[Federal Register Volume 64, Number 101 (Wednesday, May 26, 1999)]
[Notices]
[Pages 28543-28544]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13303]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41422; File No. SR-OCC-99-06]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of a Proposed Rule Change Relating to the Purchase of
OCC Stock by Participant Exchanges and the Rights of Participant
Exchanges on Liquidation of OCC
May 18, 1999.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on March 15, 1999, 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
primarily by OCC. The Commission is publishing this notice to solicit
comments from interested persons on the proposed rule change.
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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
Under the proposed rule change, OCC will update the provisions of
its Certificate of Incorporation, By-Laws, and Stockholders Agreement
relating to the purchase of OCC stock by participant exchanges and the
rights of those exchanges in the event of OCC's liquidation.
II. Self-Regulatory Organization'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 such
statements.\2\
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\2\ The Commission has modified the text of the summaries
prepared by OCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The rule change would make two substantive changes. First, it would
increase the maximum purchase price for OCC stock from $333,333 to
$1,000,000 per exchange. Second, upon liquidation of OCC it would
effectively limit distributions to exchanges that first became
stockholders after December 31, 1998, to the amounts that such
exchanges paid for their stock plus a pro rata share of any increase in
OCC's retained earnings after December 31, 1998.
Increase in Maximum Purchase Price
Article VII, Section 2 of OCC's By-Laws provides that an options
exchange that wishes to become a participant in OCC must purchase 5,000
shares of Class A Common Stock and 5,000 shares of Class B Common Stock
of OCC.\3\ Currently, the price is an amount equal to book value as of
the close of the preceding month but not less than $250,000 nor more
than $333,333. As of December 31, 1998, the book value of 10,000 shares
of OCC stock was $6,365,100 per share so the effective purchase price
is the maximum price of $333,333.
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\3\ The holders of Class A Common Stock elect OCC's member
directors. The holders of Class B Common Stock voting together as a
class elect OCC's public and management directors. Each exchange
holds a separate series of Class B Common Stock entitling it to
elect one exchange director.
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The $333,333 maximum dates from 1975, when OCC (then named Chicago
Board Options Exchange Clearing Corporation) became the common clearing
facility for listed options. It has not been reconsidered since that
time. In view of the length of time that has elapsed since the present
maximum was fixed and the prospect that new options markets may seek to
become participant exchanges of OCC,\4\ OCC engaged Deloitte & Touche,
LLP (``Deloitte'') to recommend a fair price for participation in OCC.
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\4\ Cf. ``Fledgling Electronic Options Exchange Files with SEC
for Registration as National Bourse,'' The Wall Street Journal, Feb.
3, 1999, at C 11.
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Using a variety of valuation methodologies and substantially
discounting book value to reflect lack of control and lack of
marketability, Deloitte arrived at an indicated value of $1,080,000 for
a 20% interest in OCC. The proposed rule change would increase the
maximum price for an interest in OCC to $1,000,000, which approximates
the amount recommended by Deloitte.
The $1,000,000 amount also approximates the value in 1999 dollars
of $333,333 in 1975.\5\ The present participant exchanges acquired
their stock in OCC between 1973 and 1976. Increasing the maximum price
to $1,000,000 would tend to equalize the investment required of new
exchanges with the investments made by OCC's present participant
exchanges in the mid-1970's, expressed in 1999 dollars.
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\5\ Based on the All Urban Consumer CPI, $333,333 on January 1,
1975, would amount to $1,009,932 in 1999. Using the General Consumer
Price Index, $333,333 on January 1, 1975, would amount to $1,056,518
in 1999.
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OCC's present rules specify a minimum purchase price of $250,000 if
the book value of a proportionate interest in OCC would be less than
that amount. Because the book value of a proportionate interest in OCC
greatly exceeds $250,000 and is likely to continue to do so, the
proposed rule change would eliminate the minimum price as unnecessary.
