[Federal Register Volume 87, Number 64 (Monday, April 4, 2022)]
[Notices]
[Pages 19566-19569]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-06981]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94542; File No. SR-OCC-2022-003]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change by The Options Clearing 
Corporation Concerning Cash-Settled FLEX ETF Options

March 29, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on March 16, 2022, 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 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. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change would amend various provisions of the OCC 
By-Laws and Rules to accommodate the issuance, clearance and settlement 
of flexibly structured options on exchange-traded funds (``fund 
shares'' or ``ETFs'') that are cash settled (``Cash Settled Flex ETF 
Options''). The proposed changes to OCC's By-Laws and Rules are 
contained in Exhibits 5A and 5B to file number SR-OCC-2022-003, 
respectively. Material proposed to be added to OCC's By-Laws and Rules 
as currently in effect is marked by underlining, and material proposed 
to be deleted is marked with strikethrough text. All terms with initial 
capitalization that are not otherwise defined herein have the same 
meaning as set forth in the By-Laws and Rules.\3\
---------------------------------------------------------------------------

    \3\ OCC's By-Laws and Rules can be found on OCC's public 
website: https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.

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

[[Page 19567]]

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

(1) Purpose
    The NYSE American Exchange (``NYSE American'') received approval to 
list Cash Settled Flex ETF Options as a variation of currently-traded, 
physically-settled equity flex options.\4\ Cash Settled Flex ETF 
Options will generally have characteristics of physically settled 
equity flexes; however, exercises and assignments will settle in cash 
(as opposed to physical settlement), with the settlement amount based 
on the difference between the underlying price on the date of exercise 
and the strike price of the exercised option.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 88131 (February 5, 
2020), 85 FR 7806 (February 11, 2020) (SR-NYSEAMER-2019-38).
---------------------------------------------------------------------------

    OCC does not currently settle equity options in cash unless (i) the 
underlying security undergoes a corporate action resulting in the 
conversion of the option deliverable to only cash or (ii) the 
underlying security is otherwise unavailable for delivery.\5\ Since OCC 
does not currently settle equity options in cash except for in rare 
circumstances, OCC's By-Laws and Rules are drafted on the premises that 
(i) all equity options are physically settled options; and (ii) certain 
provisions apply to physically settled options and certain provisions 
apply to cash settled options. To accommodate the Cash Settled Flex ETF 
Option product, OCC must revise its By-Laws and Rules to establish the 
following as further described below: (i) Cash Settled Flex ETF Options 
settle in cash; (ii) the distinction between Cash Settled Flex ETF 
Options and physically settled options on the same underlying security; 
(iii) certain provisions that currently apply only to physically 
settled options will also apply to Cash Settled Flex ETF Options; and 
(iv) specific deposits would not be allowed as collateral for Cash 
Settled Flex ETF Options.
---------------------------------------------------------------------------

    \5\ See OCC By-Laws Article VI, Section 11A, Interpretations and 
Policies .05 and Article VI, Section 19(c).
---------------------------------------------------------------------------

