The Chicago Board Options Exchange (CBOE) today announced it received Securities and Exchange Commission (SEC) approval for an exception to the Exchange's current rules restricting anticipatory hedging.The new "tied hedge" procedures allow firms to obtain a related stock, security futures or futures hedge prior to presenting the tied hedge order to CBOE's open-outcry trading community for execution.
The tied hedge transaction procedures will be available in all options classes including FLexible EXchange(SM) (FLEX) options, and will also apply to complex orders.Member firms will be able to place hedge orders with a minimum size of 500 options contracts as long as they follow certain conditions.
"CBOE is continually exploring ways to enhance the risk management experience for all of our market participants," said CBOE Chairman and CEO William J. Brodsky. "In the last two years, we've introduced a number of ways for our customers to employ the type of flexibility found in the OTC market without having to sacrifice the benefits of exchange-traded trading, such as price and quote transparency, centralized clearing and the elimination of counterparty risk."
"The ability to hedge prior to execution will enable firms to gain greater certainty in quoting and pricing their customers' options orders.As a result, CBOE's new procedures will make it easier for firms to facilitate large-sized orders, and will also result in greater opportunities for price improvement for their customers," said CBOE Executive Vice Chairman Ed Tilly.
Last March, CBOE eliminated long-standing blackout dates for FLEX options on expiration Friday and the two business days both before and after.FLEX options are equity or index options contracts that allow users to customize key contract terms including strike prices, exercise styles and expiration dates, with the transparency, administrative ease and clearing guarantees of standard listed options.The elimination of key expiration blackout periods enables customers who trade OTC equity and index contracts to trade exchange-traded contracts with similar characteristics and no expiration date restrictions.
Aimed at OTC options users, in 2007 CBOE launched the CFLEX(SM) trading system, the technology for electronictrading of equity and index FLEX options. The first Internet-based, fully automated, electronic FLEX options trading system in the U.S., the point-and-click CFLEX execution system allows institutional customers to significantly reduce costs, establish clearing transparency and counterparty anonymity.
The date for implementation of the CBOE's new tied hedge procedures has not yet been set.
For more information on CBOE's tied hedge procedures, see http://www.cboe.org/publish/RegCir/RG09-086.pdf.