
[Federal Register: August 19, 2008 (Volume 73, Number 161)]
[Notices]               
[Page 48421-48423]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19au08-82]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58352; File No. SR-OCC-2008-17]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change To Permit the Clearance and Settlement of Options on the 
Realized Variance and Realized Volatility of an Index

August 13, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 30, 2008, The Options 
Clearing Corporation (``OCC'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which items have been prepared by OCC. The 
Commission is publishing this notice and order to solicit comments from 
interested persons and to grant accelerated approval of the proposed 
rule change from interested parties.
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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

    OCC is seeking to clear and settle options on the realized variance 
and realized volatility of an index.

[[Page 48422]]

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 proposed rule change is to permit OCC to clear and 
settle options on the realized variance and realized volatility of an 
index. Such options are referred to respectively as ``realized variance 
options'' and ``realized volatility options,'' and collectively as 
``realized variance/volatility options.'' The Chicago Board Options 
Exchange (``CBOE'') has received Commission approval to trade realized 
variance/volatility options on the S&P 500.\3\ This rule change will 
permit OCC to clear these options as well as any other realized 
variance/volatility options proposed to be traded by an exchange for 
which OCC provides clearing services.
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    \3\ Securities Exchange Act Release No. 58171 (July 16, 2008), 
73 FR 42841 (July 23, 2008) [SR-CBOE-2008-31].
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    OCC currently clears options traded by CBOE on the CBOE S&P 500 
Volatility Index, the CBOE Nasdaq 100 Volatility Index, the CBOE Dow 
Jones Industrial Volatility Index, and the CBOE Russell 2000 Volatility 
Index, each of which measures the implied volatility of the applicable 
stock index by deriving implied volatilities using real-time bid/ask 
quotations for options on the reference index. These indexes measure 
the predicted future volatility of the reference index. The underlying 
index for a realized variance/volatility option, in contrast, measures 
the actual historical variability of an index for a specified period.
    The realized volatility/variance options described herein would be 
cleared by OCC under the same basic rules that apply to other index 
options. For purposes of the clearing process, the nature of the 
underlying index is largely irrelevant because the same basic 
procedures are applicable to clearance and settlement of all index 
options. The rule changes proposed in this filing would add additional 
terms specifically applicable to realized volatility/variance options 
and clarify how certain provisions would be applied to such options. In 
addition, the proposed rule changes are intended to provide guidance as 
to which options products are subject to the provisions of Article XVII 
of the By-Laws and Chapter XVIII (Index Options) of the Rules and to 
create greater consistency in the use of defined terms.

By-Law Amendments Applicable to Realized Variance/Volatility Options

    In order to alleviate any confusion regarding what types of 
products are covered by Article XVII of OCC's By-Laws and Chapter XVIII 
of OCC's Rules, OCC proposes to add language to the introductory 
paragraph of Article XVII explicitly stating that it and Chapter XVIII 
of the Rules are applicable to options on stock indexes; indexes 
measuring the realized or predicted volatility or variance of a 
``reference index;'' and indexes measuring the return of an investment 
strategy such as a buy-write index. To accommodate realized variance/
volatility options, OCC proposes to add a defined term ``reference 
index,'' which is used to refer to the index whose volatility or 
variance is measured by the underlying variance or volatility index. 
The new term is defined by cross-reference to the more general term 
``reference variable'' that is defined in Article I of the By-Laws. OCC 
proposes to amend the definition of ``index security'' in Article XVII, 
Section 1 of the By-Laws to include securities included in a reference 
index, as well as securities included in an underlying index. The term 
``reporting authority'' would also be amended to encompass the official 
source for a reference index.
    Article XVII, Section 3(b) would be amended to replace the term 
``underlying securities'' with the defined term ``index securities'' in 
two places in order to improve the consistency of terminology within 
the By-Laws and Rules. For the same reason, the term ``index group'' 
would be deleted from the Introduction, Section 3(b), and Section 5(a), 
as it is not used elsewhere in Article XVII.
    Similarly, OCC is proposing to amend Section 3(c) of Article XVII 
of the By-Laws to use the defined term ``index securities'' rather than 
the undefined term ``constituent securities.'' \4\ The term ``reference 
index'' is also included in this paragraph to clarify that OCC has the 
ability to modify outstanding index options if the index securities of 
either the underlying index or the reference index are changed in a 
manner which creates a discontinuity in the underlying index. OCC is 
also proposing to modify Article XVII, Section 3(d) of the By-Laws to 
provide that OCC has the authority to substitute a successor index for 
a reference index under the same circumstances under which it may 
substitute a successor index for an underlying index.
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    \4\ A comparable change is being made to Section 4(a) of Article 
XVII. In this instance, however, ``index securities'' is used 
instead of ``component securities'' of an index.
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    OCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \5\ and the rules and 
regulations thereunder applicable to OCC because it is designed to 
promote the prompt and accurate clearance and settlement of 
transactions in, including exercises of, realized variance/volatility 
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 clearance and settlement of such transactions, and, 
in general, to protect investors and the public interest. The proposed 
rule change accomplishes this by applying substantially the same rules 
and procedures to these transactions in variance/volatility options as 
OCC applies to similar transactions in other index options.
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    \5\ 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 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 that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions.\6\ The Commission 
finds that OCC's

[[Page 48423]]

proposed rule change is consistent with this obligation under the Act 
because it designed to promote the prompt and accurate clearance and 
settlement of transactions in realized variance/volatility options by 
applying substantially the same rules and procedures to these 
transactions as OCC applies to similar transactions in other index 
options.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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    OCC has requested that the Commission approve the proposed rule 
change 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 because CBOE's rule 
filing for realized variance/volatility options has been approved by 
the Commission, but CBOE will not be able to commence trading realized 
variance/volatility options until OCC's rule change is approved.\7\ 
However, OCC will delay implementation of this rule change until 
distribution of a supplement addressing realized/variance volatility 
options to the options disclosure document, Characteristics and Risks 
of Standardized Options, is distributed.
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    \7\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-2008-17 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-2008-17. 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 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. 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-2008-17 and should be submitted on or before 
September 9, 2008.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (File No. SR-OCC-2008-17) be and 
hereby is approved on an accelerated basis.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-19131 Filed 8-18-08; 8:45 am]

BILLING CODE 8010-01-P
