[Federal Register Volume 69, Number 233 (Monday, December 6, 2004)]
[Notices]
[Pages 70485-70486]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3467]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50748; File No. SR-NASD-2004-153]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the National Association of Securities Dealers, Inc. To 
Provide a Delta Hedge Exemption From Stock Option Position Limits for 
OTC Derivatives Dealers Affiliated With NASD Member Firms When Certain 
Conditions Are Satisfied

November 29, 2004.
    On October 12, 2004, the National Association of Securities 
Dealers, Inc.

[[Page 70486]]

(``NASD'') submitted to 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 amend its Rule 2860(b) to provide a delta 
hedging exemption from stock option position limits for OTC Derivatives 
Dealers affiliated with NASD member firms when certain conditions are 
satisfied.\3\ The Commission published the proposed rule change for 
comment in the Federal Register on October 21, 2004.\4\ The Commission 
received no comments on the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The proposal relates to options positions of an ``OTC 
Derivatives Dealer'' as that term is defined in Rule 3b-12 under the 
Act. See 17 CFR 240.3b-12.
    \4\ Securities Exchange Act Release No. 50539 (October 14, 
2004), 69 FR 61884 (October 21, 2004).
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    Under the proposal, a stock option position of an OTC Derivatives 
Dealer that is delta neutral \5\ would be exempt from position limits, 
provided that, among other things, the NASD member with which the OTC 
Derivatives Dealer is affiliated has received a written representation 
from the OTC Derivatives Dealer stating that it is hedging its stock 
options positions in accordance with its internal risk management 
control and pricing models approved by the Commission. Any stock 
options position of an OTC Derivatives Dealer that is not delta neutral 
would remain subject to position limits.\6\
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    \5\ The term ``delta neutral'' as defined in the proposed rule 
change describes a stock options position that has been hedged, in 
accordance with a Commission-approved pricing model, with a 
portfolio of instruments relating to the same underlying stock to 
offset the risk that the value of the options position will change 
with changes in the price of the stock underlying the options 
position.
    \6\ See proposed NASD Rule 2860(b)(3)(A)(vii)(b)(3). The 
Commission notes that NASD Rule 2860(b)(3)(A)(vii) 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 delta hedge exemption, 
such position cannot be used to take advantage of another exemption 
from position limit requirements.
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    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 association.\7\ 
In particular, the Commission believes that the proposed rule change is 
consistent with Section 15A(b)(6) of the Act,\8\ which requires, among 
other things, that NASD 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. The Commission 
has previously stated its support for recognizing options positions 
hedged on a delta neutral basis as properly exempted from position 
limits.\9\
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    \7\ 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).
    \8\ 15 U.S.C. 78o-3(b)(6).
    \9\ Securities Exchange Act Release No. 40594 (October 23, 
1998), 63 FR 59362, 59380 (November 3, 1998) (adopting rules 
relating to OTC Derivatives Dealers).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-NASD-2004-153) be, and it 
hereby is, approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-3467 Filed 12-3-04; 8:45 am]
BILLING CODE 8010-01-P