File No. SR-OCC-2007-06
Page 19 of 29
Questions regarding the proposed rule change should be addressed to Jean M.

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

Item 3. 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 a type of
option that is related to the creditworthiness of a group or “basket” of “reference entities” each of
which is an issuer or guarantor of one or more specified debt securities (“reference
obligation(s)”).° Credit default basket options (“CDBOs”) 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 of a reference entity. Characteristics of CDBOs are described below, followed by an
explanation of the specific rule changes being proposed to clear them.

Description of Credit Default Basket Options. CDBOs are structured as binary
options’ with an automatic exercise feature. They are very similar to credit default options
(“CDOs”) that were previously proposed for trading by CBOE? except that CDBOs are based
upon multiple reference entities instead of a single reference entity. A CDBO will be

automatically exercised and an exercise settlement amount will be payable if a “credit event”

> The options are proposed to be traded on the CBOE. CBOE’s proposed rules for CDBOs were filed for approval
by the Commission in SR-CBOE-2007-26.

*«Binary” options (also sometimes referred to as “digital” options) are all-or-nothing options that pay a fixed amount
if automatically exercised and otherwise nothing.



Exhibit 5 to File No. SR-OCC-2007-06
THE OPTIONS CLEARING CORPORATION
BY-LAWS
* * *
ARTICLE I
Definitions
SECTION 1. Unless the context requires otherwise (or except as otherwise
specified in the By-Laws), the terms defined herein shall, for all purposes of these By-Laws and
the Rules of the Corporation, have the meanings herein specified.
A.-D. [No change.]
E.
(1) - (19) [No change.]}
Expiration Time
(20) Except as otherwise specified in the By-Laws and Rules for particular
classes of options, [T]the term “expiration time” in respect of an option contract[, other than an

option contract as defined in Section 1.E.(4)(ii) and (iii) of Article XV or Article XX of the By-
Laws,] means 10:59 P.M. Central Time (11:59 P.M. Eastern Time).

F.—N. [No change.]
oO.

(1) - (3) [No change.]
Option Contract

(4) The term “option contract” or “option” means a put option, a call option.a

credit default basket option (as defined in Article XIV of the By-Laws) or a packaged spread

‘ option (as defined in Article XXVI of the By-Laws) issued by the Corporation pursuant to the
By-Laws and Rules. The term “stock option contract” means a put or a call, as defined in this
Article I for which the underlying security is an equity security, including fund shares. The term
“Treasury securities option contract” means a put or a call, as defined in Article XIII of the By-
Laws. The term “yield-based Treasury option contract” means a put or a call, as defined in
Article XVI of the By-Laws. The term “debt securities option contract” means a Treasury
securities option contract. The term “foreign currency option contract” means a put or a call, as



experience suggest that a lower percentage is sufficient. In the case of multiple payout CDBOs,
the amount will be set at a percentage of the maximum potential payout reflecting the low
probability of simultaneous credit events affecting multiple reference entities. Initially, long
positions in CDBOs will be valued at zero and will provide no offset against margin
requirements on the shorts. Again, based on research, analysis and experience, OCC may
determine to give some value to the longs. Ultimately, CDBOs will be incorporated into the
STANS system and valued and margined on a risk basis.

OCC does not propose to accept escrow deposits in lieu of clearing margin for
CDBOs. Therefore, Rule 1506 states that Rule 610, which otherwise would permit such
deposits, does not apply to CDBOs.

7. Acceleration of Expiration Date—Rule 1507

This provision would accelerate the expiration date of a single payout CDBO
when the option is deemed to have been exercised on any day prior to the expiration date, and to
accelerate the expiration date of a multiple payout CDBO when the option is deemed to have
been automatically exercised with respect to every reference entity underlying such option prior

to the expiration date.

The proposed changes to OCC’s By-Laws and Rules are consistent with the
purposes and requirements of Section 17A of the Securities Exchange Act of 1934, as amended,
because they are designed to promote the prompt and accurate clearance and settlement of
transactions in, including exercises of, credit default basket options, and to foster cooperation
and coordination with persons engaged in the clearance and settlement of such transactions, to

remove impediments to and perfect the mechanism of a national system for the prompt and



obligation” means any debt security the terms of which are used to define the occurrence of a
credit event with respect to the reference entity that is its issuer or guarantor.

Reporting Authority

(2) The term “reporting authority” when used in respect of a class of credit
default basket options, means the person or entity responsible for confirming the occurrence of a
credit event. Unless another reporting authority is identified by the listing Exchange for a class
of credit default options, the listing Exchange will be the reporting authority.

S—T.

Reserved
U.
Underlying Interest

(1) The term “underlying interest” when used in respect of a credit default basket
option means the reference obligations.

V.
Variable Terms

(1) The term “variable terms” when used in respect of a series of credit default
basket options means the event(s) the occurrence of which will trigger automatic exercise, the
basket of reference entities, the reference obligations, the expiration date and the exercise
settlement amounts of such option contract.

W. -Z.
Reserved

[Section 1 of this Article adds certain new definitions relevant to credit default basket options
and replaces the definitions of class, expiration date, multiplier, premium, reporting authority,
underlying interest, and variable terms in Article I, Section 1 of the By-Laws.]

General Rights and Obligations of Holders and Writers of Credit Default Basket Options
SECTION 2. (a) Multiple Payout Credit Default Basket Option.

(i) Subject to the provisions of the By-Laws and Rules, the holder of a multiple
payout credit default basket option has the right to receive from the Corporation the exercise
settlement amount specified for a particular reference entity in the basket of reference entities
underlying such option, if a credit event is determined to have occurred with respect to such
reference entity within the time specified therefore in the Exchange Rules of the listing

-6-



File No. SR-OCC-2007-06
Page 13 of 29

* * *
RULES

* * *

CHAPTER VI
Margin

Margin Requirements
Rule 601. (a) -(e) [No change.]

... Interpretations and Policies:

.01 - .02 [No change.]

equirem sor credit default

d ofc
be a fix the

basket options oration based upon_the m:
potential exercise settlement a Q i as determined by the is

CHAPTER VIII

Exercise and Assignment
Exercise of Options

RULE 801. Issued and unexpired option contracts may, subject to Exchange



amount in respect of such contracts shall be paid from or, subject to the rights of any Pledgees
under Rule 614, credited to the Liquidating Settlement Account of such Clearing Member
established pursuant to Rule 1104. The Corporation shall effect settlement pursuant to Rule
1504 with all Clearing Members that have been assigned an exercise of a suspended Exercising
Clearing Member or that have exercised credit default basket options that were assigned to a
suspended Assigned Clearing Member without regard to such suspension.

[Rule 1505 supplements Rule 1104 and Rule 1107(b) and replaces Rule 1107(a) and (c).]
Deposits in Lieu of Margin Prohibited
RULE 1506. Rule 610 shall not apply to credit default basket options.
{Rule 1506 replaces Rule 610.]

Acceleration of Expiration Date

RULE 1507. (a) Ifa multiple payout credit default basket option has been
automatically exercised with respect to every reference entity underlying such option prior to the
expiration date, the expiration date will be accelerated to fall on the date on which an automatic
exercise has occurred with respect to the last reference entity.

(b) Ifa single payout credit default basket option has been automatically
exercised with respect to any reference entity underlying such option prior to the expiration date,
the expiration date will be accelerated to fall on the date on which such automatic exercise has
occurred.

-12-



File No. SR-OCC-2007-06
Page 23 of 29
the time the series is opened for trading. Section 10(e) also reminds the reader that CDBOs are
subject to adjustment under Article XIV.
3. Rights and Obligations—Article XIV, Section 2
Article XIV, Section 2A defines the general rights and obligations of holders and
writers of CDBOs. As noted above, the holder of a CDBO that is automatically exercised has the
right to receive the fixed exercise settlement amount for the particular reference entity affected by
a credit event, and the assigned writer has the obligation to pay that amount.

4. Adjustments of Credit Default Basket Options—Article XIV, Section 3;
Determination of Occurrence of Credit Event—Article XIV, Section 4

Article XIV, Section 3 provides for adjustment of CDBOs in accordance with the
tules of the listing exchange. CBOE’s proposed rules provide for adjustment of CDBOs in the
case of certain corporate events affecting the reference obligations, and OCC proposes simply to
defer to those rules and to the determinations of CBOE pursuant to those rules. Accordingly, as
in the case of CDOs, OCC will have no responsibility for adjustment determinations with respect
to CDBOs.

