[Federal Register Volume 69, Number 249 (Wednesday, December 29, 2004)]
[Notices]
[Pages 78085-78086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3862]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50895; File No. SR-OCC-2004-11]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Relating to Yield-
Based Treasury Options

December 20, 2004.

I. Introduction

    On June 8, 2004, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-OCC-2004-11 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 October 5, 2004.\2\ No comment 
letters were received. For the reasons discussed below, the Commission 
is granting approval of the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 50466, (September 29, 
2004), 69 FR 59634.
---------------------------------------------------------------------------

II. Description

    The proposed rule change updates two sections of OCC's By-Laws 
pertaining to yield-based Treasury options in order to conform those 
sections to the corresponding provisions of OCC's By-Laws governing 
index options.
    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. Section 3(c) will now provide for the possibility that an 
exchange might increase rather than decrease the multiplier and grants 
OCC the flexibility to adjust any outstanding options accordingly. This 
rule change is similar to a previously approved OCC rule change 
pertaining to the adjustment of index option contracts.\3\
---------------------------------------------------------------------------

    \3\ Securities Exchange Act Release No. 44184 (April 16, 2001), 
66 FR 20342 (April 20, 2001) [File No. SR-OCC-99-12].
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \4\ Securities Exchange Act Release No. 48865 (December 2, 
2003), 68 FR 68676 (December 9, 2003) [File No. SR-CBOE-2003-48].
---------------------------------------------------------------------------

    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 is now amending 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

[[Page 78086]]

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.
---------------------------------------------------------------------------

    \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. 46561 (September 26, 
2002), 67 FR 61943 (October 2, 2002) [File No. SR-OCC-2002-09].
---------------------------------------------------------------------------

    As with index options, under revised Article XVI, Section 4(a)(2) 
the settlement value of yield-based Treasury options will be fixed by 
an adjustment panel consisting of representatives of the exchange or 
exchanges on which the affected series of options is traded. Also, 
under revised 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 will 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.

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 prompt and 
accurate clearance and settlement of securities transactions.\7\ The 
proposed rule change will allow OCC to make an adjustment to the 
multiplier of yield-based Treasury options in coordination with such an 
adjustment by an exchange and more clearly defines the method OCC will 
use to make a settlement adjustment for yield-based Treasury options in 
the event the settlement value is not available. By aligning OCC's 
rules for yield-based Treasury option rules with OCC's rules for index 
options, which have been previously approved by the Commission, the 
proposed rule change is designed to add uniformity and certainty to 
OCC's rules and therefore should help to promote prompt and accurate 
clearance and settlement of securities transactions.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

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-2004-11) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-3862 Filed 12-28-04; 8:45 am]
BILLING CODE 8010-01-P