[Federal Register Volume 78, Number 87 (Monday, May 6, 2013)]
[Notices]
[Pages 26413-26416]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-10605]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69480; File No. SR-OCC-2013-04]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change to Change the Expiration Date 
For Most Option Contracts to the Third Friday of the Expiration Month 
Instead of the Saturday Following the Third Friday

April 30, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on April 17, 2013 The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been substantially prepared by the clearing agency.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ OCC also filed the proposed rule change as an advance notice 
under Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``Dodd-Frank Act'') entitled the 
Payment, Clearing, and Settlement Supervision Act of 2010 
(``Clearing Supervision Act''). 12 U.S.C. 5465(e)(1); SR-OCC-2013-
802.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change would allow OCC to change the expiration 
date for most option contracts to the third Friday of the expiration 
month instead of the Saturday following the third Friday.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency 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. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.\4\
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    \4\ The Commission has modified the text of the summaries 
prepared by the clearing agency.
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(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    Most option contracts (``Standard Expiration Contracts'') currently 
expire at the ``expiration time'' (11:59 p.m. Eastern Time) on the 
Saturday following the third Friday of the specified expiration month 
(``Expiration Date'').\5\ The purpose of this proposed rule change is 
to change the Expiration Date for Standard Expiration Contracts to the 
third Friday of the expiration month. (The expiration time would 
continue to be 11:59 p.m. Eastern Time on the Expiration Date.) The 
proposed change would apply only to Standard Expiration Contracts 
expiring after February 1, 2015, and OCC does not propose to change the 
Expiration Date for any outstanding option contract. The proposed 
change will apply only to series of option contracts opened for trading 
after the effective date of this proposed rule change and having 
Expiration Dates later than February 1, 2015. Option contracts having 
non-standard expiration dates (``Non-standard Expiration Contracts'') 
will be unaffected by this proposed rule change.\6\
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    \5\ See the definition of ``expiration time'' in Article I of 
OCC's By-Laws.
    \6\ Examples of options with Non-standard Expiration Contracts 
include flex options, quarterly, monthly and weekly options, where 
the expiration exercise processing for such options presently occurs 
on a weekday.
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    In order to provide a smooth transition to the Friday expiration, 
OCC would, beginning June 21, 2013, move the expiration exercise 
procedures to Friday for all Standard Expiration Contracts even though 
the contracts would continue to expire on Saturday. After February 1, 
2015, virtually all Standard Expiration Contracts will actually expire 
on Friday. The only Standard Expiration Contracts that will expire on a 
Saturday after February 1, 2015 are certain options that were listed 
prior to the effectiveness of this rule change, and a limited number of 
options that may be listed prior to necessary systems changes of the 
options exchanges, which are expected to be completed in August 2013. 
The exchanges have agreed that once these systems changes are made they 
will not open for trading any new series of option contracts with 
Saturday expiration dates falling after February 1, 2015.
Background
    Saturday was established as the standard Expiration Date for OCC-
cleared options primarily in order to allow sufficient time for 
processing of

[[Page 26414]]

