[Federal Register Volume 64, Number 185 (Friday, September 24, 1999)]
[Notices]
[Pages 51820-51822]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-24915]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41884; File No. SR-OCC-99-06]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Granting Approval 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
September 17, 1999.
On March 15, 1999, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change (File No. SR-OCC-99-06) 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 May 26, 1999.\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. 41422 (May 18, 1999) 64
FR 28543.
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I. Description
The rule change updates the provisions of OCC's Certificate of
Incorporation, By-Laws, and Stockholders Agreement that relate to the
purchase of OCC stock by participant exchanges and the rights of
[[Page 51821]]
those exchanges in the event of OCC's liquidation. The rule change
makes two substantive changes. First, it increases the maximum purchase
price for OCC stock from $333,333 to $1,000,00 per exchange. Second, in
the event of OCC's liquidation, it limits 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\ Previously, the price was 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, so the effective purchase price is the
maximum price of $333,333.
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\3\ Class A Common Stock is voted to elect OCC's nine member
directors. Class B Common Stock is voted, as a class, to elect OCC's
public and management directors. Each participant exchange holds a
separate series of Class B Common Stock that entitles 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. Recently, OCC engaged Deloitte & Touche,
LLP (``Deloitte'') to recommend a fair price for participation in OCC
in view of the length of time that had elapsed since the maximum was
fixed and the prospect of new options markets becoming participant
exchanges of OCC.\4\ Deloitte arrived at a value of $1,080,000 for a
20% interest in OCC.
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\4\ See, e.g., Securities Exchange Act Release No. 41439 (May
24, 1999), 64 FR 29367 (notice of filing of application for
registration as a national securities exchange by the International
Securities Exchange LLP).
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The rule change increases the maximum price for an interest in OCC
to $1,00,000, which approximates the amount recommended by Deloitte.
According to OCC, the $1,000,000 amount also approximates the value in
1999 dollars of $333,333 in 1975.\5\ Therefore, OCC believes that
increasing the maximum price to $1,000,000 would tend to equalize the
investment required of new exchanges with the investments expressed in
1999 dollars made by OCC's present participant exchanges in the mid-
1970's.\6\
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\5\ OCC has informed the Commission that based on the All Urban
Consumer CPI, $333,333 on January 1, 1975, would amount of
$1,009,932 in 1999, and that using the General Consumer Price Index,
$333,333 on January 1, 1975, would amount to $1,056,518 in 1999.
\6\ OCC's current participant exchanges (which include the
American Stock Exchange, the Chicago Board Options Exchange, the
Pacific Exchange, and the Philadelphia Stock Exchange) acquired
their stock in OCC between 1973 and 1976.
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In addition, OCC's rules previously specified a minimum purchase
price of $250,00 if the book value of a proportionate interest in OCC
would be less than that amount. The rule change eliminates the minimum
price because OCC believes that the book value of a proportionate
interest in OCC greatly exceeds $250,000 today and is likely to
continue to do so.
Change in Liquidation Rights
The rule change establishes a new scheme for the distribution of
OCC's net assets if OCC were to liquidate. 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 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. OCC's
intention is to allow each exchange to recover its investment but to
reserve OCC's present retained earnings for those participant exchanges
that were stockholders during the period when the retained earnings
were being accumulated.
Technical and Conforming Changes
The rule change revises the last sentence of Article VII, Section 2
of the By-Laws. Previously, that provision stated that if OCC fails or
is unable to purchase a stockholder's shares when required under the
Stockholders Agreement, the stockholder 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 [OCC].'' 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 rule change eliminates the circularity of
the provision by allowing the stockholder to sell its shares to any
national securities exchange or national association that has effective
rules for the trading of options and who is not then a stockholder in
OCC. The rule change also makes conforming changes to the Stockholders
Agreement.
Article VII, Section 3 is amended to reflect previous rule changes
providing for public directors and to eliminate an obsolete requirement
that the stockholders renew their voting agreement every ten years.
Article VII, Section 4 is amended to reflect the fact that the
Participant Exchange Agreement between OCC and its participant
exchanges now specifically refers to options disclosure documents
required under Exchange Act Rule 9b-1.\7\
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\7\ 17 CFR 240.9b-1.
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Section 10(a) of the Stockholders Agreement is amended to increase
proportionately with the increase in the purchase price of OCC stock
the dollar discounts that OCC will apply if it repurchases a
participant exchange's stock within six years of the date when the
stock was acquired. Section 12 of the Stockholders Agreement, which
governs contributions to capital by the American Stock Exchange and the
Chicago Board Options Exchange if another OCC stockholder sells its
stock to OCC, is deleted in its entirety because it is obsolete.
II. Discussion
Section 17A(b)(3)(D) of the Act \8\ requires that the rules of a
clearing agency provide for the equitable allocation of reasonable
dues, fees, and other charges among its participants. The Commission
believes that the proposed rule change is consistent with OCC's
obligations under Section 17A(b)(3)(D) because the rule change should
ensure that the price that participant exchanges are required to pay
for OCC stock reflects the value of those shares and that participant
exchanges all pay equal amounts for OCC stock after purchase prices are
adjusted for inflation. In addition, the rule change should provide for
an equitable distribution of assets to OCC's participant exchanges if
OCC were to liquidate.
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\8\ 15 U.S.C. 78q-1(b)(3)(D).
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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 with Section 17A of the Act and the rules and regulations
thereunder.
[[Page 51822]]
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. OCC-99-06) be and hereby is
approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-24915 Filed 9-23-99; 8:45 am]
BILLING CODE 8010-01-M