Change in Liquidation Rights
Under OCC's present charter, if OCC were to liquidate, the holders
of Class A Common Stock would be entitled to receive the par value of
their shares and the balance of OCC net assets would be distributed to
the holders of Class B Common Stock. Because the purchase price of
Class B Common Stock is capped at a level substantially below book
value, the current liquidation scheme would provide a potential
windfall to new stockholders. If a new exchange purchased stock either
for the present maximum of $33.33 per share or the proposed maximum of
$100.00 per share and if OCC then liquidated, each holder of Class B
Common Stock, including the new exchange, would be entitled to receive
more than $500.00 per share on liquidation. OCC has no intention of
liquidating. Nevertheless, the outcome if OCC did liquidate would be
unfair to those exchanges that were stockholders while OCC was
accumulating its present stockholders' equity.
The proposed rule change would address this potential inequity by
establishing a new scheme for distribution of OCC's net assets on
liquidation. Under the new scheme, holders of Class A Common Stock and
Class B Common Stock would first be paid the par value of their shares
($10.00 per share). Next, each holder of
[[Page 28544]]
Class B Common Stock would receive a distribution of $1,000,000,
allowing it to recover the value of its investment in 1998 dollars.
Next, an amount equal to OCC's stockholders' equity at December 31,
1998, minus the distributions described in the two preceding sentences
would be distributed to those exchanges that acquired their Class B
Common Stock before December 31, 1998. Finally, any excess assets
(i.e., post-1998 retained earnings) would be distributed equally to all
holders of Class B Common Stock. The effect would be to allow each
exchange to recover its investment but to reserve OCC's present
retained earnings for those exchanges that were stockholders during the
period when the earnings were being accumulated.
Technical and Conforming Changes
The last sentence of Article VII, Section 2 of the By-Laws would be
revised to eliminate a circularity. That provision currently states
that if OCC fails or is unable to purchase a stockholder's shares when
required under the Stockholders Agreement, the stockholders may sell
its shares ``to a person who is qualified under Section 1 of this
Article VII for participation in [OCC] as an `Exchange' and who is not
then a stockholder of the Corporation.'' However, Section 1 of Article
VII provides that in order to be qualified for participation in OCC as
an Exchange, a securities exchange or securities association must
already have purchased stock in OCC. The proposed rule change would
eliminate the circularity by allowing the stockholders to sell its
shares to any national securities exchange or national securities
association that had effective rules for the trading of options.
Conforming changes would be made in the Stockholders Agreement.
Article VII, Section 3 would be amended to reflect previous rule
changes providing for public directors. It would also be amended to
eliminate an obsolete requirement that the stockholders renew their
voting agreement every ten years.
Article VII, Section 4 would be amended to reflect the fact that
the Participant Exchange Agreement between OCC and its participant
exchanges now includes provisions relating to Rule 9b-1 options
disclosure documents.
Section 10(a) of the Stockholders Agreement would be amended to
eliminate obsolete material and to increase, proportionately with the
proposed increase in the purchase price of OCC stock, the dollar
discounts that would apply if OCC found it necessary to repurchase a
participant exchange's stock within six years of the date when the
stock was acquired. Section 12 of the Stockholders Agreement, which is
obsolete, would be deleted in its entirety.
OCC believes that the proposed rule change is consistent with
Section 17A of the Act \6\ and the rules and regulations thereunder
because it provides for a fair valuation of OCC's stock on its
acquisition and liquidation.
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\6\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition
OCC does not believe that the proposed rule change would impose any
burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
Written comments 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 thirty-five 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 ninety 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 OCC 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, including whether the proposed rule
change is consistent with the Act. 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 20549. Copies of such filing also will be available for
inspection and copying at the principal office of OCC. All submissions
should refer to File No. SR-OCC-99-06 and should be submitted by June
16, 1999.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-13303 Filed 5-25-99; 8:45 am]
BILLING CODE 8010-01-M
