
[Federal Register Volume 77, Number 101 (Thursday, May 24, 2012)]
[Notices]
[Pages 31060-31062]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-12583]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67021; File No. SR-OCC-2012-07]


Self-Regulatory Organizations; the Options Clearing Corporation; 
Notice of Filing and of Proposed Rule Change Relating to Adjustment 
Panel Voting

May 18, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\

[[Page 31061]]

notice is hereby given that on May 7, 2012, 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 primarily by OCC. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of Terms of Substance of 
the Proposed Rule Change

    The proposed rule change would update the procedures applied to 
adjustment panel voting and would eliminate the requirement that an 
adjustment panel be convened to vote on certain specific types of 
standard contract adjustments affecting equity options.

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. The self-regulatory organization has prepared summaries, 
set forth in sections (A), (B), and (C) below, of the most significant 
aspects of such statements.\3\
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    \3\ 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 principal purposes of this rule change are to update the 
procedures applied to adjustment panel voting and to eliminate the 
requirement that an adjustment panel be convened to vote on certain 
specific types of standard contract adjustments affecting equity 
options. These changes are intended to improve overall operational 
efficiency in responding to events for which a contract adjustment may 
be made.
Background
    Certain panels may be convened under OCC's by-laws to (i) determine 
contract adjustments to the terms of outstanding options when certain 
events occur (e.g., stock distribution, stock dividend, merger, 
consolidation or reorganization) and (ii) fix certain amounts or values 
in respect of certain options in the event a required value is 
unreported, inaccurate, unreliable, unavailable, or inappropriate. Such 
panels are convened in accordance with Article VI, Section 11 of OCC's 
by-laws and currently consist of two representatives of each options 
exchange on which options affected by the event are traded and one 
representative of OCC, who votes only in case of a tie. The decision to 
adjust (and the nature of the adjustment to be made) or to fix an 
amount or value is made by majority vote of the adjustment panel. Most 
often, panels are convened to determine adjustments to the terms of 
outstanding equity options in response to certain corporate events.
    The procedures for panel voting, as described in Article VI, 
Section 11, have not been updated for over 25 years. In the past, a 
smaller number of OCC options exchanges posed few problems in convening 
panels to consider adjustments for equity options. Currently, however, 
there are nine options exchanges and multiple listing of equity options 
on several, if not all, exchanges is common. It is increasingly 
difficult to convene two members from each exchange to consider 
adjustments on a timely basis. This difficulty is magnified when it is 
necessary to convene panel meetings to address late-breaking events 
which often occur outside of normal business hours. Additionally, 
although all equity option adjustments must currently be addressed by 
an adjustment panel, certain corporate events and their corresponding 
option adjustments are so regular and predictable that it no longer 
appears necessary for an adjustment panel to be convened to address 
them.
    The OCC Securities Committee has unanimously endorsed the proposed 
changes and OCC's Board of Directors and stockholders have authorized 
OCC to submit this filing. OCC is continuing to evaluate the rules 
applicable to adjustment determinations and additional changes may be 
proposed in the future.
Proposed By-Law Changes
    As discussed below, OCC is proposing several changes to the voting 
procedures for the Securities Committee and adjustment panels. OCC 
believes the proposed changes will provide significant operational 
efficiencies, allowing OCC and the option exchanges to respond more 
quickly to corporate events affecting listed options. The proposed 
changes to the procedures governing adjustment panel voting would (1) 
Change the requirement that each exchange be represented by two persons 
to one person,\4\ (2) allow that adjustment panel actions be determined 
by votes accomplished by such means as the Securities Committee may 
designate for that purpose, (3) provide that certain kinds of corporate 
events shall not require an adjustment panel vote, (4) define a quorum 
for adjustment panels and provide for majority vote,\5\ and (5) allow 
the Chairman of OCC to designate a non-officer as his representative on 
adjustment panels.\6\
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    \4\ Panels convened by OCC to fix a required amount or value (as 
provided for in the by-laws) would continue to include two 
representatives from each exchange on which the affected series is 
open for trading. (Such panels also include an OCC representative, 
who votes only in case of a tie.) OCC believes it appropriate to 
retain this requirement as the need to fix such amount or value 
generally would involve series that are less likely to be traded on 
multiple exchanges. However, certain of the procedural changes being 
made to Article VI, Section 11 will be applied to the by-laws that 
permit panels to be convened to fix a required amount or value in 
order to improve efficiency. These changes include eliminating the 
requirement that at least one panel member from an exchange be a 
member of the Securities Committee and allowing such panels to 
transact its business by such means as determined by the Securities 
Committee.
    \5\ The intent is to ensure that any adjustment decision is 
determined by a majority of the exchanges (including a 
representative of OCC if a voting member) that trade the affected 
option. For example, if eight exchanges trade an option, five 
exchanges would constitute a quorum for an adjustment panel. 
However, a majority vote of these five exchanges would require only 
three exchanges. In this case an adjustment decision would be 
determined by a distinct minority of the exchanges trading the 
option. Specifying an additional requirement that the action be 
determined by a majority of the exchanges trading the option 
provides for an additional level of assurance that a majority of 
eligible voting members will determine an adjustment.
    \6\ Currently, the Chairman is allowed to designate an OCC 
officer as his representative. OCC believes the Chairman should be 
able to designate a non-officer as his representative.
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    The specific corporate events which would no longer require a panel 
vote to effect an adjustment to the terms of an option would be limited 
to stock splits or stock distributions where additional shares of the 
underlying security are issued, reverse splits, and cash mergers or 
similar events where all shares are exchanged exclusively for cash. 
Adjustments for stock splits, stock distributions, and reverse splits 
are generally the most routine option adjustments executed by OCC. 
Option adjustments for these events, when executed, are the result of 
well understood formulae and consistent precedent. The Securities 
Committee does not believe it is necessary to convene adjustment panels 
for ``boiler plate'' adjustments of this kind. In like manner, mergers 
and other events where the affected security is exchanged exclusively 
for cash have always

