[Federal Register Volume 78, Number 106 (Monday, June 3, 2013)]
[Notices]
[Pages 33138-33142]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-12975]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69642; File No. SR-OCC-2013-05]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change To Provide That OCC, Rather
Than an Adjustment Panel of the Securities Committee, Will Determine
Adjustments to the Terms of Options Contracts to Account for Certain
Events, Such as Certain Dividend Distributions or Other Corporate
Actions, That Affect the Underlying Security or Other Underlying
Interest
May 28, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on May 15, 2013, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by OCC. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
OCC proposes to provide that OCC, rather than an adjustment panel
of the Securities Committee, will determine adjustments to the terms of
options contracts to account for certain events, such as certain
dividend distributions or other corporate actions, that affect the
underlying security or other underlying interest.
[[Page 33139]]
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
The principal purpose of this proposed rule change is to authorize
OCC, rather than adjustment panels of the Securities Committee,\3\ to
determine option contract adjustments and to determine the value of
distributed property involved in such adjustments. Other conforming or
clarifying changes to the By-Laws relating to adjustments and/or
adjustment panels also are being proposed.
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\3\ The OCC 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.
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1. Background and Purpose of Proposed Rule Change
Certain corporate actions--such as declaration of dividends or
distributions, stock splits, rights offerings, reorganizations, or the
merger or liquidation of an issuer--affecting an underlying security
may require an adjustment to the terms of the overlying options. For
example, in a two-for-one stock split, the overlying options might also
be split two-for-one, so that each option would continue to cover the
same number of shares but with an exercise price equal to half of the
pre-split price. The basic procedural rules governing such
``adjustments'' in the terms of outstanding options are set forth in
Section 11 of Article VI of OCC's By-Laws, and the substantive rules
specifically covering adjustment of stock options are set forth in
Section 11A of Article VI. Although much less common, it is also
possible that events affecting indexes and other underlying interests
could also require adjustment of the overlying options. Rules for
adjustment of such other options are generally found in the By-Law
provisions applicable to such other options.
The procedural rules of Article VI, Section 11 of the By-Laws
provide that all adjustments to option contracts be determined on a
case-by-case basis by an adjustment panel of the Securities Committee
composed of two representatives \4\ of each exchange that trades an
option on the underlying security and the OCC Chairman (or his
representative). All actions are determined by majority vote, with OCC
voting only to break a tie. Besides determining particular adjustments
in individual cases, Article VI, Section 11 also authorizes the
Securities Committee to adopt statements of policy or interpretations
governing option adjustments in general. Additionally, the Securities
Committee is authorized to determine the value of distributed property
involved in stock option adjustments as stated in Article VI, Section
11A(f).
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\4\ The Commission has approved an amendment to OCC's By-Laws
under which only one representative of each relevant exchange is
required on an adjustment panel. Securities Exchange Act Release No.
34-67333 (July 2, 2012), 77 FR 40394 (July 9, 2012) (SR-OCC-2012-
07). However, the amendment will not be implemented until an
amendment to the Options Disclosure Document reflecting this change
is made. Interpretation and Policy .01 to Article VI, Section 11
clarifies that until such time as the amendment to the Options
Disclosure Document is made and only one representative is required,
an adjustment panel must have two representatives of each exchange
that trades an option on the underlying security.
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The options exchanges asked OCC to evaluate possible changes to the
structure and procedures which govern option contract adjustments. The
request was prompted by a desire to consider ways to lessen investor
confusion and enhance consistency in making option contract
adjustments. In addition, the exchanges have expressed concern that
exchange representatives involved in adjustment decisions may sometimes
be subject to undue pressure from investors. Accordingly, the exchanges
asked OCC to investigate whether changes to adjustment procedures could
insulate the exchanges from undue pressure while concurrently providing
greater consistency and efficiency in making adjustment decisions.
