[Federal Register Volume 72, Number 16 (Thursday, January 25, 2007)]
[Notices]
[Page 3466]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-1059]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55124; File No. SR-OCC-2006-20]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Accelerate the Expiration Date 
of American-Style Equity Options That Have Been Adjusted To Call for 
Cash-Only Delivery

January 18, 2007.

I. Introduction

    On October 26, 2006, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-OCC-2006-20 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 November 29, 2006.\2\ The 
Commission received no comment letters. 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. 54793 (November 20, 
2006), 71 FR 69172.
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II. Description

    In a cash-out merger, the common equity of the acquired company 
(``Security'') is converted into a right to receive a fixed amount of 
cash. On the day after the announced consummation date for the merger, 
the stock exchanges on which the Security is traded suspend all trading 
in the Security. Concurrently, the options exchanges discontinue 
trading in options overlying the Security. If a customer does not 
liquidate an out-of-the money option position before the exchange halts 
trading, its broker must carry the position until it expires. With 
increasing volume and the proliferation of options with long expiration 
dates, clearing members' cost and operational overhead of carrying 
these positions is significant.
    In an effort to reduce these costs, OCC seeks to modify its rules 
to accelerate the expiration date of American-style equity options that 
are adjusted to call for a cash deliverable to the earliest practicable 
regular expiration date.\3\ The exercise by exception price threshold 
for the adjusted contracts will be $.01 per share of the amount of the 
cash deliverable.\4\
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    \3\ OCC rules currently contain a provision for acceleration of 
the expiration date of European-style equity options that have been 
converted to a cash deliverable.
    \4\ Every option contract that has an exercise price below (in 
the case of a call) or above (in the case of a put) the amount of 
the cash deliverable by $.01 or more will be deemed to have been 
exercised immediately prior to the accelerated expiration time 
unless the clearing member directs otherwise. OCC also is making a 
conforming change to Rule 1106.
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    OCC will implement the foregoing rule changes on January 1, 2008, 
to allow clearing members and customers sufficient time to prepare for 
the change of methodology. OCC will not implement the rule changes 
until definitive copies of an appropriate revision of or supplement to 
the options disclosure document, Characteristics and Risks of 
Standardized Options, are available for distribution.

III. Discussion

    Section 19(b) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\5\ 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.\6\ The 
Commission finds that OCC's rule change is consistent with these 
requirements because by accelerating the expiration date of American-
style equity options that are adjusted to call for a cash deliverable 
OCC makes procedures for clearance and settlement of these options more 
efficient and thereby reduces unnecessary costs on investors and 
persons facilitating transactions by and acting on behalf of investors. 
As such, the proposed rule change should better enable OCC to promote 
the prompt and accurate clearance and settlement of securities 
transactions.\7\
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    \5\ 15 U.S.C. 78s(b).
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(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,\8\ that the proposed rule change (File No. SR-OCC-2006-20) be and 
hereby is approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    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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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-1059 Filed 1-24-07; 8:45 am]
BILLING CODE 8011-01-P