[Federal Register Volume 85, Number 45 (Friday, March 6, 2020)]
[Notices]
[Pages 13198-13200]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04576]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88310; File No. SR-OCC-2020-001]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Modify the Fees for Exercise 
Notices Submitted After the Deadlines and To Change the Deadline for 
Submitting a Late Exercise Notice on Non-Expiration Dates

March 2, 2020.

I. Introduction

    On January 14, 2020, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2020-001 (``Proposed Rule Change'') 
pursuant to Section 19(b) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to modify the fee 
imposed for submitting a late exercise notice and change the deadline 
by which such a notice must be submitted on non-expiration dates.\3\ 
The Proposed Rule Change was published for public comment in the 
Federal Register on January 30, 2020.\4\ The Commission has received no 
comments regarding the Proposed Rule Change. 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\ See Notice of Filing infra note 4, at 85 FR 5491.
    \4\ Securities Exchange Act Release No. 88030 (Jan. 24, 2020), 
85 FR 5491 (Jan. 30, 2020) (SR-OCC-2020-001) (``Notice of Filing'').
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II. Background

    OCC's rules require Clearing Members to submit option exercise 
notices within the timeframes prescribed by OCC. OCC's rules provide 
for an exception process to accommodate exercise notices submitted 
outside of such timeframes solely for the purpose of correcting a bona 
fide error on the part of a Clearing Member or customer.\5\ OCC's 
process for accommodating late exercise notices includes, among other 
things, a late filing fee and a final deadline by which any such notice 
must be received by OCC. OCC proposes to amend its Rules 801 and 805 to 
modify the fees for exercise notices submitted after the deadlines by 
which all option exercise notices must be submitted and to change the 
deadline for submitting a late exercise notice on non-expiration 
dates.\6\
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    \5\ See OCC Rules 801 and 805, available at https://www.theocc.com/components/docs/legal/rules_and_bylaws/occ_rules.pdf.
    \6\ OCC did not propose to change deadlines related to the late 
exercise of options on an option's expiration date.
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    OCC's Rule 801 governs the exercise of an options on days other 
than the option's expiration date. OCC's Rule 805 governs the exercise 
of an option on the option's expiration date. Under OCC's Rule 801(d), 
the filing of a late exercise notice by a Clearing Member may be deemed 
a violation of OCC's procedures and may subject the Clearing Member to 
disciplinary action. Additionally, under OCC's Rule 801(d) and Rule 
805(g), a Clearing Member submitting a late exercise notice is liable 
to OCC for a $75,000 fee per line item listed on a late exercise 
notice.\7\
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    \7\ A line item is an exercise instruction which includes the 
account, series, and quantity to be exercised.
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    OCC observed that the Clearing Members submitting late exercise 
notices in 2017 and 2019 captured dividends on the securities 
underlying the late exercised options, thereby securing the financial 
gains associated with such captured dividends.\8\ Further, OCC observed 
that the amount of dividends captured ranged from $93,600 to 
$436,800.\9\ OCC has previously stated that the late exercise fee is 
intended as an incentive for Clearing Members to be especially diligent 
in processing exercise notices and to improve back office procedures 
while at the same time preserving their ability to correct bona fide 
operational errors.\10\
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    \8\ See Notice of Filing, 85 FR at 5492.
    \9\ See Notice of Filing, 85 FR at 5492, n. 10. OCC also stated 
that the amount of late exercises notices received since 2017 was 
significantly more than the preceding seven years. See Notice of 
Filing, 85 FR at 5492.
    \10\ See Securities Exchange Act Release No. 57584 (Mar. 31, 
2008), 73 FR 18844 (Apr. 7, 2008) (SR-OCC-2007-016); Notice of 
Filing, 85 FR at 5492.
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    On November 9, 2017, OCC discussed late exercise notices submitted 
in 2017 at its OCC Roundtable, an OCC-sponsored advisory group 
comprised of representatives from OCC's participant exchanges, a cross-
section of OCC Clearing Members, and OCC staff.\11\ The OCC Roundtable 
participants noted the dollar amount at issue in connection with late 
exercises received in 2017, which reflected the amount of dividends 
received by the person submitting the late exercise as a result of 
receiving the underlying shares. As a result of these discussions, 
Roundtable participants agreed that an increase in the late exercise 
fee from the current $75,000 fee per line item to $250,000 fee per line 
item would be appropriate and in a range to incentivize Clearing