2. Description of Proposed Changes
Discussions among OCC and the exchanges concerning potential
changes to Securities Committee governance in respect of adjustments
yielded a consensus that the exchanges should retain policy-making
authority under the adjustment By-Laws through the Securities Committee
but that OCC should be the sole determiner of particular adjustment
decisions, thereby eliminating adjustment panels convened for the
purpose of determining adjustments of particular option contracts. The
Securities Committee ratified the following recommendations by
unanimous vote:
(i) The policy making role of the Securities Committee should be
unchanged. As members of the Securities Committee, exchanges should
retain authority to determine adjustment policy in general.
(ii) OCC should apply the adjustment By-Laws and Interpretations to
determine particular adjustments on a case-by-case basis. An adjustment
panel comprised of exchange and OCC representatives should not be
called to determine a particular adjustment, thereby insulating the
exchanges from investor pressure to determine a particular outcome.\5\
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\5\ There is precedent for this approach in that OCC currently
determines all contract adjustments for security futures. See
Article XII, Sections 3 and 4 of OCC's By-Laws.
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(iii) OCC and the exchanges should retain unrestricted ability to
mutually discuss considerations pertaining to any adjustment decision
or policy.
(iv) OCC should be given authority to determine the value of
distributed property involved in contract adjustments.
These recommendations were reviewed with OCC's Board of Directors,
which unanimously approved them by authorizing the filing of this
proposed rule change.
Notwithstanding the elimination of exchange representative
adjustment panels, panels of exchange representatives would still
retain their existing functions and authority under other provisions of
OCC's By-Laws. For example, those panels would retain the authority to
fix exercise settlement amounts for cash-settled options where a
closing price for the underlying is otherwise unavailable.\6\
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\6\ See, e.g., Article XIV, Section 5, Article XVII, Section 4,
Article XXII, Section 4 and Article XXIV, Section 4.
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The types of adjustments for which exchange representative panels
may continue to be convened would be limited to very rare situations
involving market closures or the unavailability of accurate pricing,
and would need to be done on very short notice, unlike dividend
adjustments, for which there can be a period of time between the
announcement of a dividend and the decision of the panel. Accordingly,
it is much less likely that exchange representatives on these panels
would be subject to the same risk of undue pressure from investors.
These situations are also less likely to fit within a policy or
precedent that could
[[Page 33140]]
be prescribed in advance by the Securities Committee, and therefore it
would be more difficult for the Corporation to make the decisions
without the input of the relevant exchanges.
3. Discussion
As a result of the proposed changes described above, adjustment
panels for the purpose of determining adjustments of particular options
contracts would cease to exist, and exchanges would have no obligation
or authority to determine a particular adjustment. OCC would determine
the appropriate application of the By-Laws and Interpretations and
Policies, but the exchanges would retain policy making authority as
members of the Securities Committee. In this policy making capacity,
actions of the Securities Committee would continue to require approval
by a majority vote.
Occasionally, there may be unique aspects of a corporate event that
justify departure from adjustment policy or precedent, or that involve
a situation for which there is no existing adjustment policy or
precedent. Such events may also highlight a need for a more general
reformulation of adjustment policy. Under the proposed changes, if OCC
determines such aspects to be present, OCC would determine in its sole
discretion any adjustment to be applied in the particular case. The
Securities Committee would not initiate policy changes ``ad hoc'' to
address a particular case (which would be a de facto determination of a
particular adjustment decision). Instead, after OCC determined a
particular adjustment, the Securities Committee, in its discretion,
would determine the appropriateness of adopting prospective policy
changes or clarifications.\7\
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\7\ This approach was followed in 2006 in response to a special
cash dividend. In that case, adjustment panels determined to depart
from precedent and adjust certain ETF options where the ETF
distributed pro rata dividends based on the amount of a special
dividend paid by the issuer of one of the component stocks in the
ETF. Following these adjustments, the Securities Committee
recommended to the OCC Board a policy reformulation. See
Interpretation .08 to Article VI, Section 11A.
