
[Federal Register Volume 78, Number 106 (Monday, June 3, 2013)]
[Notices]
[Pages 33138-33142]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-12975]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69642; File No. SR-OCC-2013-05]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Provide That OCC, Rather 
Than an Adjustment Panel of the Securities Committee, Will Determine 
Adjustments to the Terms of Options Contracts to Account for Certain 
Events, Such as Certain Dividend Distributions or Other Corporate 
Actions, That Affect the Underlying Security or Other Underlying 
Interest

May 28, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on May 15, 2013, 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 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. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    OCC proposes to provide that OCC, rather than an adjustment panel 
of the Securities Committee, will determine adjustments to the terms of 
options contracts to account for certain events, such as certain 
dividend distributions or other corporate actions, that affect the 
underlying security or other underlying interest.

[[Page 33139]]

II. Clearing Agency'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 these 
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    The principal purpose of this proposed rule change is to authorize 
OCC, rather than adjustment panels of the Securities Committee,\3\ to 
determine option contract adjustments and to determine the value of 
distributed property involved in such adjustments. Other conforming or 
clarifying changes to the By-Laws relating to adjustments and/or 
adjustment panels also are being proposed.
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    \3\ The OCC Securities Committee is authorized under OCC By-Law 
Article VI Section 11(a) to determine contract adjustments in 
particular cases and to formulate adjustment policy or 
interpretations having general applicability. The Securities 
Committee is comprised of representatives of OCC's participant 
options exchanges and authorized representatives of OCC.
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1. Background and Purpose of Proposed Rule Change
    Certain corporate actions--such as declaration of dividends or 
distributions, stock splits, rights offerings, reorganizations, or the 
merger or liquidation of an issuer--affecting an underlying security 
may require an adjustment to the terms of the overlying options. For 
example, in a two-for-one stock split, the overlying options might also 
be split two-for-one, so that each option would continue to cover the 
same number of shares but with an exercise price equal to half of the 
pre-split price. The basic procedural rules governing such 
``adjustments'' in the terms of outstanding options are set forth in 
Section 11 of Article VI of OCC's By-Laws, and the substantive rules 
specifically covering adjustment of stock options are set forth in 
Section 11A of Article VI. Although much less common, it is also 
possible that events affecting indexes and other underlying interests 
could also require adjustment of the overlying options. Rules for 
adjustment of such other options are generally found in the By-Law 
provisions applicable to such other options.
    The procedural rules of Article VI, Section 11 of the By-Laws 
provide that all adjustments to option contracts be determined on a 
case-by-case basis by an adjustment panel of the Securities Committee 
composed of two representatives \4\ of each exchange that trades an 
option on the underlying security and the OCC Chairman (or his 
representative). All actions are determined by majority vote, with OCC 
voting only to break a tie. Besides determining particular adjustments 
in individual cases, Article VI, Section 11 also authorizes the 
Securities Committee to adopt statements of policy or interpretations 
governing option adjustments in general. Additionally, the Securities 
Committee is authorized to determine the value of distributed property 
involved in stock option adjustments as stated in Article VI, Section 
11A(f).
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    \4\ The Commission has approved an amendment to OCC's By-Laws 
under which only one representative of each relevant exchange is 
required on an adjustment panel. Securities Exchange Act Release No. 
