Document ID: SEC-2018-1747-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2018-11-16T05:00Z

[Federal Register Volume 83, Number 222 (Friday, November 16, 2018)]
[Notices]
[Pages 57778-57780]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24988]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84565; File No. SR-ODD-2018-01]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of Accelerated Delivery of Supplement to the 
Options Disclosure Document Reflecting the Inclusion of Disclosure 
Regarding Foreign Currency Index Options and Implied Volatility Index 
Options, Certain Contract Adjustment Disclosures, and T+2 Settlement

November 9, 2018.
    On October 24, 2018, the Options Clearing Corporation (``OCC'') 
submitted to the Securities and Exchange Commission (``Commission''), 
pursuant to Rule 9b-1 under the Securities Exchange Act of 1934 
(``Act''),\1\ five preliminary copies of a supplement to amend the 
options disclosure document (``ODD'') to include disclosure regarding 
foreign currency index options and implied volatility index options, 
certain contract adjustment disclosures, and T+2 settlement (``October 
2018 Supplement'').\2\ On October 25, 2018,

[[Page 57779]]

the Commission received from the OCC five definitive copies of the 
October 2018 Supplement.\3\
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    \1\ 17 CFR 240.9b-1.
    \2\ See email from Marcie Pomper, Corporate Assistant, OCC, to 
Sharon Lawson and David Michehl, Division of Trading and Markets 
(``Division''), Commission, dated October 24, 2018.
    \3\ See letter from Karen Bilek, Vice President and Counsel, 
OCC, to Sharon Lawson, Senior Special Counsel, Division, Commission, 
dated October 24, 2018. The October 2018 Supplement also makes 
certain technical non-substantive amendments to the ODD.
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    The October 2018 Supplement consists of three parts. Part I 
addresses foreign currency index options and implied volatility index 
options. It amends and restates the April 2015 Supplement \4\ in its 
entirety and includes additional changes to take into account a 
recently approved proposed rule change allowing the listing of a new 
implied volatility index option.\5\ The April 2015 Supplement was never 
distributed to options customers. The OCC issued an information memo on 
May 22, 2015 \6\ to inform its clearing members and investors that the 
April 2015 Supplement would be amended and replaced in its entirety in 
order to accommodate other implied volatility index options proposed 
for trading by a different participant options exchange. Part I of the 
October 2018 Supplement serves as that replacement. Part II of the 
October 2018 Supplement addresses additional contract adjustment 
disclosures. Part III of the October 2018 Supplement provides for the 
change in settlement from T+3 to T+2.
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    \4\ https://www.sec.gov/rules/sro/occ/occarchive/occarchive2015.shtml#odd.
    \5\ See infra note 10.
    \6\ See OCC Information Memo No. 36788 available at https://www.theocc.com.
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    The October 2018 Supplement accommodates the introduction of 
options on foreign currency indexes and implied volatility options 
whose exercise settlement value is calculated differently than that of 
existing implied volatility options.
    Currently, the ODD states that indexes that may underlie options 
include stock indexes, variability indexes, strategy-based indexes, 
dividend indexes, and relative performance indexes. In April 2013, the 
Commission approved a proposed rule change by the International 
Securities Exchange, LLC (``ISE'') to list options on the Dow Jones 
FXCM Dollar Index.\7\ The October 2018 Supplement amends disclosures in 
the ODD to add foreign currency indexes as a type of index that can 
underlie an option, in order to accommodate the trading of options on 
the Dow Jones FXCM Dollar Index and similarly structured foreign 
currency indexes.\8\ Specifically, the October 2018 Supplement adds new 
disclosure regarding the characteristics of foreign currency index 
options and their special risks. In addition, the supplement adds an 
example of the calculation of a foreign currency index. The supplement 
also amends disclosures in the ODD to accommodate the fact that 
components of foreign currency indexes are foreign currencies rather 
than securities (e.g., by referring to ``components'' of an index 
rather than ``constituent securities'' of an index).
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    \7\ See Securities Exchange Act Release No. 69365 (April 11, 
2013), 78 FR 23321 (April 18, 2013) (SR-ISE-2013-14).
    \8\ The October 2018 Supplement is intended to accommodate the 
trading of options on foreign currency indexes that reflect the 
value of one currency, often the U.S. dollar, against a basket of 
foreign currencies. Foreign currency indexes are calculated using 
exchange rates.
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    The ODD currently contains general disclosures on the 
characteristics and risks of trading standardized options on 
variability indexes. The ODD states that variability indexes are 
indexes intended to measure the implied volatility, or the realized 
variance or volatility, of specified stock indexes or specified 
securities. In January 2014, the Commission approved a proposed rule 
change by the ISE to list options on the Nations VolDex Index.\9\ In 
October 2018, the Commission approved a proposed rule change by the 
Miami International Securities Exchange, LLC to list options on the 
SPIKES Index.\10\
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    \9\ See Securities Exchange Act Release No. 71365 (January 22, 
2014), 79 FR 4512 (January 28, 2014) (SR-ISE-2013-42).
    \10\ See Securities Exchange Act Release No. 84417 (October 12, 
2018), 83 FR 52865 (October 18, 2018) (SR-MIAX-2018-14).
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    The October 2018 Supplement amends disclosures in the ODD regarding 
implied volatility index options to accommodate the listing of options 
on the Nations VolDex Index, the SPIKES Index and other similarly 
structured implied volatility indexes.\11\ Specifically, the October 
2018 Supplement amends the discussion of implied volatility index 
options by including disclosure regarding exercise settlement value 
calculations that use the mid-point of the bid and offer of the index 
components or actual trade prices and the risks of the different 
calculation methodologies. The supplement also provides disclosure 
regarding the types of options that can be used to calculate implied 
volatility indexes (i.e., out-of-the-money option series and 
hypothetical at-the-money option series; options with certain 
expiration months or weeks; number of days the options have until 
expiration).
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    \11\ The exercise settlement value for the Nations VolDex Index 
is calculated using the mid-point of the NBBO for the component 
options of the index while the SPIKES Index uses a ``price 
dragging'' technique when determining the ongoing price for each 
individual option used in the calculation of the index. Most other 
index settlement values are calculated using transaction prices of 
the index components.
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    The October 2018 Supplement also amends the ODD to reflect that 
adjustments to some of the terms of options contracts, to account for 
certain events, such as certain dividend distributions or other 
corporate actions that affect the underlying security or other 
underlying interest, will be made by the OCC rather than an adjustment 
panel of the Securities Committee.\12\ Adjustment determinations were 
previously made by adjustment panels that consisted of two 
representatives of each U.S. options market on which a series is traded 
and one representative of the OCC, who voted only to break a tie. 
Determinations as to whether to adjust outstanding options in response 
to a particular event, and, if so, in what manner, are now made solely 
by the OCC taking into consideration policies established by 
representatives of each of the U.S. options markets on which the 
effected option trades and a representative of OCC. Panels, however, 
consisting of representatives of each of the U.S. options markets on 
which the affected series of options is traded and one representative 
of the OCC retain their function and authority under other provisions 
of the OCC's rules to fix exercise settlement amounts and cash 
settlement amounts in certain circumstances. The Supplement amends 
references to these panels, eliminating potential confusion with the 
Securities Committee, which will continue to determine the 
appropriateness of adopting prospective policy changes or 
clarifications. The October 2018 Supplement includes additional 
clarification and examples regarding how certain adjustments may affect 
an option's value and deletes certain obsolete language.
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    \12\ See Securities Exchange Act Release No. 69977 (July 11, 
2013), 78 FR 42815 (July 17, 2013) (SR-OCC-2013-05).
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    Finally, the October 2018 Supplement makes changes necessary to 
reflect that the regular exercise settlement date for physical delivery 
stock options has moved from the third business date following exercise 
(T+3) to the second business date following exercise (T+2).
    The October 2018 Supplement is intended to be read in conjunction 
with the more general ODD, which discusses the characteristics and 
risks of options generally.\13\
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    \13\ The Commission notes that the options markets must continue 
to ensure that the ODD is in compliance with the requirements of 
Rule 9b-1(b)(2)(i) under the Act, 17 CFR 240.9b-1(b)(2)(i), 
including when changes regarding foreign currency index options and 
implied volatility index options are made in the future. Any future 
changes to the rules of the options markets concerning foreign 
currency index options and implied volatility index options would 
need to be submitted to the Commission under Section 19(b) of the 
Act. 15 U.S.C. 78s(b).

