[Federal Register Volume 78, Number 100 (Thursday, May 23, 2013)]
[Notices]
[Pages 30944-30947]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-12267]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69603; File No. SR-OCC-2013-802]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of an Advance Notice To Change the Expiration Date for
Most Option Contracts to the Third Friday of the Expiration Month
Instead of the Saturday Following the Third Friday
May 17, 2013.
Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (``Dodd-Frank Act''),\1\
entitled the Payment, Clearing, and Settlement Supervision Act of 2010
(``Clearing Supervision Act'') \2\ and Rule 19b-4(n)(1)(i) \3\ of the
Securities Exchange Act of 1934 (``Exchange Act''), notice is hereby
given that on April 17, 2013, The Options Clearing Corporation
(``OCC'') filed with the Securities and Exchange Commission
(``Commission'') the advance notice, which concerns a proposed rule
change, as described in Items I and II below, which Items have been
substantially prepared by the clearing agency.\4\ The Commission is
publishing this notice to solicit comments on the advance notice from
interested persons.
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\1\ Public Law 111-203, 124 Stat. 1376 (2010).
\2\ 12 U.S.C. 5465(e)(1).
\3\ 17 CFR 240.19b-4(n)(1)(i).
\4\ OCC also filed the proposals contained in this advance
notice as a proposed rule change, under Section 19(b)(1) of the
Exchange Act and Rule 19b-4 thereunder, seeking Commission approval
to permit OCC to change its rules to reflect the proposed changes in
this advance notice. 15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4; See
Exchange Act Release No. 69480 (April 30, 2013) (SR-OCC-2013-04).
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I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice
This advance notice concerns a proposed rule change which would
allow OCC to change the expiration date for most option contracts to
the third Friday of the expiration month instead of the Saturday
following the third Friday.
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change and Advance Notice
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and advance notice and discussed any comments it received on the
proposed rule change and advance notice. The text of these statements
may be examined at the places specified in Item IV below. The clearing
agency has prepared summaries, set forth in sections (A), (B), (C), and
(D) below, of the most significant aspects of such statements.\5\
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\5\ The Commission has modified slightly the text of the
summaries prepared by the clearing agency.
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(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, Proposed Rule Change and the Advance Notice
Most option contracts (``Standard Expiration Contracts'') currently
expire at the ``expiration time'' (11:59 p.m. Eastern Time) on the
Saturday following the third Friday of the specified expiration month
(``Expiration Date'').\6\ The purpose of this proposed rule change is
to change the Expiration Date for Standard Expiration Contracts to the
third Friday of the expiration month. (The expiration time would
continue to be 11:59 p.m. Eastern Time on the Expiration Date.) The
proposed change would apply only to Standard Expiration Contracts
expiring after February 1, 2015, and OCC does not propose to change the
Expiration Date for any outstanding option contract. The proposed
change will apply only to series of option contracts opened for trading
after the effective date of this proposed rule change and having
Expiration Dates later than February 1, 2015. Option contracts having
non-standard expiration dates (``Non-standard Expiration Contracts'')
will be unaffected by this proposed rule change.\7\
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\6\ See the definition of ``expiration time'' in Article I of
OCC's By-Laws.
\7\ Examples of options with Non-standard Expiration Contracts
include flex options, quarterly, monthly and weekly options, where
the expiration exercise processing for such options presently occurs
on a weekday.
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In order to provide a smooth transition to the Friday expiration,
OCC would, beginning June 21, 2013, move the expiration exercise
procedures to Friday for all Standard Expiration Contracts even though
the contracts would continue to expire on Saturday. After February 1,
2015, virtually all Standard Expiration Contracts will actually expire
on Friday. The only Standard Expiration Contracts that will expire on a
Saturday after February 1, 2015 are certain options that were listed
prior to the effectiveness of this rule change, and a limited number of
options that may be listed prior to necessary systems changes of the
options exchanges, which are expected to be completed in August 2013.
The exchanges have agreed that once these systems changes are made they
will not
[[Page 30945]]
open for trading any new series of option contracts with Saturday
expiration dates falling after February 1, 2015.
