
[Federal Register Volume 77, Number 242 (Monday, December 17, 2012)]
[Notices]
[Pages 74705-74707]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30272]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68403; File No. SR-OCC-2012-23]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Accommodate Certain 
Physically-Settled Options on U.S. Treasury Securities

December 11, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on November 30, 2012, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    OCC proposes to accommodate certain physical-settled options on the 
U.S. Treasury securities.

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. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\3\
---------------------------------------------------------------------------

    \3\ The Commission has modified the text of the summaries 
prepared by OCC.
---------------------------------------------------------------------------

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of this proposed rule change is to accommodate the 
clearing of physically-settled options on certain U.S. Treasury notes 
and U.S. Treasury bonds (``Treasury Options'') proposed to be traded by 
NASDAQ OMX PHLX, LLC (``PHLX''). OCC's current By-Laws and Rules 
(collectively, the ``Rules'') accommodate options on Treasury 
securities, but the options on Treasury securities contemplated by the 
Rules are no longer traded and are different from the Treasury Options 
that PHLX intends to trade in certain respects. Accordingly, OCC 
proposes to amend the Rules, as described below, to accommodate such 
Treasury Options as well as to streamline Chapter XIV of its rulebook 
by re-numbering certain rules and deleting unused and ``reserved'' 
rules.
    The PHLX Treasury Options are limited to European-style options on 
Treasury notes and bonds with a unit of trading of $10,000. OCC 
therefore proposes to remove provisions and references within Chapter 
XIV of the Rules to American-style options on Treasury securities, 
Treasury bills as an eligible underlying interest for options on 
Treasury securities, and ``mini options'' on Treasury securities. In 
addition, OCC proposes to remove from the Rules the defined term 
``adjusted exercise price,'' which related only to options on Treasury 
bills and consequently is no longer needed, and update other 
definitions within the Rules to reflect the limiting of the underlying 
interests for Treasury Options to Treasury bonds and notes. 
Furthermore, OCC does not plan to permit escrow deposits to be made in 
connection with the clearing of Treasury Options and proposes to remove 
related provisions in Section 2 of Article XIII.
    OCC generally will apply current expiration date exercise 
procedures to Treasury Options, and will require delivery settlement 
for exercised and assigned Treasury Options to be effected on a broker-
to-broker basis through the Fixed Income Clearing Corporation 
(``FICC''). Clearing members interested in Treasury Options have 
advised that it would be operationally more efficient for them if 
delivery settlement were effected in this manner. As not all OCC 
clearing members are participants of the Government Securities Division 
(``GSD'') of FICC, the proposed rules would permit clearing members to 
designate, with proper advance notice to OCC, a representative that is 
a GSD participant who would be responsible for inputting trade 
information into FICC's systems for delivery settlement purposes. The 
proposed rules make it clear, however, OCC would have no obligation to 
such designated representative and contain the agreement of the 
designating clearing member to be bound by, and to hold OCC harmless 
against any claims based on, the designated representative's actions or 
delays in acting or failures to act.
    On the expiration date for a Treasury Option, OCC will produce an 
exercise and assignment report identifying the delivering and receiving 
clearing members and other relevant delivery information. Clearing 
members that are obligated to purchase or sell Treasury securities as a 
result of the exercise or assignment of positions in Treasury Options 
will be required to submit the terms of such trades to FICC's real time 
trade matching system. If the trade information submitted by the 
delivering and receiving clearing member matches within FICC's system, 
FICC becomes obligated to guarantee settlement of the trade pursuant to 
FICC's rules, at the point in time at which FICC makes available to the 
delivering and receiving clearing members a report indicating the trade 
has been compared and OCC's obligation to guarantee delivery settlement 
will be terminated. Delivery settlement through FICC includes delivery 
of the underlying securities against payment of the aggregate purchase 
price increased by the amount of accrued interest. If a trade does not 
match, the delivering and receiving OCC clearing members will be 
required to notify OCC within such time as OCC may specify of such 
failure on the first business day after the expiration date. If no such 
notification is made within the deadline, pursuant to proposed Rule 
1403(d), OCC's obligation to guarantee settlement will be extinguished 
as of