Similarly, Section 4 provides that the listing exchange for a class of CDBOs will
have responsibility for determining the occurrence of a credit event that will result in automatic
exercise of the options of that class with respect to a particular reference entity. The listing

exchange has the obligation to provide a credit event confirmation to OCC in order to trigger the



defined in Article XV of the By-Laws. The term “cross-rate foreign currency
option contract” means a put or a call, as defined in Article XX of the By-Laws. The term “‘cash-
settled foreign currency option contract” means a put or a call, as defined in Article XXII of the
By-Laws. The term “index option contract” means a put or a call, as defined in Article XVII of
the By-Laws. The term “cash-settled option contract” means any option contract that is settled
upon exercise by payment of cash rather than delivery of, and payment for, the underlying
interest, [an index option contract, a packaged spread option contract, a yield-based Treasury
option contract or a cash-settled foreign currency option contract.] The term “non-equity
securities option contract” means a debt securities option contract, a foreign currency option
contract, a cross-rate foreign currency option contract, a cash-settled option contract. For
purposes of Article VIII of the By-Laws, and Chapters VI and X of the Rules, the term “non-
equity securities option contract” shall also include such classes of fund options as the
Corporation may from time to time designate as non-equity securities option contracts for such

purposes.

P.-Z. [No change.]

ARTICLE VI
Clearance of Exchange Transactions
Terms of Cleared Contracts
SECTION 10. (a) - (d) [No change.]

(e) Except to the extent provided otherwise in the By-Laws and Rules with
respect to transactions in credit default basket options, the expiration date and exercise settlement
amount of each series of credit default basket options shall be determined by the Exchange that
first introduces such series of options for trading at the time such series is opened for trading.
Each component exercise settlement amount for a credit default basket option is subject to
adjustment in accordance with applicable provisions of Article XIV of the By-Laws.

(e) — [re-lettered as (f) but otherwise unchanged]

-2-



File No. SR-OCC-2007-06
Page 4 of 29

A.-D. [No change.]
E.— N. [unchanged]
oO.
(1) — (3) [No change.]

Option Contract

(4) The term “option contract” or “option” means a put option, a call option.
credit default option or credit default basket option (as define

a packaged spread option (as defined in Article XXVI of the By-Laws) /8) issued by! the Corporation
pursuant to the By-Laws and Rules. The term “stock option contract” means a put or a call, as
defined in this Article I for which the underlying security is an equity security, including fund
shares. The term “Treasury securities option contract” means a put or a call, as defined in Article
XIII of the By-Laws. The term “yield-based Treasury option contract” means a put or a call, as
defined in Article XVI of the By-Laws. The term “debt securities option contract” means a
Treasury securities option contract. The term “foreign currency option contract” means a put or a
call, as defined in Article XV of the By-Laws. The term “cross-rate foreign currency option
contract” means a put or a call, as defined in Article XX of the By-Laws. The term “cash-settled
foreign currency option contract” means a put or a call, as defined in Article XXII of the By-
Laws. The term “index option contract” means a put or a call, as defined in Article XVII of the
By: Laws. The term “ ‘cash-settled option o contract” means ai i nitract at is s uy

index o option c ‘contract, a packaged s spread option contract, a yield- based Treasury option contract
or a cash-settled foreign currency option contract.]] The term “non-equity securities option
contract” means a debt securities option contract, a foreign currency option contract, a cross-rate
foreign currency option contract, a cash-settled option contract. For purposes of Article VIII of
the By-Laws, and Chapters VI and X of the Rules, the term “non-equity securities option
contract” shall also include such classes of fund options as the Corporation may from time to
time designate as non-equity securities option contracts for such purposes.

.- Z. [No change.]



2 ee

OCC proposes to replace the definitions of “variable terms,” “premium” and
“multiplier” in Article I of the By-Laws with revised definitions in Article XIV, Section 1, that
are applicable to CDBOs. The term “class” is also redefined in Article XIV, Section 1. To be
within the same class, CDBOs must have the same reporting authority, which OCC anticipates
will ordinarily be the listing exchange. This is necessary because of the degree of discretion that
the reporting authority will have in determining whether a credit event has occurred.

Other terms that were created or amended for CDOs will be modified to apply to
CDBOs as well.

3. Terms of Cleared Contracts—Article VI, Section 10(e)

A new paragraph (e) is added to Article VI, Section 10, so that an Exchange is
required to designate the exercise settlement amount and expiration date for a series of CDBOs
at the time the series is opened for trading. Section 10(e) also reminds the reader that CDBOs
are subject to adjustment under Article XIV.

4, Rights and Obligations—Article XIV, Section 2

Article XIV, Section 2A defines the general rights and obligations of holders and
writers of CDBOs. As noted above, the holder of a CDBO that is automatically exercised has
the right to receive the fixed exercise settlement amount for the particular reference entity
affected by a credit event, and the assigned writer has the obligation to pay that amount.

5 Adjustments of Credit Default Basket Options—Article XIV, Section 3;
Determination of Occurrence of Credit Event—Article XIV, Section 4

Article XIV, Section 3 provides for adjustment of CDBOs in accordance with the
tules of the listing exchange. CBOE’s proposed rules provide for adjustment of CDBOs in the

case of certain corporate events affecting the reference obligations, and OCC proposes simply to



File No. SR-OCC-2007-06
Page 20 of 29
occurs with respect to any one of the reference entities at any time prior to the last day of trading.
As in the case of a CDO, a “credit event” is defined, generally speaking, 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 of a particular
reference entity and that the listing exchange has determined would be a credit event for purposes

of the CDBO.

CDBOs may be thought of as a bundle of CDOs in that there is a fixed exercise
settlement amount that is determined for each of the reference entities included in the basket of
reference entities underlying the CDBO. The exercise settlement amount may be the same for

all of the reference entities or it may be different for each one.

CDBOs come in two types: multiple payout CDBOs and single payout CDBOs.
A multiple payout CDBO is automatically exercised each time there is a credit event affecting
any one of the reference entities. Once the CDBO has been exercised with respect to that
reference entity, such reference entity is removed from the basket. In the unlikely event that a
CDBO is exercised with respect to all of the reference entities in the basket, the expiration of the
option would be accelerated. A single payout CDBO, on the other hand, is automatically

exercised only the first time that a credit event is confirmed with respect to any one of the

5 See SR-CBOE-2006-84 and Amendment No. 1, 2,3 and 4 thereto.



File No. SR-OCC-2007-06
Page 26 of 29

remove impediments to and perfect the mechanism of a national system for the prompt and
accurate clearance and settlement of such transactions, and, in general, to protect investors and
the public interest. They accomplish this purpose by applying substantially the same rules and
procedures to these transactions as OCC applies to similar transactions in other cash-settled
options except to the extent that special rules and procedures are required in order to
accommodate unique features of credit default basket options. Other than as described in Item 3
above, the proposed rule change is not inconsistent with the existing rules of OCC, including

tules 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.



File No. SR-OCC-2007-06
Page 22 of 29
result in delayed exercise settlement.

OCC also proposes to amend the definition of the term “exercise settlement
amount” in Article XIV for purposes of CDBOs. The exercise settlement amount of a CDBO is
the amount specified by the Exchange on which the option is traded that will be paid in
settlement when a CDBO is automatically exercised as a result of a credit event affect a
particular reference entity. The exercise settlement amount for each reference entity will be
determined by the Exchange at the time of listing, when the Exchange fixes the other variable
terms for the options of a particular class or series.

OCC proposes to replace the definitions of “variable terms,” “premium” and
“multiplier” in Article I of the By-Laws with revised definitions in Article XIV, Section 1, that
are applicable to CDBOs. The term “class” is also redefined in Article XIV, Section 1. To be
within the same class, CDBOs must have the same reporting authority, which OCC anticipates
will ordinarily be the listing exchange. This is necessary because of the degree of discretion that
the reporting authority will have in determining whether a credit event has occurred.

Other terms that were created or amended for CDOs will be modified to apply to
CDBOs as well.

2. Terms of Cleared Contracts—Article VI, Section 10(e)
A new paragraph (e) is added to Article VI, Section 10, so that an Exchange is

required to designate the exercise settlement amount and expiration date for a series of CDBOs at



defer to those rules and to the determinations of CBOE pursuant to those rules. Accordingly, as
in the case of CDOs, OCC will have no responsibility for adjustment determinations with respect
to CDBOs.

Similarly, Section 4 provides that the listing exchange for a class of CDBOs will
have responsibility for determining the occurrence of a credit event that will result in automatic
exercise of the options of that class with respect to a particular reference entity. The listing
exchange has the obligation to provide a credit event confirmation to OCC in order to trigger the
automatic exercise.