Background
Saturday was established as the standard Expiration Date for OCC-
cleared options primarily in order to allow sufficient time for
processing of option exercises, including correction of errors, while
the markets were closed and positions remained fixed. However,
improvements in technology and a great deal of experience have rendered
Saturday expiration processing inefficient, and Saturday processing
also poses unnecessary operational risk upon OCC and its clearing
members. Therefore, it has been a long-term goal of OCC and its
clearing members to move the expiration process for all options with
Standard Expiration Contracts from Saturday to Friday night.
OCC states that eliminating Saturday expirations would allow OCC to
streamline the expiration process between Standard Expiration Contracts
and Non-standard Expiration Contracts, which will increase operational
efficiencies and reduce operational risk for OCC and its clearing
members. After the expiration date for Standard Expiration Contracts is
moved to Friday night, expiration processing for standard options,
quarterly options, and weekly options will all occur on the same day
and will be a single, and inherently more efficient, operational
process. The move to Friday night processing will also align expiration
processing schedules for United States markets with expiration
processing schedules for European markets and will allow affected
clearing members to run a single, consistent, and efficient operational
process for all U.S. equity/index options regardless of where such
options are exercised. Moreover, the move to Friday night processing
will also eliminate the operational risk presented by scheduling an
expiration process to run on one Saturday per month when it is
otherwise run weekly on Friday night. Saturdays are typically reserved
for system maintenance and installs of system enhancements so Saturday
expiration processes force such maintenance and installs to be
rescheduled and sometimes delayed.
OCC states that from a risk management perspective, the proposed
rule change would compress the operational timeframe for processing
option expirations such that clearing members will be required to
reconcile options trades on trade date. Trade date reconciliation is a
better risk management practice and will facilitate and promote the use
of intra-day risk management systems by clearing members as well as
move clearing members toward adopting real-time trade date
reconciliation and position balancing systems.
According to OCC, industry groups, clearing members, and options
exchanges have been active participants in planning for the transition
to the Friday expiration. In March 2012, OCC began to discuss moving
Standard Expiration Contracts to Friday expiration dates with industry
groups, including two Securities Industry and Financial Markets
Association (``SIFMA'') committees, the Operations and Technology
Steering Committee and the Options Committee, and at two major industry
conferences, the SIFMA Operations Conference and the Options Industry
Conference. OCC also discussed the project with the Intermarket
Surveillance Group and at an OCC Operations Roundtable. In each case,
OCC received broad support for the initiative. Also, OCC surveyed all
of its clearing members as well as its service bureaus and learned that
a significant majority of those surveyed are currently ready to move to
Friday night expiration processing. OCC has worked with the other
clearing members and service bureaus so that all affected parties
experience a smooth transition to Friday night expiration processing.
OCC has obtained assurances from all options industry participants that
they will be ready to move to Friday night expiration processing by
June 2013.
OCC states that Friday night expiration processing is also
consistent with the long-standing rules and procedures of the options
exchanges and the Financial Industry Regulatory Authority
(``FINRA''),\8\ which generally provide that exercise decisions with
respect to Standard Expiration Contracts must be made by, and exercise
instructions may not be accepted from customers after, 5:30 p.m.
Eastern Time on the business day preceding expiration (usually
Friday).\9\ Brokerage firms may set earlier cutoff times for customers
submitting exercise notices. Clearing members are permitted to submit
exercise instructions after the cutoff time (``Supplementary
Exercises'') only in case of errors or other unusual situations, and
may be subject to fines or disciplinary actions.\10\ OCC believes that
the extended period between cutoff time and expiration of options is no
longer necessary given modern technology.
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\8\ OCC has contacted FINRA regarding the need to review the
Contrary Exercise Advisory Rule to ensure such rule is consistent
with the industry effort to move to Friday expiration dates. FINRA
has determined that no changes to its current rules are needed in
order to accommodate the transition of expiration processing from
Saturday to Friday night. FINRA has agreed that it will work with
the industry to implement coordinated and appropriate modifications
to its rules in order to accommodate Friday night expiration dates,
which will begin on or after February 1, 2015.