[[Page 74706]]

such deadline, regardless of whether or not settlement was actually 
completed.
    In the event OCC is given timely notification of a failure to match 
on the first business day after the expiration date, the clearing 
members would be required to attempt to resolve the failure such that 
settlement could occur through FICC by a deadline specified by OCC on 
the second business day following the expiration date. If the failure 
is not resolved and the trade has not matched by the deadline on the 
second business day after the expiration date, the delivering and 
receiving OCC clearing members will be required to notify OCC within 
such time as OCC may specify of such failure. If no such notification 
is made within the deadline, pursuant to proposed Rule 1404(a), OCC's 
obligation to guarantee settlement will be extinguished as of such 
deadline, regardless of whether or not settlement was actually 
completed.
    If OCC receives timely notification, pursuant to proposed Rule 
1404(a), that the second submission attempt at FICC failed to result in 
a match, OCC will assess and pay damages, if any, incurred by the 
Delivering or Receiving Clearing Member, as applicable, in connection 
with the failure to match. OCC will also be authorized to debit the 
amount of such damages from the account of the Delivering or Receiving 
Clearing Members, as applicable.
    Under proposed Rule 1404, in the event the non-defaulting clearing 
member buys or sells the underlying Treasury security, the non-
defaulting clearing member will be required to promptly notify OCC of 
the price paid or received, as applicable, and OCC will take this 
information into account in assessing damages. However, OCC will not be 
bound to accept these prices in assessing damages, and will be able to 
make an independent determination of damages. Proposed Rule 1404 
provides that OCC's determination of damages would be at OCC's sole 
discretion, final and binding on all parties. Such ``failure to match'' 
procedures will limit OCC's liability in the event of a default by one 
of its clearing members. Proposed Rules 1401, 1402, 1403 and 1404 
reflect the settlement process described above.
    OCC will collect and hold margin from clearing members with 
Treasury Option delivery or receipt obligations until the exercise 
settlement date, unless OCC receives notification of a failure to 
match, in which case OCC will continue to hold margin until either the 
trade is deemed settled or damages have been assessed and paid to the 
non-defaulting clearing member.
    Proposed Rule 1405 would clarify that OCC may pursue disciplinary 
action against clearing members who fail to discharge the delivery, 
payment, and notification obligations as set forth in proposed Rules 
1403 and 1404.
    In addition to the above changes relating to the terms of and 
settlement process for Treasury Options, OCC proposes revisions to 
Section 5 of Article XIII of the By-Laws regarding the handling of 
shortages of Treasury Securities. These revisions would provide OCC 
with broader discretion in determining whether a shortage exists and 
simplify the procedures to be used in this situation.
    The proposed changes to OCC's By-Laws and Rules are consistent with 
the purposes and requirements of Section 17A of the Securities Exchange 
Act of 1934, as amended (the ``Act''), because they are designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions and the protection of investors and the public interest. 
They accomplish this purpose by, among other things, updating OCC's 
existing rule provisions to accommodate Treasury Options, as proposed 
for trading by PHLX, and implementing a settlement process designed to 
minimize the risks of settlement failures for investors. In addition, 
the proposed changes facilitate the establishment of linked and 
coordinated facilities for clearance and settlement of transactions in 
securities options by utilizing the existing infrastructure of two 
clearing agencies to create an operationally efficient exercise 
settlement process for Treasury Options, proposed for trading by PHLX. 
The proposed rule change is not inconsistent with any rules of OCC, 
including any rules proposed to be amended.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe the proposed rule change would impose any 
burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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 Commissions 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-2012-23 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-2012-23. 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, on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. Copies of such filings will also be 
available for inspection and copying at the principal office of OCC and 
on OCC's Web site at http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_12_23.pdf.
    All comments received will be posted without change; the Commission 
does not edit personal identifying

[[Page 74707]]

information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-OCC-2012-23 and should be submitted on or before January 
7, 2013.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\4\
---------------------------------------------------------------------------

    \4\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30272 Filed 12-14-12; 8:45 am]
BILLING CODE 8011-01-P


