[Federal Register Volume 66, Number 110 (Thursday, June 7, 2001)]
[Notices]
[Pages 30777-30778]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-14310]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44370; File No. SR-OCC-00-10]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Relating to 
Adjustments of Options Contracts

May 31, 2001.
    On October 3, 2000, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change (File No. SR-OCC-00-10) pursuant to section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ Notice of 
the proposal was published in the Federal Register on December 1, 
2000.\2\ No comment letters were received. For the reasons discussed 
below, the Commission is granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 43612, (November 22, 
2000), 65 FR 75331.
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I. Description

    The purpose of the rule change is to add new language to paragraph 
(b) of Article VI, Section 11 of OCC's By-Laws to clarify that neither 
OCC nor OCC's securities committee will be liable for any failure to 
adjust outstanding option contracts or for any delay in adjusting such 
contracts when the securities committee does not learn in a timely 
manner of an event for which it would otherwise have directed an 
adjustment. While OCC believes that this should be the result under the 
By-Laws in its present form, OCC believes it is advisable to cover this 
situation specifically.
    Normally, OCC is notified of the occurrence of a section 11(a) 
adjustment event \3\ by its internal stock watch

[[Page 30778]]

department or by the exchanges, which use their research departments to 
monitor the underlying securities and the issuers of the underlying 
securities. OCC's economic research department regularly scans 
Bloomberg, Reuters, and Dow Jones newswires for announcements of 
adjustment events. When it learns of such an event, OCC contacts the 
options exchanges, the primary market for the underlying, and the 
issuer of the underlying to obtain more information about the event and 
to monitor the event. Likewise, the research departments as the various 
options exchanges scan a variety of newswires and employ different news 
alert services to monitor for adjustment events. When the exchanges 
learn of an adjustment event, they alert OCC and contact the primary 
market for the underlying security to obtain more information about the 
event to monitor the event.
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    \3\ Section 11(a) of Article VI of OCC's By-Laws states that 
whenever there is a dividend, stock split, reorganization, 
recapitalization, or similar event with respect to an underlying 
security or whenever there is a merger, consolidation, dissolution, 
or liquidation of the issuer of an underlying security, the number 
of option contracts, unit of trading, exercise price, and the 
underlying security of all outstanding options contracts open for 
trading in that underlying security may be adjusted.
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    Through these procedures, the likelihood that a potential 
adjustment event will escape notice is minimized. However, the 
possibility of such an occurrence can never be completely estimated. 
Accordingly, OCC wishes to make clear that neither it nor its 
securities committee will have liability for any failure to act or for 
any delay in acting on events not known to the securities committee.
    The rule change also clarifies that adjustment determinations are 
made in light of circumstances known at the time the determination is 
made. For example, if the securities committee does not learn of an 
event for which an adjustment would normally be made until after the 
ex-date, the fact that options trading and/or exercise activity has 
taken place in circumstances suggesting that there would be no 
adjustment could tip the balance of fairness against making an 
adjustment.

II. Discussion

    For the reasons set forth below, the Commission believes that OCC's 
rule change is consistent with OCC's obligations under section 
17A(b)(3)(F) \4\ of the Act which requires that the rules of a clearing 
agency be designed to assure the safeguarding of securities and funds 
which are in the custody or control of the clearing agency or for which 
it is responsible. The rule change minimizes OCC's exposure to 
liability for a delay or failure to adjust an outstanding option 
contract for an event which it would otherwise have made an adjustment 
where OCC does not learn or does not learn in a timely manner of the 
event. By explicitly stating that OCC has no liability in such 
situations beyond its control, OCC's rule change allows OCC to focus 
its resources on safeguarding the securities and funds for which OCC is 
responsible.
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    \4\ 15 U.S.C. 78q-1(b)(3)(F).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular 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-00-10) be and hereby is 
approved.

    For the Commission by the Division of Market Regulations, 
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. 01-14310 Filed 6-6-01; 8:45 am]
BILLING CODE 8010-01-M