Document ID: SEC-2009-0481-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Commodity Options
Posted Date: 2009-04-07T04:00Z

[Federal Register: April 7, 2009 (Volume 74, Number 65)]
[Notices]               
[Page 15789-15792]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07ap09-127]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59664; File No. SR-OCC-2009-04]

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

March 31, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on March 20, 2009, 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. OCC filed the proposed rule change pursuant to 
Section 19(b)(3)(A)(iii) of the Act \2\ and Rule 19b-4(f)(4) \3\ 
thereunder 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-1(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 Substance 
of the Proposed Rule Change

    The proposed rule change would revise OCC's By-Laws and Rules to 
accommodate conventional cash-settled commodity options, binary 
commodity options, and event options.

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.\4\
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    \4\ The Commission has modified parts of these statements.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The primary purpose of the proposed rule change is to revise OCC's 
By-Laws and Rules to accommodate conventional

[[Page 15790]]

cash-settled commodity options, binary commodity options, and event 
options. A general description of each option product follows below. 
Additionally, OCC is proposing to simplify the By-Laws and Rules by 
amending the definition of the term ``Exchange'' to refer to any 
exchange, futures market, security futures market, or international 
market for which OCC clears transactions and by revising the language 
of numerous provisions of its By-Laws and Rules to reflect this amended 
definition.
Conventional Cash-Settled Commodity Options
    Conventional cash-settled commodity options are cash-settled 
options on the spot price of physical commodities such as precious 
metals, energy-related commodities such as oil or natural gas, or other 
physical commodities. Conventional cash-settled commodity options will 
settle upon exercise based on some specified benchmark price for the 
underlying commodity. The exercise settlement amount for an in-the-
money option will be the product of the multiplier and the difference 
between the final underlying interest value and the strike price. The 
listing exchange or other reporting authority will report the final 
underlying interest value of the underlying commodity to OCC for the 
purpose of determining the exercise settlement amount.
Binary Commodity Options
    Binary commodity options are binary cash-settled options on the 
spot price of physical commodities. Binary commodity options will be 
automatically exercised and will pay a fixed exercise settlement amount 
if the spot price of the underlying commodity on the expiration date is 
greater than or equal to the specified strike price and will otherwise 
expire unexercised. Other kinds of binary commodity options may be 
structured such that call options pay only if the price of the 
underlying commodity is above and not merely equal to the underlying 
benchmark price and that put options pay if the price of the underlying 
commodity is less than or equal to the underlying benchmark price.
Event Options
    Event options are a type of binary option that pay a fixed cash 
settlement amount upon the occurrence of a specified event such as a 
positive change in U.S. gross domestic product for a particular time 
period. Event options are automatically exercised immediately upon 
confirmation of the occurrence of a defined event. The listing exchange 
or other reporting authority will monitor data reported by the official 
sources and will notify OCC when the underlying event is determined to 
have occurred. Event options may be referred to in Exchange rules as 
``capped-style'' event options but are referred to in OCC's rules 
simply as ``event options.''
    Exchange rules may also provide for ``European-style'' event 
options. An example would be a trade deficit option for which 
settlement is based upon U.S. trade deficit data. A trade deficit call 
option would pay a fixed exercise settlement amount if the trade 
deficit for a specified month is greater than or greater than or equal 
