[Federal Register Volume 63, Number 140 (Wednesday, July 22, 1998)]
[Notices]
[Pages 39335-39336]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19442]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40209; File No. SR-OCC-97-13]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Relating to Adjustments to Exercise Prices

July 15, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 22, 1997, the 
Options Clearing Corporation (``CCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-OCC-97-13) as described in Items I and II below, which items have 
been prepared primarily by OCC. The Commission is publishing this 
notice and order to solicit comments on the proposed rule change from 
interested persons and to grant accelerated approval of the proposal.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The purpose of the proposed rule change is to amend OCC's by-laws 
regarding the adjustment of exercise prices. Specifically, adjustment 
of exercise prices will be rounded to the next nearest trading 
increment as specified by the primary market for the underlying 
security.

II. Self-Regulatory Organization'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 such statements.\2\
---------------------------------------------------------------------------

    \2\ The Commission has modified the text of the summaries 
prepared by OCC.
---------------------------------------------------------------------------

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

    Under the proposed rule change, OCC will amend Article VI, Section 
11(i) of its by-laws to provide for the rounding of adjustments of 
exercise prices to the nearest ``trading increment'' for the underlying 
security, as fixed by the primary market for the security.\3\ 
Currently, OCC rounds adjustments to exercise prices to the nearest 
eighth of a dollar. The securities industry has moved from quoting 
prices in eights of a dollar (``eighths'') to sixteenths of a dollar 
(``sixteenths'') and is moving towards quoting prices in decimals. 
Therefore, OCC believes that the adjustment provisions of its by-laws 
require amendment. Amending its by-laws to provide for rounding to the 
nearest trading increment will accommodate the interim change to 
pricing in sixteenths and any final change to decimal pricing.
---------------------------------------------------------------------------

    \3\ The complete text of the amendments was submitted with OCC's 
rule filing and is available for inspection and copying at the 
Commission's Public Reference Room and through OCC.
---------------------------------------------------------------------------

    The proposed rule change also will add a new interpretation .09 to 
Article VI, Section 11 expressly authorizing OCC's securities committee 
to adjust exercise prices of outstanding options to a new trading 
increment (e.g., decimals) to correspond to a change in the trading 
increment in the underlying security in its primary market. The rule 
change will not mandate such adjustments, but it will give clear 
authority to the committee to adjust exercise prices if the committee 
deems such action to be appropriate in light of the factors cited in 
Article VI, Section 11(b) of OCC's by-laws.
    Currently, exercise prices of newly introduced options series are 
expressed in half dollar increments. However, there generally will be 
options series outstanding with exercise prices expressed in eighths or 
sixteenths as a result of previous adjustments. Eighths cannot be 
converted to fewer than three decimal places and sixteenths cannot be 
converted to fewer than four without rounding. As a result, the rule 
change will provide for rounding adjusted exercise prices to the 
nearest unit of the applicable trading increment or, where an exercise 
price is equidistant between two units, to the next lowest unit. 
Rounding would result in a small gain ($0.25 per contract in the case 
of

[[Page 39336]]

sixteenths and $0.50 per contract in the case of eighths assuming a 
trading increment of one cent) for one side of each adjusted contract 
and a corresponding loss for the other. However, OCC believes that the 
committee will not use its adjustment authority unless it determines 
that the benefits of adjusting outweigh the detriments. If approved, 
the proposed rule change will be disclosed in a supplement to the 
options disclosure document.
    OCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \4\ because it should promote 
the prompt and accurate clearance and settlement of securities 
transactions.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

B. Self-Regulatory Organizations's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose any 
burden on competition.

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

    Written comments 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

    Section 17A(b)(3)(F) of the Act \5\ requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions. The Commission 
believes that the proposed rule change is consistent with this 
obligation because it should ensure that the exercise price of an 
option on a security can be expressed in the same increment as the 
price of the underlying security when the pricing increment of an 
underlying security has been changed after the issuance of the option. 
As a result, the proposed rule change should increase the accuracy of 
the clearance and settlement of options transactions and promote the 
prompt and accurate clearance and settlement of securities 
transactions.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the publication of notice of 
the filing. Approving prior to the thirtieth day after publication of 
notice should immediately reduce the possibility of inaccurate 
clearance and settlement of options transactions where the exercise 
price of the option is expressed in a different increment than the 
trading increment of the underlying security.

IV. Solicitation of Comment

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., 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 Room, 450 Fifth Street NW., Washington, 
DC 20549. Copies of such filing will also be available for inspection 
and copying at the principal office of OCC. All submissions should 
refer to the file number SR-OCC-97-13 and should be submitted by August 
12, 1998.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\6\ that the proposed rule change (File No. SR-OCC-97-13) be and 
hereby is approved.

    \6\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
---------------------------------------------------------------------------

    \7\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-19442 Filed 7-21-98; 8:45 am]
BILLING CODE 8010-01-M