[[Page 13199]]

Members to be especially diligent in processing exercise notices while 
at the same time still allowing firms to correct bona fide errors.\12\
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    \11\ See Notice of Filing, 85 FR at 5492.
    \12\ See Notice of Filing, 85 FR at 5492.
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    OCC's Rule 801(d) defines the deadline for submitting late exercise 
notices for exercises other than at expiration. Under its current 
rules, OCC will not accept a late exercise notice received after 6:30 
a.m. CT, and Clearing Members assigned late exercises must be notified 
by 8:00 a.m. CT.\13\ OCC's rules, therefore, may provide OCC with as 
little as 90 minutes to accommodate an exception to OCC's standard 
option exercise processes. OCC's exception process requires the (1) 
review of Clearing Member positions, (2) escalation of the request to 
submit a late exercise notice to senior management, (3) random 
assignment of late exercised positions to Clearing Members, and (4) 
communication to assigned Clearing Members.\14\ OCC represented that 
the 90-minute period from 6:30 a.m. to 8:00 a.m. CT was a narrow window 
for OCC staff to complete these steps, which are necessary to properly 
process late exercises and assignments, without delays.\15\ As a 
result, in addition to increasing the late exercise fee as discussed 
above, OCC proposes to change the deadline for submission of late 
exercises to 6:00 a.m. CT to provide an additional 30 minutes of 
processing time. The OCC Roundtable discussed the proposal described 
above and agreed that it would be appropriate and in a range to 
incentivize Clearing Members to be especially diligent in processing 
exercise notices while at the same time still allowing firms to correct 
bona fide errors.\16\
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    \13\ See OCC Rule 801(d)(2), available at https://www.theocc.com/components/docs/legal/rules_and_bylaws/occ_rules.pdf.
    \14\ See Notice of Filing, 85 FR at 5492.
    \15\ See Notice of Filing, 85 FR at 5492.
    \16\ See Notice of Filing, 85 FR at 5492.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act 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 Exchange Act and the rules and regulations 
thereunder applicable to such organization.\17\ After carefully 
considering the Proposed Rule Change, the Commission finds that the 
proposal is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to OCC. More 
specifically, the Commission finds that the proposal is consistent with 
Sections 17A(b)(3)(D) and 17A(b)(3)(F) of the Exchange Act.\18\
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    \17\ 15 U.S.C. 78s(b)(2)(C).
    \18\ 15 U.S.C. 78q-1(b)(3)(D) and 15 U.S.C. 78q-1(b)(3)(F).
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A. Consistency With Section 17A(b)(3)(D) of the Exchange Act