to the specified strike price, and a trade deficit put option would pay 
a fixed exercise settlement amount if the trade deficit for a specified 
month is less than or less than or equal to the specified strike price. 
In-the-money trade deficit options would be automatically exercised on 
the expiration date. ``European-style event options'' are referred to 
in OCC's rules simply as ``binary options'' because they are based on 
the level of an underlying measure or metric at a specified point in 
time rather than an event that can occur at any time during the life of 
the option.
Changes in General Terminology
    To accommodate conventional commodity options and binary commodity 
options, OCC proposes to introduce the term ``commodity option'' and to 
add references to commodity options where the By-Laws and Rules now 
refer to ``futures options'' where appropriate. The definitions of 
``Call'' and ``Put'' in Article I of the By-Laws would be amended to 
clarify their meanings with regard to futures options. In connection 
with the introduction of commodity options, the term ``underlying 
interest'' would be amended to include commodities as possible 
underlying interests. Commodity options are not ``securities.'' 
Therefore, OCC proposes to replace ``underlying security'' and 
``cleared securities'' with ``underlying interest'' and ``cleared 
contracts,'' respectively, in the definitions of certain terms related 
to options, such as ``call'' and ``opening purchase transaction.''
    OCC also proposes to simplify its By-Laws and Rules by revising the 
term ``Exchange.'' Currently, the term includes only national 
securities exchanges. Accordingly, in numerous places in the By-Laws 
and Rules, where the intended reference is to any market for which OCC 
clears transactions, the term ``Exchange'' is accompanied by 
``international market, futures market or security futures market,'' or 
a similar phase. OCC proposes to revise the definition of Exchange to 
include all such markets and to eliminate the numerous references to 
each type of market for which OCC clears transactions. The revised 
definition of Exchange will be more consistent with the definitions of 
``Exchange transaction'' and ``Exchange rules'' because the scope of 
each of these latter terms includes non-securities exchanges or markets 
for which OCC clears transactions. In addition, OCC proposes to 
introduce the term ``Securities Exchange'' to refer to national 
security exchanges. In instances in which the reference to ``Exchange'' 
in the By-Laws and Rules is necessarily limited to a specific type of 
market, such as a Securities Exchange or ``Equity Exchange'' as defined 
in the By-Laws, OCC proposes to replace the term ``Exchange'' with the 
appropriate term.
    Finally, OCC proposes to amend the definition of ``multiplier'' to 
address the use of this term in connection with cash-settled options 
other than index options.
Changes With Respect to Cash-Settled Commodity Options Generally
    Section 1 of Article XII sets forth conditions for OCC to clear 
futures and futures options for an Exchange. Because the same 
conditions would apply for OCC to clear commodity options for an 
Exchange, OCC proposes to make Section 1 applicable to commodity 
options. Rule 1303 pertains to OCC's arrangement with an associate 
clearinghouse to enable members of the associate clearinghouse to clear 
futures and futures options through the facilities of OCC. OCC proposes 
that Rule 1303 would potentially apply to all commodity options 
although the contracts to be included in any particular such 
arrangement are agreed upon by OCC and the other clearing organization 
on a case-by-case basis.
    Existing provisions in By-Law Article XII and Rule Chapter XIII 
already provide for clearance of futures options. As discussed below, 
OCC proposes to address cash-settled commodity options separately in 
other Articles of its By-Law Articles and Chapters of its Rules. The 
introductions to By-Laws Articles XII, XIV and XVII and Rules Chapters 
XIII, XV and XVIII would be amended to reflect their proposed scope.
    OCC is proposing to amend the definitions of ``Call'' and ``Put'' 
in Article I of the By-Laws to clarify their meanings with respect to 
futures options. In addition, for purposes of clarification, OCC 
proposes to update Interpretation and Policy .01 to Article VI, Section 
9 to state that general rights

