[Federal Register Volume 61, Number 123 (Tuesday, June 25, 1996)]
[Notices]
[Pages 32873-32875]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16062]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37318; File No. SR-OCC-96-03]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of a Proposed Rule Change Relating to the Clearance
and Settlement of Flexibly Structured Equity Options
June 18, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on April 30, 1996, 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 on the proposed rule change from interested persons.
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\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The purpose of the proposed rule change is to enable OCC to clear
and settle flexibly structured equity options.
[[Page 32874]]
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
submitted 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 purpose of this proposed rule change is to accommodate within
OCC's existing By-Laws and Rules the clearance and settlement of
flexibly structured options on individual equity securities, as
proposed for trading by the American Stock Exchange, Inc. (``AMEX''),
the Chicago Board Options Exchange, Incorporated (``CBOE''), the
Philadelphia Stock Exchange, Inc. (``PHLX'') and the Pacific Stock
Exchange, Inc. (``PSE'') (collectively, ``Exchange'' or
``Exchanges'').\3\
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\3\ For a complete description of flexibly structured equity
options, refer to Securities Exchange Act Release No. 36841
(February 14, 1996), 61 FR 6666 [File Nos. SR-CBOE-95-43 and SR-PSE-
95-24] (order approving the trading of flexibly structured equity
options by the CBOE and PSE). The AMEX and PHLX also have filed
proposed rule changes for the trading of flexibly structured equity
options. For a complete description of these filings, refer to
Securities Exchange Act Release Nos. 37053 (March 29, 1996), 61 FR
15537 [File No. SR-AMEX-95-57] (notice of filing of proposed rule
change); and 37048 (March 29, 1996), 61 FR 15549 [File No. SR-PHLX-
96-08] (notice of filing of proposed rule change).
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Flexibly structured equity options allow parties to each flexibly
structured equity option trade to customize certain terms of the option
within specified limits established by the Exchange. Specifically, for
each flexibly structured equity option trade parties may establish the
exercise price, the exercise style (i.e., American,\4\ European,\5\ or
capped \6\), the cap interval in the case of capped-style options, the
expiration date, and the option type (i.e., put or call).\7\ In
addition to customization, flexibly structured equity option trades
will require a minimum transaction size of 250 contracts in opening
trades in currently unopened series and 100 contracts in the case of
opening and most closing trades in currently open series. Flexibly
structured equity options thus will differ from existing Exchange-
traded equity options both in terms of customization and size.
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\4\ An American-style equity option may be exercised at any time
prior to its expiration date.
\5\ A European-style equity option may be exercised only during
a specified period before the option expires.
\6\ A capped-style equity option will be exercised automatically
prior to expiration if the options market on which the option is
trading determines that the value of the underlying interest at a
specified time on a trading day ``hits the cap price'' for the
option (i.e., when the cap price is less than or equal to the
closing price of the underlying security for calls or when the cap
price is greater than or equal to the closing price of the
underlying security for puts).
\7\ Although the rules of the Exchanges provide for capped-style
flexibly structured equity options, the Exchanges advised OCC that
they do not intend to provide a market in capped-style flexibly
structured equity options at the outset. Accordingly, this proposed
rule change does not include the rules that would be required for
the clearance and settlement of such options. The commencement of
trading in capped-style flexibly structured equity options will
require that the Commission approve another proposed rule change
filed by OCC under Section 19(b)(1) of the Act.
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From a clearance and settlement perspective, flexibly structured
equity options can be treated and processed like any other equity
option in virtually all respects. While Exchange rules permit a Request
for Quotes \8\ to specify a quote either as a dollar amount or as a
percentage of the underlying stock price, when a trade is reported to
OCC the option premium always will be expressed as a dollar amount.
Therefore, when a flexibly structured equity option trade is reported
to OCC by one of the Exchanges all of the terms of that option will
have been established in the Exchange's report, and the terms will
correspond to existing equity options term categories. As a result, on
receipt of a matched trade report from an Exchange, OCC will establish
long and short flexibly structured equity option positions in clearing
member accounts in precisely the same way it does for existing equity
options. Furthermore, flexibly structured equity option positions will
exhibit virtually the same characteristics as existing equity options.
