Federal Register / Vol. 72, No. 42 / Monday, March 5, 2007 / Notices 9825 

15 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2Securities Exchange Act Release No. 54898 

(December 8, 2006), 71 FR 75287. 

3Securities Exchange Act Release Nos. 55258 

(February 8, 2007), 72 FR 7701 [File No. SR–OCC–

2006–01] (order approving proposed rule change to 

revise stock options adjustment methodology) and 

53400 (March 2, 2006), 71 FR 12226 [File No. SR–

OCC–2006–01] (notice of filing of proposed rule 

change to revise stock options adjustment 

methodology). 

4The notice and order for SR–OCC–2006–01 

describes OCC’s proposed changes to and the 

rationale for the rule change to its adjustment rules 

for stock options. 5 15 U.S.C. 78q–1(b)(3)(F). 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

No. SR–NYSEArca–2007–19 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

Station Place, 100 F Street, NE., 

Washington, DC 20549–1090. 

All submissions should refer to File No. 

SR–NYSEArca–2007–19. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). 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 

Room. Copies of such filing will also be 

available for inspection and copying at 

the principal office of NYSE Arca. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File No. 

SR–NYSEArca-2007–19 and should be 

submitted on or before March 26, 2007. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.15

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–3745 Filed 3–2–07; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55349; File No. SR–OCC–

2006–08] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Order 

Approving Proposed Rule Change To 

Revise Stock Futures Adjustment 

Methodology 

February 26, 2007. 

I. Introduction 

On May 19, 2006, The Options 

Clearing Corporation (‘‘OCC’’) filed with 

the Securities and Exchange 

Commission (‘‘Commission’’) proposed 

rule change SR–OCC–2006–08 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 14, 

2006.2 The Commission received no 

comment letters. For the reasons 

discussed below, the Commission is 

approving the proposed rule change. 

II. Description 

OCC is seeking to amend Article XII 

(Futures and Futures Options), Section 

3 (Adjustments to Futures and Futures 

Options) of OCC’s By-Laws to conform 

to the changes adopted in rule change 

SR–OCC–2006–01, which amended 

Article VI (Clearance of Exchange 

Transactions), Section 11A 

(Adjustments for Stock Option 

Contracts).3

On January 12, 2006, OCC filed with 

the Commission proposed rule change 

SR–OCC–2006–01. Pursuant to SR–

OCC–2006–01, OCC proposed, among 

other things, to amend its adjustment 

rules in Article VI, Section 11A for stock 

option contracts with respect to stock 

dividends, stock distributions, and stock 

splits. Subject to the Commission 

approving proposed rule change SR–

OCC–2006–01, OCC proposed to amend 

Article XII, Section 3 to ensure stock 

futures contracts can be adjusted in a 

manner consistent with adjustments 

made to stock option contracts on the 

same underlying security. 

As described in rule change SR–OCC–

2006–01, OCC amended certain of its 

adjustment rules with respect to stock 

option contracts to eliminate the need to 

round strike prices and/or units of 

trading in the event of certain stock 

dividends, stock distributions, and stock 

splits.4 The adjustment rules for stock 

futures as currently provided in Article 

XII, Section 3 parallel the adjustment 

rules for stock options provided in 

Article VI, Section 11A. Uniformity of 

the two provisions would ensure that 

stock futures contracts can be adjusted 

in a manner consistent with adjustments 

made to stock option contracts on the 

same underlying security. The changes 

to Article XII, Section 3 that are the 

subject of this proposed rule change are 

made solely to track the changes made 

to Article VI, Section 11A and are 

intended to ensure that adjustments to 

stock options and to stock futures made 

for stock dividends, stock distributions, 

and stock splits will remain consistent 

with respect to an underlying security. 

As noted above, the central purpose of 

the rule change in SR–OCC–2006–01 

was to eliminate inequities which 

resulted from certain rounding practices 

previously required by OCC’s By-Laws 

because stock option strike prices are 

quoted in and are therefore rounded to 

the nearest one-eighth. Stock futures do 

not have the same inequities because 

they are quoted in decimals. 

Nevertheless, in order to ensure 

adjustments for stock options and for 

stock futures remain consistent, OCC 

proposes to revise the adjustment rules 

with respect to stock futures to match 

the revised adjustment rules with 

respect to stock options for stock 

dividends, stock distributions, and stock 

splits. 

OCC will implement the proposed 

rule change described herein 

concurrently with the implementation 

of the changes approved in SR–OCC–

2006–01. 

III. Discussion 

Section 19(b) of the Act directs the 

Commission to approve a proposed rule 

change of a self-regulatory organization 

if it finds that such proposed rule 

change is consistent with the 

requirements of the Act and the rules 

and regulations thereunder applicable to 

such organization. Section 17A(b)(3)(F) 

of the Act requires that the rules of a 

clearing agency be designed, in general, 

to protect investors and the public 

interest.5 The Commission believes that 

OCC’s rule change is consistent with 

this Section because it is intended 

solely to keep the adjustment rules for 

stock futures with respect to stock 


erjones on PRODPC74 with NOTICES
9826 Federal Register / Vol. 72, No. 42 / Monday, March 5, 2007 / Notices 

6 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2File No. SR–CBOE–2006–84, Securities 

Exchange Act Release No. 55251 (February 7, 2007), 

72 FR 7091 (February 14, 2007) (notice of filing of 

proposed rule change). 

