[Federal Register Volume 65, Number 61 (Wednesday, March 29, 2000)]
[Notices]
[Pages 16679-16680]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-7686]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42563; File No. SR-OCC-99-16]


Self Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to Exercises by Put 
Holders in a ``Short Squeeze'' Situation

March 22, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 2, 1999, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange 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 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 proposed rule change would amend Article VI, Section 19 to 
eliminate OCC's authority to prohibit exercises by put holders who 
would be unable to deliver the underlying stock in a short squeeze 
situation and, in lieu thereof, to give OCC the same authority to 
protect put holders as OCC already has to protect call holders.

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

    The purpose of the proposed rule change is to amend Article VI, 
Section 19 of OCC's by-laws to eliminate OCC's authority to prohibit 
exercises by put holders who would be unable to deliver the underlying 
stock in a short squeeze situation and, in lieu thereof, to give OCC 
the same authority to protect put holders as OCC already has to protect 
call holders.
    Currently, Article VI, Section 19 treats calls and puts differently 
in a short-squeeze situation. Section 19(a)(3) allows OCC to suspend 
the exercise settlement obligations of clearing members' assigned 
execution notice for their call option contracts until (i) OCC 
determines that there is no reasonable likelihood that a sufficient 
supply of the underlying security will become available, in which case 
OCC fixes a cash settlement price\3\ or (ii) OCC determines that there 
is a sufficient supply of the underlying security available, in which 
case OCC either fixes a new exercise settlement date or, if delivery 
would be inequitable, a cash settlement price.\4\
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    \3\ Article VI, Section 19(c) of OCC's by-laws.
    \4\ Article VI, Section 19(b) of OCC's by-laws.
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    In contrast, Article VI, Section 19 does not currently give OCC 
discretion to protect the benefit of a put holder's bargain in a short 
squeeze situation. Instead, as it is currently written, Article 
VI,Section 19(a)(2) gives OCC the limited power to prohibit the 
exercise of put option contracts by clearing members who will be unable 
to deliver the underlying securities on the exercise settlement date 
due to the short squeeze.\5\ If OCC were to maintain such a prohibition 
through the option's expiration, a put holder who was unable to obtain 
the underlying stock would lose the benefit of the option even though 
the option is in the money.
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    \5\ The asymmetrical treatment of puts and calls was first 
addressed in 1979, when OCC believed that a call holder who is fully 
prepared to perform his obligation (i.e., pay the exercise price) 
should not be disadvantaged merely because his exercise happens to 
be randomly assigned to an uncovered writer. Securities Exchange Act 
Release No. 16014 (Aug. 3, 1979), 44 FR 47424, (Aug. 13, 1979). OCC 
now believes that it is inappropriate to render a put holder's 
contract valueless when circumstances beyond his control (often a 
bankruptcy filing or other event adversely affecting the value of 
the underlying stock and thus validating the put holder's market 
judgment) disable him from obtaining the underlying stock. Such a 
result would generally be perceived as unfair and the desirability 
of avoiding a perception of unfairness outweighs the somewhat 
legalistic basis for the present rule.
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    Rather than allowing OCC to prohibit put exercises in a short 
squeeze situation, the proposed language would allow OCC to treat puts 
in the same manner as calls by giving OCC the right to suspend 
settlement until it can determine whether the unavailability of the 
underlying stock would extend past the option expiration date and, upon 
making that determination, to take the appropriate action under Article 
VI, Section 19(b) or (c). Thus, the proposed change allows OCC to 
protect the benefit of the put holder's bargain and to treat puts and 
calls equally in a short squeeze situation.
    Because the proposed rule change would affect the fundamental 
obligations of put writers, OCC is making it effective only on a 
prospective basis with respect to new series of options introduced 
after the latter of (i) approval of the rule change by the Commission 
or (ii) commencement of distribution of a new or amended Options 
Disclosure Documents or an Options Disclosure Document \6\ supplement 
disclosing the substance of the rule change.
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    \6\ 17 CFR 240.9b-1.
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    Article XXIV, Section 5, which relates to buy-write options unitary 
derivatives (BOUNDs) \7\ is proposed to be amended so that it conforms 
to the proposed new language for Article VI, Section 19.
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    \7\ Securities Exchange Act Release No. 36960 (Mar. 13, 1996), 
61 FR 11458.
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    OCC believes that the proposed rule change is consistent with the 
purposes and requirements of Section 17A of the Act because the 
proposed rule change will facilitate the prompt and accurate clearance 
and settlement of securities transactions, foster cooperation and 
coordination with persons engaged in the clearance and settlement of 
securities transactions, and, in general, protect investors and the 
public interest.

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)

[[Page 16680]]

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 the 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 20549-0609. 
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 will also be available for 
inspection and copying at the principal office of OCC. All submissions 
should refer to File No. SR-OCC-99-16 and should be submitted by April 
19, 2000.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority. \8\
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    \8\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-7686 Filed 3-28-00; 8:45 am]
BILLING CODE 8010-01-M