
[Federal Register Volume 78, Number 20 (Wednesday, January 30, 2013)]
[Notices]
[Pages 6378-6379]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01929]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68712; File No. SR-OCC-2012-23]


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

January 23, 2013.

I. Introduction

    On November 30, 2012, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change SR-OCC-2012-23 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 December 17, 2012.\3\ The 
Commission received no comment letters. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 68403 (December 11, 
2012), 77 FR 74705 (December 17, 2012).
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II. Description of 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'') traded by NASDAQ OMX 
PHLX, LLC (``PHLX'').\4\ OCC's current By-Laws and Rules (collectively, 
``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 is amending 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.
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    \4\ See Securities Exchange Act Release No. 67976 (October 4, 
2012), 77 FR 61794 (October 11, 2012) (SR-Phlx-2012-105)
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    Since PHLX Treasury Options are limited to European-style options 
on Treasury notes and bonds with a unit of trading of $10,000, OCC is 
removing 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 is removing 
from the Rules the defined term ``adjusted exercise price,'' which 
related only to options on Treasury bills and consequently is no longer 
needed, and is updating other definitions within the Rules to reflect 
the limiting of the underlying interests for Treasury Options to 
Treasury bonds and notes. Furthermore, since OCC is not currently 
permitting escrow deposits to be made in connection with the clearing 
of Treasury Options, it is removing 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'').\5\ As not all OCC clearing members are participants of the 
Government Securities Division (``GSD'') of FICC, OCC is permitting 
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.\6\
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    \5\ Clearing members interested in Treasury Options have advised 
OCC that it would be operationally more efficient for them if 
delivery settlement were effected in this manner.
    \6\ OCC has no obligation to such designated representative and 
is harmless against any claims based on the designated 
representative's actions or delays in acting or failures to act.
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    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. At that time, 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 such deadline, regardless of whether 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 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 member, as applicable.
    Under 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 is 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.
    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

[[Page 6379]]

continue to hold margin until either the trade is deemed settled or 
damages have been assessed and paid to the non-defaulting clearing 
member.
    Rule 1405 clarifies that OCC may pursue disciplinary action against 
clearing members who fail to discharge the delivery, payment, and 
notification obligations as set forth in Rules 1403 and 1404.
    In addition to the above changes relating to the terms of and 
settlement process for Treasury Options, OCC is revising Section 5 of 
Article XIII of the By-Laws regarding the handling of shortages of 
Treasury Securities. These revisions provide OCC with broader 
discretion in determining whether a shortage exists and simplify the 
procedures to be used in this situation.

III. Discussion

    Section 17A(b)(3) (F) of the Act \7\ requires that, among other 
things, that the rules of a clearing agency are designed to promote the 
prompt and accurate clearance and settlement of securities 
transactions, and to the extent applicable derivative agreements, 
contracts, and transactions, to safeguard securities and funds in its 
custody or control or for which it is responsible, and to protect 
investors and the public interest. The proposed rule change 
accomplishes these purposes, 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. Furthermore, 
Section17A(a)(2)(A)(ii) of the Act \8\ directs the Commission to 
facilitate the establishment of linked and coordinated facilities for 
clearance and settlement of transactions in securities and securities 
options. The proposed rule change accomplishes this end by utilizing 
the existing infrastructure of two clearing agencies (OCC and FICC) to 
create a more operationally efficient exercise settlement process for 
Treasury Options, traded by PHLX.
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    \7\ 15 U.S.C. 78q-1(b)(3)(F)
    \8\ 15 U.S.C. 78q-1(a)(2)(ii)).
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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 \9\ and the 
rules and regulations thereunder.
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    \9\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (File No. SR-OCC-2012-23) be and 
hereby is approved.\11\
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    \10\ 15 U.S.C. 78s(b)(2).
    \11\ 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.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01929 Filed 1-29-13; 8:45 am]
BILLING CODE 8011-01-P