6. Exercise and Settlement—Chapter XV of the Rules and Rule 801

CDBOs would not be subject to the exercise-by-exception procedures applicable
to most other options under OCC’s Rules, but would instead be automatically exercised prior to
or at expiration if the specified criterion for exercise is met. The procedures for the automatic
exercise of CDBOs, as well as their assignment and settlement (including during periods when a
Clearing Member is suspended), are set forth in Rules 1501 through 1505 of new Chapter XV
and in revised Rule 801(b).

7. Special Margin Requirements—Rule 601; Deposits in Lieu of Margin—Rule 1506

As in the case of CDOs, OCC will not initially margin CDBOs through its usual
“STANS” system. Because of CDBOs’ fixed payout feature, further systems development is
needed to accommodate these options in STANS. Until such development is completed, OCC
has determined to require that writers of such options post margin in a fixed amount based on the
maximum potential exercise settlement amount. In the case of single payout CDBOs, that
amount will initially be set at 100% of the maximum potential payout, but OCC would have

discretion to reduce the requirement to something less than 100% if research, analysis and



File No. SR-OCC-2007-06
Page 17 of 29

single net settlement amount for credit default option and credit default basket option exercises
with respect to each account of each Clearing Member.

(3) Make available to each Clearing Member a report showing the results
of the netting described herein.

(c) At or before 9:00 A.M. Central Time (10:00 A.M. Eastern Time) on each
exercise settlement date for credit default options or credit default basket options, each Clearing
Member shall be obligated to pay to the Corporation any net settlement amount in any account of
such Clearing Member shown to be due to the Corporation on the report referred to in paragraph
(b) of this Rule for such day, and the Corporation shall be authorized to withdraw from the
Clearing Member’s bank account established in respect of such account an amount equal to such
net settlement amount, provided that the Corporation may, but is not required to, offset against
any such net settlement amount any credit balance which may be due from the Corporation to the
Clearing Member in the same or any other account.

(d) At or before 10:00 A.M. Central Time (11:00 A.M. Eastern Time) on each
exercise settlement date for credit default options or credit default basket options, the
Corporation shall be obligated to pay to the Clearing Member (provided the Clearing Member
has deposited all margin required to be deposited pursuant to Chapter VI of the Rules and has
deposited the full amount of any net daily premium due to the Corporation under Rule 502) the
net settlement amount in any account shown to be due from the Corporation to such Clearing
Member on the report referred to in paragraph (b) of this Rule for such day.

(e) Solely for purposes of Rule 601, exercised and assigned credit default options
[contracts] or credit default basket options shall be deemed settled as of the opening of business
on the exercise settlement date. No margin shall be required and no margin credit shall be given
in respect of such [contracts] options on such date.

(Rule 1504 replaces Chapter IX of the Rules and supplements Rules 502 and 607.]
Suspension of Clearing Members - Exercised Contracts

RULE 1505. Exercised credit default options [contracts] and credit default basket
options to which a suspended Clearing Member is a party (either as the Exercising Clearing
Member or as the Assigned Clearing Member) shall be settled in accordance with Rule 1504
provided that the net settlement amount in respect of such contracts shall be paid from or, subject



File No. SR-OCC-2007-06
Page 9 of 29

M.
Multiplier

(1) The term “multiplier” when used in respect of an Exchange transaction in
credit default options or credit default basket options means the fixed number by which the price
agreed upon by the purchaser and seller is multiplied in order to calculate the total purchase price
per contract.

N.-O

Reserved
P.
Premium

(1) The term “premium” when used in respect of an Exchange transaction in credit
default options or credit default basket options means the price, in dollars and cents, agreed upon by
the purchaser and seller in the transaction times the multiplier and the number of contracts subject to
the Exchange transaction.

Q.
Reserved

R.

Reference Entity; Reference Obligation(s)

(1) [The term “reference entity” as used in respect of a class of credit default
options means the issuer or guarantor of the reference obligation(s); and the term “reference
obligation(s)” means one or more debt securities the terms of which define a credit event for a
class of credit default options, as provided under the Exchange Rules of the listing Exchange.]
The term “reference entity” means the issuer or guarantor of the reference obligation(s) that
underlie a credit default option or any one of the issuers or guarantors of reference obligations
that underlie a credit default basket option. The term “reference obligation” means any debt
security the terms of which are used to define the occurrence of a credit event with respect to the
reference entity that is its issuer or guarantor.



occurs with respect to any one of the reference entities at any time prior to the last day of trading.
As in the case of a CDO, a “credit event” is defined, generally speaking, 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 of a particular
reference entity and that the listing exchange has determined would be a credit event for

purposes of the CDBO.

CDBOs may be thought of as a bundle of CDOs in that there is a fixed exercise
settlement amount that is determined for each of the reference entities included in the basket of
reference entities underlying the CDBO. The exercise settlement amount may be the same for

all of the reference entities or it may be different for each one.

CDBOs come in two types: multiple payout CDBOs and single payout CDBOs.
A multiple payout CDBO is automatically exercised each time there is a credit event affecting
any one of the reference entities. Once the CDBO has been exercised with respect to that
reference entity, such reference entity is removed from the basket. In the unlikely event that a
CDBO is exercised with respect to all of the reference entities in the basket, the expiration of the
option would be accelerated. A single payout CDBO, on the other hand, is automatically
exercised only the first time that a credit event is confirmed with respect to any one of the
reference entities. A single payout CDBO cannot be exercised again with respect to any other
reference entity and its expiration date will be accelerated. In either case, the exercise settlement
amount is the exercise settlement amount that was assigned by the listing exchange to the

reference entity affected by the credit event.



File No. SR-OCC-2007-06
Page 29 of 29

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 CLE. G CORPORATION

By: S4OO mh.

Jean M. Cawley
Senior Vice President and
Deputy General Counsel



File No. SR-OCC-2007-06
Page 6 of 29

of this Article, replaces one or more By-Laws in Articles I-XI, that fact is indicated in brackets
following the By-Law in this Article.

Definitions
SECTION 1.
A.
Adjustment Event

(1) The term “adjustment event” when used in respect of a credit default option
or a credit default basket option means either a redemption event or a succession event as defined
in the applicable Exchange Rules of the listing Exchange.

B.

Reserved
Cc.
Class

(1) The term “class” when applied to credit default options means all credit
default options having the same reference entity, reference obligation(s), credit event(s), and
teporting authority. When applied to credit default basket options, the term means all credit

default basket options having the same basket of reference entities, reference obligations, credit
event(s) and reporting authority.

Credit Default Option

(2) The term “credit default option” means an option that is automatically
exercised upon receipt by the Corporation of a credit event confirmation with respect to the
reference obligation(s) of a reference entity. Credit [D]default options have only two possible
payoff outcomes: either a fixed automatic exercise settlement amount or nothing at all.



File No. SR-OCC-2007-06
Page 5 of 29

ARTICLE VI
Clearance of Exchange Transactions

Terms of Cleared Contracts

SECTION 10. (a) - (d) [No change.]

respect ctions in credil ult options or credit default basket 0 tions, the expirati

basket option, i
of the By-Laws.

(e) — [re-lettered as (f} but otherwise unchanged]

ARTICLE XIv'

Credit Default Options and Credit Default Basket Options
Introduction

By-Laws in this Article are applicable only to credit default options and credit
default basket options. In addition, the By-Laws in Articles I-XI are also applicable to credit
default options and credit default basket options, in some cases supplemented by one or more By-
Laws in this Article, except for By-Laws that have been replaced in respect of credit default
options or credit default basket options by one or more By-Laws in this Article and except where
the context otherwise requires. Whenever a By-Law in this Article supplements or, for purposes

' This entire Article was proposed to be added in Amendment No. | to SR-OCC-2007-01. For ease of review,
double underlining and double bracketing have been omitted.



File No. SR-OCC-2007-06
Page 18 of 29

to the rights of any Pledgees under Rule 614, credited to the Liquidating Settlement Account of
such Clearing Member established pursuant to Rule 1104. The Corporation shall effect
settlement pursuant to Rule 1504 with all Clearing Members that have been assigned an exercise
of a suspended Exercising Clearing Member or that have exercised credit default options
[contracts] or credit default basket options that were assigned to a suspended Assigned Clearing
Member without regard to such suspension.

[Rule 1505 supplements Rule 1104 and Rule 1107(b) and replaces Rule 1107(a) and (c).]
Deposits in Lieu of Margin Prohibited

RULE 1506. Rule 610 shall not apply to credit default options or credit default
basket options.

