[Federal Register Volume 59, Number 95 (Wednesday, May 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12040]


[[Page Unknown]]

[Federal Register: May 18, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34050; File No. SR-NYSE-94-12]

 

Self-Regulatory Organizations; Filing of Proposed Rule Change by 
the New York Stock Exchange, Inc. Relating to Option Exercise Cut-Off 
Procedures

May 12, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ notice is hereby given that on March 23, 1994, the New 
York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the self-regulatory organization. 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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NYSE proposes to amend Exchange Rule 780 (Exercise of Option 
Contracts) to establish new exercise cut-off procedures in respect to 
expiring equity options.
    The proposed procedures would continue to require clearing members 
to notify The Options Clearing Corporation (``OCC'') of exercises of 
equity options and would establish a procedure requiring a member or 
member organization to indicate an option holder's final exercise 
decision to the Exchange. The member or member organization could do 
this in one of two ways: either it could submit a Contrary Exercise 
Advice to the Exchange or it could take no action and thereby rely on 
OCC's exercise-by-exeption procedures pursuant to OCC Rule 805.\2\ The 
``Contrary Exercise Advice'' form instructs the Exchange that the 
options holder has decided not to exercise an equity option that 
application of OCC's exercise-by-exception procedures would otherwise 
automatically exercise or to exercise an equity option that OCC's 
exercise-by-exception procedures would not otherwise exercise.
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    \2\The OCC's exercise-by-exception procedures make automatic 
exercise decisions. They allow (i) the exercise of an in-the-money 
option at expiration without the submission of an input entry into 
OCC if the option is at or above a predetermined threshold and (ii) 
the non-exercise of an option at expiration if the option is not at 
or above the predetermined threshold.
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    The proposal requires final equity option exercise decisions to be 
made at 5:30 p.m. New York time on the business day immediately 
preceding the expiration date (the ``exercise cut-off time'') and 
allows a member or member organization to submit a Contrary Exercise 
Advice subsequent to the exercise cut-off time in the event of a good-
faith error, a failure to reconcile an unmatched option transaction, or 
an exceptional circumstance that precludes communication of the 
Contrary Exercise Advice.
    Under the proposal, a member or member organization may submit the 
Contrary Exercise Advice to any place that the Exchange or any other 
national options exchange of which it is a member directs, so long as 
the option is listed on the directing exchange. Alternatively, the 
member or member organization may submit the advice to the Exchange via 
OCC.
    Where OCC has waived the exercise-by-exception procedures, a member 
or member organization must still submit the Contrary Exercise Advice 
to the Exchange when the member or member organization wishes to 
exercise in a manner that would have been contrary to the automatic 
exercise or non-exercise procedure had OCC not waived the exercise-by-
exception procedure. In determining whether the exercise would have 
been contrary to the OCC exercise-by-exception procedure had OCC not 
waived it, the price of the underlying security would normally be the 
last sale price in the primary market on the business day immediately 
prior to the expiration date.
    Proposed paragraph (d) of Rule 780 requires members and member 
organizations to assume responsibility for ensuring that the final 
exercise decisions for proprietary and customer accounts are indicated 
to the Exchange. The proposed procedures further require each member 
organization to establish a cut-off time after which it will not longer 
accept final exercise decisions.
    Proposed paragraph (f) of Rule 780 requires member organizations to 
prepare memoranda of every final exercise decision that requires a 
contrary exercise advice, including the time when the decision was made 
or received. If a final exercise decision is made after the exercise 
cut-off time, the member or member organization must prepare a 
memorandum describing the circumstances. The member or member 
organization must file a copy of that memorandum with the Exchange's 
Market Surveillance Department by no later than 12 p.m. on the first 
business day following expiration. All memoranda must be kept in 
accordance with Rule 17a-4 under the Act.\3\
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    \3\17 CFR 240.17a-4 (1993).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    It its filing with the Commission, the self-regulatory organization 
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. The self-regulatory organization 
has prepared summaries, set forth in Sections (A), (B) and (C) below, 
of the most significant aspects of such statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Under the proposed rule change, the 5:30 p.m. exercise cut-off time 
for equity options as well as the actual exercise procedures, including 
the submission of exercise notices to OCC, remain unchanged and subject 
to OCC rules.
    While retaining the 5:30 p.m. time limit for equity options, the 
proposed rule change removes the 6:30 p.m. cut-off time for the receipt 
of exercise instructions for index stock group options, thereby 
removing index stock group options from the applicability of Rule 780. 
Instead, the existing requirements of Supplementary Material .10 to 
Rule 780 would govern the exercise of index stock group options. The 
Exchange feels that removing the explicit exercise cut-off time in the 
context of index stock group options is warranted because those options 
are cash settled, thereby making it unlikely that an exercise will 
affect the market for the securities underlying the index option, and 
because the requirements of Supplementary Material .10 provide 
sufficient notice to the Exchange of the exercise of index stock group 
options.
    The Exchange feels that replacing the existing equity option 
exercise cut-off procedures with the proposed procedures will 
strengthen member and member organization audit trail capabilities. The 
exercise decision indication and the Contrary Exercise Advices will 
allow the Exchange to better track activity surrounding the exercise 
the equity options. Furthermore, the proposed procedures will provide a 
more convenient method for members to indicate exercise intentions to 
the Exchange.
    In addition, the Exchange believes that the proposed procedures 
provide it with a better audit trail. For example, the proposed 
procedures would permit a member or member organization to submit a 
Contract Exercise Advices directly to the Exchange, rather than to the 
clearing firm. This means that responsibility for the timely and proper 
submission of Contrary Exercise Advices shifts from the clearing firm 
to the option holder himself and his member organization.
    Alternatively, the proposed procedures allow a member to continue 
to submit final exercise decisions (in the form of Contrary Exercise 
Advices) to its clearing member. That would cause the clearing member 
to remain responsible for submitting the Contrary Exercise Advice to 
the Exchange. In either case, a member may submit the Contrary Exercise 
Advice directly to the Exchange at a place that the Exchange shall 
designate, or to the Exchange indirectly through OCC via OCC's Clearing 
Management and Control System. In both cases, the proposed procedures 
will create an efficient audit trail that will allow the Exchange to 
identify late submissions.
    Under current procedures, members and member organizations need not 
make submissions to the Exchange or OCC. Rather, a member or member 
organization must time stamp the receipt of an exercise instruction and 
maintain that time-stamped instruction in its files. The member or 
member organization, and not the Exchange or OCC, controls the records 
of options exercises.
    Furthermore, the proposed procedures strengthen the requirements 
regarding the preparation and maintenance of memoranda, thereby further 
strengthening the options exercise audit trail. Members and member 
organizations must maintain detailed descriptions of non-automatic 
exercises an late exercises. This should facilitate the Exchange's 
surveillance of violations of exercise procedures.
    The statutory basis for the proposed rule change is the requirement 
under Section 6(b)(5) that an exchange have rules that are designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The NYSE believes that the proposed rule change will not impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited, and does not intend to solicit 
comments on the proposed rule change. The Exchange has not received any 
unsolicited written comments from members or other interested parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date 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 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
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 inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organization. All submissions should refer to File No. 
SR-NYSE-94-12 and should be submitted by June 8, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-12040 Filed 5-17-94; 8:45 am]
BILLING CODE 8010-01-M