[Federal Register Volume 71, Number 48 (Monday, March 13, 2006)]
[Notices]
[Pages 12762-12763]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-3482]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53425; File No. SR-OCC-2005-19]


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

March 6, 2006.

I. Introduction

    On December 12, 2005, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-OCC-2005-19 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 January 18, 2006.\2\ No 
comment letters were received. For the reasons discussed below, the 
Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 53090 (January 10, 
2006), 71 FR 2973.
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II. Description

    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 time frames 
for their submission. Implementing this change requires 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 the exercise 
instruction has been modified or revoked by a clearing member because 
of a bona fide error by the clearing member or its

[[Page 12763]]

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% 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 will 
amend Rule 801 to permit OCC to specify the times when such exercise 
notices may be submitted.\7\ (Such times will be specified in OCC's 
operations manual.) The amendment will allow OCC to promptly implement 
the new deadline for post-trade instructions once it is determined and 
will give OCC greater flexibility in responding to future operational 
and technology developments. OCC will also make the following 
conforming changes to Rule 801.
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    \6\ An analysis by OCC staff determined that submission of files 
containing exercise instructions after 6:30 p.m. occurred seven 
times during the period April 1-December 31, 2005. E-mail from Jean 
M. Cawley, First Vice President and Deputy General Counsel, dated 
January 11, 2006.
    \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 will 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 will 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 will 
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) will be covered by 
the changes to Rule 801(a).
     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 will be eliminated. The $5,000 
filing fee will be applied to all requests accepted after the deadline 
specified pursuant to Rule 801(a) but before the start of critical 
processing. No change will be made to the filing fee for requests 
accepted after the start of critical processing. These proposed changes 
will 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).

III. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions.\8\ The Commission 
finds that OCC's proposed rule change is consistent with this 
requirement because it enables OCC to take advantage of operational and 
processing efficiencies gained from real-time trade submission to move 
forward the times for accepting submissions of exercise notices. 
Earlier submission of exercise notices permits OCC to move forward the 
times when it initiates nightly processing and distributes data to its 
members. Moreover, by OCC having more flexibility with respect to 
designating time frames and deadlines OCC will be able to keep such 
time frames and deadlines in step with future operational and technical 
advances.
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    \8\ 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,\9\ that the proposed rule change (File No. SR-OCC-2005-19) be and 
hereby is approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-3482 Filed 3-10-06; 8:45 am]
BILLING CODE 8010-01-P