{Rule 1506 replaces Rule 610.]

Acceleration of Expiration Date

RULE 1507. (a) Ifa credit default option is deemed to have been exercised on
any day prior to the expiration date, the expiration date will be accelerated to fall on the date of
exercise.

(b) Ifa multiple payout credit default basket option has been automatically
exercised with respect to every reference entity underlying such option prior to the expiration
date, the expiration date will be accelerated to fall on the date on which an automatic exercise has
occurred with respect to the last reference entity.

c) Ifa single payout credit default basket option has been automatically
exercised with respect to any reference entity underlying such option prior to the expiration date,

the expiration date will be accelerated to fall on the date on which such automatic exercise has
occurred.

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 December 5, 2006.



File No. SR-OCC-2007-06
Page 8 of 29

Reserved

E.
Exercise Settlement Amount

(1) The term “exercise settlement amount” when used in respect of a credit
default option means the fixed amount of cash to be paid upon exercise to a holder of an option
that is automatically exercised. When used in respect of a credit default basket option, such term
shall mean the fixed amount of cash to be paid to a holder of an option that is automatically
exercised with respect to any reference entity in the basket because of a credit event occurring
with respect to such reference entity prior to expiration of the option. Different exercise

settlement amounts may be specified by the listing options exchange with respect to different
reference entities. The exercise settlement amount(s) shall be specified by the listing Exchange

at or before the time when a series of credit default options or credit default basket options is first
opened for trading.

Expiration Date

(2) The term “expiration date” when used in respect of a series of credit default
options or credit default basket options means the last day on which the options may be
automatically exercised. [In the case of a series of credit default options, the]The expiration date
for any such series is the fourth business day after the last trading day for such series [of options]
as such trading day is specified by the Exchange on which the series of options is listed;
provided, however, that when a credit event confirmation is deemed to have been received by the
Corporation with respect to a series of credit default options or single payout credit default basket
options prior to the last trading day for such series, the expiration date for options of that series
will be accelerated to the second business day following the day on which such credit event
confirmation is deemed to have been received by the Corporation.

F.-L.

Reserved



File No. SR-OCC-2007-06
Page 24 of 29
automatic exercise.
5. Exercise and Settlement—Chapter XV of the Rules and Rule 801
CDBOs would not be subject to the exercise-by-exception procedures applicable
to most other options under OCC’s Rules, but would instead be automatically exercised prior to
or at expiration if the specified criterion for exercise is met. The procedures for the automatic
exercise of CDBOs, as well as their assignment and settlement (including during periods when a
Clearing Member is suspended), are set forth in Rules 1501 through 1505 of new Chapter XV
and in revised Rule 801(b).
6. Special Margin Requirements—Rule 601; Deposits in Lieu of Margin—Rule 1506
As in the case of CDOs, OCC will not initially margin CDBOs through its usual
“STANS” system. Because of CDBOs’ fixed payout feature, further systems development is
needed to accommodate these options in STANS. Until such development is completed, OCC
has determined to require that writers of such options post margin in a fixed amount based on the
maximum potential exercise settlement amount. In the case of single payout CDBOs, that
amount will initially be set at 100% of the maximum potential payout, but OCC would have
discretion to reduce theyrequirement to something less than 100% if research, analysis and
experience suggest that a lower percentage is sufficient. In the case of multiple payout CDBOs,
the amount will be set at a percentage of the maximum potential payout reflecting the low

probability of simultaneous credit events affecting multiple reference entities. Initially, long



a

THE OPTIONS CLEARING
CORPORATION

April 20, 2007

VIA ELECTRONIC SUBMISSION

Ms Eileen Donovan

Office of the Secretariat

Commodity Futures Trading Commission
Three Lafayette Centre

1155 21" Street, N.W.

Washington, DC 20581

Re: Rule Filing SR-OCC-2007-06 —Request for Commission Rule
Approval

Dear Ms Donovan:

The Options Clearing Corporation (“OCC”) hereby submits the above referenced
tule filing for approval by the Commodity Futures Trading Commission (the “Commission”)
pursuant to Section Sc(c)(2) of the Commodity Exchange Act (the “CEA”) and Sections 39.4(a)
and 40.5 of the Commission’s regulations. This rule filing has been, or is concurrently being,
submitted to the Securities and Exchange Commission (the “SEC”) for approval under the
Securities Exchange Act of 1934 (the “Exchange Act”). The purpose of this rule filing is to
obtain approval for OCC to clear “credit default basket options” (“CDBOs”) proposed to be
traded on the Chicago Board Options Exchange, Inc. (“CBOE”) or that might be traded on any
other national securities exchange that is an OCC participant exchange.'

In conformity with the requirements of Regulation 40.5(a), OCC states the
following: the proposed effective date of the rule change is the earliest date on which all of the
following have occurred: (i) the proposed rule change has been approved by the SEC (or
otherwise becomes effective under the Exchange Act); (ii) the SEC has approved, pursuant to the
SEC’s Rule 9b-1, a supplemental disclosure document relating to CDBOs; and (iii) the proposed
tule change has been, or is deemed to have been, approved by the Commission pursuant to
regulation Section 40.5. The text of the proposed rule is set forth in Item 1 of the enclosed filing.
The proposed rule was duly adopted by the Board of Directors of OCC as described in Item 2 of

_ the enclosed filing, pursuant to the powers granted to the Board by Article III, Section 8 of
OCC’s By-Laws. Item 3 of the enclosed filing sets forth the operation, purpose, and effect of the
proposed rule. Item 5 of the enclosed filing sets forth a description of any written comments on
the rule filing, including any such comments expressing opposing views that were not
incorporated into the proposed rule.

' CBOE’s proposed rule filing relating to CDBOs was filed with the SEC in SR-CBOE-2007-26.

JEAN M. CAWLEY
FIRST VICE PRESIDENT AND DEPUTY GENERAL COUNSEL

ONE N. WACKER DRIVE, SUITE 500 CHICAGO, ILLINOIS 60608 TEL 312.322.6269 FAX 312.322.6280
JCAWLEY@THEOCC COM WWW OPTIONSCLEARING.COM



received by the Corporation with respect to any reference entity for such class of options at any
time prior to the expiration time on the expiration date for the class of options. The reporting
authority will confirm credit events in accordance with Exchange Rules, as they are interpreted
by the reporting authority and reported to the Corporation by the reporting authority. Every
credit event confirmation will be within the sole discretion of the reporting authority and shall be
conclusive and binding on all holders and writers and not subject to review. The Corporation
will not be responsible for any credit event determination made by the reporting authority.

* * *
RULES

* * *

CHAPTER VI
Margin

Margin Requirements
Rule 601. (a)-(e) [No change.]
... Interpretations and Policies:
01 -.02 [No change.]

.03_Notwithstanding the provisions of Rule 601, the Corporation may exclude positions in credit
default basket options in any account of a Clearing Member from the margin requirement
calculations under paragraphs (c) and (d) of Rule 601. The margin requirement for excluded
short positions in any series of credit default basket options shall be a fixed amount determined
by the Corporation based upon the maximum potential exercise settlement amount for such
options as determined by the Corporation. Except to the extent that the Corporation determines
otherwise, long positions in credit default basket options shall be given no value for margin
purposes and shall not offset margin requirements on short positions except to the extent that a
Clearing Member carries unsegregated long positions and short positions in the same class of
options in the same account.

CHAPTER VIII
Exercise and Assignment
Exercise of Options
RULE 801. Issued and unexpired option contracts may, subject to Exchange

-8-



File No. SR-OCC-2007-06
Page 11 of 29

General Rights and Obligations of Holders and Writers of Credit Default Options

SECTION 2. [no change]

General Rights and Obligations of Holders and Writers of Credit Default Basket Options
SECTION 2A. (a) Multiple Payout Credit Default Basket Option.

i) The holder of a multiple payout credit default basket option has the right to
receive from the Corporation the exercise settlement amount specified for a particular reference
entity in the basket of reference entities underlying such option, if a credit event is determined to

have occurred with respect to such reference entity within the time specified therefor in the
Exchange Rules of the listing Exchange, in each case in accordance with Exchange Rules and the

By-Laws and Rules. A multiple payout credit default basket option may be exercised once and
only once with respect to each reference entity.

(ii) The writer of a multiple payout credit default basket option is obligated, upon
assignment to such writer of an exercise in respect of a reference entity for such option, to pay to
the Corporation the exercise settlement amount specified for such reference entity, in accordance
with Exchange Rules and the By-Laws and Rules. A writer of a multiple payout credit default
basket option may be assigned an exercise notice once, and only once. with respect to each
reference entity.

