The Financial Industry Regulatory Authority (FINRA) has filed proposed rule changes with the Securities and Exchange Commission to expand the availability of the “delta hedging” exemption from equity options position limits. “Delta hedging” refers to the common practice of hedging an options position with shares of the underlying stock at less than a one-to-one ratio, based on the relative sensitivity of the value of the option contract as compared to the price of the underlying stock The exemption, which was previously available only to SEC-approved “OTC Derivatives Dealers” under NASD Rule 2860, exempts from FINRA’s equity options position limits positions in standardized and/or conventional options that are hedged on a “delta neutral” basis.

Under the expanded exemption, any FINRA member, certain of their non-member affiliates, and certain other financial institutions may rely on the exemption with respect to their equity options positions in conventional or standardized options that are delta neutral under a “Permitted Pricing Model,” as defined in the rule. “Permitted Pricing Models” generally include proprietary models employed by certain broker-dealers and financial institutions that are otherwise subject to federal regulation and oversight, as well as the delta model developed by The Options Clearing Corporation. The proposed rule also sets out modified reporting requirements and standards for disaggregation relief with respect to delta hedged positions.

In addition to the FINRA proposal, the Chicago Board Options Exchange has submitted conforming amendments to its rulebook for SEC approval.  http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/E7-15723.pdf

  http://www.cboe.org/publish/RuleFilingsSEC/SR-CBOE-2007-099.pdf