
[Federal Register Volume 78, Number 119 (Thursday, June 20, 2013)]
[Notices]
[Pages 37248-37250]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-14685]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69767; File No. SR-OCC-2013-802]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection to Advance Notice Filing To Change the 
Expiration Date For Most Option Contracts to the Third Friday of the 
Expiration Month Instead of the Saturday Following the Third Friday

June 14, 2013.

I. Introduction

    On April 17, 2013, The Options Clearing Corporation (``OCC'') \1\ 
filed with the Securities and Exchange Commission (``Commission'') 
advance notice SR-OCC-2013-802 pursuant to Section 806(e) of Title VIII 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act''),\2\ entitled the Payment, Clearing, and Settlement 
Supervision Act of 2010 (``Title VIII'' or ``Clearing Supervision 
Act'').\3\ The advance notice was published in the Federal Register on 
May 23, 2013.\4\ The Commission received one comment letter to the 
Advance Notice, in which the commenter expressed support for the 
change.\5\ This publication serves as a notice of no objection to the 
advance notice.
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    \1\ OCC was designated as a systemically important financial 
market utility (``FMU'') by the Financial Stability Oversight 
Council (``FSOC'') on July 18, 2012. See FSOC 2012 Annual Report, 
Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, OCC is required to comply 
with Title VIII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act.
    \2\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Pub. L. 111-203, 124 Stat. 1376 (2010).
    \3\ OCC also filed the proposals contained in this advance 
notice as a proposed rule change, under Section 19(b)(1) of the 
Exchange Act and Rule 19b-4 thereunder, seeking Commission approval 
to permit OCC to change its rules to reflect the proposed changes in 
this advance notice. 15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4; See 
Exchange Act Release No. 69480 (April 30, 2013) (SR-OCC-2013-04).
    \4\ Securities Exchange Act Release No. 34-69603 (May 17, 2013), 
78 FR 30944 (May 23, 2013) (``Notice of Filing of Advance Notice'').
    \5\ See Comment from John V. Bruzzese dated May 3, 2013 (stating 
that the change would be ``beneficial for [the] option expiration 
process'') (http://sec.gov/comments/sr-occ-2013-04/occ201304-1.htm).
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II. Description of Proposed Rule Change

Proposal

    OCC filed this advance notice to change the expiration date for 
most option contracts (``Standard Expiration Contracts'') to the third 
Friday of the specified expiration month (``Expiration Date''). 
Standard Expiration Contracts currently expire at the ``expiration 
time'' (11:59 p.m. Eastern Time) on the Saturday following the third 
Friday of the specified expiration month (``Expiration Date'').\6\
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    \6\ See the definition of ``expiration time'' in Article I of 
OCC's By-Laws.
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    The proposed change applies only to series of option contracts 
opened for trading after the effective date of this proposed rule 
change and having Expiration Dates later than February 1, 2015. Option 
contracts having non-standard expiration dates (``Non-standard 
Expiration Contracts'') are unaffected by this proposed rule change.\7\
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    \7\ Examples of options with Non-standard Expiration Contracts 
include flex options and quarterly, monthly, and weekly options 
where the expiration exercise processing for such options presently 
occurs on a weekday.
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    In order to provide a smooth transition to the Friday expiration, 
OCC intends to, beginning June 21, 2013, move the expiration exercise 
procedures to Friday for all Standard Expiration Contracts even though 
the contracts would continue to expire on Saturday.\8\ After February 
1, 2015, virtually all Standard Expiration Contracts will expire on 
Friday. According to OCC, the only Standard Expiration Contracts that 
will expire on a Saturday after February 1, 2015 are certain options 
that were listed prior to the effectiveness of this rule change,\9\ and 
a limited number of options that may be listed prior to necessary 
systems changes of the options exchanges, which are expected to be 
completed in August 2013.\10\ After the transition period and the 
expiration of all existing Saturday-expiring options, expiration 
processing should be a single operational process and should run on 
Friday night for all Standard Expiration Contracts.
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    \8\ For contracts having a Saturday expiration date, exercise 
requests received after Friday expiration processing is complete but 
before the Saturday contract expiration time will continue to be 
processed so long as they are submitted in accordance with OCC's 
procedures governing such requests.
    \9\ According to OCC, certain option contracts have already been 
listed on exchanges with expiration dates as distant as December 
2016. Such options have Saturday expiration dates and OCC cannot 
change the terms of existing option contracts. In addition, clearing 
members have expressed a clear preference not to have open interest 
in any particular month with different expiration dates. Therefore, 
OCC will designate certain expiration dates as ``grandfathered,'' 
and any option contract that is listed, or may be listed in the 
future, that expires on a grandfathered date will have a Saturday 
expiration date even if such expiration date is after February 1, 
2015. After OCC designates an expiration date as grandfathered, the 
exchanges have agreed not to permit the listing of, and OCC will not 
accept for clearance, any newly listed standard expiration option 
contract with a Friday expiration in the applicable month.
    \10\ The exchanges have agreed that once these systems changes 
are made they will not open for trading any new series of option 
contracts with Saturday expiration dates falling after February 1, 
2015.
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    In connection with moving from Saturday to Friday night processing 
and expiration, OCC reviewed other aspects of its business to confirm 
that there would be no unintended consequences, and concluded that 
there would be none. For example, OCC believes the proposed changes do 
not affect OCC's liquidity forecasting procedures, nor do they impact 
OCC's liquidity needs, since OCC's liquidity forecasts and liquidity 
needs are driven by settlement obligations, which occur on the same day 
(T+3) irrespective of the move to Friday night processing and 
expiration dates. According to OCC, industry groups, clearing members, 
and options exchanges have been active participants in planning for the 
transition to the Friday expiration. OCC has obtained