[[Page 31062]]

occasioned option adjustments which have called for the delivery of 
cash. The Securities Committee does not believe it necessary to convene 
panel meetings to authorize these adjustments.
    While an adjustment panel vote would not be required in these 
cases, an adjustment panel could be convened at any time at the request 
of any exchange or OCC in order to address any aspect of the corporate 
event or option contract adjustment deemed to need discussion by such 
panel. Also, in all cases of option adjustments, OCC and the exchanges 
would naturally coordinate the operational execution of the adjustments 
(effective date, option symbol, strike prices, etc).
    The proposed changes also allow convened panels the ability to 
conduct their business by any means determined by the Securities 
Committee. Currently, the Securities Committee and panels are allowed 
to conduct business in person or by phone. For the purposes of 
exchanging information and registering votes, OCC and the Securities 
Committee believe that electronic means of communication (e.g., email) 
should also be allowed as well as other means of communication which 
may be available in the future (e.g., OCC systems applications 
developed for this purpose).
    OCC believes that the proposed changes to its By-Laws are 
consistent with the purposes and requirements of Section 17A of the Act 
\7\ and the rules and regulations thereunder applicable to OCC because 
they provide for more efficient and effective procedures to be used by 
the Securities Committee and its panels for the purpose of conducting 
business by eliminating impediments that elongate voting processes 
which may cause delays in determining contract adjustments or in fixing 
a required amount or value. These changes further the purposes of the 
Act by facilitating the prompt and accurate clearance and settlement of 
transactions in cleared contracts. The proposed rule change is not 
inconsistent with any rules of OCC, including any rules proposed to be 
amended.
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    \7\ 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 will have any 
impact or 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 relating to the proposed rule change have not been 
solicited or received. OCC will notify the Commission of any written 
comments received by OCC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 email to rule-comments@sec.gov. Please include 
File Number SR-OCC-2012-07 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2012-07. This file 
number should be included on the subject line if email 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 Web site viewing and 
printing in the Commission's Public Reference Section, 100 F Street 
NE., Washington, DC 20549-1090, on official business days between the 
hours of 10:00 a.m. and 3:00 p.m. Copies of such filing will also be 
available for inspection and copying at the principal office of OCC and 
on OCC's Web site at http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_12_07.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-2012-07 in the caption above and 
should be submitted on or before June 14, 2012.
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    \8\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-12583 Filed 5-23-12; 8:45 am]
BILLING CODE 8011-01-P


