[Federal Register Volume 77, Number 211 (Wednesday, October 31, 2012)]
[Notices]
[Pages 65917-65918]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-26711]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68104; File No. SR-OCC-2012-16]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Granting Accelerated Approval of Proposed Rule Change To
Accommodate Equity Options That Have a Unit of Trading of 10 Shares
October 25, 2012.
I. Introduction
On September 12, 2012, the Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'')
proposed rule change SR-OCC-2012-16. The proposed rule change, which
was filed pursuant to Section 19(b)(1) of the Securities Exchange Act
of 1934 (``Act''),\1\ was published for comment in the Federal Register
on September 28, 2012.\2\ The Commission received no comment letters
regarding the proposal. For the reasons discussed below, the Commission
is granting approval of the proposed rule change on an accelerated
basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 67917 (September 24,
2012), 77 FR 59687 (September 28, 2012). In its filing with the
Commission, OCC included statements concerning the purpose of and
basis for the proposed rule change. The text of these statements,
which the Commission has modified, is incorporated into the
discussion of the proposed rule change in Section II below.
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II. Description
The proposed rule change will accommodate Mini Options, which are
equity options that have a unit of trading of 10 shares.\3\ OCC
proposes to amend its By-Law provision that sets forth the minimum
amount of a cash dividend or distribution (``Distri- bution'') on an
underlying equity security that will result in an adjustment of
outstanding options on that underlying equity security.
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\3\ No other changes to OCC's rules are needed to clear Mini
Options, as the definition of ``unit of trading'' in Article I of
OCC's By-Laws is sufficiently flexible to permit OCC to designate a
unit of trading other than the standard 100 shares for particular
series or classes of options. Similarly, OCC's risk management
systems will take the number of underlying shares into
consideration.
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In June 2012, the International Securities Exchange and NYSE Arca
filed proposed rule changes with the Commission to list and trade Mini
Options on a select number of liquid, high-priced and actively traded
securities.\4\ Mini Options are intended
[[Page 65918]]
to expand the choices available to participants in the options markets.
Other than the difference in the unit of trading, Mini Options have the
same terms, use, and characteristics as standard equity options
(``Standard Options''), which cover 100 shares. The Commission approved
the exchanges' request to list and trade Mini Options on September 28,
2012.\5\
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\4\ Securities Exchange Act Release Nos. 67284 (June 27, 2012),
77 FR 39545 (July 3, 2012) (SR-ISE-2012-58); 67283 (June 27, 2012),
77 FR 39535 (July 3, 2012) (SR-NYSE Arca-2012-64). For example, Mini
Options are proposed to be listed on SPY (SPDR S&P 500), GLD (SPDR
Gold Trust) and AAPL (Apple, Inc.).
\5\ See Securities Exchange Act Release No. 67948 (September 28,
2012), 77 FR 60753 (October 4, 2012).
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Under OCC's By-Laws, equity options may be adjusted upon the
occurrence of certain corporate actions, including Distributions.
Currently, OCC's By-Laws stipulate that a Distribution must be in
excess of $12.50 per contract in order for OCC to consider adjusting
any type of option contract. Some Distributions, however, would exceed
the adjustment threshold in the case of Standard Options, but would not
exceed the adjustment threshold in the case of a Mini Option. The
reason for this is that the per contract Distribution on the Mini
Option would be only 1/10th of the Distribution on the Standard Option,
and the adjustment threshold is stated on a per contract basis rather
than a per share basis. OCC does not believe this result to be
appropriate given that Mini Options are intended to be identical to
Standard Options, but for the smaller unit of trading.
Instead, OCC believes that it is appropriate to fashion a new
adjustment policy such that a Distribution that would result in an
adjustment on a Standard Option would also result in an adjustment on a
Mini Option. Moreover, the exchanges that will list Mini Options, as
well as OCC clearing members, have expressed a preference for OCC to
design an adjustment policy under which OCC makes consistent and
parallel adjustments to both Mini Options and Standard Options.
