[Federal Register Volume 59, Number 95 (Wednesday, May 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12040]
[[Page Unknown]]
[Federal Register: May 18, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34050; File No. SR-NYSE-94-12]
Self-Regulatory Organizations; Filing of Proposed Rule Change by
the New York Stock Exchange, Inc. Relating to Option Exercise Cut-Off
Procedures
May 12, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'').\1\ notice is hereby given that on March 23, 1994, the New
York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') 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 the self-regulatory organization. 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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NYSE proposes to amend Exchange Rule 780 (Exercise of Option
Contracts) to establish new exercise cut-off procedures in respect to
expiring equity options.
The proposed procedures would continue to require clearing members
to notify The Options Clearing Corporation (``OCC'') of exercises of
equity options and would establish a procedure requiring a member or
member organization to indicate an option holder's final exercise
decision to the Exchange. The member or member organization could do
this in one of two ways: either it could submit a Contrary Exercise
Advice to the Exchange or it could take no action and thereby rely on
OCC's exercise-by-exeption procedures pursuant to OCC Rule 805.\2\ The
``Contrary Exercise Advice'' form instructs the Exchange that the
options holder has decided not to exercise an equity option that
application of OCC's exercise-by-exception procedures would otherwise
automatically exercise or to exercise an equity option that OCC's
exercise-by-exception procedures would not otherwise exercise.
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\2\The OCC's exercise-by-exception procedures make automatic
exercise decisions. They allow (i) the exercise of an in-the-money
option at expiration without the submission of an input entry into
OCC if the option is at or above a predetermined threshold and (ii)
the non-exercise of an option at expiration if the option is not at
or above the predetermined threshold.
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The proposal requires final equity option exercise decisions to be
made at 5:30 p.m. New York time on the business day immediately
preceding the expiration date (the ``exercise cut-off time'') and
allows a member or member organization to submit a Contrary Exercise
Advice subsequent to the exercise cut-off time in the event of a good-
faith error, a failure to reconcile an unmatched option transaction, or
an exceptional circumstance that precludes communication of the
Contrary Exercise Advice.
Under the proposal, a member or member organization may submit the
Contrary Exercise Advice to any place that the Exchange or any other
national options exchange of which it is a member directs, so long as
the option is listed on the directing exchange. Alternatively, the
member or member organization may submit the advice to the Exchange via
OCC.
Where OCC has waived the exercise-by-exception procedures, a member
or member organization must still submit the Contrary Exercise Advice
to the Exchange when the member or member organization wishes to
exercise in a manner that would have been contrary to the automatic
exercise or non-exercise procedure had OCC not waived the exercise-by-
exception procedure. In determining whether the exercise would have
been contrary to the OCC exercise-by-exception procedure had OCC not
waived it, the price of the underlying security would normally be the
last sale price in the primary market on the business day immediately
prior to the expiration date.
Proposed paragraph (d) of Rule 780 requires members and member
organizations to assume responsibility for ensuring that the final
exercise decisions for proprietary and customer accounts are indicated
to the Exchange. The proposed procedures further require each member
organization to establish a cut-off time after which it will not longer
accept final exercise decisions.
Proposed paragraph (f) of Rule 780 requires member organizations to
prepare memoranda of every final exercise decision that requires a
contrary exercise advice, including the time when the decision was made
or received. If a final exercise decision is made after the exercise
cut-off time, the member or member organization must prepare a
memorandum describing the circumstances. The member or member
organization must file a copy of that memorandum with the Exchange's
Market Surveillance Department by no later than 12 p.m. on the first
business day following expiration. All memoranda must be kept in
accordance with Rule 17a-4 under the Act.\3\
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\3\17 CFR 240.17a-4 (1993).
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
It its filing with the Commission, the self-regulatory organization
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. The self-regulatory organization
has prepared summaries, set forth in Sections (A), (B) and (C) below,
of the most significant aspects of such statements.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
Under the proposed rule change, the 5:30 p.m. exercise cut-off time
for equity options as well as the actual exercise procedures, including
the submission of exercise notices to OCC, remain unchanged and subject
to OCC rules.
While retaining the 5:30 p.m. time limit for equity options, the
proposed rule change removes the 6:30 p.m. cut-off time for the receipt
of exercise instructions for index stock group options, thereby
removing index stock group options from the applicability of Rule 780.
Instead, the existing requirements of Supplementary Material .10 to
Rule 780 would govern the exercise of index stock group options. The
Exchange feels that removing the explicit exercise cut-off time in the
context of index stock group options is warranted because those options
are cash settled, thereby making it unlikely that an exercise will
affect the market for the securities underlying the index option, and
because the requirements of Supplementary Material .10 provide
sufficient notice to the Exchange of the exercise of index stock group
options.
The Exchange feels that replacing the existing equity option
exercise cut-off procedures with the proposed procedures will
strengthen member and member organization audit trail capabilities. The
exercise decision indication and the Contrary Exercise Advices will
allow the Exchange to better track activity surrounding the exercise
the equity options. Furthermore, the proposed procedures will provide a
more convenient method for members to indicate exercise intentions to
the Exchange.
In addition, the Exchange believes that the proposed procedures
provide it with a better audit trail. For example, the proposed
procedures would permit a member or member organization to submit a
Contract Exercise Advices directly to the Exchange, rather than to the
clearing firm. This means that responsibility for the timely and proper
submission of Contrary Exercise Advices shifts from the clearing firm
to the option holder himself and his member organization.
Alternatively, the proposed procedures allow a member to continue
to submit final exercise decisions (in the form of Contrary Exercise
Advices) to its clearing member. That would cause the clearing member
to remain responsible for submitting the Contrary Exercise Advice to
the Exchange. In either case, a member may submit the Contrary Exercise
Advice directly to the Exchange at a place that the Exchange shall
designate, or to the Exchange indirectly through OCC via OCC's Clearing
Management and Control System. In both cases, the proposed procedures
will create an efficient audit trail that will allow the Exchange to
identify late submissions.
Under current procedures, members and member organizations need not
make submissions to the Exchange or OCC. Rather, a member or member
organization must time stamp the receipt of an exercise instruction and
maintain that time-stamped instruction in its files. The member or
member organization, and not the Exchange or OCC, controls the records
of options exercises.
Furthermore, the proposed procedures strengthen the requirements
regarding the preparation and maintenance of memoranda, thereby further
strengthening the options exercise audit trail. Members and member
organizations must maintain detailed descriptions of non-automatic
exercises an late exercises. This should facilitate the Exchange's
surveillance of violations of exercise procedures.
The statutory basis for the proposed rule change is the requirement
under Section 6(b)(5) that an exchange have rules that are designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to remove impediments to and perfect
the mechanism of a free and open market and a national market system,
and, in general, to protect investors and the public interest.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The NYSE believes that the proposed rule change will not impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit
comments on the proposed rule change. The Exchange has not received any
unsolicited written comments from members or other interested parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date 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 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
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 inspection and copying in the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to File No.
SR-NYSE-94-12 and should be submitted by June 8, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\4\
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\4\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-12040 Filed 5-17-94; 8:45 am]
BILLING CODE 8010-01-M