34-67333 (July 2, 2012), 77 FR 40394 (July 9, 2012) (SR-OCC-2012-
07). However, the amendment will not be implemented until an 
amendment to the Options Disclosure Document reflecting this change 
is made. Interpretation and Policy .01 to Article VI, Section 11 
clarifies that until such time as the amendment to the Options 
Disclosure Document is made and only one representative is required, 
an adjustment panel must have two representatives of each exchange 
that trades an option on the underlying security.
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    The options exchanges asked OCC to evaluate possible changes to the 
structure and procedures which govern option contract adjustments. The 
request was prompted by a desire to consider ways to lessen investor 
confusion and enhance consistency in making option contract 
adjustments. In addition, the exchanges have expressed concern that 
exchange representatives involved in adjustment decisions may sometimes 
be subject to undue pressure from investors. Accordingly, the exchanges 
asked OCC to investigate whether changes to adjustment procedures could 
insulate the exchanges from undue pressure while concurrently providing 
greater consistency and efficiency in making adjustment decisions.
2. Description of Proposed Changes
    Discussions among OCC and the exchanges concerning potential 
changes to Securities Committee governance in respect of adjustments 
yielded a consensus that the exchanges should retain policy-making 
authority under the adjustment By-Laws through the Securities Committee 
but that OCC should be the sole determiner of particular adjustment 
decisions, thereby eliminating adjustment panels convened for the 
purpose of determining adjustments of particular option contracts. The 
Securities Committee ratified the following recommendations by 
unanimous vote:
    (i) The policy making role of the Securities Committee should be 
unchanged. As members of the Securities Committee, exchanges should 
retain authority to determine adjustment policy in general.
    (ii) OCC should apply the adjustment By-Laws and Interpretations to 
determine particular adjustments on a case-by-case basis. An adjustment 
panel comprised of exchange and OCC representatives should not be 
called to determine a particular adjustment, thereby insulating the 
exchanges from investor pressure to determine a particular outcome.\5\
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    \5\ There is precedent for this approach in that OCC currently 
determines all contract adjustments for security futures. See 
Article XII, Sections 3 and 4 of OCC's By-Laws.
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    (iii) OCC and the exchanges should retain unrestricted ability to 
mutually discuss considerations pertaining to any adjustment decision 
or policy.
    (iv) OCC should be given authority to determine the value of 
distributed property involved in contract adjustments.
    These recommendations were reviewed with OCC's Board of Directors, 
which unanimously approved them by authorizing the filing of this 
proposed rule change.
    Notwithstanding the elimination of exchange representative 
adjustment panels, panels of exchange representatives would still 
retain their existing functions and authority under other provisions of 
OCC's By-Laws. For example, those panels would retain the authority to 
fix exercise settlement amounts for cash-settled options where a 
closing price for the underlying is otherwise unavailable.\6\
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    \6\ See, e.g., Article XIV, Section 5, Article XVII, Section 4, 
Article XXII, Section 4 and Article XXIV, Section 4.
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    The types of adjustments for which exchange representative panels 
may continue to be convened would be limited to very rare situations 
involving market closures or the unavailability of accurate pricing, 
and would need to be done on very short notice, unlike dividend 
adjustments, for which there can be a period of time between the 
announcement of a dividend and the decision of the panel. Accordingly, 
it is much less likely that exchange representatives on these panels 
would be subject to the same risk of undue pressure from investors. 
These situations are also less likely to fit within a policy or 
precedent that could

