[Federal Register Volume 69, Number 192 (Tuesday, October 5, 2004)]
[Notices]
[Pages 59634-59635]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2486]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50466; File No. SR-OCC-2004-11]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to Yield-Based 
Treasury Options

September 29, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 8, 2004, 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 update two sections of OCC's By-Laws 
pertaining to yield-based Treasury options. The proposed changes would 
conform those sections to the corresponding By-Law provisions governing 
index options.

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

    Article XVI, Section 3(c) of OCC's By-Laws currently provides OCC 
with the authority to adjust outstanding options in a class of yield-
based Treasury options in the event that an exchange decreases the 
multiplier. The proposed changes to Section 3(c) would simply provide 
for the possibility that an exchange might increase rather than 
decrease the multiplier and would grant OCC the flexibility to adjust 
any outstanding options accordingly. The proposed rule change is 
similar to a previously approved OCC rule change pertaining to the 
adjustment of index option contracts.\3\
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    \3\ Securities Exchange Act Release No. 44184 (April 16, 2001), 
66 FR 20342 (April 20, 2001) [File No. SR-OCC-99-12].
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    Article XVI, Section 4 of OCC's By-Laws currently provides OCC with 
the authority to fix the exercise settlement amount for exercised 
yield-based Treasury option contracts ``in accordance with the best 
information available as to the correct settlement value of the 
underlying yield'' if OCC determines that the settlement value of the 
underlying yield is unreported or otherwise unavailable for purposes of 
calculating the settlement amount for exercised contracts. Until 
recently, the Chicago Board Options Exchange (``CBOE''), on which 
yield-based Treasury options are traded, had a rule setting forth a 
specific method for determining the settlement value of the yield in 
the event the reporting authority failed to supply a settlement value. 
The CBOE rule setting forth that method, a random poll of a minimum of 
ten primary government bond dealers, was eliminated on December 2, 
2003, when the Commission accepted for immediate effectiveness a CBOE 
rule filing deleting it. In that filing, CBOE adopted a provision 
stating that the settlement value would be determined in accordance 
with OCC's By-Laws and Rules.\4\
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    \4\ Securities Exchange Act Release No. 48865 (December 2, 
2003), 68 FR 68676 (December 9, 2003) [File No. SR-CBOE-2003-48].
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    The repeal of the CBOE rule prompted OCC to review its own rules 
governing the setting of exercise settlement values for yield-based 
Treasury options. OCC now proposes to amend Article XVI, Section 4 to 
give OCC substantially the same discretion in fixing exercise 
settlement values for yield-based Treasury options as it has under 
Article XVII, Section 4 governing index options.\5\ As noted in the 
order approving OCC's rule change for index options, OCC's authority to 
fix exercise settlement values in unusual market conditions should be 
sufficiently broad to ensure that such values are consistent with the 
settlement values established for related products in other markets 
whenever that result is deemed to be in the best interest of 
investors.\6\ While Article VI, Section 4(a)(2) as currently drafted is 
also broad, OCC believes that its authority should be expressed in 
language parallel to other By-Laws provisions that expressly 
acknowledge that a settlement price may be fixed based either on the 
last reported price before a market disruption or the next reported 
price following the disruption or by some other method.
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    \5\ A draft supplement to the Options Disclosure Document 
(``ODD'') that describes the substance of the By-Laws changes 
proposed herein will be filed with the Commission pursuant to Rule 
9b-1 under the Act. Implementation of this rule change will be 
coordinated with the distribution of the related ODD supplement.
    \6\ Securities Exchange Act Release No. 47418 (February 27, 
2003), 68 FR 11439 (March 10, 2003) [File No. SR-OCC-2002-09].
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    As with index options, under Revised Article XVI, Section 4(a)(2) 
the settlement value of yield-based Treasury options would be fixed by 
an adjustment panel consisting of representatives of the exchange or 
exchanges on which the affected series of options is traded. 
Additionally, under Section 4(a)(3), in the event the adjustment panel 
delays fixing a settlement value beyond the expiration date of the 
affected series, the normal exercise by exception procedures would not 
apply. Instead, options that are in the money by one dollar or more 
would be deemed to have been irrevocably exercised prior to the 
expiration time.
    OCC believes that the proposed rule change is consistent with the 
purposes and requirements of Section 17A of the Act, as amended, 
because it is designed to promote the prompt and accurate clearance and 
settlement of securities transactions, foster cooperation and 
coordination with persons engaged in the clearance and settlement of 
securities transactions, remove impediments to the mechanisms of a 
national system for the prompt and accurate clearance and settlement of 
securities transactions, and, in general, to protect investors and the 
public interest. The proposed changes promote these objectives by 
providing OCC with flexibility in responding to unanticipated events.

[[Page 59635]]

(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.

VI. 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-2004-11 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-2004-11. 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-2004-11 and should be submitted on or before October 26, 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. E4-2486 Filed 10-4-04; 8:45 am]
BILLING CODE 8010-01-P