Page 6 of 9

File No. SR-OCC-2005-15

Item 3. Self-Regulatory Organization's Statement of the Purpose of, and Statutory
Basis for, the Proposed Rule Change

OCC occasionally receives instructions from Clearing Members attempting to effect
post-trade transactions, such as CMTA transfers and position adjustments, that appear to be
erroneous and, if implemented, would create large settlement obligations that could pose substantial
credit risk for OCC. For example, some months ago a Clearing Member submitted a CMTA transfer
instruction specifying a premium value of $6,500 instead of $1.65, which would have produced a $5
billion settlement requirement. Such mistakes are ordinarily corrected by communicating with the
Clearing Member or Clearing Members involved. However, OCC may not always be able to contact
the affected parties or to obtain a timely agreement as to the appropriate corrective measure.
Currently, the By-Laws and Rules do not expressly authorize OCC to reject post-trade transactions
where OCC determines that the input regarding such transactions contains an error or omission.
Unlike Exchange transactions, which it is OCC’s general policy not to reject, post-trade transactions
have not been vetted for errors through the trade matching process and, therefore, are more
vulnerable to errors and omissions. Existing Rules 614(c) and (e) give OCC the authority to reject
erroneous instructions to pledge positions and to release pledged positions, and Rule 2202 gives
OCC the authority to reject erroneous stock loan transactions. The proposed changes to Article VI,
Section 1, Interpretation .01 would expressly authorize OCC to reject all types of post-trade
transactions that OCC determines to be erroneous.

The proposed changes to OCC’s By-laws are consistent with the purposes and

requirements of Section 17A of the Securities Exchange Act of 1934, as amended, because such


IL. Self-Regulatory Organization's Statement of the Purpose
of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the self-regulatory organization 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. The self-regulatory organization has prepared summaries, set

forth in sections (A), (B), and (C) below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose
of, and Statutory Basis for, the Proposed Rule Change

OCC occasionally receives instructions from Clearing Members attempting to
effect post-trade transactions, such as CMTA transfers and position adjustments, that appear to
be erroneous and, if implemented, would create large settlement obligations that could pose
substantial. credit risk for OCC. For example, some months ago a Clearing Member submitted a
CMTA transfer instruction specifying a premium value of $6,500 instead of $1.65, which would
have produced a $5 billion settlement requirement. Such mistakes are ordinarily corrected by
communicating with the Clearing Member or Clearing Members involved. However, OCC may
not always be able to contact the affected parties or to obtain a timely agreement as to the
appropriate corrective measure. Currently, the By-Laws and Rules do not expressly authorize
OCC to reject post-trade transactions where OCC determines that the input regarding such
transactions contains an error or omission. Unlike Exchange transactions, which it is OCC’s
general policy not to reject, post-trade transactions have not been vetted for errors through the
trade matching process and, therefore, are more vulnerable to errors and omissions. Existing
Rules 614(c) and (e) give OCC the authority to reject erroneous instructions to pledge positions

and to release pledged positions, and Rule 2202 gives OCC the authority to reject erroneous


Page 8 of 9
File No. SR-OCC-2005-15

Item 8. Proposed Rule Change Based on Rule of Another Self-Regulatory
Organization or of the Commission

Not applicable.

Item 9. Exhibits
Exhibit 1. Completed Notice of Proposed Rule Change for publication in the

Federal Register.


Page 7 of 9

File No. SR-OCC-2005-15

changes are designed to promote the prompt and accurate clearance and settlement of securities
transactions and to protect investors and the public interest. The proposed rule change is not

inconsistent with the existing rules of OCC, including any other rules proposed to be amended.

Item 4. Self-Regulatory Organization's Statement on Burden on Competition

OCC does not believe that the proposed rule change would impose any burden on

competition.

Item 5. 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.

Item 6. Extension of Time Period for Commission Action
OCC does not consent to an extension of the time period specified in Section 19(b)(2)

of the Securities Exchange Act of 1934.

Item 7. Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for
Accelerated Effectiveness Pursuant to Section 19(b)(2)

The proposed rule change will take effect upon filing pursuant to Section
19(b)(3)(A) of the Securities Exchange Act of 1934 because it constitutes a stated policy,

practice, or interpretation with respect to the administration of OCC’s existing rules.


EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION
(Release No. 34- 3 File No. SR-OCC-2005-15

SELF-REGULATORY ORGANIZATION

Proposed Rule Change By
The Options Clearing Corporation

Relating to Rejection of Erroneous
Post-Trade Instructions

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934, 15 U.S.C. 78s(b)(1),
notice is hereby given that on , 2005, The Options Clearing Corporation
("OCC") filed with the Securities and Exchange Commission the proposed rule change as
described in Items I, II and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit comments on the proposed rule

change from interested persons.

1. Self-Regulatory Organization's Statement of the
Terms of the Substance of the Proposed Rule Change

The proposed rule change would amend Article VI, Section 1 of its By-Laws and Rule
403 of its Rules in order to provide the Corporation with the authority to reject post-trade
transactions, such as Clearing Member Trade Assignment (“CMTA”) transfers and position
adjustments, when it appears that erroneous data has been entered that would result in a

settlement that is unreasonable under the circumstances.


7 en 3 Page 2 of 9

pee. Gr ie ScCRETARIA File No. SR-OCC-2005-15

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 19b-4

Proposed Rule Change
by

THE OPTIONS CLEARING CORPORATION

Pursuant to Rule 19b-4 under the
Securities Exchange Act of 1934


IV. Solicitation of Comments

Interested persons are invited to submit written data, views and arguments concerning the
foregoing, including whether the proposed rule change is consistent with the Act. Comments
may be submitted by any of the following methods:

Electronic Comments:

e Use the Commission’s Internet comment form
(http//www.sec.gov/rules/sro.shtml); or

¢ Send an e-mail to rule-comments@sec.gov. Please include File Number SR-
OCC-2005-15 on the subject line.

Paper Comments:

e .Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609.

All submissions should refer to File Number SR-OCC-2005-15. 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 Section, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned self-regulatory

organization. All comments received will be posted without change; the Commission does not


stock loan transactions. The proposed changes to Article VI, Section 1, Interpretation .01 would
expressly authorize OCC to reject all types of post-trade transactions that OCC determines to be

erroneous.

The proposed changes to OCC’s By-laws are consistent with the purposes and
requirements of Section 17A of the Securities Exchange Act of 1934, as amended, because such
changes are designed to promote the prompt and accurate clearance and settlement of securities
transactions and to protect investors and the public interest. The proposed rule change is not
inconsistent with the existing rules of OCC, including any other rules proposed to be amended.

B. Self-Regulatory Organization's Statement on Burden on Competition

OCC does not believe that the proposed rule change would impose any burden

on competition.

Cc. 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

The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the
Act and paragraph (f) of Rule 19b-4 thereunder. At any time within 60 days of the filing of the
proposed rule change, the Commission may summarily abrogate such rule if it appears to the
Commission that such action is necessary or appropriate in the public interest, for the protection

of investors, or otherwise in furtherance of the purposes of the Act.


Page 9 of 9

File No. SR-OCC-2005-15

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, The Options

Clearing Corporation has caused this filing to be signed on its behalf by the undersigned hereunto

duly authorized.
THE OPTIONS CLEARING CORPORATION

fee H. Navin =

Executive Vice President and
General Counsel



Page 5 of 9

File No. SR-OCC-2005-15

determine whether a CMTA registration is in effect between the Executing Clearing Member and the
Carrying Clearing Member. If such a registration is in effect, the Corporation shall transfer the
Exchange transaction to the designated account of the Carrying Clearing Member unless such
matching trade information additionally includes a Customer CMTA Indicator. In that event, the
Corporation shall further determine whether such matching trade information also includes a CMTA
Customer Identifier and IB Identifier. If the matching trade information includes a CMTA Customer
Identifier and an IB Identifier and each such identifier matches a CMTA Customer Identifier and an
IB Identifier registered for purposes of the CMTA arrangement between the Carrying Clearing
Member and the Executing Clearing Member, the Corporation shall transfer the Exchange
transaction to the Carrying Clearing Member. If, however, (i) a CMTA registration is not in effect,
[or] (ii) the Corporation, in its sole discretion, determines that the information submitted in
connection with the CMTA transaction contains an error or omission as provided in paragraph (c) of
Interpretation .01 to Article VI, Section 1 of the By-Laws, or (iii) the matching trade information
reported in respect of an Exchange transaction includes a Customer CMTA Indicator, but incorrect,
incomplete, or missing information as to either identifier, the transaction shall be deemed to be a
failed CMTA transaction and shall not be transferred to an account of the Carrying Clearing
Member. A failed CMTA transaction will instead be transferred to a designated account of the
Executing Clearing Member, which shall be responsible for the clearance and settlement of such
transaction. In the absence of such designation, the Corporation shall transfer the failed CMTA
transaction to the customers’ or segregated futures account, as applicable, of the Executing Clearing
Member.

