[Federal Register Volume 69, Number 159 (Wednesday, August 18, 2004)]
[Notices]
[Pages 51343-51344]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18909]



[[Page 51343]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50178; File No. SR-OCC-2004-04]


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

August 10, 2004.

I. Introduction

    On March 19, 2004, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change File No. SR-OCC-2004-04 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposed 
rule change was published in the Federal Register on July 2, 2004.\2\ 
No comment letters were received. For the reasons discussed below, the 
Commission is now 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. 49929 (June 28, 2004), 
69 FR 40449.
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II. Description

    The purpose of the proposed rule change is to amend OCC's Rule 805, 
``Expiration Date Exercise Procedure,'' which describes OCC's 
expiration date exercise procedures including exercise by exception 
processing. Specifically, OCC will reduce the threshold amounts used in 
its exercise by exception processing to determine which equity options 
will be automatically exercised.

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 OCC 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 exercise by exception thresholds for 
equity options are $.75 for options in a clearing member's customers' 
account and $.25 for options 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 options in customers' accounts and $.15 
for options 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 to 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. From its analysis, OCC 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 on expiration and would 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 changes.\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\ OCC used timeframes of zero to three months and four to six 
months in its survey.
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    The Roundtable has requested of OCC that this change be implemented 
for the September 2004 expiration. 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 
through other forms of electronic notice such as e-mail.

III. Discussion

    Section 17A(b)(3)(F) of the Act requires among other things that 
the rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions.\6\ The 
Commission finds that OCC's proposed rule change is consistent with 
this requirement because reducing the exercise by exception thresholds 
applicable to equity options should provide for greater efficiency in 
the processing of equity options by allowing members to focus less 
attention on exception processing. As a result, OCC's proposed rule 
change should promote the prompt and accurate clearance and settlement 
of securities transactions.
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    \6\ 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,\7\ that the proposed rule change (File No. SR-

[[Page 51344]]

OCC-2004-04) be and hereby is approved.
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    \7\ 15 U.S.C. 78s(b)(2).

    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. 04-18909 Filed 8-17-04; 8:45 am]
BILLING CODE 8010-01-P