(b) Single Payout Credit Default Basket Option.

(i) The holder of a single payout credit default basket option has the right to
receive from the Corporation the exercise settlement amount specified for the first reference
entity in the basket of reference entities underlying such option in respect of which a credit event
is determined to have occurred within the time specified therefor in the Exchange Rules of the
listing Exchange, in each case in accordance with Exchange Rules and the By-Laws and Rules.
A single payout credit default basket option may be automatically exercised once and only once.

(ii) The writer of a single payout credit default basket option is obligated, upon
assignment to such writer of an exercise in respect of a reference entity for such option, to pay to
the Corporation the exercise settlement amount specified for such reference entity, in accordance
with Exchange Rules and the By-Laws and Rules. A writer of a single payout credit default



File No. SR-OCC-2007-06
Page 10 of 29

Reporting Authority

(2) The term “reporting authority” when used in respect of a class of credit
default options or credit default basket options, means the person or entity responsible for
confirming the occurrence of [the relevant] a credit event. Unless another reporting authority is
identified by the listing Exchange for a class of credit default options, the listing Exchange will
be the reporting authority.

ST.

Reserved
U.
Underlying Interest

(1) The term “underlying interest” when used in respect of a credit default option or
a credit default basket option means the reference obligation(s).

Vv.
Variable Terms

(1) The term “variable terms” when used in respect of a series of credit default
options or credit default basket options means the event(s) the occurrence of which will trigger

automatic exercise, reference entity or basket of reference entities, the reference obligation(s), the

expiration date and the exercise settlement amount(s) of such option contract.
W.-Z.
Reserved

{Section 1 of this Article adds certain new definitions relevant to credit default options and credit
default basket options and replaces the definitions of class, expiration date, multiplier, premium,
reporting authority, underlying interest, and variable terms in Article I, Section 1 of the By-
Laws.]



credit default basket option” means a credit default basket option that automatically pays an
exercise settlement amount each time a credit event is confirmed with respect to any one of the
reference entities prior to expiration of the option. A “single payout credit default basket option”
is automatically exercised and pays a single exercise settlement amount only when the first credit
event is confirmed with respect to a reference entity prior to expiration of the option.

Credit Event

(3) The term “credit event” when used in respect of a credit default basket option
means a credit event, as defined in the rules of the Exchange on which the options are listed, with
respect to a reference obligation of a reference entity for such option.

Credit Event Confirmation

(4) The term “credit event confirmation” when used in respect of a credit default
basket option means a notice received by the Corporation from the reporting authority that the
reporting authority has confirmed that a credit event occurred within the “credit event
confirmation period” specified in the Exchange Rules of the listing Exchange.

Credit Event Confirmation Deadline

(5) The term “credit event confirmation deadline” when used in respect of a
credit default basket option means the deadline specified by the Corporation by which a credit
event confirmation must be received by the Corporation on any business day other than the
expiration date in order to be treated as having been received on the business day on which it was
submitted. Credit event confirmations received after the credit event confirmation deadline shall
be treated as having been received on the following business day. Credit event confirmations
received by the Corporation after the credit event confirmation deadline on the expiration date
shall be treated as provided in the By-Laws and Rules.

D.
Reserved

E.
Exercise Settlement Amount

(1) The term “exercise settlement amount” when used in respect of a credit
default basket_option means the fixed amount of cash to be paid to a holder of an option that is
automatically exercised with respect to any reference entity in the basket because of a credit
event occurring with respect to such reference entity prior to expiration of the option. Different
exercise settlement amounts may be specified by the listing Exchange with respect to different
reference entities. The exercise settlement amount(s) shall be specified by the listing Exchange
at or before the time when a series of credit default basket options is first opened for trading.

4.



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

The purpose of this rule change is to permit OCC to clear and settle a type of
option that is related to the creditworthiness of a group or “basket” of “reference entities” each of
which is an issuer or guarantor of one or more specified debt securities (“reference
obligation(s)”).' Credit default basket options (““CDBOs”) 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 of a reference entity. Characteristics of CDBOs are described below, followed by an
explanation of the specific rule changes being proposed to clear them.

Description of Credit Default Basket Options, CDBOs are structured as
binary options” with an automatic exercise feature. They are very similar to credit default
options (“CDOs”) that were previously proposed for trading by CBOE? except that CDBOs are
based upon multiple reference entities instead of a single reference entity. A CDBO will be

automatically exercised and an exercise settlement amount will be payable if a “credit event”

' The options are proposed to be traded on the CBOE. CBOE’s proposed rules for CDBOs were filed for approval
by the Commission in SR-CBOE-2007-26.

2 “Binary” options (also sometimes referred to as “digital” options) are all-or-nothing options that pay a fixed
amount if automatically exercised and otherwise nothing.

3 See SR-CBOE-2006-84 and Amendment No. 1, 2,3 and 4 thereto.



Rules and the By-Laws, be exercised as follows:
(a) [No change.]

(b) Any expiring American option contract may be exercised on its expiration
date in accordance with Rule 805. Any capped or European option contract may be exercised
(other than automatically exercised in the case of a capped option) only on its expiration date in
accordance with Rule 805. Any credit default basket option that meets the exercise parameters
set forth in Rule 1501 will be automatically exercised in accordance with that rule.
Notwithstanding the foregoing, any expiring flexibly structured index option contract, quarterly
index option contract, or short term index option contract that meets the exercise parameters set
forth in Rule 1804(c) will be automatically exercised on its expiration date in accordance with
that rule. No expiring option contract other than an American style flexibly structured option
contract, a foreign currency option contract, a short term option contract, a quarterly option
contract, or a cross-rate foreign currency option contract may be exercised on the business day
immediately preceding its expiration date.

(c)—end [unchanged]

* * *

CHAPTER XV"
Credit Default Basket Options
Introduction

Rules in this Chapter are applicable only to credit default basket options (as
defined in the By-Laws). In addition, the Rules in Chapters I through XII are also applicable to
credit default basket options, in some cases supplemented by one or more Rules in this Chapter,
except for Rules that have been replaced in respect of credit default basket options by one or
more Rules in this Chapter and except where the context otherwise requires. Whenever a Rule in
this Chapter supplements or, for purposes of this Chapter, replaces one or more of the By-Laws
or Rules in Chapters I through XII, that fact is indicated in brackets following the Rule in this
Chapter.

Automatic Exercise of Credit Default Basket Options

RULE 1501. In the case of a credit default basket option, a Clearing Member
shall automatically be deemed to have exercised such option on any business day on which a
credit event confirmation is received by the Corporation before the credit event confirmation
deadline with respect to a particular reference entity. A credit event confirmation received after
such deadline shall be deemed to have been received by the Corporation on the following
business day; provided, however, that a credit event confirmation received after the credit event

? This entire Chapter is proposed to be added. For ease of review, it is not underlined.
-9-



EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION
(Release No. 34- 3 File No. SR-OCC-2007-06

SELF-REGULATORY ORGANIZATION

Proposed Rule Change By
The Options Clearing Corporation

Relating to Credit Default Basket Options

Comments requested within days
after the date of this publication.

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 , 2007, The Options Clearing Corporation
("OCC") filed with the Securities and Exchange Commission the proposed rule change as
described in Items I, If 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.

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

The proposed rule change would permit OCC to clear and settle a type of option that is
related to the creditworthiness of a group or “basket” of “reference entities” each of which is an

issuer or guarantor of one or more specified debt securities.



File No. SR-OCC-2007-06
Page 7 of 29

Credit Default Basket Option

(3) The term “credit default basket option” means an option that is based on a
basket comprised of at least two reference entities and that is either a “multiple payout credit
default basket option” or a “single payout credit default basket option.” _A “multiple payout
credit default basket option” means a credit default basket option that automatically pays an
exercise settlement amount each time a credit event is confirmed with respect to any one of the
reference entities prior to expiration of the option. A “single payout credit default basket option”
is.automatically exercised and pays a single exercise settlement amount only when the first credit
event is confirmed with respect to a reference entity prior to expiration of the option.

Credit Event

([3]4) The term “credit event” when used in respect of a credit default option ora
credit default basket option means a credit event, as defined in the rules of the Exchange on
which the options are listed, with respect to a reference obligation of a reference entity for such
option.

Credit Event Confirmation

({41S) The term “credit event confirmation” when used in respect of a credit
default option or a credit default basket option means a notice received by the Corporation from
the reporting authority that the reporting authority has confirmed that a credit event occurred
within the “credit event confirmation period” specified in the Exchange Rules of the listing
Exchange.

