
[Federal Register: September 25, 2008 (Volume 73, Number 187)]
[Notices]               
[Page 55582-55584]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25se08-96]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58586; File No. SR-OCC-2008-16]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Relating to the Cash 
Dividend Threshold

September 18, 2008.

I. Introduction

    On July 24, 2008, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-OCC-2008-16 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal 
was published in the Federal Register on August 19, 2008.\2\ No comment 
letters were received. For the reasons discussed below, the Commission 
is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 58353 (August 13, 2008), 
73 FR 48423.
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II. Description

    The purpose of the proposed rule change is to mitigate 
inconsistencies that may result under the current policy for adjusting 
stock option contracts. In February 2007, the Commission approved rule 
change SR-OCC-2006-01, which amended Section 11A of Article VI of the 
OCC By-Laws governing adjustments to options as a result of cash 
dividends or distributions.\3\ Under the new adjustment policy, cash 
dividends paid by a company other than pursuant to a policy or practice 
of paying dividends on a quarterly or other regular basis would be 
deemed ``special'' and would normally trigger a contract adjustment 
provided the value of the adjustment is at least $12.50 per option 
contract. This new adjustment policy will become effective for cash 
dividends announced on or after February 1, 2009.
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    \3\ Securities Exchange Act Release No. 55258 (February 8, 
2007), 72 FR 7701 (February 16, 2007).
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    However, certain inconsistencies may result when the threshold of 
``$12.50 per option contract'' is applied to all

[[Page 55583]]

options on the affected underlying security. For example, if a $.10 
special cash dividend is declared, the standard-size 100 share option 
would not be adjusted (because the value is less than $12.50). However, 
a previously adjusted 150 share option (reflecting a 3 for 2 split) 
would be adjusted (because the value is $15 per contract). Adjusting 
some but not all options of the same class in response to the same 
dividend event, especially if the 100 share option is not adjusted, 
could be confusing to investors. OCC's Securities Committee (consisting 
of representatives of each of the options exchanges and OCC) determined 
that this potential confusion should be avoided.
    OCC considered modifying the threshold to specify $.125 per share 
instead of $12.50 per contract. This approach would address all 
standard-size (100 share) contracts that currently exist plus adjusted 
contracts that come into existence in response to splits, etc. However, 
exchanges have proposed to introduce ``maxi'' size contracts. Applying 
the same per share threshold to a 1,000 and 100 share option could 
sometimes result in significant value being left on the table in the 
case of the 1,000 share option. Taking the same example of a $.10 per 
share special dividend, neither option would be adjusted if the 
threshold were $.125 per share. This would result in a loss of only $10 
per contract for the 100 share option, but the loss would be $100 per 
contract for the 1,000 share option. For this reason, a per share 
threshold is not being proposed.
    Greater consistency across contracts of varying sizes can be 
achieved by retaining the $12.50 per contract threshold in all cases 
but adding a qualification specifying that if a corresponding standard-
size contract exists on the underlying security, previously adjusted 
contracts will be adjusted only if the corresponding standard-size 
contract is also adjusted. For example, if a 100 share option and a 150 
share option (previously adjusted for a 3 for 2 split) exist, the 150 
share option would be adjusted for a special cash dividend only if the 
100 share standard option would also be adjusted for that dividend. 
Stated differently, OCC will refer back to the preadjustment standard-
size option (if any exist) in deciding whether or not to adjust a 
previously adjusted option. Thus a 150 share option that was derived 
from a 100 share option as a result of a 3 for 2 split will be referred 
back to the 100 share option. A 1,500 share option (previously adjusted 
for a 3 for 2 split) will be referred back to the 1,000 share option 
(the ``standard'' size option for a ``maxi'' contract). Thus, the 
qualification specifies ``only if the corresponding standard-size 
option contract is also adjusted.''
    This qualification achieves greater consistency because in most 
cases all contracts on the same underlying security would be adjusted 
if the 100 share contract is adjusted. The qualification also would 
allow a 1,000 share ``standard'' contract to be adjusted independently 
of a 100 share contract. Also, it could happen that an adjusted 
contract exists but not the corresponding standard contract, or a 
contract calling for delivery of fewer than 100 shares may exist (e.g., 
as a result of a spinoff adjustment). In these cases, the qualification 
would be inapplicable and a straightforward application of the $12.50 
threshold would determine whether an adjustment would be made. The 
following are examples of the qualification to the $12.50 per contract 
threshold.
    (A) If a corresponding standard size contract exists:

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                                                                     $.09 dividend                              $.13 dividend
                Shares                           Contract              ($value)              Adjust?              ($value)              Adjust?
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100...................................  Standard..................            9.00  NO.......................           13.00  YES.
133...................................  4/3 split.................           11.97  NO.......................           17.29  YES.
150...................................  3/2 split.................           13.50  NO.......................           19.50  YES.
10....................................  Spinoff...................            0.90  NO.......................            1.30  NO.
177...................................  Merger....................           15.93  NO.......................           23.01  YES.
1000..................................  Standard..................           90.00  YES......................          130.00  YES.
1500..................................  3/2 split.................          135.00  YES......................             195  YES.
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                                                                     $.02 dividend                              $.01 dividend
                Shares                           Contract              ($value)              Adjust?              ($value)              Adjust?
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100...................................  Standard..................            2.00  NO.......................            1.00  NO.
133...................................  4/3 split.................            2.66  NO.......................            1.33  NO.
150...................................  3/2 split.................            3.00  NO.......................            1.50  NO.
10....................................  Spinoff...................            0.20  NO.......................            0.10  NO.
177...................................  Merger....................            3.54  NO.......................            1.77  NO.
1000..................................  Standard..................           20.00  YES......................           10.00  NO.
1500..................................  3/2 split.................           30.00  YES......................           15.00  NO.
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    (B) If the 100 share standard size contract does not exist:

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                                                                     $.09 dividend                              $.13 dividend
                Shares                            Option               ($value)              Adjust?              ($value)              Adjust?
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133...................................  4/3 split.................           11.97  NO.......................           17.29  YES.
150...................................  3/2 split.................           13.50  YES......................           19.50  YES.
10....................................  Spinoff...................            0.90  NO.......................            1.30  NO.
177...................................  Merger....................           15.93  YES......................           23.01  YES.
1000..................................  Standard..................           90.00  YES......................          130.00  YES.
1500..................................  3/2 split.................          135.00  YES......................             195  YES.
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[[Page 55584]]

    The new adjustment policy approved in File No. SR-OCC-2006-01 will 
take effect beginning with dividends announced on and after February 1, 
2009. OCC intends this proposed rule change to take effect at the same 
time, but these changes will not be implemented until the exchanges 
have conducted appropriate educational efforts and definitive copies of 
an appropriate supplement to the options disclosure document, 
Characteristics and Risks of Standardized Options, are available for 
distribution.

III. Discussion

    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 
Commission finds the proposed rule change to be consistent with this 
requirement because it should reduce inconsistencies in the adjustment 
of stock option contracts. As a result, OCC's proposed rule change 
should promote the prompt and accurate clearance and settlement of 
securities transactions.
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    \4\ 15 U.S.C. 78q-1(b)(3)(F).
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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.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-2008-16) be and hereby 
is approved.\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).

    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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J. Lynn Talyor,
Assistant Secretary.
[FR Doc. E8-22488 Filed 9-24-08; 8:45 am]

BILLING CODE 8010-01-P
