[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