Therefore, OCC has proposed to amend the adjustment threshold in
Article VI, Section 11A of OCC's By-Laws to $.125 per share from $12.50
per contract.
Furthermore, OCC does not intend for this rule change to affect
options contracts that were originally listed with units of trading in
excess of 100 shares. The Securities Committee\6\ made this
determination because, if OCC applied a $.125 per share threshold to
all option contracts, OCC might not adjust an option contract that has
a unit of trading of 1,000 shares for certain Distributions even though
such a Distribution may represent a significant dollar amount on a per
contract basis.\7\ For example, in the case of an option contract with
a unit of trading of 1,000 shares, a Distribution of $.12 per share
would not trigger an adjustment even though the amount of the
Distribution would be $120 on a single 1,000 share contract--far in
excess of the existing $12.50 per contract de minimis threshold. To
address this adjustment issue, OCC has proposed to retain the existing
adjustment threshold of $12.50 per contract in Article VI, Section 11A
of its By-Laws for options contracts that were originally listed in
share amounts greater than 100 shares.
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\6\ The Securities Committee is authorized under OCC By-Law
Article VI Section 11(a) to determine contract adjustments in
particular cases and to formulate adjustment policy or
interpretations having general applicability. The Securities
Committee is comprised of representatives of OCC's participant
options exchanges and authorized representatives of OCC.
\7\ OCC has rules to accommodate options with a unit of trading
of 1,000 shares, although no such options currently trade.
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III. Discussion
Section 19(b)(2)(C) of the Act\8\ directs the Commission to approve
a self-regulatory organization's proposed rule change if it determines
that the proposed rule change is consistent with the requirements of
the Act and the rules and regulations thereunder applicable to such
organization. Section 17A(b)(3)(F) of the Act\9\ requires, among other
things, that the rules of a clearing agency be designed to further
several goals, including, among other things: (i) Promoting the prompt
and accurate clearance and settlement of securities transactions and,
to the extent applicable, derivative agreements, contracts and
transactions; (ii) encouraging cooperation and coordination with
persons engaged in the clearance and settlement of securities
transactions; and (iii) safeguarding securities and funds that are in a
clearing agency's custody or control, or for which it is responsible.
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\8\ 15 U.S.C. 78s(b)(2)(C).
\9\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission concludes that the proposed rule change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to OCC. By assuring that traders of
Mini Options will receive appropriate adjustments when corporate
Distributions are made, the proposed rule change will foster the prompt
and accurate clearance and settlement of options contracts, facilitate
cooperation with exchanges and others involved in the clearance and
settlement of these contracts, and ensure the safety and proper
allocation of securities and funds for which OCC is responsible.
Further, the Commission concludes that there is good cause,
pursuant to Section 19(b)(2) of the Act,\10\ for approving the proposed
rule change prior to the 30th day after the date of publication of
notice in the Federal Register. As noted above, the Commission has
approved proposals by the International Securities Exchange and NYSE
Arca to list and trade Mini Options.\11\ Accelerated approval of this
proposed rule change will facilitate the prompt and accurate clearance
and settlement of options contracts by ensuring that OCC is fully
prepared to clear and settle Mini Options as soon as they begin to
trade.
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\10\ 15 U.S.C. 78s(b)(2).
\11\ See Securities Exchange Act Release No. 67948 (September
28, 2012), 77 FR 60753 (October 4, 2012).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act, in particular
with the requirements of Section 17A of the Act\12\ and the rules and
regulations thereunder.
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\12\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-OCC-2012-16) be, and hereby
is, approved on an accelerated basis.\14\
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\13\ 15 U.S.C. 78s(b)(2).
\14\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
Kevin M. O'Neill,
Deputy Secretary.
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\15\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2012-26711 Filed 10-30-12; 8:45 am]
BILLING CODE 8011-01-P