[Federal Register Volume 77, Number 70 (Wednesday, April 11, 2012)]
[Notices]
[Pages 21819-21821]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-8708]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66742; File No. SR-OCC-2012-05]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Relating 
to Rescinding a Policy Interpretation Affecting Certain Adjustments

April 5, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on March 26, 2012, 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. OCC filed the proposed rule 
change pursuant to Section 19(b)(3)(A) \3\ of the Act and Rule 19b-
4(f)(1) \4\ thereunder.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of Terms of Substance of 
the Proposed Rule Change

    The proposed rule change would rescind a policy interpretation 
adopted by the OCC Securities Committee relating to the possible 
reclassification of recurrent cash dividends for adjustment purposes. A 
conforming change would also be made to the corresponding policy 
applicable to security futures.

[[Page 21820]]

II. Self-Regulatory Organization's Statement of Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose 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 such statements.

A. Self-Regulatory Organization's Statement of Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Under Article VI, Section 11 of the OCC By-Laws, the Securities 
Committee (``Committee''), (which is comprised of representatives of 
all participant options exchanges and OCC) may adopt statements of 
policy or interpretations pertaining to adjustments to the terms of 
listed options in response to corporate events. All adjustments to 
particular options are determined on a case by case basis by adjustment 
panels of the Committee convened for that purpose.
    Interpretation and Policy .01 (``Interpretation'') under Article 
VI, Section 11A of OCC's By-Laws provides that cash dividends or 
distributions by the issuer of the underlying security that are ``non-
ordinary'' will normally result in an adjustment to the terms of listed 
stock options. In 2010, an amendment (the ``Amendment'') was effected 
to the Interpretation, and to the corresponding interpretation under 
Section 3 of Article XII (applicable to security futures), under which 
the Committee could under certain conditions cease adjusting for 
recurring cash dividends previously deemed to be non-ordinary dividends 
based on subsequent facts suggesting that the dividends should be 
reclassified as ``ordinary''. (OCC and not the Committee determines 
adjustment made under Article XII, Section 3 although one of the 
criteria for OCC to use is ``consistency with the actions of the 
Securities Committee in making adjustments to options on the same 
underlying interest''.)
    The Amendment set forth the conditions under which the Committee 
could cease adjusting for non-ordinary cash dividends as: (i) The 
issuer discloses that it intends to pay such dividends or distributions 
on a quarterly or other regular basis, (ii) the issuer has paid such 
dividends or distributions for four or more consecutive months or 
quarters or two or more years after the initial payment whether or not 
the amounts paid were the same from period to period, or (iii) the 
Committee determines for other reasons that the issuer has a policy or 
practice of paying such dividends or distributions on a quarterly or 
other regular basis. In fairness to existing holders of open interest 
who may have assumed option positions with the belief that the 
Committee would continue to adjust for these recurring ``special'' 
dividends, the Amendment was made effective only for dividends and 
distributions announced after February 1, 2012.
    The purpose of this rule change is to rescind the change in policy 
allowing reclassification of certain dividends that was to be 
implemented on February 1, 2012, under the aforementioned Amendment.
1. Background
    The Amendment was prompted by a series of cash dividends declared 
by Diamond Offshore Corporation (``DO''). DO characterized these 
dividends as ``special'' and differentiated them from the company's 
``regular'' cash dividends. The ``special'' and ``regular'' DO 
dividends have customarily gone ``ex-distribution'' on the same date, 
and DO has declared a special dividend for every quarter since the 
fourth quarter of 2007. Initially, the Committee deemed these 
``special'' dividends to be non-ordinary under the Interpretation and 
adjusted listed options in response. However, the frequent adjustment 
to DO listed options in response to the recurrent special dividends 
caused serious operational problems in terms of option symbol and 
series proliferation that in turn adversely affected liquidity for the 
adjusted series. (Volume tends to gravitate to the standard option 
symbol and series at the expense of the adjusted option symbol and 
series.) The Committee and others felt that such DO dividends had been 
declared so consistently and predictably that they should no longer be 
considered ``non-ordinary'' for adjustment purposes. Accordingly, the 
Committee adopted the Amendment.
    As the February 1, 2012, effective date approached, OCC and the 
Committee became aware of investor questions and concerns regarding the 
application of the reclassification policy. Consistent with other 
adjustment provisions, the Amendment was written to provide the 
Committee with discretion to respond to future events. Assuming the 
criteria referenced above are satisfied, the Amendment provides that 
the Committee may exercise its best judgment to determine on a case by 
case basis whether a ``special'' dividend will be reclassified as 
ordinary so that adjustments on the overlying options and futures would 
cease. However, in considering investor questions and concerns, OCC and 
the Committee became aware that investors sought more definitive 
guidance about the likelihood of individual decisions under the 
Amendment. For example, although the Amendment indicates the Committee 
may reclassify special dividends as ordinary, it does not express 
criteria that will aid investors in anticipating when the Committee 
will reclassify such dividends. The Committee considered a range of 
hypothetical cases and found it difficult to identify and articulate in 
advance clear, specific considerations that would lead to particular 
outcomes across the wide range of cases that the Committee may be 
called upon to consider. The Committee was also concerned that if the 
Amendment was further modified to make its applications ``automatic'' 
and thereby predictable, it could be ``locked in'' to actions it would 
otherwise deem inadvisable (for example, not adjusting for a 
dramatically large special dividend declared after adjustments 
``automatically'' ceased). In addition, the Committee was informed that 
announcing decisions to cease adjusting for recurring special dividends 
at the time of the final adjustment, as was the intention under the 
Amendment and was announced in OCC Information Memos, did not provide 
enough guidance to traders. (For example, traders of 2014 LEAPS options 
do not want to wait until the 2012 special dividend to learn whether 
the anticipated 2013 dividend would be reclassified as ordinary.)
    In view of the uncertain application of the Amendment, the 
Committee decided to adjust for the February 2012 DO special dividend 
and to not take the opportunity afforded by the Amendment to cease 
adjusting for future DO special dividends. While the decision not to 
reclassify was within the discretion of the Committee as set forth in 
the Amendment and was explained in OCC information memoranda, it 
appears to have caused further investor confusion. Therefore, the 
Committee recommended to the Board of Directors of OCC that OCC seek 
approval to rescind the reclassification policy as provided in the 
Amendment.
2. Rationale for the Proposal To Amend the OCC By-Laws
    OCC and the Committee especially note three factors which favor 
rescinding the re-classification policy: (1) An industry change to 
options symbology (implemented after the adoption of the rescission 
policy) has substantially alleviated the operational

