30188 Federal Register / Vol. 74, No. 120 / Wednesday, June 24, 2009 / Notices 

12 15 U.S.C. 78s(b)(2). 

13 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. 59877 

(May 6, 2009), 74 FR 22611 (May 13, 2009) 

(‘‘Notice’’). 

4Section 220.12(f)(1) of Regulation T (12 CFR 

220), Supplement: Margin Requirements, grants 

authority to registered national securities exchanges 

to promulgate rules relating to call and put margin 

requirements. 

5The Exchange will proscribe a set delivery 

period, which is expected to be no later than three 

business days following assignment of the listed 

options. 

6 In this regard, the Exchange currently intends to 

recognize the Master Vested Stock Option 

Monetization Agreement, created by iOptions 

Group, LLC, as one acceptable agreement. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,12 that the 

proposed rule change (SR–CBOE–2008– 

55), as modified by Amendment No. 1, 

be, and hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.13

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–14797 Filed 6–23–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60127; File No. SR–ISE– 

2007–121] 

Self-Regulatory Organizations; 

International Securities Exchange, 

LLC; Order Granting Approval to a 

Proposed Rule Change, as Modified by 

Amendment No. 1, Relating to Margin 

Requirements 

June 17, 2009. 

I. Introduction 

On December 24, 2007, pursuant to 

Section 19(b)(1) of the Securities 

Exchange Act of 1934 (the ‘‘Act’’),1 and 

Rule 19b–4 thereunder,2 the 

International Securities Exchange, LLC 

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

Securities and Exchange Commission 

(the ‘‘Commission’’) a proposed rule 

change to modify its margin 

requirements to facilitate, under certain 

circumstances, the ability of account 

holders to use vested and currently 

exercisable compensatory employee 

stock options (‘‘Vested Employee 

Options’’) issued by publicly traded 

companies as collateral for writing call 

options that have the same underlying 

security as the Vested Employee 

Options. On April 29, 2009, ISE filed 

Amendment No. 1. The proposed rule 

change was published for comment in 

the Federal Register on May 13, 2009.3

The Commission received no comments 

on the proposed rule change. 

II. Description 

The Exchange proposes to amend its 

margin requirements to facilitate, under 

certain circumstances, the ability of 

account holders to use Vested Employee 

Options issued by publicly traded 

companies (‘‘Issuers’’) as collateral for 

writing call options that have the same 

underlying security as the Vested 

Employee Options. Specifically, the 

proposal would allow account holders 

to sell, as a hedge, listed equity call 

options on the same underlying security 

as the account holder’s Vested 

Employee Options without the 

requirement of margin (the 

‘‘Transactions’’). The proposal would 

permit account holders to engage in the 

Transactions using their Vested 

Employee Options as collateral. 

Currently, such Transactions would be 

deemed ‘‘naked’’ for purposes of margin 

rules and subject to a deposit of cash 

margin, effectively making the strategies 

cost prohibitive and impractical. The 

Exchange believes that enabling 

employees who hold Vested Employee 

Options to generate income and 

liquidity on their otherwise illiquid 

asset through the listed options markets 

will benefit investors by providing 

greater transparency and liquidity. 

Under Section 220.12(f)(1) of 

Regulation T,4 the Exchange, as a 

registered national securities exchange, 

is permitted to recognize the type of 

transactions described below as eligible 

for margin treatment subject to the 

approval of the Commission. 

The proposal would permit account 

holders to sell listed call options on the 

same security that underlies their 

Vested Employee Options without the 

requirement of margin. Given the 

uncertificated nature of employee stock 

options, in order to secure the account 

holder’s obligations under the 

Transactions, the proposal would 

require: 

1. The account holder to (A) pledge 

the Vested Employee Options to the 

broker-dealer and (B) provide the 

broker-dealer with an irrevocable 

power-of-attorney authorizing the 

broker-dealer to exercise the Vested 

Employee Options on the account 

holder’s behalf if the listed call options 

are assigned or if the broker-dealer 

determines it is necessary. The 

irrevocable power-of-attorney may also 

be used in the event the account holder 

wishes to close the listed option 

position prior to its expiration and 

instructs the broker-dealer to exercise 

that number of Vested Employee 

Options necessary to cover the cost of 

the closing purchase (the account holder 

will also have the option of depositing 

additional cash in the account holder’s 

account to cover the cost of the closing 

purchase). 