[[Page 37249]]

assurances from all options industry participants that they will be 
ready to move to Friday night expiration processing by June 2013.

Rule Changes

    In order to implement the change to Friday expiration processing 
and eventual transition to Friday expiration for all Standard 
Expiration Contracts, OCC is amending the definition of ``expiration 
date'' in Article I and certain other articles of the By-Laws. As 
amended, the applicability of the definition is no longer limited to 
stock options, and the definition of ``expiration date'' in certain 
articles of the By-Laws therefore is deleted in reliance on the Article 
I definition. OCC is also amending Rule 805, and all rules 
supplementing or replacing Rule 805, to allow for Friday expiration 
processing during the transition to Friday expiration. OCC is also 
amending section 18 of Article VI of the By-Laws to align procedures 
for delays in producing Expiration Exercise Reports and submission of 
exercise instructions with the amended expiration exercise procedures 
in Rule 805. OCC is amending Rule 801 to modify the prohibition against 
exercising an American-style option contract on the business day prior 
to its expiration date, because this prohibition is necessary only for 
options expiring on a Saturday, and to remove clearing members' ability 
to revoke or modify exercise notices in order to accommodate the 
compressed Friday expiration processing expiration schedule.
    Finally, OCC is amending Rules 801 and 805 to allow certain 
determinations to be made by high-level officers of OCC, rather than 
the Board of Directors, in order to provide OCC with greater 
operational flexibility in processing exercise requests received after 
Friday expiration processing is complete but before the Saturday 
contract expiration time, and to replace various references to the 
expiration date of options with reference to the procedures of Rule 
805.
    Under the proposed change, OCC is preserving the ability of the 
options exchanges to designate (or, in the case of flexibly structured 
options, permit clearing members to designate) non-standard expiration 
dates for options, or classes or series of options, so long as the 
designated expiration date is not a date OCC has specified as 
ineligible to be an expiration date.

