
[Federal Register: October 14, 2010 (Volume 75, Number 198)]
[Notices]               
[Page 63228-63229]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14oc10-125]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63066; File No. SR-OCC-2010-13]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Allow for Adjustments to the 
Settlement Price of Exchange-Designated Security Futures for All Cash 
Dividends or Distributions Paid by the Issuer of the Underlying 
Security

October 8, 2010.

I. Introduction

    On August 19, 2010, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-OCC-2010-13 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ On August 25, 2010, OCC 
amended the proposed rule change. Notice of the proposal was published 
in the Federal Register on September 7, 2010.\2\ The Commission 
received no comment letters in response to the proposed rule change. 
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. 62801 (August 31, 2010), 
75 FR 54410.
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II. Description

    The primary purpose of this proposed rule change is to revise OCC's 
By-Laws to allow OCC to make adjustments to the settlement price of 
exchange-designated security futures for all cash dividends or 
distributions paid by the issuer of the underlying security. Under its 
current rules, OCC makes such adjustments only for ``non-ordinary'' 
dividends. However, OneChicago, LLC (``OneChicago'') has informed OCC 
that it believes there is a demand for security futures that would be 
adjusted in response to all cash dividends or distributions. 
Accordingly, OCC is amending Section 3 of Article XII of its By-Laws to 
permit exchanges to designate certain security futures that will be 
adjusted for ordinary as well as ``non-ordinary'' cash dividends and 
distributions. Exchanges can continue to trade security futures that 
will be adjusted only in the event of a ``non-ordinary'' dividend or 
distribution.
    For security futures subject to adjustment for all cash dividends 
or distributions, it will be the exchange's responsibility to inform 
OCC of the issuance of a cash dividend or

[[Page 63229]]

distribution and of the appropriate adjustment amount. Provided that 
such information (including any corrections thereto) is reported to OCC 
before an OCC-designated cut-off time prior to the ex-date, OCC will 
make the appropriate adjustment to the settlement price of the security 
futures contract. Such adjustments will be effective before the opening 
of business on the ex-date.\3\ If the exchange fails to report dividend 
or distribution information to OCC on a timely basis or reports 
incorrect dividend or distribution information to OCC, then the 
exchange will be able to report such information or corrected 
information to OCC on the ex-date, and OCC will effect the adjustment 
as soon as practicable thereafter.\4\ In the event the exchange already 
opened trading in the security futures contracts affected thereby, the 
exchange will provide OCC with direction on whether such trades should 
be cleared or disregarded as provided for in Article VI, Section 7 of 
OCC's By-Laws. Pursuant thereto, disregarded transactions will be 
deemed null and void and given no effect. These procedures are intended 
not only to preserve OCC's ability to initiate and conduct nightly 
processing on a timely basis but also to provide the exchange with the 
opportunity to report to OCC dividend or distribution information that 
was not available to it before OCC's processing cut-offs or to correct 
erroneously reported information so that there is an appropriate 
adjustment to the settlement price for the affected contracts.
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    \3\ The standard method for adjusting futures contracts in 
response to cash distributions is to decrease the prior day's 
settlement price by the amount of the dividend. This adjustment is 
effective at the opening of business on the ex-distribution date and 
parallels the adjustment made to the price of the underlying stock 
by the securities exchanges on the ex-distribution date. It is 
intended to ensure that no futures mark-to-the-market attributable 
to the adjustment made to the stock price for the dividend will 
occur.
    \4\ OCC also proposes to add Interpretation and Policy .10 to 
Article XII, Section 3 to provide that officially reported 
settlement prices will not be adjusted (other than as provided for 
in the By-Laws and Rules) except in extraordinary circumstances. The 
Interpretation further provides that in no event will a completed 
settlement be adjusted due to errors discovered thereafter. This 
latter provision is intended to preserve the finality of money 
settlements should it later be determined that an officially 
reported settlement price was erroneous. The new Interpretation is 
based on existing provisions of OCC's By-Laws. See, e.g., Article 
XIV, Section 6, Interpretation and Policy .01; Article XVI, Section 
4, Interpretation and Policy .01; and Article XVII, Section 4, 
Interpretation and Policy .01.
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    In connection with OneChicago's proposal, OneChicago and OCC also 
have agreed to amend the Security Futures Agreement for Clearing and 
Settlement Services, dated April 1, 2002, (``Clearing Agreement'') by 
entering into Amendment No. 1 thereto.\5\ Amendment No. 1 would amend 
Section 5 of the Clearing Agreement to permit OneChicago to designate 
those security futures contracts for which adjustments will be made in 
response to all cash dividends or distributions of the underlying 
securities and to set forth OneChicago's obligation to furnish OCC with 
notice of all relevant information regarding such dividends or 
distributions so that OCC can adjust the settlement price of the 
affected security future as described above. Amended Section 5 further 
extends the current indemnification provided by OneChicago to OCC to 
cover losses resulting from OCC's adjustment of the settlement prices 
of security futures in accordance with dividend or distribution 
information supplied by OneChicago or OCC's failing to adjust in the 
event OneChicago did not supply OCC with information regarding such an 
adjustment.
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    \5\ Amendment No. 1 will be executed after the effectiveness of 
this filing.
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III. Discussion

    Section 19(b) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization. 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 security transactions and generally to 
protect investors and the public interest.\6\ The Commission believes 
that OCC's rule change is consistent with this Section because the rule 
change should better enable OCC to promptly and accurately clear and 
settle security futures contracts for which an exchange has designated 
that the settlement prices will be adjusted to reflect the issuance of 
all cash dividends or distributions on the underlying security.
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    \6\ 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. In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-2010-13) be and hereby 
is approved.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-25864 Filed 10-13-10; 8:45 am]
BILLING CODE 8011-01-P

