

[Federal Register: August 18, 2006 (Volume 71, Number 160)]
[Notices]               
[Page 47853-47854]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18au06-136]                         


[[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 rule-comments@sec.gov. 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 http://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
