[Federal Register Volume 73, Number 187 (Thursday, September 25, 2008)]
[Notices]
[Pages 55582-55584]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-22488]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58586; File No. SR-OCC-2008-16]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Granting Approval of a Proposed Rule Change Relating to the Cash
Dividend Threshold
September 18, 2008.
I. Introduction
On July 24, 2008, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') proposed
rule change SR-OCC-2008-16 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 August 19, 2008.\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. 58353 (August 13, 2008),
73 FR 48423.
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II. Description
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 as a result of cash
dividends or distributions.\3\ Under the new adjustment policy, cash
dividends paid by a company other 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
[[Page 55583]]
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 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. 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 will 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 will be referred
back to the 100 share option. A 1,500 share option (previously adjusted
for a 3 for 2 split) will 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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[[Page 55584]]
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, 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.
III. Discussion
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.\4\ The
Commission finds the proposed rule change to be consistent with this
requirement because it should reduce inconsistencies in the adjustment
of stock option contracts. As a result, OCC's proposed rule change
should promote the prompt and accurate clearance and settlement of
securities transactions.
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\4\ 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,
that the proposed rule change (File No. SR-OCC-2008-16) be and hereby
is approved.\5\
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\5\ 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).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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J. Lynn Talyor,
Assistant Secretary.
[FR Doc. E8-22488 Filed 9-24-08; 8:45 am]
BILLING CODE 8010-01-P