
[Federal Register: June 30, 2008 (Volume 73, Number 126)]
[Notices]               
[Page 36934-36936]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30jn08-127]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58003; File No. SR-OCC-2008-11]

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

June 23, 2008.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 2, 2008, 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 range 
options proposed to be listed by the Chicago Board Options Exchange, 
Incorporated (``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

    The purpose of this rule change is to permit OCC to clear and 
settle range options proposed to be listed by CBOE.\3\ General 
characteristics of range options are described below, followed by an 
explanation of the specific rule changes being proposed to clear them.
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    \3\ File No. SR-CBOE-2007-104. The Commission recently issued an 
order granting approval of SR-CBOE-2007-104 that allows CBOE to list 
and trade range options. Securities Exchange Act Release No. 57376 
(February 25, 2008), 73 FR 11689 (March 4, 2008).
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Description of Range Options
    Range options are European-style, cash-settled options that have a 
payout if the underlying interest value falls within a specific range 
of values (i.e. , the ``range length'') at expiration. Range options 
may be listed on any index eligible for options trading on the listing 
exchange.
    At the time a series of range options is opened for trading, the 
listing exchange will specify the range length. The exchange will also 
specify the ``range interval,'' which is a value (e.g., 10 index 
points) used to divide the range length into three segments, the ``low 
range,'' ``middle range'' and ``high range.'' The low range starts from 
the lower value end of the range length and ends at the position on the 
range length where the value is one range interval higher. The high 
range is a segment of equal length located at the higher value end of 
the range length. The middle range is the segment of values between the 
low range and the high range.
    Expiration months for range options would be equivalent to those 
for options on the same underlying index. The expiration date for a 
series of range options would be the same as for conventional index 
options. At expiration, range options would be in the money if the 
underlying interest value fell anywhere within the range length; 
otherwise the options would be out of the money.
    Range options are similar in some respects to binary options.\4\ 
Unlike binary options, however, range options would be of a single type 
rather than consisting of a put class and a call class. Moreover, the 
payout structure of range options would not be ``all or nothing'' 
throughout the range length. Rather, the payout amount (i.e., the 
``exercise settlement amount'') would vary depending on where the 
underlying

[[Page 36935]]