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[[Page 57780]]

    Rule 9b-1(b)(2)(i) under the Act \14\ provides that an options 
market must file five copies of an amendment or supplement to the ODD 
with the Commission at least 30 days prior to the date definitive 
copies are furnished to customers, unless the Commission determines 
otherwise, having due regard to the adequacy of the information 
disclosed and the public interest and protection of investors.\15\ In 
addition, five copies of the definitive ODD, as amended or 
supplemented, must be filed with the Commission not later than the date 
the amendment or supplement, or the amended ODD, is furnished to 
customers. The Commission has reviewed the October 2018 Supplement, and 
the amendments to the ODD contained therein, and finds that, having due 
regard to the adequacy of the information disclosed and the public 
interest and protection of investors, the supplement may be furnished 
to customers as of the date of this order.
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    \14\ 17 CFR 240.9b-1(b)(2)(i).
    \15\ This provision permits the Commission to shorten or 
lengthen the period of time which must elapse before definitive 
copies may be furnished to customers.
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    It is therefore ordered, pursuant to Rule 9b-1 under the Act,\16\ 
that definitive copies of the October 2018 Supplement to the ODD (SR-
ODD-2018-01), reflecting the inclusion of disclosure regarding foreign 
currency index options and implied volatility index options, certain 
contract adjustment disclosures, and T+2 settlement, may be furnished 
to customers as of the date of this order.
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    \16\ 17 CFR 240.9b-1.
    \17\ 17 CFR 200.30-3(a)(39).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-24988 Filed 11-15-18; 8:45 am]
 BILLING CODE 8011-01-P