option exercises, including correction of errors, while the markets 
were closed and positions remained fixed. However, improvements in 
technology and a great deal of experience have rendered Saturday 
expiration processing inefficient, and Saturday processing also poses 
unnecessary operational risk upon OCC and its clearing members. 
Therefore, it has been a long-term goal of OCC and its clearing members 
to move the expiration process for all options with Standard Expiration 
Contracts from Saturday to Friday night.
    Eliminating Saturday expirations will allow OCC to streamline the 
expiration process between Standard Expiration Contracts and Non-
standard Expiration Contracts, which will increase operational 
efficiencies and reduce operational risk for OCC and its clearing 
members. After the expiration date for Standard Expiration Contracts is 
moved to Friday night, expiration processing for standard options, 
quarterly options, and weekly options will all occur on the same day 
and will be a single, and inherently more efficient, operational 
process. The move to Friday night processing will also align expiration 
processing schedules for United States markets with expiration 
processing schedules for European markets and will allow affected 
clearing members to run a single, consistent, and efficient operational 
process for all U.S. equity/index options regardless of where such 
options are exercised. Moreover, the move to Friday night processing 
will also eliminate the operational risk presented by scheduling an 
expiration process to run on one Saturday per month when it is 
otherwise run weekly on Friday night. Saturdays are typically reserved 
for system maintenance and installs of system enhancements so Saturday 
expiration processes force such maintenance and installs to be 
rescheduled and sometimes delayed.
    From a risk management perspective, the proposed rule change will 
compress the operational timeframe for processing option expirations 
such that clearing members will be required to reconcile options trades 
on trade date. Trade date reconciliation is a better risk management 
practice and will facilitate and promote the use of intra-day risk 
management systems by clearing members as well as move clearing members 
toward adopting real-time trade date reconciliation and position 
balancing systems.
    Industry groups, clearing members, and options exchanges have been 
active participants in planning for the transition to the Friday 
expiration. In March, 2012, OCC began to discuss moving Standard 
Expiration Contracts to Friday expiration dates with industry groups, 
including two Securities Industry and Financial Markets Association 
(``SIFMA'') committees, the Operations and Technology Steering 
Committee and the Options Committee, and at two major industry 
conferences, the SIFMA Operations Conference and the Options Industry 
Conference. OCC also discussed the project with the Intermarket 
Surveillance Group and at an OCC Operations Roundtable. In each case, 
OCC received broad support for the initiative. Also, OCC surveyed all 
of its clearing members as well as its service bureaus and learned that 
a significant majority of those surveyed are currently ready to move to 
Friday night expiration processing. OCC has worked with the other 
clearing members and service bureaus so that all affected parties 
experience a smooth transition to Friday night expiration processing. 
OCC has obtained assurances from all options industry participants that 
they will be ready to move to Friday night expiration processing by 
June 2013.
    Friday night expiration processing is also consistent with the 
long-standing rules and procedures of the options exchanges and the 
Financial Industry Regulatory Authority (``FINRA''),\7\ which generally 
provide that exercise decisions with respect to Standard Expiration 
Contracts must be made by, and exercise instructions may not be 
accepted from customers after, 5:30 p.m. Eastern Time on the business 
day preceding expiration (usually Friday).\8\ Brokerage firms may set 
earlier cutoff times for customers submitting exercise notices. 
Clearing members are permitted to submit exercise instructions after 
the cutoff time (``Supplementary Exercises'') only in case of errors or 
other unusual situations, and may be subject to fines or disciplinary 
actions.\9\ OCC believes that the extended period between cutoff time 
and expiration of options is no longer necessary given modern 
technology.
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    \7\ OCC has contacted FINRA regarding the need to review the 
Contrary Exercise Advisory Rule to ensure such rule is consistent 
with the industry effort to move to Friday expiration dates. FINRA 
has determined that no changes to its current rules are needed in 
order to accommodate the transition of expiration processing from 
Saturday to Friday night. FINRA has agreed that it will work with 
the industry to implement coordinated and appropriate modifications 
to its rules in order to accommodate Friday night expiration dates, 
which will begin on or after February 1, 2015.
    \8\ See, e.g., FINRA Rule 4210(b)(23)(A)(iii). ``Option holders 
have until 5:30 p.m. Eastern Time (``ET'') on the business day 
immediately prior to the expiration date to make a final exercise 
decision to exercise or not exercise an expiring option. Members may 
not accept exercise instructions for customer or noncustomer 
accounts after 5:30 p.m. ET.'' Member firms may specify earlier 
cutoff times.
    \9\ See OCC Rule 805(g).
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Transition Period
    Based on significant dialogue between OCC and clearing members 
regarding the move to Friday expiration, OCC believes that the adoption 
of Friday expiration for Standard Expiration Contracts is best 
accomplished through an appropriate transition period during which 
processing activity for all options, whether expiring on Friday or 
Saturday, would move to Friday, followed by a change in the expiration 
day for new series of options. In May 2012, OCC and its clearing 
members determined that Friday, June 21, 2013, would be an appropriate 
date on which to move expiration processing from Saturday to Friday 
night. Accordingly, OCC proposes that, beginning June 21, 2013, Friday 
expiration processing will be in effect for all expiring Standard 
Expiration Contracts, regardless of whether the contract's actual 
expiration date is Friday or Saturday. However, for contracts having a 
Saturday expiration date, exercise requests received after Friday 
expiration processing is complete but before the Saturday contract 
expiration time will continue to be processed so long as they are 
submitted in accordance with OCC's procedures governing such requests. 
After the transition period and the expiration of all existing 
Saturday-expiring options, expiration processing will be a single 
operational process and will run on Friday night for all Standard 
Expiration Contracts.
Friday Expiration Processing Schedule
    Currently, expiration processing for Standard Expiration Contracts 
begins on Saturday morning at 6:00 a.m. Central Time and is completed 
at approximately noon Central Time when margin and settlement reports 
are available. The window for submission of instructions in accordance 
with OCC's exercise-by-exception procedures under Rule 805(d) is open 
from 6:00 a.m. to 9:00 a.m. Central Time on Saturday morning.\10\ OCC 
proposes that the window for submission of exercise-by-exception 
instructions be open from 6:00 p.m. to 9:15 p.m. Central Time on Friday 
evening.\11\ Friday expiration processing

