[Federal Register Volume 78, Number 137 (Wednesday, July 17, 2013)]
[Notices]
[Pages 42815-42817]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-17099]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69977; File No. SR-OCC-2013-05]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Provide That OCC, Rather Than 
an Adjustment Panel of the Securities Committee, Will Determine 
Adjustments to the Terms of Options Contracts To Account for Certain 
Events, Such as Certain Dividend Distributions or Other Corporate 
Actions, That Affect the Underlying Security or Other Underlying 
Interest

July 11, 2013.

I. Introduction

    On May 15, 2013 The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2013-05 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on June 3, 2013.\3\ The Commission received no 
comment letters. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-69642 (May 28, 2013), 
78 FR 33138 (June 3, 2013).
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II. Description

    Certain corporate actions--such as declaration of dividends or 
distributions, stock splits, rights offerings, reorganizations, or the 
merger or liquidation of an issuer--affecting an underlying security 
may require an adjustment to the terms of the overlying options. The 
principal purpose of this rule change is to authorize OCC, rather than 
adjustment panels of the Securities Committee,\4\ to determine option 
contract adjustments and to determine the value of distributed property 
involved in such adjustments.
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    \4\ The OCC Securities Committee is authorized under OCC By-Law 
Article VI Section 11(a) to determine contract adjustments in 
particular cases and to formulate adjustment policy or 
interpretations having general applicability. The Securities 
Committee is comprised of representatives of OCC's participant 
options exchanges and authorized representatives of OCC.
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    Article VI, Section 11 of OCC's By-Laws provide that all 
adjustments to option contracts are currently determined on a case-by-
case basis by an adjustment panel of the Securities Committee composed 
of two representatives \5\ of each exchange that trades an option on 
the underlying security and the OCC Chairman (or his representative). 
All actions are determined by majority vote, with OCC voting only to 
break a tie. Besides determining particular adjustments in individual 
cases, Article VI, Section 11 also authorizes the Securities Committee 
to adopt statements of policy or interpretations governing option 
adjustments in general. Additionally, the Securities Committee is 
authorized to determine the value of distributed property involved in 
stock option adjustments as stated in Article VI, Section 11A(f).
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    \5\ The Commission has approved an amendment to OCC's By-Laws 
under which only one representative of each relevant exchange is 
required on an adjustment panel. Securities Exchange Act Release No. 
34-67333 (July 2, 2012), 77 FR 40394 (July 9, 2012) (SR-OCC-2012-
07). However, the amendment will not be implemented until an 
amendment to the Options Disclosure Document reflecting this change 
is made. Interpretation and Policy .01 to Article VI, Section 11 
clarifies that until such time as the amendment to the Options 
Disclosure Document is made and only one representative is required, 
an adjustment panel must have two representatives of each exchange 
that trades an option on the underlying security.
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    Discussions among OCC and the options exchanges concerning 
potential changes to Securities Committee governance in respect of 
adjustments

[[Page 42816]]

