[Federal Register Volume 64, Number 101 (Wednesday, May 26, 1999)]
[Notices]
[Pages 28543-28544]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13303]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41422; File No. SR-OCC-99-06]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to the Purchase of 
OCC Stock by Participant Exchanges and the Rights of Participant 
Exchanges on Liquidation of OCC

May 18, 1999.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on March 15, 1999, The 
Options Clearing Corporation (``OCC'') 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 
primarily by OCC. The Commission is publishing this notice to solicit 
comments from interested persons on the proposed rule change.
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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

    Under the proposed rule change, OCC will update the provisions of 
its Certificate of Incorporation, By-Laws, and Stockholders Agreement 
relating to the purchase of OCC stock by participant exchanges and the 
rights of those exchanges in the event of OCC's liquidation.

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\
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    \2\ The Commission has modified the text of the summaries 
prepared by OCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The rule change would make two substantive changes. First, it would 
increase the maximum purchase price for OCC stock from $333,333 to 
$1,000,000 per exchange. Second, upon liquidation of OCC it would 
effectively limit distributions to exchanges that first became 
stockholders after December 31, 1998, to the amounts that such 
exchanges paid for their stock plus a pro rata share of any increase in 
OCC's retained earnings after December 31, 1998.
Increase in Maximum Purchase Price
    Article VII, Section 2 of OCC's By-Laws provides that an options 
exchange that wishes to become a participant in OCC must purchase 5,000 
shares of Class A Common Stock and 5,000 shares of Class B Common Stock 
of OCC.\3\ Currently, the price is an amount equal to book value as of 
the close of the preceding month but not less than $250,000 nor more 
than $333,333. As of December 31, 1998, the book value of 10,000 shares 
of OCC stock was $6,365,100 per share so the effective purchase price 
is the maximum price of $333,333.
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    \3\ The holders of Class A Common Stock elect OCC's member 
directors. The holders of Class B Common Stock voting together as a 
class elect OCC's public and management directors. Each exchange 
holds a separate series of Class B Common Stock entitling it to 
elect one exchange director.
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    The $333,333 maximum dates from 1975, when OCC (then named Chicago 
Board Options Exchange Clearing Corporation) became the common clearing 
facility for listed options. It has not been reconsidered since that 
time. In view of the length of time that has elapsed since the present 
maximum was fixed and the prospect that new options markets may seek to 
become participant exchanges of OCC,\4\ OCC engaged Deloitte & Touche, 
LLP (``Deloitte'') to recommend a fair price for participation in OCC.
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    \4\ Cf. ``Fledgling Electronic Options Exchange Files with SEC 
for Registration as National Bourse,'' The Wall Street Journal, Feb. 
3, 1999, at C 11.
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    Using a variety of valuation methodologies and substantially 
discounting book value to reflect lack of control and lack of 
marketability, Deloitte arrived at an indicated value of $1,080,000 for 
a 20% interest in OCC. The proposed rule change would increase the 
maximum price for an interest in OCC to $1,000,000, which approximates 
the amount recommended by Deloitte.
    The $1,000,000 amount also approximates the value in 1999 dollars 
of $333,333 in 1975.\5\ The present participant exchanges acquired 
their stock in OCC between 1973 and 1976. Increasing the maximum price 
to $1,000,000 would tend to equalize the investment required of new 
exchanges with the investments made by OCC's present participant 
exchanges in the mid-1970's, expressed in 1999 dollars.
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    \5\ Based on the All Urban Consumer CPI, $333,333 on January 1, 
1975, would amount to $1,009,932 in 1999. Using the General Consumer 
Price Index, $333,333 on January 1, 1975, would amount to $1,056,518 
in 1999.
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    OCC's present rules specify a minimum purchase price of $250,000 if 
the book value of a proportionate interest in OCC would be less than 
that amount. Because the book value of a proportionate interest in OCC 
greatly exceeds $250,000 and is likely to continue to do so, the 
proposed rule change would eliminate the minimum price as unnecessary.
Change in Liquidation Rights
    Under OCC's present charter, if OCC were to liquidate, the holders 
of Class A Common Stock would be entitled to receive the par value of 
their shares and the balance of OCC net assets would be distributed to 
the holders of Class B Common Stock. Because the purchase price of 
Class B Common Stock is capped at a level substantially below book 
value, the current liquidation scheme would provide a potential 
windfall to new stockholders. If a new exchange purchased stock either 
for the present maximum of $33.33 per share or the proposed maximum of 
$100.00 per share and if OCC then liquidated, each holder of Class B 
Common Stock, including the new exchange, would be entitled to receive 
more than $500.00 per share on liquidation. OCC has no intention of 
liquidating. Nevertheless, the outcome if OCC did liquidate would be 
unfair to those exchanges that were stockholders while OCC was 
accumulating its present stockholders' equity.
    The proposed rule change would address this potential inequity by 
establishing a new scheme for distribution of OCC's net assets on 
liquidation. Under the new scheme, holders of Class A Common Stock and 
Class B Common Stock would first be paid the par value of their shares 
($10.00 per share). Next, each holder of