interest value falls within the range length. At the time a series of 
range options is opened for trading, the listing exchange will set a 
``maximum range exercise value'' and a ``contract multiplier,'' the 
product of which would be the maximum exercise settlement amount for 
that series. This maximum exercise settlement amount would be payable 
if the underlying interest value fell anywhere within the middle range. 
If the underlying interest value fell within the low range, the 
exercise settlement amount would, in accordance with applicable 
exchange rules, increase from zero to the maximum exercise settlement 
amount as the underlying interest value increased within the low range. 
Finally, if the underlying interest value fell within the high range, 
the exercise settlement amount would, in accordance with applicable 
exchange rules, decrease from the maximum exercise settlement amount to 
zero as the value of the underlying index decreased within the high 
range. Range options are subject to the ``exercise-by-exception'' 
expiration date exercise procedures set forth in applicable OCC Rules.
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    \4\ See Securities Exchange Act Release No. 56875 (November 30, 
2007), 72 FR 69274 (December 7 2007) [SR-OCC-2007-08].
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By-Law and Rule Amendments Applicable to Range Options
1. Terminology--Article I, Section 1 and Article XIV, Section 1
    OCC proposes to define ``range option'' in Article XIV, Section 1 
of the By-Laws and to cross-reference the definition in Article I of 
the By-Laws. OCC also proposes to add ``range length,'' ``range 
interval,'' ``high range,'' ``middle range,'' and ``low range'' as new 
defined terms in Article XIV, Section 1.
    OCC proposes to amend the definitions of ``option contract'' and 
``type of option'' in Article I of the By-Laws to include range 
options.\5\
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    \5\ OCC further proposes to remove a provision from the 
definition of ``option contract'' which provided that classes of 
fund shares as designated by OCC would be treated as non-equity 
securities for purposes of Article VIII and Chapters VI and X of the 
Rules. Such provision is no longer necessary because STANS, OCC's 
margin system, covers both equity and non-equity securities. 
Securities Exchange Act Release No. 53322 (February 15, 2006), 71 FR 
9403 (February 23, 2006) [SR-OCC-2004-20].
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    OCC proposes to redefine the term ``class'' in Article XIV, Section 
1 so that it will apply to range options. To be within the same class, 
range options must cover the same underlying interest.
    In respect of range options, OCC proposes to replace the definition 
of ``exercise price'' in Article I with a revised definition in Article 
XIV, Section 1 which clarifies that the exercise price for a series of 
range options is the range length. The exercise price (i.e., range 
length) of a range option is not, as defined in Article I, an amount 
that is paid in exchange for an underlying interest; rather, it is used 
to determine whether such option is in the money and the exercise 
settlement amount upon exercise.
    OCC proposes to redefine the term ``exercise settlement amount'' in 
Article XIV, Section 1 so that it will apply to range options. When 
used in respect of range options, exercise settlement amount means the 
amount of cash to be paid to the holder of an in-the-money option upon 
exercise. As described above, the exercise settlement amount will be 
the function of a maximum range exercise value and a contract 
multiplier, and will vary depending on where the underlying interest 
value falls within the range length at expiration. The manner in which 
the exercise settlement amount varies along the range length is set 
forth in applicable listing exchange rules.
    Other defined terms in Article XIV that were created for binary 
options are proposed to be modified accordingly so that they will apply 
to range options.
2. Terms of Cleared Contracts--Article VI, Section 10(f)
    OCC proposes to add a new paragraph (f) in Article VI Section 10 to 
clarify that the listing exchange will specify the variable terms for 
each series of range options at or before the time such series is first 
opened for trading.
3. General Rights and Obligations--Article XIV, Section 2C
    OCC proposes to add a new Section 2C to Article XIV to define the 
general rights and obligations of holders and writers of range options. 
As noted above, range options are subject to the exercise-by-exception 
procedures set forth in applicable OCC Rules. The holder of an 
exercised range option has the right to receive the exercise settlement 
amount from OCC and the assigned writer has the obligation to pay that 
amount to OCC.
4. Adjustments of Range Options--Article XIV, Section 3A(b); 
Unavailability or Inaccuracy of Final Underlying Interest Value--
Article XIV, Section 5; Determination of Final Underlying Interest 
Value--Article XIV, Section 6
    Article XIV, Section 3A(b) governs adjustments of binary options 
(other than credit default options and credit default basket options) 
for which the underlying interest is an index of securities. OCC 
believes that such procedures are sufficient to support adjustments of 
range options. Therefore, OCC proposes to amend Section 3A(b) so that 
it will apply to range options as well. OCC also proposes to amend 
Article XIV, Section 5 to give OCC the authority to fix the underlying 
interest value for an expiring series of range options, and to rely on 
that value for determining whether such options are in the money. 
Additional changes are proposed to be made to Section 5 to reflect the 
fact that range options are subject to the exercise-by-exception 
procedures set forth in Rule 805 and applicable rules in Chapter XV. 
Finally, Article XIV, Section 6 is proposed to be amended to provide 
that, as with binary options, the underlying interest value of a series 
of range options will be determined by the exchange or exchanges on 
which such options are traded, subject to any overriding provision of 
OCC's By-Laws and Rules. If a series of range options is traded on more 
than one exchange, OCC may use the underlying interest value received 
from the exchange deemed by OCC to be the principal exchange, or OCC 
may employ a procedure to derive a single value based on some or all of 
the values received.
    For purposes of deleting surplus words, OCC proposes to delete the 
word ``equity'' from Sections 3(A)(b)(2) and 5(a).
5. Exercise and Settlement--Rule 1501A, 1502A and 1503-1505
    Range options will be subject to the exercise-by-exception 
procedures applicable to most other options under OCC Rules. Proposed 
procedures for exercise of in-the-money range options, as well as 
assignment and settlement of exercises (including provisions applicable 
to suspended clearing members), are set forth in amended rules and new 
rules in Chapter XV.
6. Deposits in Lieu of Margin Prohibited--Rule 1506
    Escrow deposits will be prohibited for range options as well as 
binary options.
    The proposed changes to OCC's By-Laws and Rules are consistent with 
the purposes and requirements of Section 17A of the Act because they 
are designed to promote the prompt and accurate clearance and 
settlement of transactions in, including exercises of, range options, 
and to foster cooperation and coordination with persons engaged in the 
clearance and settlement of such transactions, to remove impediments to 
and perfect the mechanism of a national system for the prompt and 
accurate

[[Page 36936]]

clearance and settlement of such transactions, and, in general, to 
protect investors and the public interest. They accomplish this purpose 
by applying substantially the same rules and procedures to these 
transactions as OCC applies to similar transactions in other cash-
settled options except to the extent that special rules and procedures 
are required in order to accommodate unique features of range options. 
The proposed rule change is not inconsistent with the existing rules of 
OCC, including any 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.\6\ The 
purpose of the proposed rule change is to amend OCC's By-Laws and Rules 
so that OCC may clear and settle range options. Accordingly, the 
proposed rule change should result in the prompt and accurate clearance 
and settlement of securities transactions, specifically transactions in 
range options.
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    \6\ 15 U.S.C. 7q-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 range options 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-2008-11 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2008-11. 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_08_11.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-
2008-11 and should be submitted on or before July 21, 2008.

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.\7\
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    \7\ 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-2008-11) be and hereby 
is approved on an accelerated basis.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-14657 Filed 6-27-08; 8:45 am]

BILLING CODE 8010-01-P
