[Federal Register Volume 73, Number 16 (Thursday, January 24, 2008)]
[Notices]
[Pages 4297-4299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-1155]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57163; File No. SR-OCC-2007-18]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Relating to Expiration Date Exercise Procedure

January 16, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 7, 2007, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change described 
in Items I and II below, which items have been prepared primarily by 
OCC. The Commission is publishing this notice and order to solicit 
comments from interested persons and to grant accelerated approval to 
the proposed rule change.
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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 reduce the threshold amounts used to 
determine the equity options that are deemed to be in the money for 
purposes of exercise by exception processing.

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

    OCC is proposing to amend Rule 805, which prescribes expiration 
date exercise procedures including exercise by exception processing, to 
reduce from $.05 to $.01 the threshold amount used to determine the 
equity options that are deemed to be in the money for purposes of 
exercise by exception processing.\3\
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    \3\ A conforming change is also being made to Rule 1106, which 
concerns the treatment of open positions following the suspension of 
a clearing member.
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(1) Background
    OCC has for years maintained an ``exercise by exception'' 
procedure. Under that procedure, options that are in the money at 
expiration by more than a specified threshold amount are exercised 
automatically unless the clearing member carrying the position 
instructs otherwise. Equity options are determined to be in the money 
or not based on the difference between the exercise price and the 
closing price of the underlying equity interest on the last trading day 
before expiration. In each of the last two years, OCC has reduced the 
threshold amounts for equity options in order to streamline expiration 
processing.\4\ These changes were implemented at the request of the OCC 
Roundtable \5\ and benefited both OCC and clearing members by reducing 
the time required for the submission of exercise instructions on an 
average expiration weekend.
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    \4\ In September, 2005, the threshold was reduced from $.75 to 
$.25 for equity options in a clearing member's customers' account 
and from $.25 to $.15 for equity options in any other account (i.e., 
firm and market makers' accounts). Securities Exchange Act Release 
No. 50178 (August 10, 2004), 69 FR 51343 (August 18, 2004) [File No. 
SR-OCC-2004-04]. In October, 2006, the threshold became $.05 for 
equity options in all account types. Securities Exchange Act Release 
No. 54514 (September 26, 2006), 71 FR 58656 (October 4, 2006) [File 
No. SR-OCC-2006-05].
    \5\ OCC's Roundtable is an OCC sponsored advisory group 
comprised of representatives from OCC's participant exchanges, OCC, 
a cross-section of OCC clearing members, and industry service 
bureaus. The Roundtable considers operational improvements that may 
be made to increase efficiencies and lower costs in the options 
industry.
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(2) Discussion
    In view of the high options volumes experienced in 2007, the OCC 
Roundtable once again recommended that OCC decrease the threshold 
applicable to equity options in an effort to continue to improve 
expiration

[[Page 4298]]