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Although OCC and the exchanges believe it is feasible for OCC to
independently determine adjustments, both are averse to losing valuable
exchange experience and insight that is now brought to bear in
adjustment decisions. Accordingly, OCC and the exchanges believe that
they should retain unrestricted ability to discuss with each other any
considerations pertaining to an adjustment decision or policy--with the
understanding that adjustment decisions would be made solely by OCC and
the exchanges would be involved solely in an advisory capacity.
Accordingly, nothing in the present proposal would prohibit either the
exchanges or OCC from initiating conversations concerning adjustment
policy or particular adjustment decisions, but neither would such
consultation be required.\8\ Furthermore, to ensure continued exchange
involvement in determining adjustment policy, OCC intends to call
periodic meetings of the Securities Committee to discuss policy issues
and review recent experience with contract adjustments.\9\ Such
meetings will be held on a quarterly or more frequent periodic basis.
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\8\ Confidentiality of the communications between OCC and the
Exchanges would continue to be observed--as it is today.
\9\ As a practical matter, even if adjustments are determined
solely by OCC it would still be necessary for OCC and the exchanges
to coordinate the operational execution of all option adjustments.
This coordination includes, but is not limited to, the determination
of an effective date, option symbols and strike prices and the
publication of notices.
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Occasionally option adjustments involve the substitution of cash
value in lieu of delivery of property. For example, this is the case
when a security does not trade in the United States or cash in lieu of
property is involved. Currently, the Securities Committee has authority
to determine such cash value. OCC is proposing that it would instead be
authorized to determine cash value in these cases since it would have
sole discretion to determine contract adjustments.
The proposed changes would apply only to the functions of OCC and
the Securities Committee in the determination of option contract
adjustments as described in Article VI, Sections 11 and other By-Law
provisions.\10\ The Securities Committee--or panels comprised of
representatives of the Securities Committee--in respect of actions that
do not involve option contract adjustments would retain all other
functions and authority granted under the By-Laws, including, for
example, the ability to fix index option settlement values in cases of
market disruption \11\ and similar actions.
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\10\ See, e.g., [sic] Article XII, Sections 3 and 4; Article
XIV, Section 3A; Article XV, Section 4; Article XVI, Section 3;
Article XVII, Section 3; Article XX, Section 4; Article XXII,
Section 3; Article XXIII, Section 4; and Article XXIV, Section 6.
\11\ See, e.g., By-Law Article XVII, Section 4.
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Adjustment provisions of the By-Laws pertaining to classes of
options other than stock options sometimes provide for adjustment
panels by referring to Article VI, Section 11. Insofar as Article VI,
Section 11 would be modified to eliminate the need for adjustment
panels, the requirement for adjustment panels to determine contract
adjustments for these other types of option contracts would also be
eliminated, with case by case adjustment decisions determined solely by
OCC.
4. Other Changes
In addition to the principal purpose underlying this rule change as
described above, certain other conforming and/or clarifying changes are
being proposed. These changes are intended to update the By-Laws to
eliminate stale rule provisions, to conform cross-references contained
in other By-Laws to changes being proposed herein and to clarify
certain interpretations adopted under the By-Laws to reflect a recent
policy determination made by the Securities Committee in accordance
with its authority granted under Article VI, Section 11 of OCC's By-
Laws. These changes generally are described below.
OCC is proposing to modify or eliminate certain adjustment related
By-Law provisions because, due to industry or other changes, there is
no longer any open interest in options covered by such provisions. For
example, equity options previously had traded with exercise prices
expressed in either fractions or decimals. All exercise prices for
equity options now are expressed in decimals, and all open interest in
options series for which exercise prices were expressed in fractions
has expired. Several By-Law provisions are being modified or eliminated
to reflect this circumstance.\12\
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\12\ See, e.g., the proposed changes to the definition of the
term ``adjustment increment,'' Article I, Section 1.A(2); Article
VI, Section 11A(d); Interpretation & Policy .09 under Article VI,
Section 11A; and Article XII, Section 3(d).
