[Federal Register Volume 67, Number 154 (Friday, August 9, 2002)]
[Notices]
[Pages 51919-51921]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20181]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46312; File No. SR-OCC-2002-06]


Self-Regulatory Organizations; the Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to Adjustment 
Procedures for Security Futures

August 5, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 12, 2002, 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

[[Page 51920]]

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 would amend OCC's adjustment procedures 
for stock futures to provide for adjusting stock futures contracts to 
compensate for special cash dividends and for rights distributions that 
expire in the money during the life of the futures contract.\2\
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    \2\ Article I of OCC's By-Laws defines``stock future'' as ``a 
security future for which the underlying security is an equity 
security.''
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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.\3\
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    \3\ 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 proposed rule change would amend OCC's adjustment procedures 
for stock futures to provide for adjusting stock futures contracts to 
compensate for special cash dividends and for rights distributions that 
expire in the money during the life of the futures contract. Security 
futures markets and certain firms interested in trading stock futures 
have expressed to OCC their belief that in order for stock futures to 
be successful they must replicate a position in the underlying stock as 
closely as possible. This means that, among other things, if an 
unanticipated corporate event (i.e., an event that cannot be discounted 
in futures prices) materially affects the value of an underlying stock, 
the terms of futures contracts on that stock should be adjusted to 
compensate for the event. There are two types of corporate events that 
cause particular concern from this perspective: (1) special (i.e., non-
recurrent) cash dividends and (2) rights distributions. OCC does not, 
as a general rule, adjust options for cash dividends unless the amount 
of the dividend exceeds 10 per cent of the value of the underlying 
stock. If the holder of a call option wants to capture a dividend below 
that threshold, he can do so by exercising although at the cost of 
losing the remaining time value of his option. The holder of a long 
stock future would not have that ability. Recurrent cash dividends are 
not regarded as a problem because they can be anticipated and 
discounted in futures settlement prices. But there is no economical way 
for holders of long stock futures positions to ensure themselves the 
benefit of unscheduled dividends.
    Similarly, if the issuer of an underlying stock declares a rights 
distribution and the rights will expire before the options do, the 
holder of a call option can capture the value of the rights by 
exercising the option before the rights expire. In contrast, the holder 
of a long stock future would have no way of obtaining the benefit of a 
rights distribution if the rights expire before the future does.
    OCC's rules currently specify adjustment procedures for stock 
futures that generally parallel the adjustment rules for options. These 
procedures do not take into account the economic differences between 
options and futures discussed above. The security futures markets and 
firms interested in trading stock futures believe strongly that OCC's 
adjustment provisions should accommodate these differences.\4\
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    \4\ Although this would cause the adjustment procedures for 
stock futures to diverge from those applicable to equity options, 
the consensus among prospective markets and market participants 
appears to be that it is more important to avoid discontinuity 
between stock futures and the underlying stocks than between futures 
and options.
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    The proposed rule change is intended to address that concern. OCC's 
by-laws presently provide that, as a general rule, outstanding stock 
futures contracts will not be adjusted to compensate for ordinary cash 
dividends. A cash dividend is deemed ``ordinary'' if the amount does 
not exceed 10 percent of the value of the underlying stock on the 
declaration date. The proposed rule change would amend the by-laws to 
provide that in the case of stock futures, a cash dividend would be 
deemed ``ordinary'' if OCC determined that it was declared pursuant to 
a policy or practice of paying such dividends on a quarterly or other 
regular basis regardless of the size of the cash dividend.\5\ This 
change recognizes that market pricing mechanisms can compensate for 
anticipated cash dividends. Because the market cannot anticipate and 
price for special dividends, the proposed rule change would provide for 
adjustments to outstanding stock futures when a company pays a special 
(i.e., non-recurring) cash dividend without regard to size. This would 
be done through a one-time adjustment in the futures settlement price 
that has the effect of causing the short to pass the value of the 
dividend to the long.
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    \5\ Quarterly stock dividends would also be deemed ``ordinary'' 
regardless of size. Stock futures contracts would ordinarily be 
adjusted for other stock distributions, even if recurrent (e.g., 
annual), to avoid creating an unnecessary discontinuity with equity 
options.
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    OCC's by-laws currently provide that outstanding stock futures will 
not be adjusted to compensate for rights distributions where the rights 
expire before the maturity date of the future. Under the proposed rule 
change, if rights would expire before they were to be delivered under a 
stock futures contract, then the futures would be adjusted through a 
one-time adjustment in the futures settlement price in an amount equal 
to the value of the rights as determined by OCC. OCC's good-faith 
determination of value would be conclusive and binding on investors.
    Interpretation .11, which applies only to certain types of 
adjustments, is being deleted because OCC has concluded that it is 
likely to be more confusing than useful.
    The proposed rule change is consistent with the requirements of 
section 17A of the Act \6\ and the rules and regulations thereunder 
applicable to OCC because it promotes the prompt and accurate clearance 
and settlement of securities transactions, 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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    \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 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.

[[Page 51921]]

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 the self-regulatory organization 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 20549-0609. 
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-2002-06 and should be submitted by 
August 30, 2002.

    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. 02-20181 Filed 8-8-02; 8:45 am]
BILLING CODE 8010-01-P