[Federal Register Volume 78, Number 137 (Wednesday, July 17, 2013)]
[Notices]
[Pages 42815-42817]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-17099]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69977; File No. SR-OCC-2013-05]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving 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
July 11, 2013.
I. Introduction
On May 15, 2013 The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2013-05 pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder.\2\ The proposed rule change was published for comment in
the Federal Register on June 3, 2013.\3\ The Commission received no
comment letters. This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 34-69642 (May 28, 2013),
78 FR 33138 (June 3, 2013).
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II. Description
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. The
principal purpose of this rule change is to authorize OCC, rather than
adjustment panels of the Securities Committee,\4\ to determine option
contract adjustments and to determine the value of distributed property
involved in such adjustments.
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\4\ 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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Article VI, Section 11 of OCC's By-Laws provide that all
adjustments to option contracts are currently determined on a case-by-
case basis by an adjustment panel of the Securities Committee composed
of two representatives \5\ 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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\5\ 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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Discussions among OCC and the options exchanges concerning
potential changes to Securities Committee governance in respect of
adjustments
[[Page 42816]]
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.
Under the rule change:
(i) The policy making role of the Securities Committee will be
unchanged. As members of the Securities Committee, exchanges will
retain authority to determine adjustment policy in general.
(ii) OCC will 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 will not be called
to determine a particular adjustment.
(iii) OCC and the exchanges will retain unrestricted ability to
mutually discuss considerations pertaining to any adjustment decision
or policy.
(iv) OCC will have authority to determine the value of distributed
property involved in contract adjustments.
Notwithstanding the elimination of exchange representative
adjustment panels, panels of exchange representatives will retain their
existing functions and authority under other provisions of OCC's By-
Laws.\6\ The types of adjustments for which exchange representative
panels may continue to be convened will be limited to rare situations
involving market closures or the unavailability of accurate pricing.
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\6\ For example, those panels will retain the authority to fix
exercise settlement amounts for cash-settled options where a closing
price for the underlying is otherwise unavailable.
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As a result of this rule change, adjustment panels for the purpose
of determining adjustments of particular options contracts will cease
to exist and exchanges will have no obligation or authority to
determine a particular adjustment. OCC will determine the appropriate
application of the By-Laws and Interpretations and Policies, but the
exchanges will retain policy making authority as members of the
Securities Committee. In this policy making capacity, actions of the
Securities Committee will continue to require approval by a majority
vote.
OCC states that 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 this rule
change, if OCC determines such aspects to be present, OCC will
determine in its sole discretion any adjustment to be applied in the
particular case. The Securities Committee will 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, will 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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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.\8\ Accordingly, this rule
change does not prohibit either the exchanges or OCC from initiating
conversations concerning adjustment policy or particular adjustment
decisions, but neither would such consultation be required.
Furthermore, to ensure continued exchange involvement in determining
adjustment policy, OCC intends to call periodic meetings of the
Securities Committee, to be held on a quarterly or more frequent period
basis, to discuss policy issues and review recent experience with
contract adjustments.\9\
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\8\ 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.
\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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The rule change will 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. The Securities Committee--or panels comprised of
representatives of the Securities Committee--in respect of actions that
do not involve option contract adjustments will 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 and similar actions.
In addition to the principal purpose underlying this rule change,
OCC is making certain other conforming and/or clarifying changes to the
By-Laws relating to adjustments and/or adjustment panels. Specifically,
OCC is modifying or eliminating 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. OCC is
eliminating other stale provisions, including those found within
Interpretation and Policy .01 under the Article VI, Section 11, which
relate to the determination of ``ordinary cash dividends or
distributions'' for which no adjustment is ordinarily made. OCC is also
making changes to Article XIV, Section 3A(a)(3) in relation to binary
options for which the underlying is an equity interest. OCC is also
making changes to Article XIV Section 3A to reflect a clarifying
interpretation issued by the Securities Committee with respect to
determinations of corporate issuers to accelerate or defer payments of
otherwise ordinary dividends.\10\ Other conforming changes being made
by OCC update cross-references to By-Laws and Rules that are being
amended.
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\10\ 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. 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.
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III. Discussion
Section 19(b)(2)(C) of the Act \11\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such 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 \12\
requires that the rules of a clearing agency are designed to, among
other things, promote the prompt and accurate clearance and settlement
of securities transactions and foster cooperation and coordination with
persons engaged in the clearance and settlement of securities
transactions.
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\11\ 15 U.S.C. 78s(b)(2)(C).
\12\ 15 U.S.C. 78q-1(b)(3)(F).
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[[Page 42817]]
By providing OCC with sole discretion for particular adjustment
decisions, the rule change helps to ensure that decisions are
consistent, efficient and free from undue influence. As a result, the
rule change should help to promote the prompt and accurate clearance
and settlement of securities transactions as well as foster cooperation
and coordination with persons engaged in the clearance and settlement
of securities transactions consistent with Section 17A(b)(3)(F) of the
Act.\13\ Furthermore, in addition to ensuring consistency with Section
17A(b)(3)(F) of the Act,\14\ the conforming and clarifying changes to
OCC's By-Laws and Rules should help ensure that OCC maintains a well-
founded, transparent and enforceable legal framework as required by
Rule 17Ad-22(d)(1).\15\
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\13\ 15 U.S.C. 78q-1(b)(3)(F).
\14\ 15 U.S.C. 78q-1(b)(3)(F).
\15\ 17 CFR 240.17Ad-22(d)(1).
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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 and in
particular with the requirements of Section 17A of the Act \16\ and the
rules and regulations thereunder.
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\16\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\17\ that the proposed rule change (File No. SR-OCC-2013-05) be and
hereby is approved.\18\
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\17\ 15 U.S.C. 78s(b)(2).
\18\ 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.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-17099 Filed 7-16-13; 8:45 am]
BILLING CODE 8011-01-P