2. In the event the Vested Employee 

Options are exercised between the date 

of the Transaction in the listed call 

options (the ‘‘Commencement Date’’) 

and the date the Transaction is closed 

(the ‘‘Closing Date’’), the shares issued 

upon exercise will be pledged to the 

broker-dealer (thereby replacing the 

Vested Employee Options that had been 

pledged prior to exercise). For example, 

during the time a Transaction is 

pending, the account holder may resign 

from the account holder’s employment 

with the Issuer and may be required to 

exercise the Vested Employee Options 

within a certain timeframe following the 

account holder’s departure. In such a 

scenario, the account holder would ask 

the broker dealer to exercise the Vested 

Employee Options, and the stock issued 

pursuant to the exercise would be 

pledged to the broker-dealer. 

3. The Issuer will promptly deliver 

the stock upon payment or receipt of the 

exercise notice from the broker-dealer.5

The Issuer will also agree prior to the 

Commencement Date to waive any 

forfeiture conditions that otherwise 

might apply to the Vested Employee 

Options (e.g., upon a termination of the 

account holder’s employment with the 

Issuer) as well as any transfer 

restrictions that would preclude pledge 

of the Vested Employee Options to the 

broker-dealer. In addition, the Issuer 

will represent that the Vested Employee 

Options are covered by an effective 

registration statement on Form S–8. If 

the registration statement becomes 

ineffective, the Issuer will notify the 

broker-dealer immediately. 

4. Because it is essential that the 

account holder, broker-dealer and Issuer 

cooperate and are each fully informed, 

agree to and acknowledge their own and 

each other’s responsibilities, all 

Transactions will be governed by an 

agreement (the ‘‘Agreement’’) entered 

into by the account holder, brokerdealer and Issuer prior to the 

Commencement Date of the first 

transaction. The Agreement would 

generally set forth each party’s 

obligations, representations and 

acknowledgements and the terms and 

conditions governing the Transactions 

and must be in a form acceptable to the 

Exchange.6

Federal Register / Vol. 74, No. 120 / Wednesday, June 24, 2009 / Notices 30189 

7 In approving this proposal, the Commission has 

considered the proposed rule’s impact on 

efficiency, competition, and capital formation. See 

15 U.S.C. 78c(f). 8 15 U.S.C. 78f(b)(5). 

9 17 CFR 240.15c3–1. 

10 15 U.S.C. 78s(b)(2). 

11 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. 59896 

(May 11, 2009), 74 FR 22991 (‘‘Notice’’). 

4See CBSX Rule 53.54. A CBSX DPM is a marketmaker that must, among other things, provide 

opening and continuous quotes in its assigned 

securities. See CBSX Rule 53.56. 

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

6 In approving this proposal, the Commission has 

considered the proposed rule’s impact on 

efficiency, competition, and capital formation. See 

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

5. Such other terms and conditions 

prescribed by the Exchange in 

accordance with such form, formats and 

procedures as may be established by the 

Exchange from time to time would also 

apply. In this regard, upon approval of 

the proposed rule change and for a 

period of one year, the Exchange will 

require that, prior to the 

Commencement Date, a legal opinion 

with respect to the account holder’s and 

Issuer’s legal right to enter into the 

Transactions under the terms of the 

Issuer’s employee stock option plan and 

related documents (the ‘‘Legal 

Opinion’’) be obtained in a form 

acceptable to the Exchange. During the 

one-year time period, the Exchange may 

determine that such Legal Opinion is no 

longer necessary and will revise its 

established forms, formats and 

procedures accordingly. 