[[Page 21821]]

burdens associated with recurrent adjustments (especially option symbol 
proliferation), which were highlighted in the instance of DO (With this 
change in symbology, all adjusted series can normally be housed under 
the standard option symbol, dramatically reducing option symbol 
proliferation.); (2) OCC and the Committee believe alleviation of 
investor uncertainty is of paramount importance and have concluded that 
attempts to further modify the Amendment to provide more specific 
guidance about the application of the Amendment to particular cases may 
be complicated and thereby create even more uncertainty for investors; 
and (3) If the reclassification policy is rescinded, non-ordinary 
dividends which have occasioned adjustments in the past will ordinarily 
continue to occasion adjustments in the future and thus alleviate 
investor uncertainty.
    The reclassification policy applied to listed options was discussed 
in and published in interpretative guidance, which will be updated to 
reflect its rescission.\5\ Clean and marked copies of the updated 
interpretative guidance are available as described below. The marked 
copy shows changes from the current language.
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    \5\ See Exchange Act Release Nos. 34-58059 (June 30, 2008), 73 
FR 36367 (July 9, 2008); 34-59442 (February 24, 2009), 74 FR 9654 
(March 5, 2009); and 34-62879 (September 9, 2010), 75 FR 56631 
(September 16, 2010). Consistent with past practice, the 
interpretative guidance will be available on OCC's public Web site 
but not incorporated into OCC's By-Laws and Rules.
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* * * * *
    The proposed change is consistent with Section 17A of the Act 
because it facilitates the prompt and accurate clearance and settlement 
of securities transactions and the protection of investors and reduces 
unnecessary costs and burdens on investors and persons facilitating 
transactions on their behalf. It does so in response to investor 
feedback by reducing uncertainty regarding adjustments for certain cash 
dividends and distributions. The proposed rule change is not 
inconsistent with the existing rules of OCC, including any other rules 
proposed to be amended.

B. Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change will have any 
impact or impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    OCC has not solicited and does not intend to solicit comments 
regarding this proposed rule change. OCC has not received any 
unsolicited written comments from interested parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change was filed pursuant to Section 19(b)(3)(A) 
of the Act and paragraph (f)(1) of Rule 19b-4 thereunder and therefore 
became effective on filing although OCC will delay the implementation 
of the rule change until it is deemed certified under CFTC Regulation 
Sec.  40.6. At any time within sixty days of the filing of such rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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 may be submitted by using the 
Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml), or send an email to [email protected]. Please include 
File No. SR-OCC-2012-05 on the subject line.
     Paper comments should be sent in triplicate to Elizabeth 
M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street 
NE., Washington, DC, 20549-1090.
All submissions should refer to File Number SR-OCC-2012-05. This file 
number should be included on the subject line if email 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 Web site viewing and 
printing 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.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_12_05.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-2012-05 and should be submitted on or before May 2, 
2012.

    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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-8708 Filed 4-10-12; 8:45 am]
BILLING CODE 8011-01-P