[Federal Register Volume 68, Number 42 (Tuesday, March 4, 2003)]
[Notices]
[Pages 10293-10295]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-4955]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47396; File No. SR-OCC-2002-14]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to Procedures for 
Processing Late and Supplementary Exercise Instructions

February 24, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 28, 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 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 OCC Rules 801 and 805 to 
modify the existing fees for processing late instructions and 
supplementary exercise notices and would amend Rule 801 to establish a 
specific cut-off time for accepting late exercise notices after the 
start of critical processing and to eliminate OCC's ability to accept 
instructions to modify a previously submitted exercise after the start 
of critical processing.

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 this rule change is to amend Rules 801(e) and 805(g) 
to

[[Page 10294]]

modify OCC's fees for processing late exercise instructions and 
supplementary exercise notices and to amend Rule 801(e) to establish a 
specific cut-off time for accepting late exercise notices after the 
start of critical processing and to eliminate OCC's ability to accept 
instructions to modify a previously submitted exercise notice after the 
start of critical processing.
Background
    Rule 801 sets forth the procedures for submitting exercise notices 
on a business day which is not an expiration date, including the 
requirement that such submissions be completed by 7 P.M. (All times are 
Central Time.) Rule 801(e) provides OCC with the authority to permit 
clearing members to file, revoke, or modify exercise notices after 7 
P.M. for the purpose of correcting bona fide errors. Authority to 
accept or reject such late instructions is vested with the Chairman, 
Management Vice Chairman, President, or such officer's delegate.
    If a late instruction is accepted, Rule 801(e) requires the 
clearing member submitting the instruction to pay a late filing fee.\3\ 
The fees for late instructions increase the later the notice is 
received. Late instructions accepted for filing after the start of 
critical processing are processed on a best efforts basis and only if 
the assigned clearing member(s) can be notified before 8 a.m. 
Previously submitted exercises may not be revoked after the start of 
critical processing.
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    \3\ Late filings, revocations, and modifications of exercise may 
also be the subject of disciplinary action. Rule 801(e)(4) and 
805(g).
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    These late exercise procedures help provide a monetary incentive 
for clearing members to take precautions to avoid exercise errors and 
to identify those errors that do occur earlier in OCC's processing 
cycle. The earlier late exercise notices are submitted, the easier and 
less costly it is for OCC to process these exercises. Late exercise 
notices submitted before the start of OCC's critical processing cycle 
can be readily accommodated through standard procedures. Late exercise 
notices submitted after the start of critical processing require 
supplemental assignment procedures.
    Rule 805 sets forth the procedures for submitting exercise notices 
on expiration dates. Rule 805 permits clearing members to submit 
exercise notices with respect to expiring options (``supplementary 
exercise notices'') after the normal deadline but before their 
expiration time (i.e., 10:59 P.M.), by following prescribed procedures. 
A clearing member submitting such a supplementary exercise notice is 
required to pay a late filing fee.\4\ As under Rule 801, the filing 
fees increase the later the notice is received. Supplementary exercise 
notices submitted in accordance with the prescribed procedures are 
irrevocable.
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    \4\ Late filings of supplementary exercise notices may also be 
the subject of disciplinary action. See note 3 above.
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Discussion
    OCC recently completed a review of these rules as a result of an 
increase in the number of late instructions received from clearing 
members. Based on that review, OCC is proposing to change the 
applicable fee schedules and cut-off times for processing late 
instructions and supplementary exercise notices.
Fees
    One of the principal purposes for charging a filing fee for late 
instructions under both Rule 801 and Rule 805 is to provide an 
incentive for clearing members to discover exercise errors earlier in 
the processing cycle. The recent increase in the number of late 
instructions has led OCC to conclude that the current fee schedules do 
not provide a sufficient incentive. The current and proposed fee 
schedules are as follows:

Rule 801(e)

------------------------------------------------------------------------
       Submission time             Current fee          Proposed fee
------------------------------------------------------------------------
7 p.m.-8 p.m................  $500/any accepted      $2,000/any accepted
                               request.              request.
8:01 p.m.--start of critical  $2,000/any accepted   $5,000/any accepted
 processing.                   request.              request.
After start of critical       $10,000/line item on  $20,000/ line item
 processing up until 8         any exercise notice   on any exercise
 a.m.\5\.                      or modification       accepted.\6\
                               notice accepted.
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\5\ On approval of this filing, this time will be 6:30 a.m.
\6\ On approval of this filing, only exercise notices (i.e., not
  modifications) will be accepted after the start of critical
  processing.

Rule 805(g)

------------------------------------------------------------------------
       Submission time             Current fee          Proposed fee
------------------------------------------------------------------------
After the prescribed          $2,000/any exercise   $5,000/any notice
 deadline for the submission   notice accepted.      exercise accepted.
 of exercise instructions--
 start of critical
 processing.
After start of critical       $10,000/line item on  $20,000/line item on
 processing--expiration time.  any exercise notice   any notice
                               accepted.             accepted.
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Late Exercise Cut-Off Time; Instructions To Modify

    Rule 801(e) does not specify a cut-off time for the acceptance of 
late exercise notices. To provide for greater consistency in processing 
late exercise notices, OCC has concluded that it is desirable to 
establish a uniform cut-off time (i.e., 6:30 a.m.) for their 
acceptance. A 6:30 A.M. cut-off allows adequate time for OCC to process 
a late exercise notice and to inform all assigned clearing members 
before 8 a.m.
    Finally, OCC is proposing to stop accepting modifications to 
previously submitted exercise instructions after the start of critical 
processing. Rule 801(e) currently provides that modifications will be 
accepted after the start of critical processing on a best efforts 
basis, but revocation instructions will not be accepted after the start 
of critical processing. This prohibition is in place because the 
procedures involved in processing revocations are riskier than those 
associated with accepting a late exercise due to the need to back out 
data. A modification that reduces the number of exercised contracts 
requires use of the same revocation procedures. OCC therefore believes 
that modifications and revocations should be treated alike. A request 
by a clearing

[[Page 10295]]

member to exercise additional contracts will be considered as a request 
to file a late exercise (and not a request to modify a previously 
submitted exercise notice) and will be handled pursuant to the rules 
applicable to late exercise instructions.
    OCC believes that the proposed rule change is consistent with 
Section 17A of the Act and the rules and regulations thereunder because 
it improves the efficiency of OCC's procedures for the acceptance of 
late exercise notices and supplementary exercise notices and therefore 
promotes the improvement of the national system for the prompt and 
accurate clearance and settlement of securities transactions.

(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) 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 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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-OCC-2002-14. This file number should be included on the 
subject line if e-mail is used. To help us process and review comments 
more efficiently, comments should be sent in hardcopy or by e-mail but 
not by both methods. 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 the File No. 
SR-OCC-2002-14 and should be submitted by March 25, 2003.

    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).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-4955 Filed 3-3-03; 8:45 am]
BILLING CODE 8010-01-P