[Federal Register Volume 61, Number 122 (Monday, June 24, 1996)]
[Notices]
[Pages 32471-32472]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16028]



-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37315; File No. SR-OCC-95-18]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving a Proposed Rule Change Clarifying Rules Regarding the 
Unavailability of Current Index Values

June 17, 1996.
    On November 24, 1995, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change (File No. SR-OCC-95-18) pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ On March 
19, 1996, OCC amended the proposed rule change.\2\ Notice of the 
proposal was published in the Federal Register on March 27, 1996.\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 James C. Yong, First Vice President and General 
Counsel, OCC, to Jerry W. Carpenter, Assistant Director, Division of 
Market Regulation, Commission (March 19, 1996).
    \3\ Securities Exchange Act Release No. 36988 (March 20, 1996), 
61 FR 13558.
---------------------------------------------------------------------------

I. Description of the Proposal

    OCC has determined that certain technical changes should be made to 
its rules to clarify the respective rights and responsibilities of OCC 
and the options exchanges (``exchanges'') \4\ with respect to the 
reporting of current index values and the determination of settlement 
values. Specifically, OCC is amending Article XVII, Section 4 of its 
by-laws, which empowers OCC to fix an exercise settlement amount in the 
event that OCC determines that the current index value is unreported or 
otherwise unavailable, to clarify that OCC has the authority to fix an 
exercise settlement amount whenever the primary market for the 
securities representing a substantial part of the value of an 
underlying index is not open for trading at the time when the current 
index value i.e., the value used for exercise settlement purposes) 
ordinarily would be determined. OCC believes this authority is implicit 
in the language of the present by-law because in such circumstances the 
current index value would generally be ``unreported or otherwise 
unavailable;'' however, OCC believes the rule change will make OCC's 
authority explicit.
---------------------------------------------------------------------------

    \4\ The exchanges include the American Stock Exchange, the 
Chicago Board Options Exchange, the New York Stock Exchange, the 
Pacific Stock Exchange, and the Philadelphia Stock Exchange.
---------------------------------------------------------------------------

    In addition, the rule change assigns the responsibility for fixing 
exercise settlement amounts in situations where the current index value 
is unavailable or inaccurate to a panel consisting of OCC's Chairman 
and two designated representatives of each exchange on which the 
affected series is open for trading, one of whom shall be such 
exchange's representative on OCC's Securities Committee. This procedure 
to assign the decision-making responsibility to an exchange-controlled 
panel conforms with the procedures used in making determinations with 
respect to adjustments made pursuant to Article VI, Section 11.\5\ The 
rule change authorizes the panel to fix the exercise settlement amount 
based on its judgment as to what is appropriate for the protection of 
investors and the public interest taking into account factors such as 
fairness to holders and writers and the maintenance of fair and orderly 
markets. The panel may, but is not restricted to, fixing the exercise 
settlement amount on the basis of the reported level of the underlying 
index at the close of trading on the last preceding trading day for 
which a closing index level was reported.
---------------------------------------------------------------------------

    \5\ Section 11 of Article VI sets forth the procedures by which 
adjustments are made to options when there is a distribution, stock 
split, rights offering, reorganization or similar event with respect 
to the underlying security.
---------------------------------------------------------------------------

    Identical changes also are being made to Article XXIII, Section 5, 
which governs the fixing of exercise settlement amounts for Flexibly 
Structured Index Options Denominated in a Foreign Currency (``FX Index 
Options''). Under these proposed changes, the situation contemplated by 
the last two sentences of the definition of ``expiration date'' in 
Article XXIII, Section 1.E.(3) (i.e., where the primary markets for 
underlying securities representing a substantial part of the value of 
an index is closed on an expiration date) will be explicitly covered by 
Article XXIII, Section 5; therefore, the last two sentences of Article 
XXIII, Section 1.E. (3) will be deleted.
    The remainder of the changes to OCC's by-laws are technical changes 
that are being made primarily for the purpose of conforming OCC's by-
laws to changes made in the Commission's approval of FX Index 
Options.\6\
---------------------------------------------------------------------------

    \6\ For a complete description of FX Index Options, refer to 
Securities Exchange Act Release No. 35149 (January 3, 1995), 60 FR 
158 [File No. SR-OCC-94-08] (order approving proposed rule change).
---------------------------------------------------------------------------

II. Discussion

    Section 17A(b)(3)(F) \7\ requires that the rules of a clearing 
agency be designed to promote the prompt and accurate clearance and 
settlement of

[[Page 32472]]

securities transactions. The Commission believes that OCC's proposed 
rule change is consistent with OCC's obligations under Section 
17A(b)(3)(F) because the proposal will clarify OCC's exercise 
settlement procedures with respect to the determination of index values 
and exercise settlement values in the event such values are unavailable 
or unreported by the designated reporting authorities. Furthermore, the 
Commission believes that the rule change should clarify the respective 
rights and responsibilities of OCC and the exchanges in such 
circumstances.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
---------------------------------------------------------------------------

    As described earlier, the responsibility for fixing exercise 
settlement amounts is now assigned to a panel consisting of OCC's 
Chairman and two designated representatives of each exchange on which 
the affected series is open for trading. In the past, the Commission 
has approved this concept of utilizing an exchange-controlled panel to 
make determinations with respect to adjustments to options 
contracts.\8\ The Commission believes that assigning the responsibility 
for fixing exercise settlement amounts in certain situations to an 
exchanged-controlled panel also is appropriate in this situation. 
Furthermore, because the proposal sets forth factors which can be 
considered in making any such adjustments, the proposal should add 
certainty to the settlement of index options. Therefore, as a whole the 
proposal should facilitate the prompt and accurate clearance and 
settlement of securities transactions.
---------------------------------------------------------------------------

    \8\ Securities Exchange Act Release No. 24024 (January 23, 
1987), 52 FR 3184 [File No. SR-OCC-86-11] (order granting approval 
of a proposed rule change to amend OCC's by-laws concerning 
adjustments to the terms of outstanding stock option contract).
---------------------------------------------------------------------------

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of Section 17A(b)(3)(F) 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-95-18) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 200. 30-3(a)(12) (1995).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. 96-16028 Filed 6-21-96; 8:45 am]
BILLING CODE 8010-01-M