
[Federal Register: April 7, 2008 (Volume 73, Number 67)]
[Notices]               
[Page 18844-18846]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07ap08-112]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57584; File No. SR-OCC-2007-16]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to Late Exercises

March 31, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 7, 2007, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange 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 the 
Substance of the Proposed Rule Change

    The proposed rule change would amend OCC's rules relating to the 
submission of late items and the fees associated with filing exercise 
notices after the start of critical 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.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of this rule filing is to amend OCC's (1) Rule 801 to 
modify the fee applied to exercise notices that are accepted by OCC 
after the start of critical processing, (2) Rule 805 to make conforming 
changes to the filing fees applied to the submission of supplementary 
exercise notices tendered after critical processing, and (3) Rule 205 
to clarify the unusual or unforeseen circumstances when OCC may extend 
the cut-off time for submitting instructions to OCC.
1. Background
    Rule 801 addresses the exercise of options other than at 
expiration. Subject to specified exceptions and conditions, Rule 801(d) 
grants certain individuals \2\ the discretion to permit a clearing 
member to file, revoke, or modify any exercise notice after the 
prescribed deadline for the purpose of correcting a bona fide error. 
However, the requesting clearing member is liable to OCC for a late 
filing fee in escalating increments and time segments. Currently, these 
fees are:
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    \2\ Those individuals are OCC's Chairman, Management Vice 
Chairman, President, or a designee of such officer.
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    (i) A fee of $5,000 for any request accepted between the prescribed 
deadline and the start of critical processing (provided that the 
request does not materially affect such start time) \3\ and
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    \3\ The current deadline for submitting exercise notices is 7:00 
p.m. CT.
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    (ii) a filing fee of $20,000 per line item listed on any exercise 
notice accepted for filing after the start of critical processing, with 
50% of the fee to be distributed to the assigned clearing member or on 
a pro rata basis if more than one clearing member is assigned.\4\
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    \4\ OCC will accept exercises until as late as 6:30 a.m. 
However, OCC will not accept a request to revoke or modify an 
exercise after the start of critical processing.
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    Clearing members with short positions that have been assigned a 
late exercise are to receive notification thereof by 8 a.m. CT.
2. Discussion
    At the March 2007 OCC Roundtable meeting,\5\ a clearing member 
raised the issue of processing late exercises other

[[Page 18845]]

than at expiration. The firm questioned the fairness of this process to 
option writers, noting that unexpectedly receiving additional 
assignments in the morning financially impacted the firm because its 
practice is to promptly review assignments from nightly processing and 
to hedge those obligations before the U.S. markets open. Expressing the 
view that late exercises permit a clearing member to shift liability 
for its own operational errors to another, the firm proposed that late 
exercises be eliminated to remedy this inequity and to cause clearing 
members to improve back office operations. After discussion, the 
Roundtable participants agreed to review the matter within their 
respective organizations and to revisit the topic at their next 
meeting.
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    \5\ OCC's 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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    In connection with its consideration of the matter, OCC reviewed 
the purpose served by permitting such exercises and recent processing 
of late exercise requests. Late exercises have long been allowed under 
OCC's rules to prevent clearing members from suffering severe economic 
losses due to bona fide operational errors. OCC determined that only a 
few late exercise requests were received during the period January 
2006, through March 2007.\6\ Specifically, there were five requests for 
late exercises from five different firms relating to 14 line items with 
values ranging from $124,000 to $270,000. All requests were received 
after the start of critical processing, requiring OCC to run 
supplemental exercise procedures after nightly processing had been 
completed. Such processing was initiated following the 6:30 a.m. (CT) 
cut-off time for late exercise requests,\7\ and all assigned firms were 
notified before the 8 a.m. (CT) deadline. As specified in Rule 801(d), 
fifty percent of the $20,000 per line item filing fee was distributed 
to assigned clearing members.
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    \6\ From April 2007 to October 2007 there were no requests to 
submit a late exercise although in each of June and September 2007, 
OCC received [0]an inquiry regarding a possible submission. However, 
the clearing members involved elected not to formally file such a 
request.
    \7\ Systemic and operational constraints preclude OCC from 
processing late exercise requests at an earlier time.
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    Although no late exercise requests were received between the 
deadline for submitting exercises and the start of critical processing 
during the above-referenced review period, OCC also determined that, 
upon request, its operations staff would extend the deadline by a 
reasonable period in the event an exchange, clearing member, or OCC 
experienced system or operational problems that prevented one or more 
clearing members from submitting exercises on a timely basis.\8\ The 
payment of the applicable filing fee in such instances was not required 
nor has it typically been required for requests received before the 
start of critical processing.
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    \8\ Subject to OCC's need to start critical processing, the 
deadline for submitting exercise notices may be extended if 
``unforeseen conditions'' prevent their submission by a clearing 
member (OCC Rule 205). OCC has concluded that its authority to 
extend such deadlines should more explicitly reference systemic or 
operational problems or other unforeseen conditions experienced by 
additional industry participants that may impact the timely 
submission of exercise notices.
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    After carefully weighing the purpose and recent uses of the late 
exercise rule versus the fairness issue, OCC determined that it would 
be appropriate to retain the late exercise rule with certain 
modifications. Accordingly, OCC proposes to raise the filing fee for 
late exercise requests submitted post-critical processing from $20,000 
to $75,000 per line item.\9\ This change is intended to provide an 
incentive for firms to improve back office processing by increasing the 
cost of filing late exercise requests after the start of critical 
processing as well as to provide greater compensation to clearing 
members receiving ``late assignments'' while at the same time 
preserving the ability of firms to correct bona fide operational 
errors. To reflect current operating procedures, OCC proposes to 
eliminate the $5,000 filing fee for late exercise requests filed prior 
to the start of critical processing. For consistency, OCC also proposes 
to modify the fees applicable to the submission of supplementary 
exercise notices at expiration as set forth in Rule 805.\10\ 
Accordingly, OCC will amend Rule 805's filing fees to conform them to 
the changes being made in Rule 801.
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    \9\ OCC's management's proposal was presented at the June 2007 
Roundtable meeting. The Roundtable determined that OCC's management 
should decide whether to recommend the proposal to OCC's Board of 
Directors.
    \10\ It has been at least five years since a supplementary 
exercise notice has been submitted for processing.
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    OCC states that the proposed change is consistent with Section 17A 
of the Act \11\ because it promotes the prompt and accurate clearance 
and settlement of securities transactions by providing an incentive for 
clearing members to improve back office processing with respect to 
determining positions for which an exercise notice is to be submitted, 
while preserving their ability to correct bona fide operational errors. 
In addition, the proposed rule change is not inconsistent with the 
existing rules of OCC, including any other rules proposed to be 
amended.
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    \11\ 15 U.S.C. 78q-1.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change will impose any 
burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    OCC has not solicited or received written comments with respect to 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within thirty-five 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 ninety 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 such 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-2007-16 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-2007-16. 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/

[[Page 18846]]

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 OCC's principal office and on OCC's web site 
(http://www.theocc.com/publications/rules/proposed_changes/ proposed_
changes.jsp). 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 No. SR-OCC-
2007-16 and should be submitted on or before April 28, 2008.

    For the Commission by the Division of Trading and Markets 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-7120 Filed 4-4-08; 8:45 am]

BILLING CODE 8011-01-P