\9\ See, e.g., FINRA Rule 4210(b)(23)(A)(iii). ``Option holders
have until 5:30 p.m. Eastern Time (``ET'') on the business day
immediately prior to the expiration date to make a final exercise
decision to exercise or not exercise an expiring option. Members may
not accept exercise instructions for customer or noncustomer
accounts after 5:30 p.m. ET.'' Member firms may specify earlier
cutoff times.
\10\ See OCC Rule 805(g).
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Transition Period
Based on significant dialogue between OCC and clearing members
regarding the move to Friday expiration, OCC believes that the adoption
of Friday expiration for Standard Expiration Contracts is best
accomplished through an appropriate transition period during which
processing activity for all options, whether expiring on Friday or
Saturday, would move to Friday, followed by a change in the expiration
day for new series of options. In May 2012, OCC and its clearing
members determined that Friday, June 21, 2013, would be an appropriate
date on which to move expiration processing from Saturday to Friday
night. Accordingly, OCC proposes that, beginning June 21, 2013, Friday
expiration processing will be in effect for all expiring Standard
Expiration Contracts, regardless of whether the contract's actual
expiration date is Friday or Saturday. However, for contracts having a
Saturday expiration date, exercise requests received after Friday
expiration processing is complete but before the Saturday contract
expiration time will continue to be processed so long as they are
submitted in accordance with OCC's procedures governing such requests.
After the transition period and the expiration of all existing
Saturday-expiring options, expiration processing will be a single
operational process and will run on Friday night for all Standard
Expiration Contracts.
Friday Expiration Processing Schedule
Currently, expiration processing for Standard Expiration Contracts
begins on Saturday morning at 6:00 a.m. Central Time and is completed
at approximately noon Central Time when margin and settlement reports
are available. The window for submission of instructions in accordance
with OCC's exercise-by-exception procedures under OCC Rule 805(d) is
open from 6:00 a.m. to 9:00 a.m. Central Time on Saturday
[[Page 30946]]
morning.\11\ OCC proposes that the window for submission of exercise-
by-exception instructions be open from 6:00 p.m. to 9:15 p.m. Central
Time on Friday evening.\12\ Friday expiration processing for Standard
Expiration Contracts would therefore begin at 6:00 p.m. Central Time on
Friday evening and end at approximately 2:00 a.m. Central Time on
Saturday morning when margin and settlement reports will be
available.\13\
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\11\ OCC's exercise-by-exception procedures are described in its
Rule 805(d), which generally provides that each clearing member will
automatically be deemed to have submitted an exercise notice
immediately prior to the expiration time for all in-the-money option
contracts unless the clearing member has instructed OCC otherwise in
a written exercise notice.
\12\ The exercise-by-exception window for weekly and quarterly
expiration options is from 6:00 p.m. to 7:00 p.m. Central Time on
the expiration date.
\13\ The proposed expiration schedule for Friday expiration
processing is similar to the expiration schedule for weekly options,
which begins at 6:00 p.m. Central Time on Friday evening and ends at
11:30 p.m. Central Time on Friday evening. All timeframes would be
set forth in OCC's procedures and subject to change based on OCC's
experience with Friday expiration processing.
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Exercises for Standard Expiration Contracts with Saturday
expirations must be allowed under the terms of the contracts. However,
in order to accommodate the proposed new expiration schedule, OCC also
proposes to shorten the period of time in which clearing members may
submit a Supplementary Exercise notice under OCC Rule 805(b). In
addition, OCC Rule 801 would be amended to eliminate the ability of
clearing members to revoke or modify exercise notices submitted to OCC.
This proposed change, along with the proposed change in the processing
timeline discussed above, will more closely align OCC's expiration
processing procedures with exchange rules, under which exchange members
must submit exercise instructions by 5:30 p.m. Central Time on Friday
and may not accept exercise instructions from customers after 4:30 p.m.
Central Time on Friday. Accordingly, this proposed change will not
represent a departure from current practices for clearing members or
their customers.
