[Federal Register Volume 63, Number 128 (Monday, July 6, 1998)]
[Notices]
[Pages 36467-36468]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17717]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40132; File No. SR-OCC-97-02]
Self-Regulatory Organizations; the Options Clearing Corporation;
Order Granting Approval of a Proposed Rule Change Regarding the
Issuance, Clearance, and Settlement of Options on Unit Investment Trust
Interests and Investment Company Shares That Hold Portfolios or Baskets
of Common Stock
June 25, 1998.
On February 21, 1997, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change (File No. SR-OCC-97-02) pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ On
February 21, 1997, May 14, 1997, and June 11, 1998, OCC amended the
proposed rule change. Notice of the proposal was published in the
Federal Register on June 9, 1997.\2\ No comment letters were received.
For the reasons discussed below, the Commission is approving the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 38706 (June 2, 1997), 62
FR 31468.
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I. Description
The rule change amends OCC's existing by-laws and rules to
accommodate the issuance, clearance, and settlement of options on
exchange listed securities representing units of beneficial interests
in open-end unit investment trusts (``trust units'') and in open-end
management investment companies (``fund shares'') that hold securities
based on an index or a portfolio of common stocks, such as shares that
have been proposed for trading by the American Stock Exchange
(``Amex'').\3\ The Amex currently trades trust units know as Portfolio
Depository Receipts (``SPDRs'') based on the Standard & Poor's
(``S&P'') 500 index and on the S&P MidCap 400 index. SPDRs are trust
units that represent beneficial ownership in the SPDR trust \4\
[[Page 36468]]
and trade similarly to shares of common stock.
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\3\ Securities Exchange Act Release No. 38308 (February 19,
1997), 62 FR 8467 [File No. SR-Amex-96-44]. The Chicago Board
Options Exchange has filed a proposed rule change to trade similar
products. Securities Exchange Act Release No. 38342 (February 26,
1997), 62 FR 10098 [File No. SR-CBOE-97-03].
\4\ The SPDR trust was established to accumulate and hold a
portfolio of common stocks that is intended to track the price
performance and dividend yield of a particular S&P index.
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The Amex also trades fund shares known as World Equity Benchmark
Shares (``WEBS'') which are issued by an open-end management investment
company consisting of seventeen separate series based on seventeen
foreign equity market indexes.\5\ The investment objective of each
series is to provide results that correspond to the aggregate price and
yield performance of publicly traded securities in a particular market
as represented by a particular foreign equity index.
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\5\ The initial series offered by this investment company are:
the Australia Index Series; the Austria Index Series; the Belgium
Index Series; the Canada Index Series; the France Index Series; the
Germany Index Series; the Hong Kong Index Series; the Italy Index
Series; the Japan Index Series; the Malaysia Index Series; the
Mexico (Free) Index Series; the Netherlands Index Series; the
Singapore (Free) Index Series; the Spain Index Series; the Sweden
Index Series; the Switzerland Index Series; and the United Kingdom
Index Series.
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The Amex has proposed trading options on exchange-traded trust
units and fund shares pursuant to the same rules and procedures that
are generally applicable to trading in options on equity securities
with only minor differences that affect their clearance and
settlement.\6\ These differences are that options on trust units and
fund shares would be listed as European-style options only and that
each option contract would cover 1000 trust units or fund shares as the
unit of trading.
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\6\ Supra note 3.
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The general rights of a holder of a single call equity option
contract are set forth in Article VI, Section 9(a) of OCC's by-laws,
and the general rights of a holder of a single put equity option
contract are set forth in Article VI, Section 9(b) of OCC's by-laws.
Because options on trust units or fund shares are deemed equity option
contracts under OCC's rules, OCC is amending Section 9(a) and (b) of
Article VI to set forth the general rights of a holder of a single
European-style equity call option \7\ and a single European-style
equity put option,\8\ respectively. Furthermore, OCC is amending
Interpretations and Policy .01 to Section 9, which provides that
subsections (a) and (b) of Section 9 apply only to stock option
contracts to clarify that the term ``stock option contracts'' will
include option contracts on publicly traded interests in trust units,
fund shares, or shares in entities similar to investment companies that
hold portfolios or baskets of common stock.
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\7\ A holder of a single European-style call option contract
will have the right on and only on the expiration date, expiring at
the expiration time on such date, to purchase from OCC at the
aggregate exercise price the number of units of the underlying
security represented by such option contract.
\8\ A holder of a single European-style put option contract will
have the right on and only on the expiration date, expiring at the
expiration time on such date, to sell to OCC at the aggregate
exercise price the number of units of the underlying security
represented by such option contract.
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OCC is adding Interpretation and Policy .01 to Article VI, Section
10 of the by-laws to reflect that, for series of options in which the
underlying security is trust units or fund shares, the unit of trading
is the amount of the underlying security deliverable upon the exercise
of the option as specified by the exchange on which the option is
traded unless otherwise specified by OCC in accordance with its by-laws
and rules.
In addition, OCC is adding Rule 807 to its rules. The rule contains
essentially the same provisions as those found in Interpretations and
Policy .08 to Article VI, Section 11 of the by-laws.\9\ Rule 807 sets
forth the general provision that when a flexibly structured option
contract with a European-style expiration has been adjusted to require
upon exercise the delivery of a fixed amount of cash, the expiration
date with respect to the option will be accelerated to fall on or
shortly after the date on which the conversion of the underlying
security to a right to receive cash occurs. The ability to accelerate
an expiration date following an adjustment calling for a fixed amount
of cash was added specifically to accommodate European-style, flexibly-
structured equity options. Without the ability to accelerate, the
option position would have to be maintained until it could be exercised
at its regular expiration. For the same reason, OCC is making this
applicable to all European-style stock option contracts. In connection
with the addition of Rule 807, OCC is amending the term ``expiration
date'' as defined in Article I, Section 1 of OCC's by-laws, to provide
that the expiration date of a stock option contract is subject to the
acceleration provisions of the new rule.
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\9\ Section 11 sets forth the general rules pertaining to
adjustments on stock option contracts. OCC has deleted Section .08
from the Interpretations and Policies and moved these provisions to
new Rule 807.
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II. Discussion
Section 17A(b)(3)(F) of the Act \10\ requires that the rules of a
clearing agency be designed to assure the safeguarding of securities
and funds in its custody or control or for which it is responsible. The
Commission believes the rule change is consistent with OCC's obligation
under the Act because OCC will clear and settle options on trust units
and fund shares by using existing OCC systems, rules, and procedures.
Thus, OCC should be able to implement the clearance and settlement of
options on trust units and fund shares in a safe manner consistent with
its statutory obligation due to the similarity of options on trust
units and fund shares to option products currently cleared and settled
by OCC.
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\10\ 15 U.S.C. 78q-1(b)(3)(F).
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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-97-02) be and hereby is
approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-17717 Filed 7-2-98; 8:45 am]
BILLING CODE 8010-01-M