yielded a consensus that the exchanges should retain policy-making 
authority under the adjustment By-Laws through the Securities Committee 
but that OCC should be the sole determiner of particular adjustment 
decisions, thereby eliminating adjustment panels convened for the 
purpose of determining adjustments of particular option contracts. 
Under the rule change:
    (i) The policy making role of the Securities Committee will be 
unchanged. As members of the Securities Committee, exchanges will 
retain authority to determine adjustment policy in general.
    (ii) OCC will apply the adjustment By-Laws and Interpretations to 
determine particular adjustments on a case-by-case basis. An adjustment 
panel comprised of exchange and OCC representatives will not be called 
to determine a particular adjustment.
    (iii) OCC and the exchanges will retain unrestricted ability to 
mutually discuss considerations pertaining to any adjustment decision 
or policy.
    (iv) OCC will have authority to determine the value of distributed 
property involved in contract adjustments.
    Notwithstanding the elimination of exchange representative 
adjustment panels, panels of exchange representatives will retain their 
existing functions and authority under other provisions of OCC's By-
Laws.\6\ The types of adjustments for which exchange representative 
panels may continue to be convened will be limited to rare situations 
involving market closures or the unavailability of accurate pricing.
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    \6\ For example, those panels will retain the authority to fix 
exercise settlement amounts for cash-settled options where a closing 
price for the underlying is otherwise unavailable.
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    As a result of this rule change, adjustment panels for the purpose 
of determining adjustments of particular options contracts will cease 
to exist and exchanges will have no obligation or authority to 
determine a particular adjustment. OCC will determine the appropriate 
application of the By-Laws and Interpretations and Policies, but the 
exchanges will retain policy making authority as members of the 
Securities Committee. In this policy making capacity, actions of the 
Securities Committee will continue to require approval by a majority 
vote.
    OCC states that occasionally there may be unique aspects of a 
corporate event that justify departure from adjustment policy or 
precedent, or that involve a situation for which there is no existing 
adjustment policy or precedent. Such events may also highlight a need 
for a more general reformulation of adjustment policy. Under this rule 
change, if OCC determines such aspects to be present, OCC will 
determine in its sole discretion any adjustment to be applied in the 
particular case. The Securities Committee will not initiate policy 
changes ``ad hoc'' to address a particular case (which would be a de 
facto determination of a particular adjustment decision). Instead, 
after OCC determined a particular adjustment, the Securities Committee, 
in its discretion, will determine the appropriateness of adopting 
prospective policy changes or clarifications.\7\
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    \7\ This approach was followed in 2006 in response to a special 
cash dividend. In that case, adjustment panels determined to depart 
from precedent and adjust certain ETF options where the ETF 
distributed pro rata dividends based on the amount of a special 
dividend paid by the issuer of one of the component stocks in the 
ETF. Following these adjustments, the Securities Committee 
recommended to the OCC Board a policy reformulation. See 
Interpretation .08 to Article VI, Section 11A.
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    OCC and the exchanges believe that they should retain unrestricted 
ability to discuss with each other any considerations pertaining to an 
adjustment decision or policy--with the understanding that adjustment 
decisions would be made solely by OCC and the exchanges would be 
involved solely in an advisory capacity.\8\ Accordingly, this rule 
change does not prohibit either the exchanges or OCC from initiating 
conversations concerning adjustment policy or particular adjustment 
decisions, but neither would such consultation be required. 
Furthermore, to ensure continued exchange involvement in determining 
adjustment policy, OCC intends to call periodic meetings of the 
Securities Committee, to be held on a quarterly or more frequent period 
basis, to discuss policy issues and review recent experience with 
contract adjustments.\9\
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    \8\ Although OCC and the exchanges believe it is feasible for 
OCC to independently determine adjustments, both are averse to 
losing valuable exchange experience and insight that is now brought 
to bear in adjustment decisions.
    \9\ As a practical matter, even if adjustments are determined 
solely by OCC it would still be necessary for OCC and the exchanges 
to coordinate the operational execution of all option adjustments. 
This coordination includes, but is not limited to, the determination 
of an effective date, option symbols and strike prices and the 
publication of notices.
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    The rule change will apply only to the functions of OCC and the 
Securities Committee in the determination of option contract 
adjustments as described in Article VI, Sections 11 and other By-Law 
provisions. The Securities Committee--or panels comprised of 
representatives of the Securities Committee--in respect of actions that 
do not involve option contract adjustments will retain all other 
functions and authority granted under the By-Laws, including, for 
example, the ability to fix index option settlement values in cases of 
market disruption and similar actions.
    In addition to the principal purpose underlying this rule change, 
OCC is making certain other conforming and/or clarifying changes to the 
By-Laws relating to adjustments and/or adjustment panels. Specifically, 
OCC is modifying or eliminating certain adjustment related By-Law 
provisions because, due to industry or other changes, there is no 
longer any open interest in options covered by such provisions. OCC is 
eliminating other stale provisions, including those found within 
Interpretation and Policy .01 under the Article VI, Section 11, which 
relate to the determination of ``ordinary cash dividends or 
distributions'' for which no adjustment is ordinarily made. OCC is also 
making changes to Article XIV, Section 3A(a)(3) in relation to binary 
options for which the underlying is an equity interest. OCC is also 
making changes to Article XIV Section 3A to reflect a clarifying 
interpretation issued by the Securities Committee with respect to 
determinations of corporate issuers to accelerate or defer payments of 
otherwise ordinary dividends.\10\ Other conforming changes being made 
by OCC update cross-references to By-Laws and Rules that are being 
amended.
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    \10\ OCC's Securities Committee is empowered under the By-Laws 
to adopt statements of policy or interpretations having general 
application to specified types of events or specific kinds of 
cleared contracts. The Securities Committee determined that such 
events would not, as a general rule, affect the ordinary nature of 
such dividends subject to the evaluation of these events on a case-
by-case basis.
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III. Discussion

    Section 19(b)(2)(C) of the Act \11\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such organization. Section 17A(b)(3)(F) of the Act \12\ 
requires that the rules of a clearing agency are designed to, among 
other things, promote the prompt and accurate clearance and settlement 
of securities transactions and foster cooperation and coordination with 
persons engaged in the clearance and settlement of securities 
transactions.
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    \11\ 15 U.S.C. 78s(b)(2)(C).
    \12\ 15 U.S.C. 78q-1(b)(3)(F).

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[[Page 42817]]

    By providing OCC with sole discretion for particular adjustment 
decisions, the rule change helps to ensure that decisions are 
consistent, efficient and free from undue influence. As a result, the 
rule change should help to promote the prompt and accurate clearance 
and settlement of securities transactions as well as foster cooperation 
and coordination with persons engaged in the clearance and settlement 
of securities transactions consistent with Section 17A(b)(3)(F) of the 
Act.\13\ Furthermore, in addition to ensuring consistency with Section 
17A(b)(3)(F) of the Act,\14\ the conforming and clarifying changes to 
OCC's By-Laws and Rules should help ensure that OCC maintains a well-
founded, transparent and enforceable legal framework as required by 
Rule 17Ad-22(d)(1).\15\
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ 15 U.S.C. 78q-1(b)(3)(F).
    \15\ 17 CFR 240.17Ad-22(d)(1).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \16\ and the 
rules and regulations thereunder.
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    \16\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (File No. SR-OCC-2013-05) be and 
hereby is approved.\18\
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    \17\ 15 U.S.C. 78s(b)(2).
    \18\ 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.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-17099 Filed 7-16-13; 8:45 am]
BILLING CODE 8011-01-P