    Section 17A(b)(3)(D) of the Exchange Act requires that the rules of 
a clearing agency provide for the equitable allocation of reasonable 
dues, fees, and other charges among its participants.\19\ Based on its 
review of the record, the Commission believes that the proposed 
increase in the late exercise notice fee is reasonable for the reasons 
described below.
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    \19\ 15 U.S.C. 78q-1(b)(3)(D).
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    As described above, under Rules 801(d) and 805(g), the filing of a 
late exercise notice may be deemed by OCC to be a violation of OCC's 
procedures and could subject the Clearing Member who submits such a 
filing to disciplinary action, as well as a $75,000 late exercise fee. 
At the same time, OCC's Rules provide for a late exercise process 
designed to allow OCC to accommodate exceptions to its rules governing 
the option exercise process for bona fide errors. As noted above, OCC 
observed that, despite subjecting Clearing Members to the late exercise 
fee and potentially subjecting them to disciplinary action for 
violating OCC's procedures, Clearing Members were nevertheless filing 
late exercise notices, thereby securing the financial gains associated 
with the captured dividends on the securities underlying the late 
exercised options.
    OCC proposes to increase the late exercise fee from $75,000 to 
$250,000 per line item. As noted above, OCC's determination to increase 
the late exercise fee by this amount was based on discussions at the 
2017 OCC Roundtable among representatives from OCC's participant 
exchanges, a cross-section of OCC Clearing Members, and OCC staff 
regarding a potential increase in the amount of the late exercise fee 
that would be appropriate and in a range to incentivize Clearing 
Members to be especially diligent in processing exercise notices while 
at the same time still allowing firms to correct bona fide errors.\20\ 
As part of those discussions, Roundtable participants reviewed the 
dollar amounts at issue in connection with late exercises received in 
2017, which reflected the amount of dividends received by the person 
submitting the late exercise as a result of receiving the underlying 
shares. Based on these discussions, the Roundtable participants agreed 
that an increase in the late exercise fee from the current $75,000 fee 
per line item to $250,000 fee per line item would be appropriate and in 
a range to accomplish the goals noted above.
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    \20\ See Notice of Filing, 85 FR at 5492.
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    The Commission understands that, as part of OCC's exception 
process, one of the purposes of the late exercise fee is to incent 
Clearing Members to be especially diligent in complying with OCC's 
Rules regarding processing exercise notices, while at the same time 
preserving the ability of Clearing Members to correct bona fide 
operational errors in those relatively rare instances when such a need 
arises.\21\ To that end, as noted above, OCC coordinated with relevant 
stakeholders to discuss the relevant information and determine the 
level of fees related to late exercise notices that would strike an 
appropriate balance between these goals. The Commission views OCC's 
efforts in this regard as reasonable. Likewise, given that dividends 
captured through the late exercise process in 2017 and 2019 ranged from 
$93,600 to $436,800, the Commission believes that OCC's proposal to 
adopt the consensus recommendation from the 2017 OCC Roundtable to 
raise the late exercise fee to $250,000 is equally reasonable.
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    \21\ See Securities Exchange Act Release No. 57584 (Mar. 31, 
2008), 73 FR 18844 (Apr. 7, 2008) (SR-OCC-2007-016); Notice of 
Filing, 85 FR at 5492.
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    Taken together, and given the purpose of the late exercise fee and 
the financial incentives represented by such dividends, the Commission 
believes that the proposed increase to $250,000 per line item for late 
exercise notices is reasonable and, therefore, is consistent with the 
requirements of Section 17A(b)(3)(D) of the Exchange Act.\22\
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    \22\ 15 U.S.C. 78q-1(b)(3)(D).
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B. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange 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.\23\ Based on its review of the record, the Commission 
believes that the proposed change to the deadline for submitting late 
exercise notices is consistent with the promotion of prompt and 
accurate clearance and settlement of securities transactions for the 
reasons described below.
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    \23\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, the late exercise notice process is designed to 
accommodate exceptions for bona fide errors to the routine options 
exercise

[[Page 13200]]

process. OCC's current rules may provide as little as 90 minutes to 
process late exercise notices. Processing such notices requires a 
number of procedural steps, including the notification of Clearing 
Members affected by the random assignment of late exercises. The 
Commission believes that successful and timely completion of exercise 
and assignment processes is important to the prompt and accurate 
settlement of securities transactions. The Commission further believes 
that providing an additional 30 minutes to facilitate the processing of 
late exercises and assignments without delay would promote the prompt 
and accurate clearance and settlement of securities transactions and 
is, therefore, consistent with the requirements of Section 17A(b)(3)(F) 
of the Exchange Act.\24\
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    \24\ 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 
Exchange Act, and in particular, the requirements of Section 17A of the 
Exchange Act \25\ and the rules and regulations thereunder.
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    \25\ In approving this Proposed Rule Change, the Commission has 
considered the proposed rules' impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\26\ that the Proposed Rule Change (SR-OCC-2020-001) be, 
and hereby is, approved.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-04576 Filed 3-5-20; 8:45 am]
BILLING CODE 8011-01-P