In connection with moving from Saturday to Friday night processing
and expiration, OCC reviewed other aspects of its business to confirm
that there would be no unintended consequences, and concluded that
there would be none. For example, OCC believes the proposed changes do
not affect OCC's liquidity forecasting procedures, nor do they impact
OCC's liquidity needs, since OCC's liquidity forecasts and liquidity
needs are driven by settlement obligations, which occur on the same day
(T+3) irrespective of the move to Friday night processing and
expiration dates.
Grandfathering of Certain Options Series
Certain option contracts have already been listed on exchanges with
expiration dates as distant as December 2016. Such options have
Saturday expiration dates and OCC cannot change the terms of existing
option contracts. In addition, according to OCC clearing members have
expressed a clear preference to not have open interest in any
particular month with different expiration dates. Therefore, OCC will
designate certain expiration dates as ``grandfathered,'' and any option
contract that is listed, or may be listed in the future, that expires
on a grandfathered date will have a Saturday expiration date even if
such expiration date is after February 1, 2015.\14\ Further, certain
FLEX options that have already been accepted for clearance and have
expiration dates beyond February 1, 2015, will also be designated as
grandfathered. The Friday night expiration transition period processing
schedule, as described above, will be in effect for any grandfathered
Saturday expiration contract. According to OCC, in order to minimize
the number of grandfathered expiration dates, exchanges have already
agreed that, if there is not already a previously listed Standard
Expiration Contract with an expiration in a particular month that is
after February 1, 2015,\15\ they will not open for trading any new
series of Standard Expiration Contracts with Saturday expiration dates
in such month.
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\14\ After OCC designates an expiration date as grandfathered,
the exchanges have agreed to not permit the listing of, and OCC will
not accept for clearance, any newly listed standard expiration
option contract with a Friday expiration in the applicable month.
\15\ Until exchanges complete certain systems enhancements in
August 2013, it is possible that additional option contracts may be
listed with Saturday expiration dates beyond February 1, 2015.
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Proposed Amendments to By-Laws and Rules
In order to implement the change to Friday expiration processing
and eventual transition to Friday expiration for all Standard
Expiration Contracts, OCC proposes to amend the definition of
``expiration date'' in Article I and certain other articles of the By-
Laws. As amended, the applicability of the definition would not be
limited to stock options, and the definition of ``expiration date'' in
certain articles of the By-Laws therefore can be deleted in reliance on
the Article I definition. OCC also proposes to amend Rule 805, and all
rules supplementing or replacing Rule 805, to allow for Friday
expiration processing during the transition to Friday expiration.
Section 18 of Article VI of the By-Laws would also be amended to align
procedures for delays in producing Expiration Exercise Reports and
submission of exercise instructions with the amended expiration
exercise procedures in OCC Rule 805. OCC Rule 801 would be amended to
modify the prohibition against exercising an American-style option
contract on the business day prior to its expiration date because this
prohibition is necessary only for options expiring on a Saturday. The
prohibition can be removed altogether when there are no longer any
options expiring on a Saturday.
OCC Rule 801 would also be amended to remove clearing members'
ability to revoke or modify exercise notices in order to accommodate
the proposed compressed Friday expiration processing expiration
schedule. Finally, OCC Rules 801 and 805 would be amended to allow
certain determinations to be made by high-level officers of OCC, rather
than the Board of Directors, in order to provide OCC with greater
operational flexibility in processing exercise requests received after
Friday expiration processing is complete but before the Saturday
contract expiration time, and to replace various references to the
expiration date of options with reference to the procedures of Rule
805.
Under the proposed rule change, OCC would preserve the ability of
the options exchanges to designate (or, in the case of flexibly
structured options, permit clearing members to designate) non-standard
expiration dates for options, or classes or series of options, so long
as the designated expiration date is not a date OCC has specified as
ineligible to be an expiration date.
OCC believes the proposed rule change is consistent with the
purposes and requirements of Section 17A of the Exchange Act \16\
because it provides for the prompt and accurate clearance and
settlement of securities transactions and the protection of securities
investors and the public interest \17\ by improving the processing time
for clearing of option contracts, standardizing the expiration day of
numerous options contracts, and requiring clearing members to reconcile
options transactions on the trade date, which will facilitate and
promote intra-day risk management by the clearing members.