III. Analysis of Advance Notice

    Although Title VIII does not specify a standard of review for an 
Advance Notice, the Commission believes that the stated purpose of 
Title VIII is instructive.\11\ The stated purpose of Title VIII is to 
mitigate systemic risk in the financial system and promote financial 
stability by, among other things, promoting uniform risk management 
standards for systemically-important financial market utilities 
(``FMU'') and providing an enhanced role for the Federal Reserve Board 
in the supervision of risk management standards for systemically-
important FMUs.\12\
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    \11\ 12 U.S.C. 5461(b).
    \12\ Id.
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    Section 805(a)(2) of the Clearing Supervision Act \13\ authorizes 
the Commission to prescribe risk management standards for the payment, 
clearing, and settlement activities of designated clearing entities and 
financial institutions engaged in designated activities for which it is 
the supervisory agency or the appropriate financial regulator. Section 
805(b) of the Clearing Supervision Act \14\ states that the objectives 
and principles for the risk management standards prescribed under 
Section 805(a) shall be to:
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    \13\ 12 U.S.C. 5464(a)(2).
    \14\ 12 U.S.C. 5464(b).
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     Promote robust risk management;
     Promote safety and soundness;
     Reduce systemic risks; and
     Support the stability of the broader financial system.
    The Commission adopted risk management standards under Section 
805(a)(2) of the Clearing Supervision Act on October 22, 2012 
(``Clearing Agency Standards'').\15\ The Clearing Agency Standards 
became effective on January 2, 2013 and require clearing agencies that 
perform central counterparty services to establish, implement, 
maintain, and enforce written policies and procedures that are 
reasonably designed to meet certain minimum requirements for their 
operations and risk management practices on an ongoing basis.\16\ As 
such, the Commission believes it is appropriate to review Advance 
Notices against these risk management standards that the Commission 
promulgated under Section 805(a) and the objectives and principles of 
these risk management standards as described in Section 805(b).
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    \15\ Clearing Agency Standards, Securities Exchange Act Release 
No. 34-68080 (October 22, 2012), 77 FR 66219 (November 2, 2012).
    \16\ The Clearing Agency Standards are substantially similar to 
the risk management standards established by the Federal Reserve 
Board governing the operations of designated FMUs that are not 
clearing entities and financial institutions engaged in designated 
activities for which the Commission or the Commodity Futures Trading 
Commission is the Supervisory Agency. See Financial Market 
Utilities, 77 FR 45907 (Aug. 2, 2012).
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    OCC's proposal to move the expiration date of Standard Expiration 
Contracts to the third Friday of the month, as described above, is 
designed to help mitigate operational risk that Saturday expiration 
imposes on OCC and its members. Consistent with Section 805(b) of the 
Clearing Supervision Act,\17\ the Commission believes the proposed 
changes should promote safety and soundness of OCC's operations and 
reduce systemic risks by allowing OCC to streamline the expiration 
process among Standard Expiration Contracts and Non-Standard Expiration 
Contracts and quarterly options and weekly options. It should also 
allow OCC to align the expiration process for Standard Expiration 
Contracts with expiration processing schedules for European markets and 
should allow clearing members to run a single operational process for 
all US equity/index options regardless of where such options are 
exercised.
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    \17\ See 12 U.S.C. 5464(b).
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    Furthermore, Rule 17Ad-22(d)(4), adopted as part of the Clearing 
Agency Standards, requires clearing agencies to ``establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to identify sources of operational risk and minimize them 
through the development of appropriate systems, controls, and 
procedures . . . .'' \18\ The Commission believes the proposed rule 
changes minimize operational risk through the development of a system 
to move the expiration date of Standard Expiration Contracts to the 
third Friday of the month so that exercise processing across Standard 
Expiration Contracts, Non-standard Expiration Contracts, quarterly 
options, and weekly options occur on the same day in a single 
operational process.
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    \18\ 17 CFR 240.17Ad-22(d)(4).
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IV. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act,\19\ that, the Commission does not object to 
the advance notice (File No. SR-OCC-2013-802) and that OCC be and 
hereby is authorized to implement proposed rule change (File No. AN-
OCC-2013-802) as of the date of this notice or the date of an ``Order 
Approving Proposed Rule Change to Change the Expiration Date for Most 
Option Contracts to the Third Friday of the Expiration Month Instead of 
the Saturday Following the Third Friday''

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(File No. SR-OCC-2013-04), whichever is later.
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    \19\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-14685 Filed 6-19-13; 8:45 am]
BILLING CODE 8011-01-P