Revisions To Distinguish Cash Settled Flex ETF Options From Physically 
Settled Options
    OCC proposes the following modifications to its By-Laws to 
emphasize the distinction between physically settled flexibly 
structured options and Cash Settled Flex ETF Options.
     Article I (Definitions), Section 1(F)(8). OCC is proposing 
to revise the definition of ``Flexibly Structured Option'' to (i) 
emphasize that such options may be physically settled or cash settled 
depending on the listing exchange's rules and (ii) clarify that Cash 
Settled Flex ETF Options would not be fungible with physically settled 
flexibly structured options and would not be consolidated with standard 
options listed after a flexibly structured option with the same strike, 
expiration date, and underlying security, as is the case with a 
physically settled flexibly structured option that is fungible.
     Article I (Definitions), Section 1(S)(12). OCC proposes to 
revise the definition of ``Series'' to state that the options of the 
same series have the same settlement method.
     Article I (Definitions), Section 1(V)(1). OCC proposes to 
revise the definition of ``Variable Terms'' to recognize that in 
addition to the variable terms itemized in the definition, flexibly 
structured options on fund shares may be either physically or cash 
settled.
     Article XVII (Index Options and Certain Other Cash-Settled 
Options), Introduction. OCC proposes to revise the introduction to add 
flexibly structured options that cash settle to the list of options for 
which Article XVII of the By-Laws applies.
     Article XVII (Index Options and Certain Other Cash-Settled 
Options), Section 1(C)(4). OCC proposes to revise the definition of 
``Class of Options'' to state that flexibly structured options that 
cash settle shall constitute a different class of options from 
physically settled options on the same underlying interest.
Revisions To Apply Certain Provisions for Physically Settled Options 
to, and Exclude the Application of Certain Provisions for Index Options 
and Other Cash Settled Options From, Cash Settled Flex ETF Options
    OCC also proposes the following modifications to its By-Laws and 
Rules to emphasize the application of certain provisions that otherwise 
apply only to physically settled options and to exclude application of 
certain provisions that otherwise would apply to all cash settled 
options.
     Article I (Definitions), Section 1(C)(15). OCC proposes to 
revise the definition of ``Clearing Member'' to clarify that a Clearing 
Member is not an ``Index Clearing Member'' solely by virtue of being 
approved to clear Cash Settled Flex ETF Options.
     Article I (Definitions), Section 1(R)(5). OCC currently 
defines ``Reporting Authority'' when used with respect of any cash-
settled contract to mean the source that OCC uses as the official 
source for the current price or value of the underlying interest. OCC 
would revise this definition to emphasize that the reporting for Cash 
Settled Flex ETF Options will be the same source used by OCC for 
physically settled equity options with the same underlying interest. 
This change is designed to facilitate the use of the same closing price 
for automatic exercise determinations on both physically settled and 
cash settled options with the same underlying security, thereby 
ensuring that expiration processing for a Cash Settled Flex ETF Option 
will align with expiration processing for a physically settled product 
on the same underlying security.
     Article XVII (Index Options and Certain Other Cash-Settled 
Options), Section 1(R)(3). ``Reporting Authority'' is also defined in 
Article XVII for index and certain other cash settled options. OCC 
proposes to revise this definition to explicitly exclude Cash Settled 
Flex ETF Options and to emphasize that the reporting authority for Cash 
Settled Flex ETF Options is the same source used by OCC for physically 
settled equity options.
     Article XVII (Index Options and Certain Other Cash-Settled 
Options), Sections 3(a) and 3(h). This provision currently states that 
the adjustment provisions of Article VI, Section 11A do not apply to 
cash settled equity contracts. Since adjustment decisions for Cash 
Settled Flex ETF Options and physically settled options on the same 
underlying should be the same, OCC is proposing to add language to this 
section to state explicitly that Article VI, Section 11A of the By-Laws 
applies to Cash Settled Flex ETF Options.
Revisions Unique to the Nature of Cash Settled Flex ETF Options
    Finally, OCC proposes to revise the following By-Laws and Rules to 
accommodate unique characteristics of Cash Settled Flex ETF Options.
     Article XVII (Index Options and Certain Other Cash-Settled 
Options), Section 4(a)(2). This provision states the method by which 
the exercise

[[Page 19568]]