III. Discussion and Commission’s 

Findings 

After careful review of the proposed 

rule change and ISE’s response, the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of the Act and the rules 

and regulations thereunder applicable to 

a national securities association.7

In particular, the Commission finds 

that the proposed rule change is 

consistent with Section 6(b)(5),8 in that 

the proposed rule change is designed to 

prevent fraudulent and manipulative 

acts and practices, promote just and 

equitable principles of trade, remove 

impediments to and perfect the 

mechanisms of a free and open market 

and a national market system, and, in 

general, to protect investors and the 

public interest. The proposed rule 

change will offer market participants 

new trading opportunities and will 

enhance the Exchange’s competitive 

position. 

The Commission believes that the 

proposed rule change to amend the 

Exchange’s margin rule should be 

allowed. However, the Commission 

does have significant concerns with the 

amount of control each broker-dealer 

has over the Vested Employee Options. 

One purpose of the margin rules is to 

protect broker-dealers in the event of 

market turmoil. The broker-dealer must 

have enough control over the cash or 

securities it is holding as margin on 

behalf of investors to be able to act 

unilaterally to protect itself. With 

Vested Employee Options, the brokerdealer cannot act unilaterally to use the 

margin deposited by the customer (i.e., 

the Vested Employee Options); instead, 

the broker-dealer must rely on another 

person (i.e., the issuer) to promptly 

deliver the required shares. For 

example, if an issuer notifies the brokerdealer that there is an ineffective 

registration statement, it could prevent 

the broker-dealer from exercising the 

options and receiving publicly tradable 

shares, a prospect that could cause 

financial harm to the broker-dealer. 

The Commission raised these 

concerns in the Notice by noting in a 

footnote that absent relief from the 

Commission, broker-dealers would need 

to take a capital charge for any 

unsecured margin debt and by asking 

questions about how the broker-dealer’s 

legal authority to exercise the Vested 

Employee Options could be enhanced 

and how to limit the liquidity and 

operational risks arising from the 

Transactions. The Commission received 

no comments on this footnote or these 

questions. Thus, for purposes of 

determining whether an account is 

unsecured or partly secured pursuant to 

the net capital rule,9 including an 

account containing a Transaction, a 

broker-dealer may not include the value 

of a Vested Employee Option. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,10 that the 

proposed rule change (SR–ISE–2007– 

121), as modified by Amendment No. 1, 

be, and hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.11

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–14798 Filed 6–23–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60129; File No. SR–CBOE– 

2009–030] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Order Approving 

Proposed Rule Change Regarding 

Appointments of CBSX DPMs 

June 17, 2009. 

On May 7, 2009, the Chicago Board 

Options Exchange, Incorporated 

(‘‘CBOE’’ or ‘‘Exchange’’) 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 

regarding appointments of Designated 

Primary Market-Makers (‘‘DPMs’’) on 

the CBOE Stock Exchange (‘‘CBSX’’). 

The proposed rule change was 

published for comment in the Federal 

Register on May 15, 2009.3 The 

Commission received no comments 

regarding the proposal. This order 

approves the proposed rule change. 

CBOE proposed to amend its rules 

regarding appointments of CBSX DPMs. 

Currently, every security traded on 

CBSX must be assigned to a DPM.4 The 

Exchange’s proposal will modify its 

rules to provide the Exchange with the 

flexibility to commence trading in a 

security on the CBSX without an 

assigned DPM. The Exchange 

represented that some securities are not 

traded on CBSX because DPMs have 

opted to not seek assignments in such 

securities. The Exchange’s proposal will 

allow CBSX users the ability to trade 

these securities on CBSX without them 

being quoted by a DPM. The Exchange 

has also represented that this proposed 

modification to CBSX Rule 53.54 is not 

intended to in any way affect existing 

DPM appointments. The Exchange will 

notify its market participants of those 

securities that will trade without a DPM 

via a circular. 

CBOE’s proposal will also modify 

CBSX Rule 53.56 to change the time 

DPMs are required to begin providing 

quotes from 8:15 a.m. to 8:30 a.m. 

(Chicago time). Lastly, CBOE’s proposal 

will eliminate CBSX Rule 53.54 which 

governed the allocation process used by 

CBSX prior to its initial launch. 

The Commission finds that the 

proposal is consistent with Section 

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

the rules of a national securities 

exchange be designed, among other 

things, 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.6 The Act does not 

mandate a particular market structure 

or, specifically, that an exchange have