
[Federal Register Volume 77, Number 131 (Monday, July 9, 2012)]
[Notices]
[Pages 40394-40396]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16625]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67333; File No. SR-OCC-2012-07]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change Relating to Adjustment Panel 
Voting

July 2, 2012.

I. Introduction

    On May 7, 2012, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2012-07 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on May 24, 2012.\3\ The Commission received no 
comment letters on the proposal. This order approves the proposal.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 67021 (May 18, 2012), 77 
FR 31060 (May 24, 2012).
---------------------------------------------------------------------------

II. Description

    OCC is updating the procedures applied to adjustment panel voting 
and eliminating the requirement that an adjustment panel be convened to 
vote on certain specific types of standard

[[Page 40395]]

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.
    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 ten 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 the proposed rule change. OCC is continuing to evaluate 
the rules applicable to adjustment determinations and additional 
changes may be proposed in the future.

Proposed By-Law Changes

    OCC is making several changes to the voting procedures for the 
Securities Committee and adjustment panels. OCC believes the changes 
will provide significant operational efficiencies, allowing OCC and the 
option exchanges to respond more quickly to corporate events affecting 
listed options. The changes to the procedures governing adjustment 
panel voting (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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 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 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).

III. Discussion

    Section 19(b)(2)(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.\7\ Section 17A(b)(3)(F) of the Act requires that a 
clearing agency, among other things, have the capacity to facilitate 
the prompt and accurate clearance and settlement of securities 
transactions for which it is responsible.\8\
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission finds that the proposed change is consistent with 
the purposes and requirements of Section

[[Page 40396]]

17A of the Act \9\ and the rules and regulations thereunder applicable 
to OCC. In particular, the Commission believes that the proposed change 
provides for more efficient procedures that further the purposes of the 
Act by facilitating the prompt and accurate clearance and settlement of 
securities transactions for which OCC is responsible.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \10\ and the 
rules and regulations thereunder.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-OCC-2012-07) be, 
and hereby is, approved.\12\
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(2).
    \12\ 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.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-16625 Filed 7-6-12; 8:45 am]
BILLING CODE 8011-01-P