[[Page 26415]]

for Standard Expiration Contracts would therefore begin at 6:00 p.m. 
Central Time on Friday evening and end at approximately 2:00 a.m. 
Central Time on Saturday morning when margin and settlement reports 
will be available.\12\
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    \10\ OCC's exercise-by-exception procedures are described in 
Rule 805(d), which generally provides that each clearing member will 
automatically be deemed to have submitted an exercise notice 
immediately prior to the expiration time for all in-the-money option 
contracts unless the clearing member has instructed OCC otherwise in 
a written exercise notice.
    \11\ The exercise-by-exception window for weekly and quarterly 
expiration options is from 6:00 p.m. to 7:00 p.m. Central Time on 
the expiration date.
    \12\ The proposed expiration schedule for Friday expiration 
processing is similar to the expiration schedule for weekly options, 
which begins at 6:00 p.m. Central Time on Friday evening and ends at 
11:30 p.m. Central Time on Friday evening. All timeframes would be 
set forth in OCC's procedures and subject to change based on OCC's 
experience with Friday expiration processing.
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    Exercises for Standard Expiration Contracts with Saturday 
expirations must be allowed under the terms of the contracts. However, 
in order to accommodate the proposed new expiration schedule, OCC also 
proposes to shorten the period of time in which clearing members may 
submit a Supplementary Exercise notice under Rule 805(b). In addition, 
Rule 801 would be amended to eliminate the ability of clearing members 
to revoke or modify exercise notices submitted to OCC. This proposed 
change, along with the proposed change in the processing timeline 
discussed above, will more closely align OCC's expiration processing 
procedures with exchange rules, under which exchange members must 
submit exercise instructions by 5:30 p.m. Central Time on Friday and 
may not accept exercise instructions from customers after 4:30 p.m. 
Central Time on Friday. Accordingly, this proposed change will not 
represent a departure from current practices for clearing members or 
their customers.
    In connection with moving from Saturday to Friday night processing 
and expiration, OCC reviewed other aspects of its business to confirm 
that there would be no unintended consequences, and concluded that 
there would be none. For example, OCC believes the proposed changes do 
not affect OCC's liquidity forecasting procedures, nor do they impact 
OCC's liquidity needs, since OCC's liquidity forecasts and liquidity 
needs are driven by settlement obligations, which occur on the same day 
(T+3) irrespective of the move to Friday night processing and 
expiration dates.
Grandfathering of Certain Options Series
    Certain option contracts have already been listed on exchanges with 
expiration dates as distant as December 2016. Such options have 
Saturday expiration dates and OCC cannot change the terms of existing 
option contracts. In addition, clearing members have expressed a clear 
preference to not have open interest in any particular month with 
different expiration dates. Therefore, OCC will designate certain 
expiration dates as ``grandfathered,'' and any option contract that is 
listed, or may be listed in the future, that expires on a grandfathered 
date will have a Saturday expiration date even if such expiration date 
is after February 1, 2015.\13\ Further, certain FLEX options that have 
already been accepted for clearance and have expiration dates beyond 
February 1, 2015, will also be designated as grandfathered. The Friday 
night expiration transition period processing schedule, as described 
above, will be in effect for any grandfathered Saturday expiration 
contract. In order to minimize the number of grandfathered expiration 
dates, exchanges have already agreed that, if there is not already a 
previously listed Standard Expiration Contract with an expiration in a 
particular month that is after February 1, 2015,\14\ they will not open 
for trading any new series of Standard Expiration Contracts with 
Saturday expiration dates in such month.
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    \13\ After OCC designates an expiration date as grandfathered, 
the exchanges have agreed to not permit the listing of, and OCC will 
not accept for clearance, any newly listed standard expiration 
option contract with a Friday expiration in the applicable month.
    \14\ Until exchanges complete certain systems enhancements in 
August 2013, it is possible that additional option contracts may be 
listed with Saturday expiration dates beyond February 1, 2015.
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Proposed Amendments to By-Laws and Rules
    In order to implement the change to Friday expiration processing 
and eventual transition to Friday expiration for all Standard 
Expiration Contracts, OCC proposes to amend the definition of 
``expiration date'' in Article I and certain other articles of the By-
Laws. As amended, the applicability of the definition would not be 
limited to stock options, and the definition of ``expiration date'' in 
certain articles of the By-Laws therefore can be deleted in reliance on 
the Article I definition. OCC also proposes to amend Rule 805, and all 
rules supplementing or replacing Rule 805, to allow for Friday 
expiration processing during the transition to Friday expiration. 
Section 18 of Article VI of the By-Laws would also be amended to align 
procedures for delays in producing Expiration Exercise Reports and 
submission of exercise instructions with the amended expiration 
exercise procedures in Rule 805. Rule 801 would be amended to modify 
the prohibition against exercising an American-style option contract on 
the business day prior to its expiration date because this prohibition 
is necessary only for options expiring on a Saturday. The prohibition 
can be removed altogether when there are no longer any options expiring 
on a Saturday.
    Rule 801 is also being amended to remove clearing members' ability 
to revoke or modify exercise notices in order to accommodate the 
proposed compressed Friday expiration processing expiration schedule. 
Finally, Rules 801 and 805 would be amended to allow certain 
determinations to be made by high-level officers of OCC, rather than 
the Board of Directors, in order to provide OCC with greater 
operational flexibility in processing exercise requests received after 
Friday expiration processing is complete but before the Saturday 
contract expiration time, and to replace various references to the 
expiration date of options with reference to the procedures of Rule 
805.
    Under the proposed rule change, OCC would preserve the ability of 
the options exchanges to designate (or, in the case of flexibly 
structured options, permit clearing members to designate) non-standard 
expiration dates for options, or classes or series of options, so long 
as the designated expiration date is not a date OCC has specified as 
ineligible to be an expiration date.
    OCC believes the proposed rule change is consistent with the 
purposes and requirements of Section 17A of the Exchange Act \15\ 
because it provides for the prompt and accurate clearance and 
settlement of securities transactions and the protection of securities 
investors and the public interest \16\ by improving the processing time 
for clearing of option contracts, standardizing the expiration day of 
numerous options contracts, and requiring clearing members to reconcile 
options transactions on the trade date, which will facilitate and 
promote intra-day risk management by the clearing members. OCC believes 
the proposed rule change is not inconsistent with any existing OCC By-
Laws or Rules.
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    \15\ 15 U.S.C. Section 78q-1.
    \16\ 15 U.S.C. Section 78q-1(b)(3)(F).
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(B) Clearing Agency's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose a 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change, which 
will apply to all OCC clearing members, involves operational 
improvements that will allow OCC and its clearing members to become 
more operationally efficient and

