[Federal Register Volume 69, Number 127 (Friday, July 2, 2004)]
[Notices]
[Pages 40449-40450]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15087]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49929; File No. SR-OCC-2004-04]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change To Reduce the Thresholds 
Applied to Equity Options for Purposes of Exercise by Exception 
Processing on Expiration

June 28, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, notice is hereby given that on March 19, 2004, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change 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 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

    OCC is seeking to amend its rules to reduce the threshold amounts 
applied to equity options for purposes of exercise by exception 
processing on expiration.

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.\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 amend OCC's Rule 805, 
``Expiration Date Exercise Procedure,'' which describes its expiration 
date exercise procedures including exercise by exception processing. 
Specifically, OCC proposes to reduce the threshold amounts used to 
determine equity options that are in the money for purposes of exercise 
by exception processing.

Background

    OCC has for years maintained an ``exercise by exception'' 
procedure. Under that procedure, options that are in the money at 
expiration by more than a specified threshold amount are exercised 
automatically unless the clearing member carrying the position 
instructs otherwise. Equity options are determined to be in the money 
or not based on the difference between the exercise price and the 
closing price of the underlying equity interest on the last trading day 
before expiration. The current threshold for equity options is $.75 in 
a clearing member's customers' account and $.25 in any other account 
(i.e., firm and market makers' accounts).
Discussion
    OCC's Roundtable has proposed that the threshold amounts for equity 
options be reduced to $.25 for customers' accounts and $.15 in all 
other accounts.\3\ The Roundtable believes that reducing these 
thresholds will streamline expiration processing.
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    \3\ OCC's Roundtable is an OCC-sponsored advisory group 
comprised of representatives from OCC's participant exchanges, OCC, 
a cross-section of OCC clearing members, and industry service 
bureaus. The Roundtable considers operational improvements that may 
be made to increase efficiencies and lower costs in the options 
industry.
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    In response to the Roundtable's proposal, OCC analyzed equity 
options exercise information from the November 2003, December 2003, and 
January 2004 expirations. OCC's analysis determined that clearing 
members exercised 93% to 97% of equity option contracts carried in 
their customers' accounts that were in the money by $.25 to $.74 (i.e., 
the change in the ``in the money'' amount represented by the proposed 
customer account threshold). OCC's analysis also determined that 
exercise activity in the proposed ``other account'' range (i.e., with 
an in the money amount of $.15 to $.24) supported the proposed 
threshold change.
    OCC also surveyed all clearing members to obtain their views and 
comments on the proposed change. Survey results demonstrated strong 
support across the membership for the change. Of 116 clearing members, 
105 responded to the survey with 96 clearing members in favor of the 
threshold change.\4\ Clearing members supporting the change confirmed 
the Roundtable's view that it would significantly reduce the number of 
instructions they are required to input

[[Page 40450]]

on expiration, thereby shortening the timeframe for completing 
instructions to OCC.
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    \4\ OCC also contacted clearing members that did not respond to 
its survey. These firms expressed no opinion on the matter.
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    OCC contacted each firm that opposed the threshold change. These 
firms expressed a concern about having to input more ``do not 
exercise'' instructions. All of these firms agreed that they could 
adapt to the change if supported by the majority of clearing members. 
OCC reviewed the positions carried by these firms and determined that, 
on average, they carry position in fewer than ten expiring series that 
are below the current threshold of $.75. This review led OCC to 
conclude that the threshold change would result in only a slight 
increase in processing time for these firms and that they would not be 
unduly burdened by its implementation.
    The clearing member survey also asked firms to provide an estimate 
of the time needed to accommodate the threshold change based upon 
supplied timeframes.\5\ The majority of firms indicated that they could 
complete the necessary systems development and customer notifications 
within six months. OCC contacted any firm that commented on the 
proposed timeframes, and all expressed the view that their efforts 
would be completed in the six-month time period.
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    \5\ The supplied timeframes were zero to three months and four 
to six months from the time of the survey.
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    The Roundtable has requested of OCC that this change be implemented 
for the September 2004 expiration. OCC therefore requests that the 
Commission approve this rule filing by September 1, 2004, and authorize 
OCC to implement the threshold change thereafter based upon its 
assessment of clearing member readiness. If OCC determines that 
clearing members need additional time to complete preparations for the 
threshold change, OCC will implement the threshold change in accordance 
with such time needed. OCC anticipates implementation no later than for 
the October 2004 expiration. OCC will provide at least ten days' 
advanced notice to clearing members of the effective date for the new 
threshold amounts. Such notice will be provided through information 
memoranda and other forms of electronic notice such as e-mail.
    OCC believes that 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 will promote the 
prompt and accurate clearance and settlement of securities transactions 
by increasing OCC's efficiency in processing exercise information of 
options on expiration.
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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 will impose any 
burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    As referenced in Item II(A), written comments were received in 
connection with the clearing member survey conducted by OCC. No other 
written comments were received, and no other written comments are 
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.

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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an e-mail to [email protected]. Please include 
File Number SR-OCC-2004-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-OCC-2004-04. 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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 http://www.optionsclearing.com. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-OCC-2004-04 and should be 
submitted on or before July 23, 2004. 

    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. 04-15087 Filed 7-1-04; 8:45 am]
BILLING CODE 8010-01-P