
[Federal Register: December 11, 2008 (Volume 73, Number 239)]
[Notices]               
[Page 75486-75487]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11de08-105]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59046; File No. SR-OCC-2007-16]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Relating to Late 
Exercises

December 3, 2008.

I. Introduction

    On December 7, 2007, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission a proposed rule 
change pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act'') \1\ and Rule 19b-4 thereunder \2\ to 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. The 
proposed rule change was published for comment in the Federal Register 
on April 7, 2008.\3\ No comment letters were received on the proposal. 
This order approves the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 57584 (Mar. 31, 2008), 
73 FR 18844.
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II. Description of the Proposal

    The rule filing will 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.
    Rule 801 addresses the exercise of options other than at 
expiration. Subject to specified exceptions and conditions, Rule 801(d) 
grants certain individuals \4\ 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. Prior to this 
rule change, these fees were:
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    \4\ 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 did not materially affect such start time) \5\ and
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    \5\ The current deadline for submitting exercise notices is 7 
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.\6\
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    \6\ 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 had been assigned a late 
exercise were to receive notification thereof by 8 a.m. CT.
    Under this rule change, OCC will eliminate the $5,000 filing fee 
for late exercise requests filed prior to the start of critical 
processing but will raise the filing fee for late exercise requests 
submitted after the start of critical processing from $20,000 to 
$75,000 per line item. For consistency, OCC also will modify the fees 
applicable to the submission of supplementary exercise notices at 
expiration as set forth in Rule 805.\7\ Accordingly, OCC will amend 
Rule 805's filing fees to conform them to the changes being made in 
Rule 801.
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    \7\ It has been at least five years since a supplementary 
exercise notice has been submitted for processing.
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    By increasing the cost of filing late exercise requests after the 
start of critical processing, OCC intends to provide an incentive for 
firms to improve back office processing as well as to provide greater 
compensation to clearing members receiving ``late assignments'' while 
at the same time

[[Page 75487]]

preserving the ability of firms to correct bona fide errors.
    As explained in the Commission's notice of OCC's proposed rule 
change,\8\ the primary reason for this rule change is that there were 
only a few late exercise requests that OCC received during the period 
January 2006 through March 2007.\9\ 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,\10\ and all assigned firms 
were notified before the 8 a.m. (CT) deadline. 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 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.\11\ The payment of the 
applicable filing fee in such instances was neither required nor has it 
typically been required for requests received before the start of 
critical processing.
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    \8\ Supra note 3.
    \9\ 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 an inquiry regarding a possible submission. However, 
the clearing members involved elected not to formally file such a 
request.
    \10\ Systemic and operational constraints preclude OCC from 
processing late exercise requests at an earlier time.
    \11\ 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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III. Discussion

    Section 17A(b)(3)(F) of the Act \12\ requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions. The Commission 
finds that OCC's proposed rule change is consistent with this 
requirement because the new fee structure should provide an incentive 
for clearing members to improve their back office processing with 
respect to determining positions for which an exercise notice is to be 
submitted in order to reduce the frequency that they file late exercise 
requests while preserving their ability to correct bona fide 
operational errors.
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    \12\ 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 \13\ and the rules and regulations 
thereunder.
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    \13\ 15 U.S.C. 78q-1.
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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-2007-16), as amended, be 
and hereby is approved. In approving the proposed rule change, the 
Commission considered the proposal's impact on efficiency, competition 
and capital formation.\14\
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    \14\ 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-29250 Filed 12-10-08; 8:45 am]

BILLING CODE 8011-01-P