[[Page 26416]]

reduce operational risk. Moreover, OCC has coordinated moving to a 
Friday night expiration process with options industry participants and 
has also obtained assurance from all such participants that they are 
able to adhere to OCC's Friday night expiration implementation 
schedule. Therefore, OCC does not believe the proposed rule change 
would impose a burden on competition.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    While the matters discussed in this proposed rule change have been 
subject to extensive discussion with clearing members, including during 
an OCC Operations Roundtable, 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 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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 or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.\17\
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    \17\ OCC also filed the proposed rule change as an advance 
notice under Section 806(e)(1) of the Clearing Supervision Act. 12 
U.S.C. 5465(e)(1); SR-OCC-2013-802. Proposed changes filed under the 
Clearing Supervision Act may be implemented pursuant to Section 
806(e)(1)(G) of the Clearing Supervision Act if the Commission does 
not object to the proposed change within 60 days of the later of (i) 
the date that the proposed change was filed with the Commission or 
(ii) the date that any additional information requested by the 
Commission is received. 12 U.S.C. 5465(e)(1)(G).
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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 Exchange 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 email to [email protected]. Please include 
File Number SR-OCC-2013-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549.
    All submissions should refer to File Number SR-OCC-2013-04. 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 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of OCC and on OCC's 
Web site: (http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_13_04.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-2013-04 and should be submitted on or before May 28, 
2013.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-10605 Filed 5-3-13; 8:45 am]
BILLING CODE 8011-01-P