processing and to reducing operational risks. The Roundtable suggested 
$.01 as the new threshold for all accounts.
    As with the other proposed threshold reductions, OCC conducted a 
survey of its clearing membership to assess support for the change. 
Survey results reflected strong support for the change across the 
membership.\6\ Seventy-nine clearing members responded to the survey 
with 69 clearing members in favor of the threshold change and 10 
clearing members opposed. Clearing members supporting the change 
confirmed the Roundtable's view that it would significantly reduce the 
number of instructions they are required to input on expiration and 
thereby shorten the timeframe for completing instructions to OCC.
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    \6\ OCC also contacted clearing members that did not respond to 
its survey. These clearing members expressed no opinion on the 
matter.
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    OCC contacted each clearing member that opposed the threshold 
change, generally mid-size to small retail clearing members. Their 
principal concern was that the lowered threshold would require them to 
input more ``do not exercise'' instructions although some indicated 
concerns about the need to educate customers and the possibility that 
commission costs could make an exercise unprofitable.\7\ For 
approximately half of the 10 clearing members opposed to the change, 
expiration exercise reports for the first eight months of 2007 
reflected that there were about 20 to 70 line items of positions that 
were in the money but not exercised because the in the money amount was 
less than the current threshold level.\8\ As a result, OCC believes 
these clearing members would most likely have to input more ``do not 
exercise'' instructions. The remaining clearing members carried 
positions in fewer than ten expiring series that were in the money by 
less than the current threshold, leading OCC to conclude that these 
clearing members would have a negligible increase in processing time 
for submitting instructions not to exercise. All clearing members, 
however, agreed that they could adapt to the change if supported by the 
majority of clearing members.
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    \7\ As noted, clearing members are able to instruct OCC not to 
exercise an expiring equity option even though the option is in the 
money by more than the exercise by exception threshold. Clearing 
members could, for example, choose not to exercise an expiring 
equity option that is in the money where the in the money amount is 
less than the applicable commission costs.
    \8\ OCC continually reviews expiration exercise reports of 
clearing members to monitor exercise activity. The referenced 
information, which remained consistent across expirations during 
this period and thereafter was obtained in the course of performing 
such reviews.
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    After carefully considering clearing member views on the threshold 
change, OCC has concluded that a $.01 threshold will generally benefit 
the majority of clearing members and will further improve expiration 
processing. OCC will modify its clearing system to provide increased 
functionality in order to lessen the operational burden that may be 
experienced by the clearing members needing to submit additional ``do 
not exercise'' instructions as a result of changing the threshold.
    The clearing member survey also asked firms to provide an estimate 
of the time needed to accommodate the threshold change based upon 
supplied time frames (i.e., 0-3 months or 4-6 months). The majority of 
clearing members indicated that they could complete the necessary 
systems development and customer notifications within six months. OCC 
contacted every clearing member that commented on the proposed 
timeframes, and all expressed the view that their efforts would be 
completed in the six month time period.
    The Roundtable has asked that this change be implemented no later 
than the June 2008 expiration. OCC therefore requests the Commission to 
approve this rule filing no later than January 31, 2008, in order for 
OCC to provide sufficient advance notice to clearing members that it 
has been approved for implementation. OCC further requests that it be 
authorized to implement the threshold change thereafter based upon its 
assessment of clearing member readiness. OCC will provide at least ten 
days advance notice to clearing members of the effective date of the 
new threshold amounts. Such notice will be provided through information 
memoranda and other forms of electronic notice such as email.
    OCC believes that the proposed rule change is consistent with 
Section 17A of the Act because it facilitates the prompt and accurate 
processing of exercise information on expiration.

(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

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions.\9\ OCC 
Rule 805 is based on the assumption that when an option is in-the-money 
by at least a minimum fixed threshold level, most OCC members and their 
customers would choose to exercise the option. The rule has the effect, 
therefore, of reducing the number of exercise instructions that must be 
submitted to and processed by OCC. As OCC notes in its description of 
the proposed rule change, if a threshold amount is set too low, the 
result could be that some members would have to submit a greater number 
of ``do not exercise'' instructions than they would have to submit if 
the threshold amount was set at a higher amount. However, the 
Commission is satisfied that by consulting with an industry advisory 
group, by surveying its clearing members, and by its analysis, OCC has 
made a reasoned determination in deciding to set the threshold amount 
for equity options in all account types at $.01. Furthermore, we note 
that OCC indicated that it would modify its clearing system to provide 
increase functionality in order to lessen the operational burden on 
clearing members that experience increased ``do not exercise'' 
instructions as a result of the new threshold amount. Accordingly, 
because the proposed rule change is designed to reduce the amount of 
processing required for in-the-money equity options, we find that it is 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions.
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    OCC has requested that the Commission approve the proposed rule at 
least six months prior to the June 2008 expiration. The Commission 
finds good cause for approving the proposed rule change prior to the 
thirtieth day after publication of notice because such approval will 
allow OCC to give its clearing members sufficient time to complete the 
necessary system developments and customer notifications before OCC's 
scheduled implementation for the June 2008 expiration.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing,

[[Page 4299]]

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-2007-18 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 20549-1090.

All submissions should refer to File Number SR-OCC-2007-18. 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 Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. 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.theocc.com/publications/rules/proposed_changes/sr_occ_07_18.pdf. 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-
2007-18 and should be submitted on or before February 14, 2008.

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.\10\
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    \10\ 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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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-2007-18) be and hereby 
is approved.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-1155 Filed 1-23-08; 8:45 am]
BILLING CODE 8011-01-P