[[Page 33140]]

be prescribed in advance by the Securities Committee, and therefore it 
would be more difficult for the Corporation to make the decisions 
without the input of the relevant exchanges.
3. Discussion
    As a result of the proposed changes described above, adjustment 
panels for the purpose of determining adjustments of particular options 
contracts would cease to exist, and exchanges would have no obligation 
or authority to determine a particular adjustment. OCC would determine 
the appropriate application of the By-Laws and Interpretations and 
Policies, but the exchanges would retain policy making authority as 
members of the Securities Committee. In this policy making capacity, 
actions of the Securities Committee would continue to require approval 
by a majority vote.
    Occasionally, there may be unique aspects of a corporate event that 
justify departure from adjustment policy or precedent, or that involve 
a situation for which there is no existing adjustment policy or 
precedent. Such events may also highlight a need for a more general 
reformulation of adjustment policy. Under the proposed changes, if OCC 
determines such aspects to be present, OCC would determine in its sole 
discretion any adjustment to be applied in the particular case. The 
Securities Committee would not initiate policy changes ``ad hoc'' to 
address a particular case (which would be a de facto determination of a 
particular adjustment decision). Instead, after OCC determined a 
particular adjustment, the Securities Committee, in its discretion, 
would determine the appropriateness of adopting prospective policy 
changes or clarifications.\7\
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    \7\ This approach was followed in 2006 in response to a special 
cash dividend. In that case, adjustment panels determined to depart 
from precedent and adjust certain ETF options where the ETF 
distributed pro rata dividends based on the amount of a special 
dividend paid by the issuer of one of the component stocks in the 
ETF. Following these adjustments, the Securities Committee 
recommended to the OCC Board a policy reformulation. See 
Interpretation .08 to Article VI, Section 11A.
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    Although OCC and the exchanges believe it is feasible for OCC to 
independently determine adjustments, both are averse to losing valuable 
exchange experience and insight that is now brought to bear in 
adjustment decisions. Accordingly, OCC and the exchanges believe that 
they should retain unrestricted ability to discuss with each other any 
considerations pertaining to an adjustment decision or policy--with the 
understanding that adjustment decisions would be made solely by OCC and 
the exchanges would be involved solely in an advisory capacity. 
Accordingly, nothing in the present proposal would prohibit either the 
exchanges or OCC from initiating conversations concerning adjustment 
policy or particular adjustment decisions, but neither would such 
consultation be required.\8\ Furthermore, to ensure continued exchange 
involvement in determining adjustment policy, OCC intends to call 
periodic meetings of the Securities Committee to discuss policy issues 
and review recent experience with contract adjustments.\9\ Such 
meetings will be held on a quarterly or more frequent periodic basis.
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    \8\ Confidentiality of the communications between OCC and the 
Exchanges would continue to be observed--as it is today.
    \9\ As a practical matter, even if adjustments are determined 
solely by OCC it would still be necessary for OCC and the exchanges 
to coordinate the operational execution of all option adjustments. 
This coordination includes, but is not limited to, the determination 
of an effective date, option symbols and strike prices and the 
publication of notices.
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    Occasionally option adjustments involve the substitution of cash 
value in lieu of delivery of property. For example, this is the case 
when a security does not trade in the United States or cash in lieu of 
property is involved. Currently, the Securities Committee has authority 
to determine such cash value. OCC is proposing that it would instead be 
authorized to determine cash value in these cases since it would have 
sole discretion to determine contract adjustments.
    The proposed changes would apply only to the functions of OCC and 
the Securities Committee in the determination of option contract 
adjustments as described in Article VI, Sections 11 and other By-Law 
provisions.\10\ The Securities Committee--or panels comprised of 
representatives of the Securities Committee--in respect of actions that 
do not involve option contract adjustments would retain all other 
functions and authority granted under the By-Laws, including, for 
example, the ability to fix index option settlement values in cases of 
market disruption \11\ and similar actions.
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    \10\ See, e.g., [sic] Article XII, Sections 3 and 4; Article 
XIV, Section 3A; Article XV, Section 4; Article XVI, Section 3; 
Article XVII, Section 3; Article XX, Section 4; Article XXII, 
Section 3; Article XXIII, Section 4; and Article XXIV, Section 6.
    \11\ See, e.g., By-Law Article XVII, Section 4.
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    Adjustment provisions of the By-Laws pertaining to classes of 
options other than stock options sometimes provide for adjustment 
panels by referring to Article VI, Section 11. Insofar as Article VI, 
Section 11 would be modified to eliminate the need for adjustment 
panels, the requirement for adjustment panels to determine contract 
adjustments for these other types of option contracts would also be 
eliminated, with case by case adjustment decisions determined solely by 
OCC.
4. Other Changes
    In addition to the principal purpose underlying this rule change as 
described above, certain other conforming and/or clarifying changes are 
being proposed. These changes are intended to update the By-Laws to 
eliminate stale rule provisions, to conform cross-references contained 
in other By-Laws to changes being proposed herein and to clarify 
certain interpretations adopted under the By-Laws to reflect a recent 
policy determination made by the Securities Committee in accordance 
with its authority granted under Article VI, Section 11 of OCC's By-
Laws. These changes generally are described below.
    OCC is proposing to modify or eliminate certain adjustment related 
By-Law provisions because, due to industry or other changes, there is 
no longer any open interest in options covered by such provisions. For 
example, equity options previously had traded with exercise prices 
expressed in either fractions or decimals. All exercise prices for 
equity options now are expressed in decimals, and all open interest in 
options series for which exercise prices were expressed in fractions 
has expired. Several By-Law provisions are being modified or eliminated 
to reflect this circumstance.\12\
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    \12\ See, e.g., the proposed changes to the definition of the 
term ``adjustment increment,'' Article I, Section 1.A(2); Article 
VI, Section 11A(d); Interpretation & Policy .09 under Article VI, 
Section 11A; and Article XII, Section 3(d).
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    OCC also is proposing to eliminate other stale provisions, 
including those found within Interpretation and Policy .01 under the 
Article VI, Section 11, which relates to the determination of 
``ordinary cash dividends or distributions'' for which no adjustment is 
ordinarily made. These provisions preserved the ``10% rule'' (i.e., the 
former method used to determine whether a cash dividend or distribution 
was ordinary) for application to certain series that had open interest 
prior to rescission of the 10% rule. Open interest in all such 
``grandfathered'' series has expired, and therefore these provisions 
are no longer necessary. Changes would also be made to Article XIV, 
Section 3A(a)(3) in relation to