Credit Event Confirmation Deadline

([5]6) The term “credit event confirmation deadline” when used in respect of a
credit default option or a credit default basket option means the deadline specified by the
Corporation by which a credit event confirmation must be received by the Corporation on any
business day other than the expiration date in order to be treated as having been received on the
business day on which it was submitted. Credit event confirmations received after the credit
event confirmation deadline shall be treated as having been received on the following business
day. Credit event confirmations received by the Corporation after the credit event confirmation
deadline on the expiration date shall be treated as provided in the By-Laws and Rules.



File No. SR-OCC-2007-06
Page 21 of 29
reference entities. A single payout CDBO cannot be exercised again with respect to any other
reference entity and its expiration date will be accelerated. In either case, the exercise settlement
amount is the exercise settlement amount that was assigned by the listing exchange to the

reference entity affected by the credit event.

By-Law and Rule Amendments Applicable to CDBOs. In order to
accommodate trading in CDBOs, OCC proposes to amend the By-Law Article and Rule Chapter
that were proposed for CDOs.

1. Terminology—Article I, Section 1 and Article XIV, Section 1

The definition of “option contract” in Article I of the By-Laws is amended to
include a CDBO.

“Adjustment event” is defined in Article XIV by reference to the rules of the
listing exchange. Similarly, “credit event” is defined by reference to exchange rules. The terms
“credit event confirmation” and “credit event confirmation deadline” are used, respectively, to
refer to the notice that must be provided by the listing exchange or other reporting authority to
OCC that a credit event has occurred (and that a CDBO will therefore automatically be
exercised) and to the deadline for receipt of such notice if it is to be treated as having been
received on the business day on which it is submitted. Credit event confirmations received after

the deadline on the expiration date but before the expiration time will be given effect but may



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:

¢ Use the Commission’s Intemet 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-2007-06 on the subject line.

Paper Comments:

* Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and
Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2007-06. 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, 100F Fifth
Street, N.E., Washington, D.C. 20549-1090. 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
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-
2007-06 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:



File No. SR-OCC-2007-06
Page 27 of 29

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)

OCC requests that the Commission accelerate the effectiveness of this filing to the
extent necessary to make it effective not later than the effectiveness of CBOE’s proposed rule
filing, as amended, relating to CDBOs. OCC believes there is good cause for such accelerated
effectiveness because CBOE will not be able commence trading CDBOs, even if its filing is
approved, until OCC’s rule change is approved. This proposed filing implements CBOE’ filing,
which was initially submitted to the Commission on April 5, 2007. However, OCC will delay
implementation of this rule change until distribution of a supplement to the options disclosure
document, Characteristics and Risks of Standardized Options, addressing credit default basket

options.

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

Not applicable.



File No. SR-OCC-2007-06
Page 3 of 29

Item 1. Text of the Proposed Rule Change

In order to clear and settle “credit default basket options” proposed to be listed by
the Chicago Board Options Exchange, Incorporated (“CBOE”), The Options Clearing
Corporation (“OCC” or the “Corporation”) proposes to amend and supplement its By-Laws and
Rules as set forth below. Material proposed to be added is underlined. Material proposed to be
deleted is enclosed in bold brackets. Material that was proposed to be added in Amendment No.
1 to SR-OCC-2007-01, which was previously filed with the Commission and has not yet been
approved, is indicated by double underlining. Material proposed to be deleted in that previous
filing is indicated by double bold brackets. In the event that this filing is approved before the
previous filing is approved, the text of the By-Laws and Rules as amended by this filing is set

forth on Exhibit 5.

THE OPTIONS CLEARING CORPORATION
BY-LAWS
* * *
ARTICLE I
Definitions

SECTION 1. Unless the context requires otherwise (or except as otherwise
specified in the By-Laws), the terms defined herein shall, for all purposes of these By-Laws and
the Rules of the Corporation, have the meanings herein specified.



Exchange, in each case in accordance with Exchange Rules and the By-Laws and Rules. A
multiple payout credit default basket option may be exercised once and only once with respect to
each reference entity.

(ii) The writer of a multiple payout credit default basket option is obligated, upon
assignment to such writer of an exercise in respect of a reference entity for such option, to pay to
the Corporation the exercise settlement amount specified for such reference entity, in accordance
with Exchange Rules and the By-Laws and Rules. A writer of a multiple payout credit default
basket option may be assigned an exercise notice once, and only once, with respect to each
reference entity.

(b) Single Payout Credit Default Basket Options

(i) Subject to the provisions of the By-Laws and Rules, the holder of a single
payout credit default basket option has the right to receive from the Corporation the exercise
settlement amount specified for the first reference entity in the basket of reference entities
underlying such option in respect of which a credit event is determined to have occurred within
the time specified therefore in the Exchange Rules of the listing Exchange, in each case in
accordance with Exchange Rules and the By-Laws and Rules. A single payout credit default
basket option may be automatically exercised once and only once.

(ii) The writer of a single payout credit default basket option is obligated, upon
assignment to such writer of an exercise in respect of a reference entity for such option, to pay to
the Corporation the exercise settlement amount specified for such reference entity, in accordance
with Exchange Rules and the By-Laws and Rules. A writer of a single payout credit default
basket option may be assigned an exercise notice once, and only once, with respect to such
option.

[Section 2 of this Article replaces paragraphs (a) and (b) of Section 9 of Article VI of the By-
Laws.]

Adjustments of Credit Default Basket Options

SECTION 3. The listing Exchange is vested with complete discretionary
authority to confirm adjustment events and make adjustments to credit default basket options in
accordance with Exchange Rules, as they are interpreted by the Exchange. Adjustment
determinations shall be reported to the Corporation by the Exchange. Every adjustment
determination by the Exchange will be within its sole discretion and shall be conclusive and
binding on all holders and writers and not subject to review. The Corporation shall not be
responsible for any adjustment determination by the Exchange.

[Section 3 of this Article replaces Section 11 and 11A of Article VI of the By-Laws.]
Determination of Occurrence of Credit Event

SECTION 4. A class of credit default basket options will be exercised
automatically, without any action on the part of the holders, if a credit event confirmation is

-7-



Expiration Date

(2) The term “expiration date” when used in respect of a series of credit default
basket option means the last day on which the options may be automatically exercised. The
expiration date for any such series is the fourth business day after the last trading day for such
series as such trading day is specified by the Exchange on which the series of options is listed;
provided, however, that when a credit event confirmation is deemed to have been received by the
Corporation with respect to a series of single payout credit default basket options prior to the last
trading day for such series, the expiration date for options of that series will be accelerated to the
second business day following the day on which such credit event confirmation is deemed to
have been received by the Corporation.

F.-L.
Reserved

M.

Multiplier

(1) The term “multiplier” when used in respect of an Exchange transaction in
credit default basket options means the fixed number by which the price agreed upon by the
purchaser and seller is multiplied in order to calculate the total purchase price per contract.

N.-O
Reserved

P.

Premium

(1) The term “premium” when used in respect of an Exchange transaction in
credit default basket options means the price, in dollars and cents, agreed upon by the purchaser
and seller in the transaction times the multiplier and the number of contracts subject to the
Exchange transaction.

Q.
Reserved
R.
Reference Entity; Reference Obligation(s)

(1) The term “reference entity” means any one of the issuers or guarantors of
reference obligations that underlie a credit default basket option. The term “reference

-5-



File No. SR-OCC-2007-06
Page 14 of 29

Rules and the By-Laws, be exercised as follows:
(a) [No change.]

(b) Any expiring American option contract may be exercised on its expiration
date in accordance with Rule 805. Any capped or European option contract may be exercised
(other than automatically exercised in the case of a capped option) only on its expiration date in
accordance with Rule 805. Any credit default option or credit default basket option that meet:

that rule. Notwithstanding the foregoing, any expiring flexibly structured index option contract,
quarterly index option contract, or short term index option contract that meets the exercise
parameters set forth in Rule 1804(c) will be automatically exercised on its expiration date in
accordance with that rule. No expiring option contract other than an American style flexibly
structured option contract, a foreign currency option contract, a short term option contract, a
quarterly option contract, or a cross-rate foreign currency option contract may be exercised on the
business day immediately preceding its expiration date.