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OCC believes proposed rule change is not inconsistent with any existing
OCC By-Laws or Rules.
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\16\ 15 U.S.C. 78q-1.
\17\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Clearing Agency's Statement on Burden on Competition
OCC does not believe that the proposed rule change would impose a
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rule change, which
will apply to all OCC clearing members, involves operational
improvements that will allow OCC and its clearing members to become
more operationally efficient and reduce operational risk. Moreover, OCC
has coordinated moving to a Friday night expiration process with
options industry participants and has also obtained assurance from all
such participants that they are able to adhere to OCC's Friday night
expiration implementation schedule. Therefore, OCC does not believe the
proposed rule change would impose a burden on competition.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
While the matters discussed in this proposed rule change have been
subject to extensive discussion with clearing members, including during
an OCC Operations Roundtable, written comments were not and are not
intended to be solicited with respect to the proposed rule change, and
none have been received.
(D) Advance Notices Filed Pursuant to Section 806(e) of the Clearing
Supervision Act
OCC is filing this proposed rule change as an advance notice
pursuant to Section 806(e)(2) of Clearing Supervision Act because OCC
believes the proposed change could be deemed to materially affect the
nature or level of risks presented by OCC. OCC believes that the Rule
change will enhance OCC's ability to manage the risks presented to it.
The operational processing of stock option contracts with Saturday
expiration dates on the preceding Friday and the ultimate transition to
a Friday expiration date for standard expiration contracts as described
above will reduce the operational risk to OCC by allowing OCC to
streamline the expiration process for all such options contracts and
increase the operational efficiencies for OCC and its clearing members.
In addition, it will compress the operational timeframe for processing
the options expirations such that clearing members will be required to
reconcile options trades on the trade date, which will facilitate and
promote intra-day risk management of cleared trades, and promote real-
time trade date reconciliation and positions balancing, by clearing
members.
III. Date of Effectiveness of the Advance Notice and Timing for
Commission Action
The proposed change may be implemented pursuant to Section
806(e)(1)(G) of the Clearing Supervision Act \18\ if the Commission
does not object to the proposed change within 60 days of the later of
(i) the date that the proposed change was filed with the Commission or
(ii) the date that any additional information requested by the
Commission is received. The clearing agency shall not implement the
proposed change if the Commission has any objection to the proposed
change.
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\18\ 12 U.S.C. 5465(e)(1)(G).
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The Commission may extend period for review by an additional 60
days if the proposed change raises novel or complex issues, subject to
the Commission or the Board of Governors of the Federal Reserve System
providing the clearing agency with prompt written notice of the
extension. A proposed change may be implemented in less than 60 days
from the date the advance notice is filed, or the date further
information requested by the Commission is received, if the Commission
notifies the clearing agency in writing that it does not object to the
proposed change and authorizes the clearing agency to implement the
proposed change on an earlier date, subject to any conditions imposed
by the Commission.
The clearing agency shall post notice on its Web site of proposed
changes that are implemented.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.\19\
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\19\ OCC also filed the proposals contained in this advance
notice as a proposed rule change, under Section 19(b)(1) of the
Exchange Act and Rule 19b-4 thereunder, seeking Commission approval
to permit OCC to change its rules to reflect the proposed changes in
this advance notice. 15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4; SR-OCC-
2013-04. See Supra note 4.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-OCC-2013-802 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549.
All submissions should refer to File Number SR-OCC-2013-802. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml.) Copies of the submission, all subsequent amendments, all
written statements with respect to the advance notice that are filed
with the Commission, and all written communications relating to the
advance notice between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for Web site viewing and printing in
the Commission's Public Reference Room, 100 F Street, NE., Washington,
DC 20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of OCC and on OCC's Web site:
(http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_13_04.pdf). All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-OCC-2013-802 and should be submitted on or before June
13, 2013.
By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-12267 Filed 5-22-13; 8:45 am]
BILLING CODE 8011-01-P