[Federal Register Volume 61, Number 32 (Thursday, February 15, 1996)]
[Notices]
[Pages 6053-6054]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-3418]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36823; File No. SR-OCC-95-13]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving a Proposed Rule Change Relating to Adjustments of 
Options for Ordinary Stock Dividends

February 8, 1996.
    On September 19, 1995, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change (File No. SR-OCC-95-13) pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ On 
October 16, 1995, OCC filed an amendment to the proposed rule 
change.\2\ Notice of the proposal was published in the Federal Register 
on December 13, 1995.\3\ No comment letters were received. For the 
reasons discussed below, the Commission is approving the proposed rule 
change.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Letter from Jacqueline R. Luthringshausen, OCC, to Jerry W. 
Carpenter, Esq., Division of Market Regulation, Commission (October 
11, 1995).
    \3\ Securities Exchange Act Release No. 36558 (December 6, 
1995), 60 FR 64087).
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I. Description of the Proposal

    Article VI, Section 11 of OCC's by-laws sets forth general rules 
regarding adjustments that may be made by the standardized terms of 
options when certain events occur.\4\ Each specific adjustment is 
determined by the vote of an OCC adjustment panel comprised of two 
designated representatives of each exchange that lists such option and 
the designee of OCC's chairman who votes only in the case of a tie.\5\

    \4\ The adjustment is made by proportionately changing the 
strike price, the unit of trading, or both.
    \5\ Article VI, Section 11(j) grants authority to the adjustment 
panel to make such exceptions to any of the general adjustment rules 
as it deems to be appropriate. Recently, two adjustment panels 
exercised their exception authority and determined not to adjust 
outstanding option contracts to reflect a stock dividend. In both 
instances, the issuer evidenced a pattern of declaring a small stock 
dividend in conjunction with a quarterly cash dividend. In 
determining not to adjust the options, each adjustment panel 
considered the provision in the Options Disclosure Document that 
states a stock dividend may be treated as an ordinary cash dividend 
by an adjustment panel if the issuer of the underlying security 
announces or exhibits a policy of declaring regular stock dividends 
that do not individually exceed 10% of the market value of the 
underlying security. The adjustment panels involved in making these 
adjustments requested that OCC amend its by-laws to provide 
explicitly for a general rule that no adjustment will be made to 
reflect ordinary stock dividends.
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    OCC is amending Article VI, Section 11 of its by-laws to provide 
for a general rule that no adjustments to options will be made as a 
result of ordinary distributions made on the underlying security. 
Article VI, Section 11(d) previously contained a general rule that 
required the adjustment of equity options whenever there was a stock 
dividend, stock distribution, or stock split.\6\ Under the amendment, 
no adjustments will be made as a result of an ordinary stock dividend. 
Under the Interpretations and Policies to Article VI, Section 11 of 
OCC's by-laws, stock dividends and distributions that are paid on a 
quarterly basis by the issuer of the underlying security that do not 
exceed ten percent of the market value of the underlying security will 
be deemed to be ordinary stock dividends or distributions. The rule 
change will not affect the current adjustment practice with regard to 
ordinary cash dividends.\7\ Because the rule change only applies to 
recurrent stock dividends, OCC anticipates that only in a small number 
of cases will adjustments be made for stock dividends or distributions. 
OCC believes that formalizing a policy of not adjusting for recurrent 
stock dividends will eliminate potential problems associated with the 
creation of an undesirable proliferation of options series and will 
eliminate the need to convene adjustment panels to make discretionary 
determinations for such dividends on a case-by-case basis.

    \6\ In contrast, Section 11(c) states that it shall be the 
general rule that there will be no adjustment for ordinary cash 
dividends. This is because ordinary cash dividends generally are 
paid on a quarterly basis and adjusting outstanding options each 
time a dividend is paid could create a massive proliferation of 
option series that would dilute market liquidity and would overtax 
price reporting and other systems. Section 11(e) is being amended to 
include ordinary stock dividends or distributions in the coverage of 
the general rule.
    \7\ Interpretations and Policies .01 to Article VI, Section 11 
of OCC's by-laws provides that cash dividends that do not exceed 10 
percent of the market value of the market value of the underlying 
security generally will be deemed ordinary cash dividends. Ordinary 
cash dividends are not subject to adjustment.
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    Finally, pursuant to a request from Commission staff, OCC is 
deleting language from Article VI, Section 11 that provides for 
Commission review of the determinations made by any OCC adjustment 
panel.

II. Discussion

    Section 17A(b)(3)(F) of the Act 8 requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and generally, to 
protect investors and the public interest. The Commission believes the 
proposed rule change is consistent with OCC's obligations under 

[[Page 6054]]
the Act because it should add certainty as to when and how adjustments 
will be made to option contracts due to an issuer's distribution of 
stock dividends. Removal of the requirement in OCC's rules providing 
for Commission review of OCC adjustment panel decisions also should add 
certainty and predictability to the options market. Furthermore, 
administrative inefficiencies should be reduced because adjustment 
panels will be convened only when there is an extraordinary stock 
dividend rather than each time issuers distribute an ordinary stock 
dividend.

    \8\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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    As a self-regulatory organization, OCC has been granted significant 
authority under the Act. The use of an adjustment panel to administer 
the adjustment of standardized options is an example of the broad 
authority Congress granted to self-regulatory organizations. However, 
it is expected that OCC will notify the Commission of any adjustment 
panel's decision (i) to adjust standardized option contracts for stock 
or cash dividends that otherwise would be deemed ordinary under OCC's 
rules, interpretations, or policies or (ii) not to adjust standardized 
option contracts for stock or cash dividends that otherwise would not 
be deemed ordinary under OCC's rules, interpretations, or policies.

III. 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 and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-95-13) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-3418 Filed 2-14-96; 8:45 am]
BILLING CODE 8010-01-M