extend 

its program that allows transactions to 

take place at a price that is below $1 per 

option contract until June 1, 2011. The 

text of the proposed rule change is 

available on the Exchange’s Web site 

(http://www.cboe.org/Legal), at the 

Exchange’s Office of the Secretary, on 

the Commission’s Web site at http:// 

www.sec.gov, and at the Commission’s 

Public Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

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 those 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 

An ‘‘accommodation’’ or ‘‘cabinet’’ 

trade refers to trades in listed options on 

the Exchange that are worthless or not 

actively traded. Cabinet trading is 

generally conducted in accordance with 

the Exchange Rules, except as provided 

in Exchange Rule 6.54, Accommodation 

Liquidations (Cabinet Trades), which 

sets forth specific procedures for 

engaging in cabinet trades. Rule 6.54 

currently provides for cabinet 

transactions to occur via open outcry at 

a cabinet price of $1 per option contract 

in any options series open for trading in 

the Exchange, except that the Rule is not 

applicable to trading in option classes 

participating in the Penny Pilot 

Program. Under the procedures, bids 

and offers (whether opening or closing 

a position) at a price of $1 per option 

contract may be represented in the 

trading crowd by a Floor Broker or by 

a Market-Maker or provided in response 

to a request by a PAR Official/OBO, a 

Floor Broker or a Market-Maker, but 


srobinson on DSKHWCL6B1PROD with NOTICES