[Federal Register Volume 73, Number 161 (Tuesday, August 19, 2008)]
[Notices]
[Pages 48423-48425]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-19132]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58353; File No. SR-OCC-2008-16]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to the Cash 
Dividend Threshold

August 13, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 24, 2008, 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 from 
interested persons.
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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 mitigate inconsistencies that may 
result under the current policy for adjusting stock option contracts.

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 mitigate 
inconsistencies that may result under the current policy for adjusting 
stock option contracts. In February 2007, the Commission approved rule 
change SR-OCC-2006-01, which amended Section 11A of Article VI of the 
OCC By-Laws governing adjustments to options in response to cash 
dividends or distributions.\3\ Under the new adjustment policy, cash 
dividends paid by a company otherwise than pursuant to a policy or 
practice of paying dividends on a quarterly or other regular basis 
would be deemed ``special'' and would normally trigger a contract 
adjustment provided the value of the adjustment is at least $12.50 per 
option contract. This new adjustment policy will become effective for 
cash dividends announced on or after February 1, 2009.
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    \3\ Securities Exchange Act Release No. 55258 (February 8, 
2007), 72 FR 7701 (February 16, 2007).
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    However, certain inconsistencies may result when the threshold of 
``$12.50 per option contract'' is applied to all options on the 
affected underlying security. For example, if a $.10 special cash 
dividend is declared, the standard-size 100 share option would not be 
adjusted (because the value is less than $12.50). However, a previously 
adjusted 150 share option (reflecting a 3 for 2

[[Page 48424]]

split) would be adjusted (because the value is $15 per contract). 
Adjusting some but not all options of the same class in response to the 
same dividend event, especially if the 100 share option is not 
adjusted, could be confusing to investors, and OCC's Securities 
Committee (consisting of representatives of each of the options 
exchanges and OCC) determined that this potential confusion should be 
avoided.
    OCC considered modifying the threshold to specify $.125 per share 
instead of $12.50 per contract. This approach would address all 
standard-size (100 share) contracts that currently exist plus adjusted 
contracts that come into existence in response to splits, etc. However, 
exchanges have proposed to introduce ``maxi'' size contracts. Applying 
the same per share threshold to a 1,000 and 100 share option could 
sometimes result in significant value being left on the table in the 
case of the 1,000 share option. Taking the same example of a $.10 per 
share special dividend, neither option would be adjusted if the 
threshold were $.125 per share. This would result in a loss of only $10 
per contract for the 100 share option, but the loss would be $100 per 
contract for the 1,000 share option. For this reason, a per share 
threshold is not being proposed.
    Greater consistency across contracts of varying sizes can be 
achieved by retaining the $12.50 per contract threshold in all cases 
but adding a qualification specifying that if a corresponding standard-
size contract exists on the underlying security, previously adjusted 
contracts will be adjusted only if the corresponding standard-size 
contract is also adjusted. For example, if a 100 share option and a 150 
share option (previously adjusted for a 3 for 2 split) exist, the 150 
share option would be adjusted for a special cash dividend only if the 
100 share standard option would also be adjusted for that dividend. 
Stated differently, OCC proposes to refer back to the preadjustment 
standard-size option (if any exist) in deciding whether or not to 
adjust a previously adjusted option. Thus a 150 share option that was 
derived from a 100 share option as a result of a 3 for 2 split would be 
referred back to the 100 share option. A 1,500 share option (previously 
adjusted for a 3 for 2 split) would be referred back to the 1,000 share 
option (the ``standard'' size option for a ``maxi'' contract). Thus, 
the qualification specifies ``only if the corresponding standard-size 
option contract is also adjusted.''
    This qualification achieves greater consistency because in most 
cases all contracts on the same underlying security would be adjusted 
if the 100 share contract is adjusted. The qualification also would 
allow a 1,000 share ``standard'' contract to be adjusted independently 
of a 100 share contract. Also, it could happen that an adjusted 
contract exists but not the corresponding standard contract, or a 
contract calling for delivery of fewer than 100 shares may exist (e.g., 
as a result of a spinoff adjustment). In these cases, the qualification 
would be inapplicable and a straightforward application of the $12.50 
threshold would determine whether an adjustment would be made. The 
following are examples of the qualification to the $12.50 per contract 
threshold.
    (A) If a corresponding standard size contract exists:

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                                                                    $.09 Dividend                               $.13 Dividend
                Shares                           Contract             ($Value)               Adjust?              ($Value)              Adjust?
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100...................................  Standard.................            9.00  NO........................           13.00  YES.
133...................................  4/3 split................           11.97  NO........................           17.29  YES.
150...................................  3/2 split................           13.50  NO........................           19.50  YES.
10....................................  Spinoff..................            0.90  NO........................            1.30  NO.
177...................................  Merger...................           15.93  NO........................           23.01  YES.
1000..................................  Standard.................           90.00  YES.......................          130.00  YES.
1500..................................  3/2 split................          135.00  YES.......................          195     YES.
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                                                                    $.02 Dividend                               $.01 Dividend
                Shares                           Contract             ($Value)               Adjust?              ($Value)              Adjust?
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100...................................  Standard.................            2.00  NO........................            1.00  NO.
133...................................  4/3 split................            2.66  NO........................            1.33  NO.
150...................................  3/2 split................            3.00  NO........................            1.50  NO.
10....................................  Spinoff..................            0.20  NO........................            0.10  NO.
177...................................  Merger...................            3.54  NO........................            1.77  NO.
1000..................................  Standard.................           20.00  YES.......................           10.00  NO.
1500..................................  3/2 split................           30.00  YES.......................           15.00  NO.
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    (B) If the 100 share standard size contract does not exist:

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                                                                    $.09 Dividend                               $.13 Dividend
                Shares                            Option              ($Value)               Adjust?              ($Value)              Adjust?
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133...................................  4/3 split................           11.97  NO........................           17.29  YES.
150...................................  3/2 split................           13.50  YES.......................           19.50  YES.
10....................................  Spinoff..................            0.90  NO........................            1.30  NO.
177...................................  Merger...................           15.93  YES.......................           23.01  YES.
1000..................................  Standard.................           90.00  YES.......................          130.00  YES.
1500..................................  3/2 split................          135.00  YES.......................          195     YES.
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    The new adjustment policy approved in File No. SR-OCC-2006-01 will 
take effect beginning with dividends announced on and after February 1, 
2009. OCC intends this proposed rule change to take effect at the same 
time,

[[Page 48425]]

but these changes will not be implemented until the exchanges have 
conducted appropriate educational efforts and definitive copies of an 
appropriate supplement to the options disclosure document, 
Characteristics and Risks of Standardized Options, are available for 
distribution.
    OCC believes that the proposed rule change is consistent with the 
purposes and requirements of the Act because it is designed to promote 
the prompt and accurate clearance and settlement of transactions in 
securities options, to remove impediments to and perfect the mechanism 
of a national system for the prompt and accurate clearance and 
settlement of such transactions, and, in general, to protect investors 
and the public interest. It accomplishes this by reducing 
inconsistencies in the adjustment of stock option contracts. The 
proposed rule change is not inconsistent with the existing By-Laws and 
Rules of OCC, including any rules proposed to be amended.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose any 
material 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-2008-16 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2008-16. 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_08_16.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-
2008-16 and should be submitted on or before September 3, 2008.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-19132 Filed 8-18-08; 8:45 am]
BILLING CODE 8010-01-P