[Federal Register Volume 68, Number 104 (Friday, May 30, 2003)]
[Notices]
[Pages 32562-32563]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-13496]



[[Page 32562]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47902; File No. SR-OCC-2002-14]


Self-Regulatory Organizations; the Options Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Relating to 
Procedures for Processing Late and Supplementary Exercise Instructions

May 22, 2003.

I. Introduction

    On June 28, 2002, the Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-OCC-2002-14 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 March 4, 2003.\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. 47396 (February 24, 
2003), 68 FR 10293.
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II. Description

    The proposed rule change amends Rules 801(e) and 805(g) to modify 
OCC's fees for processing late exercise instructions and supplementary 
exercise notices and amends 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 changing 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 on
 processing up until 8         any exercise notice   any exercise notice
 a.m.\5\.                      or modification       accepted.\6\
                               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 notice (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 exercise
 deadline for the submission   notice accepted.      notice 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 exercise notice
                               accepted.             accepted.
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[[Page 32563]]

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 will no longer accept 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 due to the 
need to back out data the procedures involved in processing revocations 
are riskier than those associated with accepting a late exercise. 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 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.

III. Discussion

    Section 17A(b)(3)(F) requires that the rules of a clearing agency 
be designed to promote the prompt and accurate clearance and settlement 
of securities transactions.\7\ The Commission finds OCC's proposed rule 
change is consistent with section 17A(b)(3)(F) of the Act because it 
should reduce the number of late exercise instructions submitted to 
OCC. Late instructions are more time consuming and costly for OCC to 
process and reducing the number of them submitted for processing should 
promote the prompt and accurate clearance and settlement of securities 
transactions.
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    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. 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-2002-14) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-13496 Filed 5-29-03; 8:45 am]
BILLING CODE 8010-01-P