[[Page 28544]]

Class B Common Stock would receive a distribution of $1,000,000, 
allowing it to recover the value of its investment in 1998 dollars. 
Next, an amount equal to OCC's stockholders' equity at December 31, 
1998, minus the distributions described in the two preceding sentences 
would be distributed to those exchanges that acquired their Class B 
Common Stock before December 31, 1998. Finally, any excess assets 
(i.e., post-1998 retained earnings) would be distributed equally to all 
holders of Class B Common Stock. The effect would be to allow each 
exchange to recover its investment but to reserve OCC's present 
retained earnings for those exchanges that were stockholders during the 
period when the earnings were being accumulated.
Technical and Conforming Changes
    The last sentence of Article VII, Section 2 of the By-Laws would be 
revised to eliminate a circularity. That provision currently states 
that if OCC fails or is unable to purchase a stockholder's shares when 
required under the Stockholders Agreement, the stockholders may sell 
its shares ``to a person who is qualified under Section 1 of this 
Article VII for participation in [OCC] as an `Exchange' and who is not 
then a stockholder of the Corporation.'' However, Section 1 of Article 
VII provides that in order to be qualified for participation in OCC as 
an Exchange, a securities exchange or securities association must 
already have purchased stock in OCC. The proposed rule change would 
eliminate the circularity by allowing the stockholders to sell its 
shares to any national securities exchange or national securities 
association that had effective rules for the trading of options. 
Conforming changes would be made in the Stockholders Agreement.
    Article VII, Section 3 would be amended to reflect previous rule 
changes providing for public directors. It would also be amended to 
eliminate an obsolete requirement that the stockholders renew their 
voting agreement every ten years.
    Article VII, Section 4 would be amended to reflect the fact that 
the Participant Exchange Agreement between OCC and its participant 
exchanges now includes provisions relating to Rule 9b-1 options 
disclosure documents.
    Section 10(a) of the Stockholders Agreement would be amended to 
eliminate obsolete material and to increase, proportionately with the 
proposed increase in the purchase price of OCC stock, the dollar 
discounts that would apply if OCC found it necessary to repurchase a 
participant exchange's stock within six years of the date when the 
stock was acquired. Section 12 of the Stockholders Agreement, which is 
obsolete, would be deleted in its entirety.
    OCC believes that the proposed rule change is consistent with 
Section 17A of the Act \6\ and the rules and regulations thereunder 
because it provides for a fair valuation of OCC's stock on its 
acquisition and liquidation.
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    \6\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization'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

    Within thirty-five 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 ninety 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 OCC 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, 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, 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 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of OCC. All submissions 
should refer to File No. SR-OCC-99-06 and should be submitted by June 
16, 1999.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-13303 Filed 5-25-99; 8:45 am]
BILLING CODE 8010-01-M