settlement amount for exercised contracts of an affected series is 
fixed for index options and certain other cash-settled options. OCC 
proposes to add a sentence to this provision to state that the exercise 
settlement amount for Cash Settled Flex ETF Options shall be determined 
by using the last reported sale price for the underlying security 
during regular trading hours. This is consistent with the expiration 
closing price determination for physically settled options in Rule 805.
     Chapter VI (Margins), Rule 610 (Deposits in Lieu of 
Margin). Rule 610 allows for Clearing Members to use specific deposits 
of the underlying security as collateral to short customer positions on 
a call option. Specific deposits allow a short call position to be 
fully covered because the security that will need to be delivered if 
the call option writer is assigned is pledged to OCC for the purpose of 
covering the short position. OCC proposes to modify Rule 610 to 
disallow specific deposits for Cash Settled Flex ETF Options because 
such options do not require delivery of the underlying security upon 
assignment. Consequently, a specific deposit of the underlying security 
will not cover the delivery requirement of Cash Settled Flex ETF 
Options as it does for a physically settled option. OCC would, however, 
allow escrow deposits to be made for Cash Settled Flex ETF Options.
     Chapter VIII (Exercise and Assignment), Rule 805 
(Expiration Exercise Procedure) and Chapter XVIII (Index Options and 
Certain Other Cash Settled Options), Rule 1804 (Expiration Exercise 
Procedure for Cash-Settled Options). Rule 805(j) states that the 
``closing price'' used for any underlying security in Rule 805 is the 
last reported sale price for the underlying security during regular 
trading hours (as determined by OCC) on the trading day immediately 
preceding the expiration date, or on the expiration date if the 
expiration date is a trading day, on such national securities exchange 
or other domestic securities market as OCC shall determine. OCC is 
proposing to revise Rule 805(j) to state explicitly that the same 
definition of ``closing price'' applies to underlying securities for 
Cash Settled Flex ETF Options. Rule 1804 generally provides for the 
expiration exercise procedure for cash-settled options. OCC is 
proposing to add an interpretation and policy to Rule 1804 to clarify 
that, notwithstanding its general application to cash-settled options, 
the determination of the closing price for an underlying security of a 
flexibly structured cash settled equity option is the same as the 
determination of the closing price per Rule 805(j).
     Chapter XVIII (Index Options and Certain Other Cash 
Settled Options), Rule 1804 (Expiration Exercise Procedure for Cash 
Settled Options). OCC proposes to revise Rule 1804(a) and Rule 1804(b) 
to state that Cash Settled Flex ETF Options will be deemed exercised on 
expiration if the strike price is $0.01 or more in-the-money in 
accordance with the provisions of Rule 805(d). This will ensure that 
the threshold used for automatic exercises of Cash Settled Flex ETF 
Options will be the same as the threshold established for physically 
settled equity options rather than the $1.00 per contract threshold 
established in Rule 1804.
     Chapter VIII (Exercise and Assignment) Rule 805 
(Expiration Exercise Procedure) I&P.03 and Chapter XVIII (Index Options 
and Certain Other Cash Settled Options), Rule 1804 (Expiration Exercise 
Procedure for Cash Settled Options). Rule 805, interpretation and 
policy .03 states that the exercise procedures set forth in Rule 805 
apply to flexibly structured equity options. OCC proposes to add 
language excepting from application of Rule 805(d) American-style Cash 
Settled Flex ETF Options subject to delayed settlement for any 
deliverable component. Similarly, OCC is proposing to add language to 
Rule 1804(a) to state explicitly that Rule 805(d) does not apply to 
American-style Cash Settled Flex ETF Options that have a deliverable 
component subject to delayed settlement. These changes are necessary 
because any such option with a pended delivery component on its 
expiration date should not be automatically exercised, as the total 
value of the option deliverable can only be estimated. OCC anticipates 
this outcome would be rare, and likely the result of a contract 
adjustment that involves cash in lieu of fractional shares that have 
yet to be finalized on an option's an expiration date.
(2) Statutory Basis
    Section 17A(b)(3)(F) of the Act \6\ requires, among other things, 
that the rules of a clearing agency be designed to promote the prompt 
and accurate clearance and settlement of securities transactions and, 
to the extent applicable, derivative agreements, contracts, and 
transactions. OCC believes the proposed rule change is consistent with 
Section 17A(b)(3)(F) of the Act \7\ because it is designed to promote 
prompt and accurate clearance and settlement of securities transactions 
in flexibly structured options. The proposed rule change accomplishes 
this by maintaining consistency between OCC's By-Laws and Rules and 
NYSE American's rules as applied to the clearance and settlement of 
Cash Settled Flex ETF Options. Because Cash Settled Flex ETF Options 
are fundamentally unique from currently listed flexibly structured 
equity options, OCC By-Laws and Rules must provide for two different 
types of settlement methods for flexibly structured options with ETFs 
as the underlying securities to provide clearance and settlement of 
Cash Settled Flex ETF Options. The proposed changes are necessary to 
make explicit the differences between Cash Settled Flex ETF Options and 
physically settled options on the same underlying ETF, and will allow 
OCC to issue, clear, and settle Cash Settled Flex ETF Options in 
alignment with exchange rules for this product type. Accordingly, OCC 
believes the proposed rule change is designed to promote the prompt and 
accurate clearance and settlement of securities and derivatives 
transactions in accordance with Section 17A(b)(3)(F) of the Act.\8\
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ 15 U.S.C. 78q-1.
    \8\ Id.
---------------------------------------------------------------------------

    In addition, the proposed rule change is not inconsistent with the 
existing By-Laws and Rules of OCC, including any rules proposed to be 
amended.

(B) 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.

(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

[[Page 19569]]

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.

    OCC shall post notice on its website of proposed changes that are 
implemented. The proposal shall not take effect until all regulatory 
actions required with respect to the proposal are completed.

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 Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-OCC-2022-003 on the subject line.

Paper Comments

     Send paper comments in triplicate to Vanessa Countryman, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2022-003. 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 website (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 website 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 such filing also will be available for inspection 
and copying at the principal office of OCC and on OCC's website at 
https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-OCC-2022-003 and 
should be submitted on or before April 25, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-06981 Filed 4-1-22; 8:45 am]
BILLING CODE 8011-01-P