(c)-end [unchanged]

CHAPTER XV”

Credit Default Options and Credit Default Basket Options

Introduction

Rules in this Chapter are applicable only to credit default options and credit
default basket options (as defined in the By-Laws). In addition, the Rules in Chapters [ through
XII are also applicable to credit default options and credit default basket options, in some cases
supplemented by one or more Rules in this Chapter, except for Rules that have been replaced in
respect of credit default options and credit default basket options by one or more Rules in this
Chapter and except where the context otherwise requires. Whenever a Rule in this Chapter
supplements or, for purposes of this Chapter, replaces one or more of the By-Laws or Rules in
Chapters [ through XU, that fact is indicated in brackets following the Rule in this Chapter.

? This entire Chapter was proposed to be added in Amendment No. | to SR-OCC-2007-01. For ease of review,
double underlining has been omitted.



File No. SR-OCC-2007-06
Page 16 of 29

available to each Clearing Member on the business day following the date of exercise a report or
reports reflecting all automatic exercises of credit default options and credit default basket
options in the accounts of such Clearing Member effected on such date, and all assignments of
exercises to short positions in the accounts of such Clearing Member.

[Rule 1502 replaces Rules 803 and 804.]
Exercise Settlement Date for Credit Default Options and Credit Default Basket Options

RULE 1503. (a) The exercise settlement date for a credit default option or credit
default basket option shall be the third business day following the date on which the option is
deemed to have been exercised; provided, however, that in the case of an option that is deemed
to have been exercised on the expiration date, the exercise settlement date shall be the business
day following the expiration date.

(b) The Corporation may extend or postpone any exercise settlement date for
credit default options whenever, in its opinion, such action is required in the public interest or to
meet unusual conditions.

[Rule 1503, together with Rule 1504, replaces Rule 902.]
Settlement of Credit Default Options and Credit Default Basket Options

RULE 1504. (a) Exercised credit default options or credit default basket options
and short positions in [credit default] such options to which exercises have been assigned shall be
settled through the payment of the exercise settlement amount by the Corporation to the holder of
the [credit default] option and by the writer of the [credit default] option to the Corporation.

(b) On each exercise settlement date for credit default options, at or before such
time as the Corporation may specify, the Corporation shall:

(1) Determine, as to each account of each Clearing Member, the number
of exercised and assigned option contracts of each series of credit default options or credit default
basket options for which the current business day is the exercise settlement date.

(2) Net the exercise settlement amounts to be paid by the Clearing
Member against the exercise settlement amounts to be paid to the Clearing Member to obtain a



File No. SR-OCC-2007-06
Page 2 of 29

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



accurate clearance and settlement of such transactions, and, in general, to protect investors and
the public interest. They accomplish this purpose by applying substantially the same rules and
procedures to these transactions as OCC applies to similar transactions in other cash-settled
options except to the extent that special rules and procedures are required in order to
accommodate unique features of credit default basket options. Other than as described in Item 3
above, the proposed rule change is not inconsistent with the existing rules of OCC, including
tules 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.

Ill. Date of Effectiveness of the Proposed Rule Change
and Timing for Commission Action

Within 35 days of the date of publication of this notice in the Federal Register or within
such longer period (i) as the Commission may designate up to 90 days of such date if it finds
such longer period to be appropriate and publishes its reasons for so finding, or (ii) as to which
the self-regulatory organization consents, the Commission will:

(A) _ by order approve the proposed rule change, or

(B) __ institute proceedings to determine whether the proposed rule change should be

disapproved.



File No. SR-OCC-2007-06
Page 25 of 29
positions in CDBOs will be valued at zero and will provide no offset against margin
requirements on the shorts. Again, based on research, analysis and experience, OCC may
deterinine to give some value to the longs. Ultimately, CDBOs will be incorporated into the
STANS system and valued and margined on a risk basis.
OCC does not propose to accept escrow deposits in lieu of clearing margin for
CDBOs. Therefore, Rule 1506 states that Rule 610, which otherwise would permit such
deposits, does not apply to CDBOs.
7. Acceleration of Expiration Date—Rule 1507
This provision would accelerate the expiration date of a single payout CDBO
when the option is deemed to have been exercised on any day prior to the expiration date, and to
accelerate the expiration date of a multiple payout CDBO when the option is deemed to have
been automatically exercised with respect to every reference entity underlying such option prior

to the expiration date.

The proposed changes to OCC’s By-Laws and Rules are consistent with the
purposes and requirements of Section 17A of the Securities Exchange Act of 1934, as amended,
because they are designed to promote the prompt and accurate clearance and settlement of
transactions in, including exercises of, credit default basket options, and to foster cooperation and

coordination with persons engaged in the clearance and settlement of such transactions, to



a

OCC proposes to clear CDBOs as securities options subject to the jurisdiction of
the SEC, and would therefore not require Clearing Members that carry such options for the
accounts of their customers to hold them in accounts that are subject to the segregation
requirements of the CEA. OCC believes that this practice would not violate the CEA because
such options are within the definition of a “security” under Section 3(a)(10) of the Exchange Act
and therefore excluded from the Commission’s jurisdiction under Section 2(a)(1)(C)(i) of the
CEA.

As a derivatives clearing organization subject to the jurisdiction of the
Commission as well as a registered securities clearing agency, OCC is filing this rule change for
prior Commission approval in order to confirm that the Commission concurs in OCC’s
conclusion that OCC would not violate the CEA by treating CDBOs as securities rather than
commodity options. Should you have any questions regarding this matter, please do not hesitate
to contact William H. Navin, Executive Vice President and General Counsel, OCC, at (312) 322-
1817 or the undersigned.

Sincerely,

Enclosures

ce: CFTC Central Region (w/ enclosures)
300 South Riverside Plaza, Suite 1600 North
Chicago, IL 60606

Ananda K. Radhakrishnan
Director
Division of Clearing and Intermediary Oversight

John C, Lawton
Deputy Director and Chief Counsel
Division of Clearing and Intermediary Oversight

2-

CHE 3841564v.1



confirmation deadline on the business day before the last scheduled trading day and before the
expiration time on the expiration date will be deemed to have been received on the expiration
date. If a credit event confirmation is received after the credit event confirmation deadline on the
expiration date and before the expiration time, the Corporation may extend the exercise
settlement date pursuant to Rule 1503(c). A multiple-payout credit default basket option shall be
deemed to be exercised each time a credit event is confirmed in accordance with this paragraph
(b) with respect to a different reference entity; provided, however, that a credit event may be
confirmed only once with respect to any single reference entity. A single-payout credit default
basket option will be deemed to be exercised only the first time that a credit event is confirmed
in accordance with this paragraph (b) with respect to a reference entity and cannot be exercised
with respect to any other reference entity thereafter.

[Rule 1501 supplements Rule 805 and replaces Rule 802.]
Assignment and Allocation of Credit Default Basket Option Exercises

RULE 1502. Following the automatic exercise of credit default basket option
contracts in any series, the exercises shall be assigned and allocated to all open short positions in
such series of options. The Corporation shall make available to each Clearing Member on the
business day following the date of exercise a report or reports reflecting all automatic exercises
of credit default basket options in the accounts of such Clearing Member effected on such date,
and all assignments of exercises to short positions in the accounts of such Clearing Member.
(Rule 1502 replaces Rules 803 and 804.]

Exercise Settlement Date for Credit Default Basket Options

RULE 1503. (a) The exercise settlement date for a credit default basket option
shall be the third business day following the date on which the option is deemed to have been
exercised; provided, however, that in the case of an option that is deemed to have been exercised
on the expiration date, the exercise settlement date shall be the business day following the
expiration date.

(b) The Corporation may extend or postpone any exercise settlement date for
credit default options whenever, in its opinion, such action is required in the public interest or to
meet unusual conditions.

[Rule 1503, together with Rule 1504, replaces Rule 902.]
Settlement of Credit Default Basket Options
RULE 1504. (a) Exercised credit default basket options and short positions in
credit default basket options to which exercises have been assigned shall be settled through the

payment of the exercise settlement amount by the Corporation to the holder of the option and by
the writer of the option to the Corporation.

-10-



By-Law and Rule Amendments Applicable to CDBOs,. In order to

accommodate trading in CDBOs, OCC proposes to amend the By-Law Article and Rule Chapter
that were proposed for CDOs.
2. Terminology—Article I, Section 1 and Article XIV, Section 1

The definition of “option contract” in Article I of the By-Laws is amended to
include a CDBO.

“Adjustment event” is defined in Article XIV by reference to the rules of the
listing exchange. Similarly, “credit event” is defined by reference to exchange rules. The terms
“credit event confirmation” and “credit event confirmation deadline” are used, respectively, to
refer to the notice that must be provided by the listing exchange or other reporting authority to
OCC that a credit event has occurred (and that a CDBO will therefore automatically be
exercised) and to the deadline for receipt of such notice if it is to be treated as having been
received on the business day on which it is submitted. Credit event confirmations received after
the deadline on the expiration date but before the expiration time will be given effect but may
result in delayed exercise settlement.

OCC also proposes to amend the definition of the term “exercise settlement
amount” in Article XIV for purposes of CDBOs. The exercise settlement amount of a CDBO is
the amount specified by the Exchange on which the option is traded that will be paid in
settlement when a CDBO is automatically exercised as a result of a credit event affect a
particular reference entity. The exercise settlement amount for each reference entity will be
determined by the Exchange at the time of listing, when the Exchange fixes the other variable

terms for the options of a particular class or series.



* * *

ARTICLE XIV!
Credit Default Basket Options

Introduction

By-Laws in this Article are applicable only to credit default basket options. In
addition, the By-Laws in Articles I-X1 are also applicable to credit default basket options, in
some cases supplemented by one or more By-Laws in this Article, except for By-Laws that have
been replaced in respect of credit default basket options by one or more By-Laws in this Article
and except where the context otherwise requires. Whenever a By-Law in this Article
supplements or, for purposes of this Article, replaces one or more By-Laws in Articles I-XI, that
fact is indicated in brackets following the By-Law in this Article.

Definitions

SECTION 1.
A.
Adjustment Event

(1) The term “adjustment event” when used in respect of a credit default basket
option means either a redemption event or a succession event as defined in the applicable
Exchange Rules of the listing Exchange.
B.

Reserved

Cc.
Class

(1) The term “class” when applied to credit default basket options means all
credit default basket options having the same basket of reference entities, reference obligations,
credit event(s), and reporting authority.

Credit Default Basket Options

(2) The term “credit default basket option” means an option that is based on a
basket comprised of at least two reference entities and that is either a “multiple payout credit

default basket option” or a “single payout credit default basket option.” A “multiple payout

' This entire Article is proposed to be added. For ease of review, it is not underlined.
-3-



File No. SR-OCC-2007-06
Page 28 of 29
Item 9. Exhibits
Exhibit 1. Completed Notice of Proposed Rule Change for publication in the
Federal Register.
Exhibit 5. Text of the OCC By-Laws and Rules as amended by File No. SR-
OCC-2007-06 (this filing), if File No. SR-OCC-2007-01, as amended, is not approved before this

filing.



File No. SR-OCC-2007-06
Page 12 of 29

basket option may be assigned an exercise notice once, and only once, with respect to such
option,

Section 2A of this Article replaces paragraphs (a) and (b) of Section 9 of Article VI of the By-
Laws.

Adjustments of Credit Default Options_and Credit Default Basket Options

SECTION 3. The listing Exchange is vested with complete discretionary
authority to confirm adjustment events and make adjustments to credit default options and credit
default basket options in accordance with Exchange Rules, as they are interpreted by the
Exchange. Adjustment determinations shall be reported to the Corporation by the Exchange.
Every adjustment determination by the Exchange will be within its sole discretion and shall be
conclusive and binding on all holders and writers and not subject to review.. The Corporation
shall not be responsible for any adjustment determination by the Exchange.

[Section 3 of this Article replaces Section 11 and 11A of Article VI of the By-Laws.]
Determination of Occurrence of Credit Event

SECTION 4. A class of credit default options will be exercised automatically,
without any action on the part of the holders, if a credit event confirmation is received by the
Corporation at any time prior to the expiration time on the expiration date for the class. A class

of credit default basket options will be exercised automatically, without any action on the part of
the holders, if.a credit event confirmation is received by the Corporation with respect to any

reference entity for such class of options at any time prior to the expiration time on the expiration
date for the class of options. The reporting authority will confirm credit events in accordance

with Exchange Rules, as they are interpreted by the reporting authority and reported to the
Corporation by the reporting authority. Every credit event confirmation will be within the sole
discretion of the reporting authority and shall be conclusive and binding on all holders and
writers and not subject to review. The Corporation will not be responsible for any credit event
determination made by the reporting authority.



(b) On each exercise settlement date for credit default options, at or before such
time as the Corporation may specify, the Corporation shall:

(1) Determine, as to each account of each Clearing Member, the number
of exercised and assigned option contracts of each series of credit default basket options for
which the current business day is the exercise settlement date.

(2) Net the exercise settlement amounts to be paid by the Clearing
Member against the exercise settlement amounts to be paid to the Clearing Member to obtain a
single net settlement amount for credit default basket option exercises with respect to each
account of each Clearing Member.

(3) Make available to each Clearing Member a report showing the results
of the netting described herein.

(c) At or before 9:00 A.M. Central Time (10:00 A.M. Eastern Time) on each
exercise settlement date for credit default basket options, each Clearing Member shall be
obligated to pay to the Corporation any net settlement amount in any account of such Clearing
Member shown to be due to the Corporation on the report referred to in paragraph (b) of this
Rule for such day, and the Corporation shall be authorized to withdraw from the Clearing
Member’s bank account established in respect of such account an amount equal to such net
settlement amount, provided that the Corporation may, but is not required to, offset against any
such net settlement amount any credit balance which may be due from the Corporation to the
Clearing Member in the same or any other account.

(d) At or before 10:00 A.M. Central Time (11:00 A.M. Eastern Time) on each
exercise settlement date for credit default basket options, the Corporation shall be obligated to
pay to the Clearing Member (provided the Clearing Member has deposited all margin required to
be deposited pursuant to Chapter VI of the Rules and has deposited the full amount of any net
daily premium due to the Corporation under Rule 502) the net settlement amount in any account
shown to be due from the Corporation to such Clearing Member on the report referred to in
paragraph (b) of this Rule for such day.

(e) Solely for purposes of Rule 601, exercised and assigned credit default basket
options shall be deemed settled as of the opening of business on the exercise settlement date. No
margin shall be required and no margin credit shall be given in respect of such options on such
date.

[Rule 1504 replaces Chapter IX of the Rules and supplements Rules 502 and 607.]
Suspension of Clearing Members - Exercised Contracts
RULE 1505. Exercised credit default basket options to which a suspended
Clearing Member is a party (either as the Exercising Clearing Member or as the Assigned

Clearing Member) shall be settled in accordance with Rule 1504 provided that the net settlement

-ll-



File No. SR-OCC-2007-06
Page 15 of 29

Automatic Exercise of Credit Default Options and Credit Default Basket Options

RULE 1501. (a) In the case of a credit default option, a Clearing Member shall
automatically be deemed to have exercised such option on any business day on which a credit
event confirmation is received by the Corporation before the credit event confirmation deadline.
A credit event confirmation received after such deadline shall be deemed to have been received
by the Corporation on the following business day; provided, however, that a credit event
confirmation received after the credit event confirmation deadline on the business day before the
last scheduled trading day and before the expiration time on the expiration date will be deemed to
have been received on the expiration date. Ifa credit event confirmation is received after the
credit event confirmation deadline on the expiration date and before the expiration time, the
Corporation may extend the exercise settlement date pursuant to Rule 1503(c).

In the case of a credit default basket option, a Clearing Member shall
automatically be deemed to have exercised such option on any business day on which a credit
event confirmation is received by the Corporation with respect to a particular reference entity
before the credit event confirmation deadline. A credit event confirmation received after such
deadline shall be deemed to have been received by the Corporation on the following business
day; provided, however, that a credit event confirmation received after the credit event
confirmation deadline on the business day before the last scheduled trading day and before the
expiration time on the expiration date will be deemed to have been received on the expiration
date. Ifa credit event confirmation is received after the credit event confirmation deadline on the
expiration date and before the expiration time, the Corporation may extend the exercise
settlement date pursuant to Rule 1503(c). A multiple-payout credit default basket option shall be
deemed to be exercised each time a credit event is confirmed in accordance with this paragraph
(b) with respect to a different reference entity: provided, however, that a credit event may be
confirmed only once with respect to any single reference entity. A single-payout credit default

basket option will be deemed to be exercised only the first time that a credit event is confirmed in
accordance with this paragraph (b) with respect to a reference entity and cannot be exercised with

respect to any other reference entity thereafter.

(Rule 1501 supplements Rule 805 and replaces Rule 802.]
Assignment and Allocation of Credit Default Option Exercises
RULE 1502. Following the automatic exercise of credit default option contracts

or credit default basket option contracts in any series, the exercises shall be assigned and
allocated to all open short positions in such series of options. The Corporation shall make