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\8\ A Request for Quotes is the initial request suppled by the
submitting exchange member to initiate FLEX bidding and offering.
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Because of the similarities between existing equity options and
flexibly structured equity options, only a few of OCC's By-Laws and
Rules need adjustment to accommodate flexibly structured equity
options.\9\ OCC proposes to amend Section 1 of Article I to add an all-
purpose definition of ``flexibly structured option.'' Thus, the
definitions for ``flexibly structured option'' as set forth in Articles
XV, XVII, and XXIII will be deleted. The definition of ``expiration
date'' in Article I, Section 1 is being amended to make clear that
flexibly structured equity options may expire on dates other than the
Saturday following the third Friday of the expiration month. The
expiration date of any such option will be the date reported to OCC by
the Exchange, subject to such constraints on the range of possible
expiration dates as are set forth in the rules of the Exchanges.
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\9\ The specific changes to OCC's By-Laws and Rules are set
forth in OCC's proposed rule change, which is available for review
at the principal office of OCC and the Commission's Public Reference
Room.
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Section 11 of Article VI, regarding adjustments to equity and index
options, will be amended to apply to the adjustment of flexibly
structured equity and index options.\10\ OCC also is proposing to add
Interpretation and Policy .08 to Section 11 for situations where a
European-style flexibly structured equity option is adjusted to require
the delivery upon exercise of a fixed amount of cash, such as would
normally occur in the event of a merger where the underlying security
is converted into a right to receive a fixed amount of cash. In such a
circumstance, it is proposed that the expiration of the option will
ordinarily be accelerated so that the option will expire on or shortly
after the date on which the underlying stock is converted into a right
to receive cash. Without this adjustment, the option position would
have to be maintained until it could be exercised at its regular
expiration even though the amount to be received on exercise has
already been fixed. This special adjustment is being proposed to
accommodate flexibly structured equity options because unlike existing
equity options flexibly structured equity options may have European-
style exercise features.
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\10\ Adjustments may be made to the number of option contracts,
the unit of trading, the exercise price, and the underlying security
with respect to all outstanding option contracts open for trading in
an underlying security which is the subject of a dividend, stock
dividend, stock distribution, stock split, reverse stock split,
rights offering, distribution, reorganization, recapitalization,
reclassification or similar event, or the merger, consolidation,
dissolution, or liquidation of the issuer of the underlying
security.
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The only change proposed to be made to OCC's Rules is the addition
of Interpretation and Policy .03 to Rule 805, which will clarify that
OCC's exercise procedures as set forth in Rule 805 \11\ shall apply to
the exercise of flexibly structured equity options. The new
interpretation also gives OCC the flexibility, if necessary, to depart
from regular expiration date procedures and
[[Page 32875]]
deadlines in the case of flexibly structured equity options. Such
departures are not currently anticipated and adequate prior notice will
be given to all clearing members.
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\11\ OCC Rule 805 sets forth the expiration date exercise
procedures.
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OCC believes the proposed rule change is consistent with the
purposes and requirements of Section 17A of the Act because the
proposal provides for the prompt and accurate clearance and settlement
of transactions in flexibly structured equity options and because it
provides for the safeguarding of related securities and funds. OCC
believes the proposed rule change meets such requirements by
establishing a framework in which existing, reliable OCC systems,
rules, and procedures are extended to the processing of flexibly
structured equity options. Finally, OCC believes the proposed rule
change will foster cooperation with persons, including OCC clearing
members, engaged in the clearance and settlement of securities
transactions and will thereby promote the protection of investors and
the public interest.
(B) Self-Regulatory Organization's Statement on Burden on Competition
OCC does not believe that the proposed rule change will 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 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. Sec. 552, will be available for inspection and copying in
the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 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-96-03 and should be
submitted by July 16, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-16062 Filed 6-24-96; 8:45 am]
BILLING CODE 8010-01-M
