[Federal Register Volume 69, Number 30 (Friday, February 13, 2004)]
[Notices]
[Pages 7275-7277]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3196]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49208; File No. SR-OCC-2003-08]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Related to Delivery 
Settlement of Exercised Stock Options and Matured Stock Futures

February 9, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 22, 2003, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change described 
in Items I and II below, which items have been prepared primarily by 
OCC. The Commission is publishing this notice and order to solicit 
comments from interested persons and to grant accelerated approval of 
the proposed rule change.
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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

    OCC is seeking to restructure its rules applicable to delivery 
settlement of exercised stock options and matured stock futures.

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. NSCC 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 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 purpose of the proposed rule change is to:
    (1) Restructure OCC's rules applicable to physical settlement of 
exercised stock options and matured stock futures to reflect that such 
settlements are normally effected through the National Securities 
Clearing Corporation (``NSCC'') (i.e., the correspondent clearing 
corporation) with broker-to-broker (``BTB'') settlement procedures as a 
backup;
    (2) Require that BTB settlements be made on a delivery-versus-
payment (``DVP'') basis at The Depository Trust Company (``DTC'') 
unless OCC directs otherwise;
    (3) Revise OCC's rules applicable to delivery settlement effected 
on a BTB basis in order to reflect the enhanced system capabilities to 
track such settlements offered by ENCORE Release 4.0, which is 
scheduled for installation on September 26, 2003; \3\
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    \3\ ENCORE Release 4.0, which includes updated systems for 
settlement of physical delivery stock options and stock futures, is 
the next major installation in OCC's multiyear project to rewrite 
its clearance and settlement system.
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    (4) Revise OCC's rules relating to buy-ins and sell-outs to 
parallel NSCC's

[[Page 7276]]

rules relating to buy-ins in respect of security balance orders;
    (5) Revise OCC's rule relating to protect provisions so OCC rules 
parallel NSCC's rules relating to protect provisions with respect to 
security balance orders.
    OCC's by-laws define an ``underlying security'' with respect to 
physically settled stock options and stock futures to mean the security 
or other asset that OCC is obligated to sell or purchase upon exercise 
or maturity of the contract. Normally, underlying securities are 
delivered and paid for through the facilities of NSCC, but under 
certain circumstances, settlement must be made on a BTB basis.\4\ If 
more than one underlying security is deliverable with respect to an 
exercised or matured contract, ENCORE Release 4.0 will treat the 
delivery of each underlying security as a separate settlement 
obligation. Payment of the aggregate purchase price for an underlying 
security will also be treated as a separate settlement obligation.\5\ 
As is the case today, OCC will allocate a percentage of the exercise 
price or the final settlement price to each underlying security to be 
delivered.\6\
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    \4\ Such circumstances include cases when NSCC excludes an 
underlying security from its continuous net settlement system or 
when OCC suspends a clearing member with pending settlements that 
have not yet been guaranteed by NSCC.
    \5\ If the underlying security includes a cash component (e.g., 
cash in lieu amounts or the proceeds of a cash merger), the cash is 
settled through OCC's cash settlement system.
    \6\ An adjustment of a contract in response to a corporate 
action may result in more than one underlying security being 
deliverable upon exercise or maturity. OCC By-Laws, Article VI, 
Section 11 and Article XIII, Section 4.
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    OCC will provide clearing members with Delivery Advices indicating 
whether settlements are to be effected via NSCC or on a BTB basis. 
Delivery Advices will specify settlement information for the clearing 
member including each underlying security to be delivered or received, 
the aggregate purchase price to be received or paid, the delivery date, 
the exercise price or final settlement price, the percentage of the 
exercise price allocated to the underlying security, the contra 
clearing member to the settlement (for BTB settlements), and in the 
case of options, the activity (i.e., exercise or assignment) giving 
rise to the settlement obligation.
    OCC will normally require that BTB settlements be made on a DVP 
basis through the facilities of DTC in order to avoid the need for OCC 
to margin ``Herstatt risk'' (i.e., the risk that a party may fail to 
make delivery or payment, as the case may be, after having itself 
received payment or delivery). However, the proposed rule change 
retains provisions for BTB settlements outside DTC to provide for the 
rare case where an underlying security may not be DTC-eligible and 
reflects the enhanced ENCORE Release 4.0 system capabilities to process 
and monitor BTB settlements. For BTB settlements, the delivering 
clearing member will enter into ENCORE the number of units of the 
underlying security delivered (up to the total delivery requirement) 
and the amount received in respect thereof. The receiving clearing 
member will enter the number of units of the underlying security 
received and the amount paid. These entries can occur at different 
times. Only if the entries match (i.e., the number of units delivered 
equals the number received or the amount received equals the amount 
paid, as the case may be) will the settlement obligation be discharged. 
In the event that the matched number of units or payment amounts is 
less than the total settlement obligation, only the deficiency will be 
treated as unsettled. An entry for which no response has been given by 
the second business day after its posting will be deemed settled 
provided that the specified delivery date has passed. Contradictory 
entries will be treated as unmatched items and will be deemed 
unsettled. All unsettled obligations will be margined.\7\ Partial 
deliveries will be permitted but only in round lots except where an 
adjustment has resulted in a unit of trading other than a round lot, in 
which case partial deliveries will also be permitted in the odd lot 
component or multiples thereof.\8\
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    \7\ The total obligation will continue to be margined until the 
installation of the margin subsystem.
    \8\ For example, where the unit of trading for an adjusted 
contract is 133 shares, a writer of three assigned calls could 
deliver in increments of 100 shares, 200 shares, 300 shares, 33 
shares, 66 shares, and/or 99 shares, separately or in any 
combination up to a total of 399 shares.
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    Chapter IX of OCC's Rules sets forth the delivery and payment rules 
for stock options and stock futures. Those Rules will be restructured 
to reflect that settlement normally occurs through NSCC with BTB 
settlement as the backup. Consistent with other OCC Rule Chapters, an 
introductory section has been added to Chapter IX of the Rules. This 
introductory section sets forth OCC's authority to designate a 
settlement method with regard to exercised stock options and matured 
stock futures, OCC's general policy to effect such settlement through 
NSCC, and OCC's authority to alter a previous designation of a 
settlement method. Former Rule 913, which concerns settlements through 
NSCC, has been renumbered as Rule 901. Other conforming changes have 
been made to the Rule to reflect the general policy that settlement 
will occur through NSCC.
    Former Rules 901 through 907, which pertain to BTB settlements, 
have been renumbered as Rules 902 through 908. These Rules, along with 
Rule 909, have been modified to reflect the enhanced system for 
monitoring and tracking BTB settlements described above. Rules 910 and 
911, which concern fails to deliver and receive, respectively, and 
910A, which concerns protect procedures, have been modified to more 
closely parallel applicable provisions of NSCC's rules. Obsolete rule 
references have been deleted, and conforming changes have been made to 
other by-law and rule provisions as necessary.
    OCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \9\ and the rules and 
regulations thereunder applicable to OCC because it will promote the 
prompt and accurate clearance and settlement of securities transactions 
by enhancing physical settlement of exercised options and matured 
security futures.
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    \9\ 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 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 such proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

[[Page 7277]]

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-2003-08. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your 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 also will be available for inspection and copying 
at the principal office of OCC and on OCC's Web site at 
www.optionsclearing.com. All submissions should refer to File No. SR-
OCC-2003-08 and should be submitted by March 5, 2004.
    All submissions should refer to File No. SR-OCC-2003-08 and should 
be submitted by March 5, 2004.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-3196 Filed 2-12-04; 8:45 am]
BILLING CODE 8010-01-P