3The Commission has modified the text of the 

summaries prepared by OCC. 

4 ‘‘Binary’’ options (also sometimes referred to as 

‘‘digital’’ options) are ‘‘all-or-nothing’’ options that 

pay a fixed amount if automatically exercised and 

otherwise pay nothing. 

5File No. SR–OCC–2004–21. 

6File Nos. SR–Amex–2004–27 and SR–CBOE–

2006–105. 

dividends, stock distributions, and stock 

splits consistent with the adjustment 

rules for stock options with respect to 

stock dividends, stock distributions, and 

stock splits and thus should protect 

investors and the public interest. 

IV. 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. In 

approving the proposed rule change, the 

Commission considered the proposal’s 

impact on efficiency, competition and 

capital formation. 

It is therefore ordered, pursuant to 

section 19(b)(2) of the Act, that the 

proposed rule change (File No. SR–

OCC–2006–08) be and hereby is 

approved. 

For the Commission by the Division of 

Market Regulation, pursuant to delegated 

authority.6

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–3747 Filed 3–2–07; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55362; File No. SR–OCC–

2007–01] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Notice 

of Filing of Proposed Rule Change 

Relating to Credit Default Options 

February 27, 2007. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 notice is hereby given that on 

February 13, 2007, The Options Clearing 

Corporation (‘‘OCC’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change 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 parties. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The proposed rule change would 

permit OCC to clear and settle credit 

default options (‘‘CDOs’’), which are 

options related to the creditworthiness 

of an issuer or guarantor of one or more 

specified debt securities. Credit default 

options are proposed to be traded by the 

Chicago Board Options Exchange 

(‘‘CBOE’’).2

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 these statements.3

(A) Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

The purpose of this rule change is to 

permit OCC to clear and settle CDOs, 

which are options related to the 

creditworthiness of an issuer or 

guarantor (‘‘reference entity’’) of one or 

more specified debt securities 

(‘‘reference obligation(s)’’). CDOs are 

binary options that pay a fixed amount 

to the holder of the option upon the 

occurrence of a ‘‘credit event’’ affecting 

the reference obligations.4

Characteristics of CDOs are described 

below, followed by an explanation of 

the specific rule changes being proposed 

to clear them. 

Description of Credit Default Options 

CDOs are structured as binary options 

that are automatically exercised and the 

exercise settlement amount payable if a 

‘‘credit event’’ occurs at any time prior 

to the last day of trading. A ‘‘credit 

event’’ is generally defined as any 

failure to pay on any of the reference 

obligations or any other occurrence that 

would constitute an ‘‘event of default’’

or ‘‘restructuring’’ under the terms of 

any of the reference obligations and that 

the listing exchange has determined 

would be a credit event for purposes of 

the CDO. Under CBOE’s current 

proposal, the payout or ‘‘settlement 

amount’’ for a single exercised option 

would be $100,000. 

OCC does not currently clear any 

binary options although OCC has filed 

a rule change 5 seeking to clear binary 

options on securities and securities 

indexes that have been proposed for 

trading by CBOE and the American 

Stock Exchange (‘‘Amex’’).6 The binary 

options rule filings of OCC, Amex, and 

CBOE are still pending approval by the 

Commission, and OCC expects to amend 

its binary options rule filing in the near 

future in order to conform it to the 

changes made in this filing and to make 

any additional changes necessary to 

accommodate the Amex and CBOE 

products. Under the binary options rule 

filings, binary options are proposed to 

be traded on the price of single 

securities or on the price of indexes of 

securities where the option is exercised 

if the closing value of the underlying 

interest meets the specified criterion for 

automatic exercise, which could be 

defined as ‘‘at or above’’ a certain value, 

‘‘below’’ a certain value, or in other 

ways. In other words, the underlying 

interest is a continuous measure that 

could have a wide range of positive 

values. CDOs, on the other hand, are 

options for which the payout is 

determined by the occurrence or nonoccurrence of a discrete credit event 

affecting underlying securities. The 

rules proposed in the current rule filing 

for CDOs are intended to be sufficiently 

generic to be the basis for clearing CDOs 

as well as other binary options although 

certain provisions specific to other 

binary options proposals will be filed 

separately. 

By-Law and Rule Amendments 

Applicable to CDOs 

In order to accommodate trading in 

CDOs and to provide a framework of 

rules that can accommodate other 

binary option products as well, OCC 

proposes to add a new By-Law Article 

and a new Chapter to its Rules to 

incorporate several new defined terms 

and procedures for clearing and settling 

binary options generally and CDOs 

specifically. 

1. Terminology—Article I, Section 1 and 

Article XIV, Section 1 of the By-Laws 

‘‘Binary Option’’ is defined in Article 

XIV, Section 1 of the By-Laws, and that 

definition is cross-referenced in Article 

I of the By-Laws. The definition of 

‘‘expiration time’’ in Article I is 

modified to be a default provision, 

permitting the expiration time to be 

defined differently for different classes 

of options. The definition of ‘‘option 

contract’’ in Article I of the By-Laws is 

amended to include a binary option and 


erjones on PRODPC74 with NOTICES