01-14310. Self-Regulatory Organizations; The Options Clearing Corporation; Order Granting Approval of a Proposed Rule Change Relating to Adjustments of Options Contracts

May 31, 2001.

On October 3, 2000, The Options Clearing Corporation (“OCC”) filed with the Securities and Exchange Commission (“Commission”) a proposed rule change (File No. SR-OCC-00-10) pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”).^[1] Notice of the proposal was published in the Federal Register on December 1, 2000.^[2] No comment letters were received. For the reasons discussed below, the Commission is granting approval of the proposed rule change.

I. Description

The purpose of the rule change is to add new language to paragraph (b) of Article VI, Section 11 of OCC's By-Laws to clarify that neither OCC nor OCC's securities committee will be liable for any failure to adjust outstanding option contracts or for any delay in adjusting such contracts when the securities committee does not learn in a timely manner of an event for which it would otherwise have directed an adjustment. While OCC believes that this should be the result under the By-Laws in its present form, OCC believes it is advisable to cover this situation specifically.

Normally, OCC is notified of the occurrence of a section 11(a) adjustment event ^[3] by its internal stock watch department or by the exchanges, which use their research departments to monitor the underlying securities and the issuers of the underlying securities. OCC's economic research department regularly scans Bloomberg, Reuters, and Dow Jones newswires for announcements of adjustment events. When it learns of such an event, OCC contacts the options exchanges, the primary market for the underlying, and the issuer of the underlying to obtain more information about the event and to monitor the event. Likewise, the research departments as the various options exchanges scan a variety of newswires and employ different news alert services to monitor for adjustment events. When the exchanges learn of an adjustment event, they alert OCC and contact the primary market for the underlying security to obtain more information about the event to monitor the event.

Through these procedures, the likelihood that a potential adjustment event will escape notice is minimized. However, the possibility of such an occurrence can never be completely estimated. Accordingly, OCC wishes to make clear that neither it nor its securities committee will have liability for any failure to act or for any delay in acting on events not known to the securities committee.

The rule change also clarifies that adjustment determinations are made in light of circumstances known at the time the determination is made. For example, if the securities committee does not learn of an event for which an adjustment would normally be made until after the ex-date, the fact that options trading and/or exercise activity has taken place in circumstances suggesting that there would be no adjustment could tip the balance of fairness against making an adjustment.

II. Discussion

For the reasons set forth below, the Commission believes that OCC's rule change is consistent with OCC's obligations under section 17A(b)(3)(F) ^[4] of the Act which requires that the rules of a clearing agency be designed to assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible. The rule change minimizes OCC's exposure to liability for a delay or failure to adjust an outstanding option contract for an event which it would otherwise have made an adjustment where OCC does not learn or does not learn in a timely manner of the event. By explicitly stating that OCC has no liability in such situations beyond its control, OCC's rule change allows OCC to focus its resources on safeguarding the securities and funds for which OCC is responsible.

III. Conclusion

On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act and in particular Section 17A of the Act and the rules and regulations thereunder.

It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (File No. SR-OCC-00-10) be and hereby is approved.

For the Commission by the Division of Market Regulations, pursuant to delegated authority.^[5]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  Securities Exchange Act Release No. 43612, (November 22, 2000), 65 FR 75331.

3.  Section 11(a) of Article VI of OCC's By-Laws states that whenever there is a dividend, stock split, reorganization, recapitalization, or similar event with respect to an underlying security or whenever there is a merger, consolidation, dissolution, or liquidation of the issuer of an underlying security, the number of option contracts, unit of trading, exercise price, and the underlying security of all outstanding options contracts open for trading in that underlying security may be adjusted.

4.  15 U.S.C. 78q-1(b)(3)(F).

5.  17 CFR 200.30-3(a)(12).