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OCC also is proposing to eliminate other stale provisions,
including those found within Interpretation and Policy .01 under the
Article VI, Section 11, which relates to the determination of
``ordinary cash dividends or distributions'' for which no adjustment is
ordinarily made. These provisions preserved the ``10% rule'' (i.e., the
former method used to determine whether a cash dividend or distribution
was ordinary) for application to certain series that had open interest
prior to rescission of the 10% rule. Open interest in all such
``grandfathered'' series has expired, and therefore these provisions
are no longer necessary. Changes would also be made to Article XIV,
Section 3A(a)(3) in relation to
[[Page 33141]]
binary options for which the underlying is an equity interest.
OCC's Securities Committee is empowered under the By-Laws to adopt
statements of policy or interpretations having general application to
specified types of events or specific kinds of cleared contracts.
Recently, the Securities Committee issued a clarifying interpretation
with respect to determinations of corporate issuers to accelerate or
defer payments of otherwise ordinary dividends. More specifically, the
Securities Committee determined that such events would not, as a
general rule, affect the ordinary nature of such dividends subject to
the evaluation of these events on a case-by-case basis.\13\ Comparable
changes, as applicable, would be made to Article XIV, Section 3A. Other
changes being proposed are conforming in nature in that they update
cross-references to By-Laws and Rules proposed to be amended.
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\13\ Securities Exchange Act Release No. 34-68531 (December 21,
2012), 77 FR 77157 (December 31, 2012) (SR-OCC-2012-26).
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OCC believes the proposed rule change is consistent with the
purposes and requirements of Section 17A(b)(3)(F) of the Securities
Exchange Act of 1934, as amended, (the ``Act'') \14\ and the rules and
regulations thereunder because the proposed changes would help promote
the prompt and accurate clearance and settlement of securities
transactions and foster cooperation and coordination with persons
engaged in the settlement of securities transactions \15\ by providing
OCC with sole discretion for particular adjustment decisions to help
ensure that decisions are consistent, efficient and free from undue
influence and by providing conforming and clarifying changes to OCC's
By-Laws and Rules to help ensure that OCC maintains a well-founded,
transparent and enforceable legal framework as required by Rule 17Ad-
22(d)(1).\16\ The proposed rule change is not inconsistent with any
rules of OCC, including any rules proposed to be amended.
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\14\ 15 U.S.C. 78q-1.
\15\ 15 U.S.C. 78q-1(b)(3)(F).
\16\ 17 CFR 240.17Ad-22(d)(1).
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OCC will not implement these proposed rule changes until the
effectiveness of an amendment to the Options Disclosure Document
relating to the proposed changes.
(B) Clearing Agency's Statement on Burden on Competition
OCC does not believe that the proposed rule change will impact, or
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rule change
primarily affects OCC's clearing members and their customers, but it
would not impose any additional burden on them because options are
already subject to adjustment and the revised procedures apply equally
to all clearing members. OCC does not believe that providing OCC with
sole discretion for particular adjustment decisions, rather than
continuing to rely on adjustment panels consisting of exchange
representatives, would inhibit access to any of OCC's services or
disadvantage or favor any user of OCC's services in relationship to any
other such user. In fact, OCC believes that the proposed rule change
would promote competition among participants in the options markets
because it would help ensure that adjustment decisions are consistent,
efficient and free from undue influence and therefore it would promote
certainty, fairness and a level playing field in the options markets
with respect to when and how participants are affected by adjustments.
For the foregoing reasons, OCC believes that the proposed rule
change is in the public interest and consistent with the requirements
of the Act applicable to clearing agencies because it would promote
competition in the options markets that OCC serves and not impose a
burden on competition that is unnecessary or inappropriate in
furtherance of the purposes of the Act.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
Written comments on the proposed rule change were not and are not
intended to be solicited with respect to the proposed rule change and
none have been received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Exchange Act. 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-2013-05 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-2013-05. 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 proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change 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.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_13_05.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-2013-05
and should be submitted on or before June 24, 2013.
[[Page 33142]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-12975 Filed 5-31-13; 8:45 am]
BILLING CODE 8011-01-P