[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