

[Federal Register: December 6, 2007 (Volume 72, Number 234)]
[Notices]               
[Page 68937-68939]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06de07-107]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56856; File No. SR-OCC-2007-13]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Relating to Delayed Start Options

November 28, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 9, 2007, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change described 
in Items I, II, and III below, which items have been prepared primarily 
by OCC. The Commission is publishing this notice and order to solicit 
comments from interested persons and to grant approval of the proposal.
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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 permit OCC to clear and settle 
delayed start options (``DSOs'') by the Chicago Board Options Exchange 
(``CBOE'').

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 these 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by OCC.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change--Purpose of Rule Change

    The purpose of the proposed rule change is to accommodate the 
introduction of DSOs by the CBOE. Initially CBOE proposes to list DSOs 
only on indexes.\3\
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    \3\ File No. SR-CBOE-2007-26. The Commission recently issued an 
order granting approval of SR-CBOE-2007-26 that allows CBOE to list 
and trade DSOs. Securities Exchange Act Release No. 56855 (November 
28, 2007).
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Description of Product
    As described by CBOE, a DSO is identical to existing standardized 
options with one exception: at the commencement of trading in a series, 
DSOs of that series will not have a set exercise price. Instead, a DSO 
will commence trading with a preestablished formula that the listing 
exchange will use to fix the exercise price for the DSO on a specified 
date prior to the DSO's expiration date (``exercise price setting 
date''). The CBOE is currently proposing that an ``at-the-money'' DSO 
on an index will be assigned an exercise price equal to the closing 
value of the underlying index on the exercise price setting date, 
rounded to the increment established by CBOE at the time the DSO 
commences trading. CBOE has also indicated that it may introduce in- or 
out-of-the-money DSOs. Those DSOs would, according to CBOE, have the 
same terms as at-the-money DSOs except that the exercise price would be 
set at a specified percentage either in- or out-of-the-money on the 
exercise price setting date (e.g., 5% in-the-money or 5% out-of-the-
money).
    The listing exchange will specify the exercise price setting date 
prior to the opening of each series of DSOs. According to CBOE, the 
exercise price setting date for each series of DSOs traded on CBOE will 
initially be three months prior to the DSO's expiration date. In other 
words, each series of DSOs will trade without an exercise price until 
three months prior to expiration. From the exercise price setting date 
forward, all options terms will be fixed, and DSOs will be fungible 
with any other option on the same underlying interest having the same 
terms such as exercise price, expiration date, etc. An exchange may 
determine to issue series of DSOs with more or less than three months 
between the exercise price setting date and the expiration date.
    A DSO will not have an exercise price until the exercise price 
setting date, and it will not be exerciseable until after that date. 
Thus, an ``American-style'' DSO would be exerciseable only between the 
exercise price setting date and the expiration date. A ``European-
style'' DSO, like any other European-style option, would be exercised 
only on or near the expiration date.
Proposed Changes to OCC's By-Laws and Rules
    In order to issue and clear DSOs, OCC needs to make several 
definitional changes in its By-Laws. A definition of DSO would be added 
to Article I of the By-Laws. OCC is also proposing to

[[Page 68938]]

amend the existing definition of ``American-style'' in Article I of its 
By-Laws to make clear that unlike other American-style options, DSOs 
could not be exercised beginning at the commencement time for the 
options. Instead, American-style DSOs could only be exercised after 
their exercise price is set. Additionally, OCC proposes to amend the 
existing definition of ``series'' to provide that DSOs with the same 
expiration date, unit of trading, exercise price setting date, and 
exercise price setting formula will comprise the same series until 
their exercise price is set. At that point DSOs with the same 
expiration date, unit of trading and exercise price will, like other 
options, comprise the same series. Similarly, OCC is proposing to amend 
the existing definition of ``variable terms'' in Article I because DSOs 
will not have an exercise price as one of their variable terms until 
their exercise price setting date. Instead, DSOs will have both an 
exercise price setting date and an exercise price setting formula as 
variable terms until that time. OCC is proposing to add two definitions 
to Article I as well. Both ``exercise price setting date'' and 
``exercise price setting formula'' are needed to reflect the fact that 
DSOs will not have an exercise price when they begin trading and to 
describe when and how an exercise price will be fixed by the listing 
exchange.
    OCC proposes amending Article VI of its By-Laws to clarify that an 
exchange listing DSOs need not set the exercise price for such options 
at the time each series is opened for trading but instead must set the 
exercise price setting date and the exercise price setting formula, and 
that an American-style DSO may not be exercised until after its 
exercise price has been set. The proposed amendment to the definition 
of ``series of options'' in Article XVII is similar to the amendment to 
the definition of ``series'' in Article I and like that amendment is to 
clarify that DSOs with the same expiration date, unit of trading, 
exercise price setting date, and exercise price setting formula will 
comprise the same series until their exercise price is set. The 
amendments to Article XVII, Section 2(a) and to Rule 1802(a), like the 
changes to the definition of ``American-style'' in Article I and in 
Article VI, would prohibit holders of American-style DSOs from 
exercising until the exercise price is set.
    Proposed amendments to Rule 401(a)(1) are to permit matched trade 
reports for DSOs to contain the exercise price setting date and 
exercise price setting formula rather than an exercise price until the 
exercise price is set.
    The proposed changes to OCC's By-Laws and Rules are consistent with 
the purposes and requirements of Section 17A of the Act, as amended, 
because they are designed to promote the prompt and accurate clearance 
and settlement of transactions in DSOs, which are a new product 
designed to allow customers to manage risk associated with the 
volitility of an underlying interest. DSOs are very similar to existing 
options currently cleared by OCC and would be governed by substantially 
the same rules and procedures to which existing options are subject. 
The proposed rule change is not inconsistent with the existing rules of 
OCC, including rules proposed to be amended.

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

    Section 17A(b)(3)(F) of the 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.\4\ The 
purpose of the proposed rule change is to amend OCC's By-Laws and Rules 
so that OCC may clear and settle DSOs. Accordingly, after careful 
review the Commission finds that the proposed rule change meets the 
requirements of Section 17A(b)(3)(F) of the Act because the proposed 
rule change should result in the prompt and accurate clearance and 
settlement of securities transactions, specifically transactions in 
DSOs.
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    \4\ 15 U.S.C. 78q-1(b)(3)(F).
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    OCC has requested that the Commission approve the proposed rule 
prior to the thirtieth day after publication of the notice of filing. 
The Commission finds good cause for approving the proposed rule change 
prior to the thirtieth day after publication of notice because such 
approval will allow CBOE to commence trading of DSOs without any 
unnecessary delay.

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-2007-13 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-2007-13. 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 Room, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. 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.theocc.com/publications/rules/proposed_changes/sr_occ_07_13.pdf.
 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-
2007-13 and should be submitted on or before December 27, 2007.

[[Page 68939]]

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 17A of the Act and the rules and regulations 
thereunder.\5\
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    \5\ 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).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-2007-13) be and hereby 
is approved on an accelerated basis.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-23610 Filed 12-5-07; 8:45 am]

BILLING CODE 8011-01-P
