[Federal Register Volume 71, Number 11 (Wednesday, January 18, 2006)]
[Notices]
[Pages 2973-2975]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-463]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53090; File No. SR-OCC-2005-19]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to Submission of 
Exercise Notices for American Option Contracts Other Than at Expiration

January 10, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 12, 2005, 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

    The proposed rule change would amend OCC Rule 801, which applies to 
the submission of exercise notices for American-style option contracts 
other than at expiration, to delete specific references as to times 
when such exercise notices may be submitted and to instead provide OCC 
with the authority to prescribe the time frames for their submission.

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 modify OCC Rule 801, 
which applies to the submission of exercise notices for American-style 
option contracts other than at expiration, to delete specific 
references to the times when such exercise notices may be submitted, 
and to instead provide OCC with the authority to prescribe the 
timeframes for their submission. Implementing this change would require 
additional conforming changes to Rule 801 as described herein.
Rule 801
    Rule 801(a) permits a clearing member desiring to exercise an 
American-style equity or non-equity option on a business day other than 
the business day prior to its expiration to submit an exercise notice 
to OCC between 9 a.m. and 7 p.m., provided that an exercise notice for 
an American-style currency option must be submitted by 2:30 p.m.\3\ 
(All times are at Central Time.) Exercise instructions submitted with 
respect to equity and non-equity options become irrevocable at 7 p.m. 
and 2:30 p.m. in the case of currency options unless modified or 
revoked by a clearing member because of a bona fide error by the 
clearing member or its customer in accordance with the procedures 
prescribed by OCC.
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    \3\ Except for short dated options, an American-style option may 
not be exercised on the business day prior to its expiration date.
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    Rule 801(b) allows the OCC Board of Directors to designate with not 
less than seven days' prior written notice to non-equity securities 
clearing members a cut-off time earlier than that specified in Rule 
801(a) as the deadline for submitting exercise notices with respect to 
American-style non-equity option contracts and the time when such 
exercise notices become irrevocable.
    Subject to specified exceptions and conditions, Rule 801(e) grants 
certain OCC employees \4\ the discretion to permit a clearing member to 
file, revoke, or modify any exercise notice submitted in accordance 
with Rule 801(a) after the 7 p.m. deadline for the purpose of 
correcting a bona fide error. One condition is that the requesting 
clearing member is liable to OCC for a late filing fee in escalating 
increments and time segments. The late filing fee is as follows:
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    \4\ Those employees are OCC's Chairman, Management Vice 
Chairman, President, or a designee of such officer.
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     $2,000 for any request accepted between 7 p.m. and 8 p.m.;
     $5,000 for any request accepted between 8:01 p.m. and the 
start of critical processing provided that the request does not 
materially affect the start of critical processing; and
     $20,000 per line item listed on any exercise notice 
accepted for filing after the start of critical processing with 50%

[[Page 2974]]

of the fee to be distributed to the assigned clearing member or 
clearing members on a pro rata basis if more than one clearing member 
is assigned.
Changes to Rule 801
    The operational and processing efficiencies gained from real-time 
trade submission have prompted the OCC Roundtable \5\ to propose that 
OCC advance the 7 p.m. cut-off time for submission of post-trade 
instructions, including exercise notices, by clearing members on 
regular business days. The Roundtable believes that an earlier deadline 
for filing such instructions would further straight-through processing 
goals by permitting OCC to move forward the times when it initiates 
nightly processing and distributes data to members.
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    \5\ The OCC Roundtable is an OCC-sponsored advisory group 
comprised of representatives from OCC, a cross-section of clearing 
members, participant exchanges, 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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    Although current discussions have centered on a post-trade 
submission cut-off time of 6:30 p.m., the Roundtable has not yet 
reached a consensus on a recommended time.\6\ Notwithstanding that 
additional discussions are required to determine a new deadline, the 
Roundtable has asked OCC to amend Rule 801 to eliminate the requirement 
that exercise notices with respect to most American-style options be 
submitted between 9 a.m. and 7 p.m. on a business day. In response to 
the Roundtable's request and consistent with other OCC rules, OCC 
proposes that Rule 801 be amended to permit OCC to specify the times 
when such exercise notices may be submitted.\7\ (Such times would be 
specified in OCC's operations manual.) Such an amendment would allow 
OCC to implement the new deadline for post-trade instructions promptly, 
once it is determined, and would give OCC greater flexibility in 
responding to future operational and technology developments. OCC also 
proposes to make the following conforming changes to Rule 801:
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    \6\ A preliminary analysis by OCC staff suggests that fewer than 
five clearing members submit exercise notices after 6:30 p.m.
    \7\ Under Rule 805, OCC already has the authority to prescribe 
deadlines for the submission of exercise instructions for purposes 
of expiration date processing.
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     Amend Rule 801(a) to eliminate the mandated 2:30 p.m. 
deadline for filing exercise notices with respect to currency options. 
The deadline would instead be a time specified by OCC (in its 
operations manual). While there are no current plans to advance this 
deadline, the language of the rule would be changed for consistency and 
future flexibility.
     Amend Rule 801(a) to provide that the prescribed deadlines 
for submitting exercise notices may be changed with not less than 30 
days' prior written notice to affected clearing members. This would 
ensure that clearing members have sufficient time to adjust their 
procedures for submitting exercise notices.
     Delete Rule 801(b) which authorizes the Board to advance 
the deadline for submitting exercise notices for American-style non-
equity options. The subject matter of Rule 801(b) would be covered by 
the changes to Rule 801(a) described above.
     Amend Rule 801(e) to restructure portions of the fee 
schedule for submitting late requests to file, revoke, or modify 
exercise notices. The $2,000 filing fee would be eliminated. The $5,000 
filing fee would be applied to all requests accepted after the deadline 
specified pursuant to Rule 801(a) but before the start of critical 
processing. No change would be made to the filing fee for requests 
accepted after the start of critical processing. These proposed changes 
would align the filing fee schedule under Rule 801 with the filing fee 
schedule for supplementary exercise notices filed under Rule 805 (which 
applies to expiration date processing).
* * * * *
    OCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \8\ and the rules and 
regulations thereunder applicable to OCC because it enhances the 
efficiency and effectiveness of OCC's procedures for accepting 
submissions of exercise notices otherwise than at expiration by giving 
OCC the flexibility to designate the applicable time frames and revise 
them in response to future operational and technological developments. 
The proposed rule change is not inconsistent with the existing rules of 
OCC, including any other rules proposed to be amended.
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    \8\ 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.

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-2005-19 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.

All submissions should refer to File Number SR-OCC-2005-19. 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

[[Page 2975]]

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, 100 F Street, 
NE., Washington, DC 20549. Copies of such filings also will be 
available for inspection and copying at the principal office of OCC and 
on OCC's Web site, 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-2005-19 and should be 
submitted on or before February 8, 2006.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-463 Filed 1-17-06; 8:45 am]
BILLING CODE 8010-01-P