[Federal Register Volume 71, Number 160 (Friday, August 18, 2006)]
[Notices]
[Pages 47853-47854]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-13616]
[[Page 47853]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54306; File No. SR-OCC-2006-05]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of a Proposed Rule Change Relating to Expiration Date
Exercise Procedures
August 11, 2006.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on April 26, 2006, The
Options Clearing Corporation (``OCC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change as
described in Items I, II, and III below, which items have been prepared
primarily by OCC. 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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change would amend Rule 805, which describes
expiration date exercise procedures including exercise by exception
processing.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, OCC 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. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\2\
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\2\ The Commission has modified parts of these statements.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The proposed rule change would amend Rule 805, Expiration Date
Exercise Procedure, to reduce the threshold amounts used to determine
the equity options that are in the money for purposes of exercise by
exception processing. A conforming change would also be made to Rule
1106, Open Positions, which concerns the treatment of open positions
following the suspension of a clearing member.
OCC has for years maintained an ``exercise by exception''
procedure. Under that procedure, options that are in the money at
expiration by more than a specified threshold amount are exercised
automatically unless the clearing member carrying the position
instructs otherwise. Equity options are determined to be in the money
or not based on the difference between the exercise price and the
closing price of the underlying equity interest on the last trading day
before expiration. In September 2004, in order to streamline expiration
processing, OCC reduced the threshold amounts for equity options from
$.75 to $.25 in a clearing member's customers' account and from $.25 to
$.15 in any other account (i.e., firm and market makers' accounts).\3\
This change, which was implemented at the request of the OCC
Roundtable,\4\ immediately yielded significant benefits to both OCC and
clearing members as the time for submitting exercise instructions was
reduced by one to three hours on an average expiration weekend.
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\3\ Securities Exchange Act Release No. 50178 (August 10, 2004),
69 FR 51343 (August 18, 2004) [File No. SR-OCC-2004-04].
\4\ The OCC Roundtable is an OCC sponsored advisory group
comprised of representatives from OCC's participant exchanges, OCC,
a cross-section of OCC clearing members, and industry service
bureaus. The Roundtable considers operational improvements that may
be made to increase efficiencies and lower costs in the options
industry.
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Increasing options volumes in 2004 and 2005 prompted the OCC
Roundtable to review the thresholds applied to equity options in an
effort to further reduce operational risks and improve expiration
processing. Initially, the Roundtable proposed that the threshold for
all account types be set at $.01, but an OCC survey of clearing members
found that while 65% of responding clearing members supported this
change, 35% were against it. A second OCC survey determined that 75% of
responding clearing members were in favor of a threshold change to $.05
for all account types and 25% were opposed to it. The Roundtable then
requested that OCC establish $.05 as the threshold applicable to equity
options exercises for all account types.
In response to this request, OCC analyzed equity options exercise
information from the June 2004 through December 2005 expirations. OCC's
analysis determined that 70% of equity option contracts carried in
clearing members' customers' accounts that were in the money by the
amount of $.05 to $.24 (i.e., the change in the ``in-the-money'' amount
represented by the proposed threshold) were exercised. OCC's analysis
also determined that exercise activity in other account ranges
supported the proposed threshold change.
OCC surveyed all clearing members to obtain their views and
comments on the proposed change to $.05 as the threshold amount for
equity options for all account types. Survey results demonstrated
strong support across the membership for the change. Eighty-seven
clearing members \5\ responded to the survey with sixty-five clearing
members (75 percent) in favor of the threshold change and 22 clearing
members (25 percent) opposed. Clearing members supporting the change
confirmed the Roundtable's view that it would significantly reduce the
number of instructions they are required to input on expiration thereby
shortening the timeframe for completing instructions to OCC.
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\5\ OCC contacted clearing members that did not respond to its
survey. These firms expressed no opinion on the matter.
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OCC contacted each firm that opposed the threshold change. These
firms are generally mid-size to small retail clearing members. Their
opposition to the change reflected their principal concern about having
to input more ``do not exercise'' instructions. Some indicated concerns
about the need to educate customers and the possibility that commission
costs could make an exercise unprofitable.\6\ However, all of these
firms agreed that they could adapt to the change if supported by the
majority of clearing members. OCC further reviewed the positions
carried by these firms and determined that, on average, they carry
positions in fewer than 10 expiring series per expiration that are
below the current threshold of $.25. This review led OCC to conclude
that the threshold change would result in only a slight increase in
processing time for these firms and that they would not be unduly
burdened by its implementation.
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\6\ As noted, clearing members are able to instruct OCC not to
exercise an expiring equity option.
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OCC's survey of clearing members also asked firms to provide an
estimate of the time needed to accommodate the threshold change based
upon supplied time frames (e.g., 0-3 months or 4-6 months). The
majority of firms indicated that they could complete the necessary
systems development and customer notifications within six months. OCC
contacted every firm that commented on the proposed time frames, and
all expressed the view that their efforts would be completed in the six
month time period.
[[Page 47854]]
The Roundtable has recommended that this change be implemented for
the October 2006 expiration. OCC therefore requests that the Commission
approve the proposed rule change with an effective date of October 1,
2006, and that the Commission authorize OCC to implement the threshold
change thereafter based upon its assessment of clearing member
readiness. OCC would provide at least ten days advance notice to
clearing members of the effective date for the new threshold amounts by
information memoranda and other forms of electronic notice such as e-
mail. Additionally, OCC would allow clearing members additional time to
complete preparations for the threshold change if necessary.
OCC believes that the proposed rule change is consistent with
Section 17A of the Act because it facilitates the prompt and accurate
processing of exercise information on expiration.
(B) Self-Regulatory Organization's Statement on Burden on Competition
OCC does not believe that the proposed rule change would impose any
burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
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 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date 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 the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
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 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 e-mail to [email protected]. Please include
File Number SR-OCC-2006-05 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2006-05. This
file number should be included on the subject line if e-mail 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 inspection
and copying in the Commission's Public Reference Section, 100 F Street,
NE., Washington, DC 20549. Copies of such filing also will be available
for inspection and copying at the principal office of OCC and on OCC's
Web site at www.optionsclearing.com. 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-2006-05 and should be submitted on
or before September 8, 2006.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-13616 Filed 8-17-06; 8:45 am]
BILLING CODE 8010-01-P