[[Page 33141]]

binary options for which the underlying is an equity interest.
    OCC's Securities Committee is empowered under the By-Laws to adopt 
statements of policy or interpretations having general application to 
specified types of events or specific kinds of cleared contracts. 
Recently, the Securities Committee issued a clarifying interpretation 
with respect to determinations of corporate issuers to accelerate or 
defer payments of otherwise ordinary dividends. More specifically, the 
Securities Committee determined that such events would not, as a 
general rule, affect the ordinary nature of such dividends subject to 
the evaluation of these events on a case-by-case basis.\13\ Comparable 
changes, as applicable, would be made to Article XIV, Section 3A. Other 
changes being proposed are conforming in nature in that they update 
cross-references to By-Laws and Rules proposed to be amended.
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    \13\ Securities Exchange Act Release No. 34-68531 (December 21, 
2012), 77 FR 77157 (December 31, 2012) (SR-OCC-2012-26).
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    OCC believes the proposed rule change is consistent with the 
purposes and requirements of Section 17A(b)(3)(F) of the Securities 
Exchange Act of 1934, as amended, (the ``Act'') \14\ and the rules and 
regulations thereunder because the proposed changes would help promote 
the prompt and accurate clearance and settlement of securities 
transactions and foster cooperation and coordination with persons 
engaged in the settlement of securities transactions \15\ by providing 
OCC with sole discretion for particular adjustment decisions to help 
ensure that decisions are consistent, efficient and free from undue 
influence and by providing conforming and clarifying changes to OCC's 
By-Laws and Rules to help ensure that OCC maintains a well-founded, 
transparent and enforceable legal framework as required by Rule 17Ad-
22(d)(1).\16\ The proposed rule change is not inconsistent with any 
rules of OCC, including any rules proposed to be amended.
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    \14\ 15 U.S.C. 78q-1.
    \15\ 15 U.S.C. 78q-1(b)(3)(F).
    \16\ 17 CFR 240.17Ad-22(d)(1).
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    OCC will not implement these proposed rule changes until the 
effectiveness of an amendment to the Options Disclosure Document 
relating to the proposed changes.

(B) Clearing Agency's Statement on Burden on Competition

    OCC does not believe that the proposed rule change will impact, or 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change 
primarily affects OCC's clearing members and their customers, but it 
would not impose any additional burden on them because options are 
already subject to adjustment and the revised procedures apply equally 
to all clearing members. OCC does not believe that providing OCC with 
sole discretion for particular adjustment decisions, rather than 
continuing to rely on adjustment panels consisting of exchange 
representatives, would inhibit access to any of OCC's services or 
disadvantage or favor any user of OCC's services in relationship to any 
other such user. In fact, OCC believes that the proposed rule change 
would promote competition among participants in the options markets 
because it would help ensure that adjustment decisions are consistent, 
efficient and free from undue influence and therefore it would promote 
certainty, fairness and a level playing field in the options markets 
with respect to when and how participants are affected by adjustments.
    For the foregoing reasons, OCC believes that the proposed rule 
change is in the public interest and consistent with the requirements 
of the Act applicable to clearing agencies because it would promote 
competition in the options markets that OCC serves and not impose a 
burden on competition that is unnecessary or inappropriate in 
furtherance of the purposes of the Act.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    Written comments on the proposed rule change were not and are not 
intended to be solicited with respect to the proposed rule change and 
none have been received.

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 such 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 Exchange 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-2013-05 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.

All submissions should refer to File Number SR-OCC-2013-05. 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 Room, 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 the filing also will be available 
for inspection and copying at the principal office of OCC and on OCC's 
Web site: http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_13_05.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-2013-05 
and should be submitted on or before June 24, 2013.


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-12975 Filed 5-31-13; 8:45 am]
BILLING CODE 8011-01-P


