Document ID: SEC-2009-0471-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Flexibly Structured Options
Posted Date: 2009-04-07T04:00Z

[Federal Register: April 7, 2009 (Volume 74, Number 65)]
[Notices]               
[Page 15794-15795]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07ap09-129]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59675; File No. SR-OCC-2009-05]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Flexibly Structured Options

April 1, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ notice is hereby given that on March 19, 2009, The Options 
Clearing Corporation (``OCC'') filed with the Securities and Exchange 
Commission the proposed rule change as described in Items I, II, and 
III below, which Items have been prepared primarily by OCC. OCC filed 
the proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the 
Act \2\ and Rule 19b-4(f)(4) thereunder \3\ so that the proposal was 
effective upon filing with the Commission. 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. 78s(b)(1).
    \2\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \3\ 17 CFR 240.19b-4(f)(4).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The proposed rule change will amend OCC's By-Laws in order to clear 
and settle flexibly structured options traded on the Chicago Board 
Options Exchange (``CBOE'').

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.

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

    Flexibly structured options are options that give investors the 
ability to customize basic option features including size, expiration 
date, exercise style, and certain exercise prices. Currently, options 
exchanges generally do not permit flexibly structured options to be 
customized to expire on the same expiration date as any series of non-
flexibly structured options that are listed for trading.\4\ However, 
pursuant to a recent CBOE rule change, CBOE eliminated this restriction 
so that the parties to a flexibly structured option transaction can 
choose an expiration date that coincides with that of a series of non-
flexibly structured options.\5\ As a result of eliminating the 
expiration date restriction, it is now possible for new flexibly 
structured options to become fungible with a series of non-flexibly 
structured options that are subsequently listed for trading. Thus, CBOE 
now permits flexibly structured options to be traded before identical 
non-flexibly structured options are listed for trading. Once an option 
series is listed on CBOE for trading as a non-flexibly structured 
option series, (i) all existing flexibly structured options having 
identical terms as the non-flexibly structured option series will be 
fully fungible with options in such series and (ii) any further trading 
in such series would be as non-flexibly structured options. As an 
exception to the foregoing, flexibly structured options will not become 
fungible with subsequently-introduced non-flexibly structured quarterly 
options or short term options.
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    \4\ There are exceptions to this general prohibition. Subject to 
certain aggregation requirements for cash-settled options, CBOE 
permits flexibly structured options to expire on the same day as 
non-flexibly structured quarterly options and non-flexibly 
structured weekly options. Non-flexibly structured weekly options 
are called ``short term options'' in OCC's By-Laws and Rules. CBOE 
Rules 24A.7(d) and 24B.7(d).
    \5\ Securities Exchange Act Release No. 59417 (Feb. 18, 2009), 
74 FR 8591 (Feb. 25, 2009) [SR-CBOE-2008-115].
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    In order to clear and settle flexibly structured options traded on 
CBOE in a manner that is consistent with CBOE's rules, OCC will change 
the definition of ``flexibly structured option'' in Article I of its 
By-Laws to clarify that an option will be classified as a flexibly 
structured option only if its variable terms do not correspond to the 
variable terms of any series of non-flexibly structured options listed 
for trading other than a series of quarterly options or short term 
options. Furthermore, existing flexibly structured options will be 
fungible with options in a subsequently listed non-flexibly structured 
option series other than quarterly options or short term options that 
have identical variable terms and will not be classified as flexibly 
structured options. The definition of ``flexibly structured option'' in 
Article XVII, Section 1 of OCC's By-Laws will be deleted because such 
definition is redundant. OCC will also amend the definition of 
``variable terms'' in Article I of the By-Laws to clarify that the 
expiration date is a variable term for all types of options. Finally, 
other parts of the definition will also be revised to group together 
variable terms of option contracts and variable terms of futures 
contracts.
    Prior to this rule change, OCC's rules provided that an expiring 
flexibly structured index option with an exercise settlement amount of 
$1.00 or more was automatically exercised on its expiration date. In 
comparison, an expiring non-flexibly structured index option with an 
exercise settlement amount of $1.00 or more except quarterly options or 
short term options was subject to the ``exercise by exception'' 
procedures under which the option will be exercised on its expiration 
date if the option holder does not give contrary exercise instructions. 
However, as described above, flexibly

[[Page 15795]]

structured options that become fungible with non-flexibly structured 
options will cease to be classified as flexibly structured options. 
Therefore, such flexibly structured options will cease to be subject to 
automatic exercise at expiration and will instead be subject to 
exercise by exception like the non-flexibly structured options with 
which they have become fungible.
    OCC believes that the proposed changes to OCC's By-Laws and Rules 
are consistent with the purposes and requirements of Section 17A of the 
Act \6\ because they are designed to promote the prompt and accurate 
clearance and settlement of transactions in, including exercises of, 
flexibly structured 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 accurate clearance and settlement of 
such transactions, and, in general, to protect investors and the public 
interest. It accomplishes these purposes by maintaining consistency 
between OCC's By-Laws and Rules and CBOE's rules as applied to the 
clearance and settlement of flexibly structured options. The proposed 
rule change is not inconsistent with the existing By-Laws and Rules of 
OCC, including any rules proposed to be amended.
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    \6\ 15 U.S.C. 78q-1.
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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.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    OCC has not solicited or received written comments with respect to 
the proposed rule change. OCC will notify the Commission of any written 
comments it receives.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \7\ and Rule 19b-4(f) thereunder because the 
proposed rule effects a change in an existing OCC service that (i) does 
not adversely affect the safeguarding of securities or funds in OCC's 
custody or control or for which OCC is responsible and (ii) does not 
significantly affect OCC's respective rights or obligations or persons 
using the service. At any time within 60 days of the filing of the 
proposed rule change, the Commission may summarily abrogated such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \7\ 15 U.S.C. 78a(b)(3)(A).
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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 Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comment@sec.gov. Please include 
File No. SR-OCC-2009-05 on the subject line.

Paper Comments

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

All submissions should refer to File No. SR-OCC-2009-05. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. to 3 p.m. Copies of such filing also will be available for 
inspection and copying at OCC's principal office and on OCC's Web site 
at http://www.theocc.com/publications/rules/proposed_changes/
proposed_changes.jsp. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File No. SR-
OCC-2009-05 and should be submitted on or before April 28, 2009.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-7774 Filed 4-6-09; 8:45 am]

BILLING CODE 8010-01-P