[Federal Register Volume 61, Number 123 (Tuesday, June 25, 1996)]
[Notices]
[Pages 32873-32875]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16062]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37318; File No. SR-OCC-96-03]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to the Clearance 
and Settlement of Flexibly Structured Equity Options

June 18, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 30, 1996, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
primarily by OCC. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The purpose of the proposed rule change is to enable OCC to clear 
and settle flexibly structured equity options.

[[Page 32874]]

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

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
submitted by OCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of this proposed rule change is to accommodate within 
OCC's existing By-Laws and Rules the clearance and settlement of 
flexibly structured options on individual equity securities, as 
proposed for trading by the American Stock Exchange, Inc. (``AMEX''), 
the Chicago Board Options Exchange, Incorporated (``CBOE''), the 
Philadelphia Stock Exchange, Inc. (``PHLX'') and the Pacific Stock 
Exchange, Inc. (``PSE'') (collectively, ``Exchange'' or 
``Exchanges'').\3\
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    \3\ For a complete description of flexibly structured equity 
options, refer to Securities Exchange Act Release No. 36841 
(February 14, 1996), 61 FR 6666 [File Nos. SR-CBOE-95-43 and SR-PSE-
95-24] (order approving the trading of flexibly structured equity 
options by the CBOE and PSE). The AMEX and PHLX also have filed 
proposed rule changes for the trading of flexibly structured equity 
options. For a complete description of these filings, refer to 
Securities Exchange Act Release Nos. 37053 (March 29, 1996), 61 FR 
15537 [File No. SR-AMEX-95-57] (notice of filing of proposed rule 
change); and 37048 (March 29, 1996), 61 FR 15549 [File No. SR-PHLX-
96-08] (notice of filing of proposed rule change).
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    Flexibly structured equity options allow parties to each flexibly 
structured equity option trade to customize certain terms of the option 
within specified limits established by the Exchange. Specifically, for 
each flexibly structured equity option trade parties may establish the 
exercise price, the exercise style (i.e., American,\4\ European,\5\ or 
capped \6\), the cap interval in the case of capped-style options, the 
expiration date, and the option type (i.e., put or call).\7\ In 
addition to customization, flexibly structured equity option trades 
will require a minimum transaction size of 250 contracts in opening 
trades in currently unopened series and 100 contracts in the case of 
opening and most closing trades in currently open series. Flexibly 
structured equity options thus will differ from existing Exchange-
traded equity options both in terms of customization and size.
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    \4\ An American-style equity option may be exercised at any time 
prior to its expiration date.
    \5\ A European-style equity option may be exercised only during 
a specified period before the option expires.
    \6\ A capped-style equity option will be exercised automatically 
prior to expiration if the options market on which the option is 
trading determines that the value of the underlying interest at a 
specified time on a trading day ``hits the cap price'' for the 
option (i.e., when the cap price is less than or equal to the 
closing price of the underlying security for calls or when the cap 
price is greater than or equal to the closing price of the 
underlying security for puts).
    \7\ Although the rules of the Exchanges provide for capped-style 
flexibly structured equity options, the Exchanges advised OCC that 
they do not intend to provide a market in capped-style flexibly 
structured equity options at the outset. Accordingly, this proposed 
rule change does not include the rules that would be required for 
the clearance and settlement of such options. The commencement of 
trading in capped-style flexibly structured equity options will 
require that the Commission approve another proposed rule change 
filed by OCC under Section 19(b)(1) of the Act.
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    From a clearance and settlement perspective, flexibly structured 
equity options can be treated and processed like any other equity 
option in virtually all respects. While Exchange rules permit a Request 
for Quotes \8\ to specify a quote either as a dollar amount or as a 
percentage of the underlying stock price, when a trade is reported to 
OCC the option premium always will be expressed as a dollar amount. 
Therefore, when a flexibly structured equity option trade is reported 
to OCC by one of the Exchanges all of the terms of that option will 
have been established in the Exchange's report, and the terms will 
correspond to existing equity options term categories. As a result, on 
receipt of a matched trade report from an Exchange, OCC will establish 
long and short flexibly structured equity option positions in clearing 
member accounts in precisely the same way it does for existing equity 
options. Furthermore, flexibly structured equity option positions will 
exhibit virtually the same characteristics as existing equity options.
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    \8\ A Request for Quotes is the initial request suppled by the 
submitting exchange member to initiate FLEX bidding and offering.
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    Because of the similarities between existing equity options and 
flexibly structured equity options, only a few of OCC's By-Laws and 
Rules need adjustment to accommodate flexibly structured equity 
options.\9\ OCC proposes to amend Section 1 of Article I to add an all-
purpose definition of ``flexibly structured option.'' Thus, the 
definitions for ``flexibly structured option'' as set forth in Articles 
XV, XVII, and XXIII will be deleted. The definition of ``expiration 
date'' in Article I, Section 1 is being amended to make clear that 
flexibly structured equity options may expire on dates other than the 
Saturday following the third Friday of the expiration month. The 
expiration date of any such option will be the date reported to OCC by 
the Exchange, subject to such constraints on the range of possible 
expiration dates as are set forth in the rules of the Exchanges.
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    \9\ The specific changes to OCC's By-Laws and Rules are set 
forth in OCC's proposed rule change, which is available for review 
at the principal office of OCC and the Commission's Public Reference 
Room.
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    Section 11 of Article VI, regarding adjustments to equity and index 
options, will be amended to apply to the adjustment of flexibly 
structured equity and index options.\10\ OCC also is proposing to add 
Interpretation and Policy .08 to Section 11 for situations where a 
European-style flexibly structured equity option is adjusted to require 
the delivery upon exercise of a fixed amount of cash, such as would 
normally occur in the event of a merger where the underlying security 
is converted into a right to receive a fixed amount of cash. In such a 
circumstance, it is proposed that the expiration of the option will 
ordinarily be accelerated so that the option will expire on or shortly 
after the date on which the underlying stock is converted into a right 
to receive cash. Without this adjustment, the option position would 
have to be maintained until it could be exercised at its regular 
expiration even though the amount to be received on exercise has 
already been fixed. This special adjustment is being proposed to 
accommodate flexibly structured equity options because unlike existing 
equity options flexibly structured equity options may have European-
style exercise features.
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    \10\ Adjustments may be made to the number of option contracts, 
the unit of trading, the exercise price, and the underlying security 
with respect to all outstanding option contracts open for trading in 
an underlying security which is the subject of a dividend, stock 
dividend, stock distribution, stock split, reverse stock split, 
rights offering, distribution, reorganization, recapitalization, 
reclassification or similar event, or the merger, consolidation, 
dissolution, or liquidation of the issuer of the underlying 
security.
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    The only change proposed to be made to OCC's Rules is the addition 
of Interpretation and Policy .03 to Rule 805, which will clarify that 
OCC's exercise procedures as set forth in Rule 805 \11\ shall apply to 
the exercise of flexibly structured equity options. The new 
interpretation also gives OCC the flexibility, if necessary, to depart 
from regular expiration date procedures and

[[Page 32875]]

deadlines in the case of flexibly structured equity options. Such 
departures are not currently anticipated and adequate prior notice will 
be given to all clearing members.
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    \11\ OCC Rule 805 sets forth the expiration date exercise 
procedures.
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    OCC believes the proposed rule change is consistent with the 
purposes and requirements of Section 17A of the Act because the 
proposal provides for the prompt and accurate clearance and settlement 
of transactions in flexibly structured equity options and because it 
provides for the safeguarding of related securities and funds. OCC 
believes the proposed rule change meets such requirements by 
establishing a framework in which existing, reliable OCC systems, 
rules, and procedures are extended to the processing of flexibly 
structured equity options. Finally, OCC believes the proposed rule 
change will foster cooperation with persons, including OCC clearing 
members, engaged in the clearance and settlement of securities 
transactions and will thereby promote the protection of investors and 
the public interest.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change will impose any 
burden on competition.

(C) 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

    Within thirty-five 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 ninety 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 OCC consents, the Commission will:
    (a) by order approve such proposed rule change or
    (b) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
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. Sec. 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 also will be available 
for inspection and copying at the principal office of OCC. All 
submissions should refer to File No. SR-OCC-96-03 and should be 
submitted by July 16, 1996.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-16062 Filed 6-24-96; 8:45 am]
BILLING CODE 8010-01-M