[Federal Register Volume 65, Number 94 (Monday, May 15, 2000)]
[Notices]
[Pages 31036-31037]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-12134]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42769; File No. SR-OCC-00-01]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving a Proposed Rule Change Relating to Exercise Settlement 
Values for Expiring Index Options

May 9, 2000.
    On January 19, 2000, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change (File No. SR-OCC-00-01) pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') and on March 
14, 2000, amended the proposed rule change.\1\ Notice of the proposal 
was published in the Federal Register on March 31, 2000.\2\ No comments 
letters were received. For the reasons discussed below, the Commission 
is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 42575 (March 24, 2000), 
65 FR 17328.
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I. Description

    The proposed rule change adds new subparagraph (3) to Article XVII, 
Section 4 of OCC's By-Laws \3\ to allow OCC to establish the exercise 
settlement value for expiring index options in conformity with the 
establishment of the final settlement value for related index futures 
and options on index futures when the primary market(s) for one or more 
component securities of the index is closed on the last trading day 
before expiration.\4\ OCC's current method for setting the exercise 
settlement amount for an underlying index when the primary market(s) 
for securities representing a substantial portion of the value of the 
index are closed on the last trading day before expiration is to use 
the reported level of the underlying index at the close of trading on 
the last preceding day for which a closing index level was reported.\5\
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    \3\ Section 4 sets forth OCC's procedures for establishing the 
exercise settlement value for an index option when the current value 
for the index is unavailable or inaccurate.
    \4\ The rule change will only apply to series of index options 
introduced after the later of: (1) The date of the Commission's 
approval of this rule filing or (2) the date specified in a new 
Options Disclosure document or supplement thereto that discloses the 
substance of this rule change.
    \5\ OCC By-laws, Article XVII, Section 4(a)(2).
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    However, the valuation method that would be used by the Chicago 
Mercantile Exchange (``CME'') is to set the settlement value for index 
futures whenever the primary market for a single component stock of the 
index is closed the last trading day before expiration. In such a 
situation, CME would determine the settlement value of the index by 
using the reported opening values for index stocks affected by the 
closing when the primary market(s) for such stocks reports.\6\ The use 
of

[[Page 31037]]

different dates and hence potentially different index values for fixing 
the final settlement values for options and futures on the same index 
creates uncertainty and risk.\7\ Therefore, OCC is amending its By-Laws 
so that if the primary market(s) for one or more component securities 
of an index does not open for trading on the last trading day before 
expiration of a series of options on the index, an adjustment panel 
acting pursuant to Article XVII may fix the exercise settlement amount 
for such options by using the opening prices of the affected security 
or securities when the primary market reopens.
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    \6\ For example, CME Rule 4003 states. ``[I]f the New York Stock 
Exchange (NYSE) does not open on the day scheduled for the 
determination of the Final Settlement Price [of S&P 500 index 
futures], then the NYSE-stock component of the Final Settlement 
Price shall be based on the next opening prices of NYSE stocks.''
    \7\ For example, many market participants use trading strategies 
whereby they trade index options and index futures based on the 
expectation that the settlement values will have a predictable 
relationship.
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    OCC also is amending Article XVII to make clear that (1) OCC has 
the discretion to determine which market is a security's primary market 
and (2) when OCC fixes a settlement price based on an index level at 
the close of trading, the price will be fixed based on the index level 
at the close of regular trading hours, as determined by OCC.

II. Discussion

    In Section 17A, Congress stated its finding that the development of 
uniform standards and procedures for clearance and settlement will 
reduce unnecessary costs and increase the protection of investors and 
persons facilitating transactions by and acting on behalf of investors. 
Congress then directed the Commission to facilitate the establishment 
of coordinated facilities for the clearance and settlement of 
transactions in securities, securities options, futures, and options on 
futures.\8\ The Commission believes that the approval of OCC's rule 
change is in line with this finding and directive of Congress. The 
current practice of using different dates and hence potentially 
different index values for fixing the final settlement values for 
options and futures on the same index has the potential to create 
uncertainty and risks for many market participants. This risk should be 
minimized by OCC's new procedure which will allow OCC to conform its 
method of establishing the expiration settlement value for index 
options with that used for establishing the final settlement price for 
related index futures and options on index futures.
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    \8\ 15 U.S.C. 78q-1(a)(1)(D).
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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-00-01) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-12134 Filed 5-12-00; 8:45 am]
BILLING CODE 8010-01-M