(c) — (k) [unchanged]

Item 2. Procedures of the Self-Regulatory Organization

The proposed rule change was approved by the Board of Directors of OCC at a
meeting held on May 24, 2005.
Questions regarding the proposed rule change should be addressed to Jean M.

Cawley, First Vice President and Deputy General Counsel, at (312) 322-6269.


Page 4 of 9

File No. SR-OCC-2005-15

within such times as the Corporation shall prescribe. Such adjustments shall be treated as Exchange
transactions for the purposes of Sections 15 and 16 of Article VI of the By-Laws and for the
purposes of other sections of Article VI except where the context otherwise requires.

(b) Subject to paragraph (c) below, [I]it is the policy of the Corporation to accept
adjustments submitted by the correspondent clearing corporation on behalf of a Clearing Member to
effect a transfer of accounts between Clearing Members. Such data shall be submitted in such form
and within such times as the Corporation shall prescribe. Notwithstanding the foregoing, the
Corporation may be unable to accept such adjustments from the correspondent clearing corporation
if the account of the Clearing Member includes positions or pending transactions in classes of
options cleared through ICS.

(c) Notwithstanding paragraphs (a) and (b) above, the Corporation shall have the
right to reject adjustments to Clearing Members’ positions and accounts contemplated by paragraphs
(a) and (b), as well as any other post-trade transactions permitted by the Corporation’s By-Laws and
Rules, under circumstances where the Corporation, in its sole discretion, determines that the input
regarding the adjustment or other transaction contains an error or omission.

-02 [unchanged]

CHAPTER IV

Trade Reporting and Matching

Clearing Member Trade Assignment (“CMTA”)

Rule 403. (a) [unchanged]

(b) Before transferring an Exchange transaction to a Carrying Clearing Member as
specified in the matching trade information reported to the Corporation, the Corporation shall first


Page 3 of 9

File No. SR-OCC-2005-15

Item 1. Text of the Proposed Rule Change

The Options Clearing Corporation (““OCC” or “the Corporation”) wishes to amend
Article VI, Section | of its By-Laws and Rule 403 of its Rules as set forth below in order to provide
the Corporation with the authority to reject post-trade transactions, such as Clearing Member Trade
Assignment (“CMTA”) transfers and position adjustments, when it appears that erroneous data has
been entered that would result in a settlement that is unreasonable under the circumstances. Material
to be added to OCC’s By-Laws and Rules as currently in effect is underlined, and material proposed

to be deleted is enclosed in bold brackets.

THE OPTIONS CLEARING CORPORATION
BY-LAWS

* ok *

Article VI — Clearance of Exchange Transactions

eo oe
General Clearance Rule

SECTION 1. [unchanged]

... Interpretations and Policies:

-01 (a) Subject to paragraph (c) below, [I]it is the policy of the Corporation to permit
a Clearing Member to submit adjustments to its positions with the Corporation to (1) effect a transfer
of accounts between Clearing Members; (2) effect a Return, (3) effect a CMTA Retransfer; and (4)
correct a bona fide error or omission regarding an Exchange transaction previously submitted to the
Corporation by the Exchange, security futures market, futures market, futures market or international
market on which such Exchange transaction occurred. Such data shall be submitted in such form and


edit personal identifying information from submissions. You should submit only information
that you wish to make available publicly. All submissions should refer to File Number SR-OCC-
2005-15 and should be submitted on or before [insert date 21 days from publication in the
Federal Register.]

For the Commission by the Division of Market Regulation, pursuant to delegated
authority.

Secretary

Dated: