[Federal Register Volume 65, Number 180 (Friday, September 15, 2000)]
[Notices]
[Pages 56014-56015]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-23734]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43277; File No. SR-OCC-00-07]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Relating to Adjustment Increments and Decimalization

September 11, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 9, 2000, The 
Options Clearing Corporation (``OCC'') filed with the Securities 
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 on the proposed rule change from interested parties.
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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 clarifies OCC's existing policies on 
minimum adjustment increments and rounding and proposes new minimum 
adjustment increments and rounding provisions with respect to decimal 
strike prices. The proposed rule change also states OCC's intention to 
restate existing strike prices in decimals when decimal strike prices 
are introduced for new series in the same class of options.

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 these 
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 Statements of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed amendments to Article I, Section 1 and 
Article VI, Section 11 of OCC's By-Laws is to clarify OCC's existing 
policies regarding minimum adjustment increments and rounding and to 
state the minimum adjustment increments and rounding provisions that 
will apply during and after the transition to decimal strike prices. 
The proposed amendments also announce OCC's intention to restate 
existing strike prices in decimals when decimal strike prices are 
introduced for new series in the same class of options so long as that 
can be done without changing the absolute value of the existing strike 
prices.
    Article VI, Section 11 of OCC's By-Laws currently states that, ``as 
a general rule,'' OCC will adjust to the ``nearest trading increment,'' 
which is defined in Article I of the By-Laws as the minimum trading 
increment specified by the primary exchange for the underlying 
security. OCC's practice, as disclosed in the options disclosure 
document, is to round to the nearest eighth when making adjustments. 
OCC follows this practice even where the trading increment for the 
underlying security may be one-sixteenth rather than one-eight. With 
decimalization, the potential exists for even smaller minimum trading 
units. OCC intends to continue its disclosed policy of rounding to the 
nearest eighth in the case of fractional prices and to round to the 
nearest cent in the case of decimal prices. Thus, adjustments will be 
made to the nearest eighth or cent even if the trading increment is 
more or less than an eighth or a cent. Accordingly, OCC is proposing to 
define a new term ``adjustment increment'' and to change the reference 
in Article VI, Section 11 to refer to ``adjustment increment'' rather 
than ``trading increment.''
    OCC rounds up when an adjusted exercise price is equidistant 
between two adjustment increments. OCC proposes to amend Article VI, 
Section 11 accordingly.
    The existing text of Interpretation and Policy .09 is being 
replaced by a

[[Page 56015]]

provision allowing OCC to make a smoother transition from fractional to 
decimal strike prices, during which some strikes are expressed in 
fractions and others in decimals. Because the minimum decimal strike 
price increment will be one cent, there will be some fractional strike 
prices (e.g., eighths) that cannot be converted into decimals without a 
loss of value. However, there will be others (e.g., quarters) that 
convert evenly into decimals. OCC wants to avoid simultaneously 
expressing identical amounts in fractions and decimals. Accordingly, 
OCC proposes to restate the exercise prices of existing series of 
options decimals when the first decimal series is introduced with the 
same underlying interest. OCC will restate exercise prices in decimals 
only for series having fractional strike prices that convert evenly 
into dollars and cents. Thus, a strike price of 25\3/4\ would be 
expressed as 25.75. Where a fractional strike does not convert evenly 
into decimals, it will continue to be expressed as a fraction until the 
series expired. Thus, for example, a strike price of 25\1/8\, which 
converts to 25.125, will continue to be expressed in fractions. This 
policy represents a compromise that will allow as many strike prices as 
possible in each class of options to be expressed in decimals while 
avoiding adjustments that would affect the substantive rights of 
holders and writers of options even by a small amount.
    The proposed rule change is consistent with the requirements of 
Section 17A of the Act \3\ and the rules and regulations thereunder 
applicable to OCC because it fosters cooperation and coordination with 
persons engaged in the clearance and settlement of securities 
transactions, removes impediments to and perfects the mechanism of a 
national system for the prompt and accurate clearance and settlement of 
securities transactions, and, in general, protects investors and the 
public interest.
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    \3\ 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 have any 
material adverse impact on competition.

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

    Written comments relating to the proposed rule change have not yet 
been solicited or received. OCC will notify the Commission of any 
written comments received by OCC.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions.\4\ As discussed 
below, the Commission believes that the rule change is consistent with 
this obligation because it should facilitate the prompt and accurate 
clearance and settlement of options during and after the transition to 
decimal strike prices which has already begun.
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    \4\ 15 U.S.C. 78q-1(b)(3)(F).
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    The rule change should assure that OCC's existing policies 
regarding minimum adjustment increments and rounding in fractions will 
convert smoothly to options with decimal strike prices. The rule change 
should allow the process of decimalization of options to proceed 
concurrently with the move to the process of decimalization of the 
underlying securities.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after publication of the notice of 
filing because accelerated approval will permit OCC to immediately 
implement decimal strike pricing which will bring the pricing of such 
options in line with the pricing already in place for the underlying 
securities.

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 also will be available for 
inspection and copying at the principal office of OCC. All submissions 
should refer to File No. SR-OCC-00-7 and should be submitted by October 
6, 2000.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-23734 Filed 9-14-00; 8:45 am]
BILLING CODE 8010-01-M