[[Page 15791]]

and obligations of holders and writers of cleared contracts other than 
stock options are governed by the provisions of those Articles of the 
By-Laws pertaining to such products and not by Subsections (a) and (b) 
Section 9 of Article VI.
Changes With Respect to Event Options and Binary Commodity Options
    To accommodate event options and binary commodity options, OCC 
proposes to broaden By-Law Article XIV and Rule Chapter XV, which 
currently apply only to binary options and range options for which the 
underlying interest is a security or securities index. Credit default 
options (``CDOs'') and credit default basket options (``CDBOs'') are 
the only types of event options currently addressed by these provisions 
of the By-Laws and Rules. OCC proposes to modify the existing framework 
of rules governing CDOs and CDBOs to support clearance of event options 
in general while retaining certain definitions and provisions that are 
applicable only to CDOs and/or CDBOs.
    Article XIV of the By-Laws, which presently applies to CDOs and 
CDBOs as well as to other binary options and range options, is proposed 
to be amended to apply to the event options and other binary options 
proposed by CFE. Section 1 would be amended to add a definition of 
``event option,'' which in OCC's lexicon would be confined to binary 
options that are automatically exercised upon the occurrence of a 
specified event. CDOs and CDBOs would be defined as specific kinds of 
event options. Event options, in turn, would be a subcategory of binary 
options. Certain terms applicable to CDOs and CDBOs would be made more 
generic so as to apply to all event options. Other definitions would be 
amended to accommodate event options, and to provide that underlying 
interests for binary options and range options may include commodities. 
Other sections of Article XIV are amended to, among other things, 
specify which provisions are unique to CDOs and CDBOs and which apply 
to event options generally. Although no market has yet proposed to 
trade range options on underlying commodities, the proposed rule 
amendments are broad enough to accommodate such trading.
    Existing adjustment provisions in Section 3 of Article XIV, which 
defer entirely to the listing market to determine adjustments for CDOs 
and CDBOs, will be made to apply to all event options. This is 
appropriate because OCC anticipates that the definitions of underlying 
events and other terms of these products will be unique to the listing 
market. Existing Section 3A will apply to binary options other than 
event options and range options where the underlying interest is a 
security or an index of securities, and OCC is proposing a new Section 
3B to provide for adjustments to binary options other than event 
options and range options where the underlying interest is a commodity 
rather than a security or index of securities. Adjustments under 
Section 3B will be made by OCC rather than through an adjustment panel 
as is the case for securities products under Section 3A.
    Rules in Chapter V are being amended to provide for event options, 
other binary options and range options on underlying commodities. The 
changes intended to accommodate the new contracts govern among other 
things the automatic exercise of event options and binary options and 
exercise settlement. They also provide that binary options and event 
options on commodities that when carried for the accounts of customers, 
must be carried in the customers' segregated funds account in 
accordance with CFTC regulations.
Changes With Respect to Cash-Settled Conventional Commodity Options
    OCC proposes to provide for clearance of cash-settled conventional 
commodity options by expanding the scope of By-Law Article XVII and 
Rule Chapter XVIII, which currently cover only index options.
Article XVII
    OCC proposes to amend the definitions of numerous terms to apply to 
cash-settled options generally. Other provisions of Article VII are 
also amended to make them more generic to cash-settled options 
generally. Provisions limited to index options are retained where 
appropriate and in many cases are made applicable to options on 
commodity indexes as well as securities indexes. OCC proposes to 
substitute the term ``cash-settled option'' for the term ``index 
option'' in Article XVII, Section 2 so that it will apply to cash-
settled options generally. Section 3 of Article XVII will govern 
adjustments to cash-settled options generally. A new proposed paragraph 
(b) would address adjustments to cash-settled options overlying a 
single commodity. Under the proposed amendments, OCC rather than an 
adjustment panel will decide when and what adjustments may be necessary 
in light of various policy considerations. Existing paragraph (b), 
which governs adjustments of index options, would be renumbered as 
paragraph (c) and amended to reflect the inclusion of commodities as 
possible components of an underlying index.
    Similarly, existing Section 4 of Article XVII, which defines OCC's 
rights and obligations in situations in which the current index value 
of an index option is unavailable or otherwise determined to be 
inaccurate will be amended to expand its application to cover 
unavailability or inaccuracy of values for any underlying interest.
Chapter XVIII, Rules 1802-1806
    OCC proposes to amend Rules 1802-1806 so that they will apply to 
cash-settled options generally. The term ``cash-settled option'' would 
be substituted for the term ``index option'' and the term ``current 
interest value'' would be substituted for the term ``current index 
value'' in Rules 1802-1806. In addition, OCC proposes to amend 
paragraphs 1801(a)(1) and (a)(2) to specify the conditions under which 
Clearing Member will pay the exercise settlement to or receive the 
exercise settlement from OCC with respect to an exercised cash-settled 
option other than an index option. OCC also proposes to substitute the 
term ``cash-settled option'' for the term ``index option'' and make a 
small number of other corrections to certain defined terms in Rules 
1802, 1803, 1804, and 1805 so that they will apply to cash-settled 
options generally.
Chapter XVIII, Rules 1807
    Cash-settled commodity options will be carried in a Clearing 
Member's segregated futures account(s). Therefore, to maintain 
consistency with Rule 1104, OCC proposes to amend Rule 1807 so that the 
net settlement amount with respect to exercised cash-settled commodity 
options is paid from or credited to a suspended Clearing Member's 
Segregated Liquidating Settlement Account.
    In several other places in the By-Laws and Rules where references 
are made to index options, OCC proposes to substitute the term ``cash-
settled option'' for the term ``index option'' and the term ``current 
underlying interest value'' for the term ``current index value.''
    Finally, OCC proposes to amend the terms of Article VI, Section 2 
of the By-Laws, which concerns the initial clearing fund contribution 
of clearing members, to be consistent with the terms of Rule 1001. Rule 
1001 provides that affiliates of existing Clearing Members that become 
Clearing Members of OCC solely for the purpose of clearing transactions 
in security futures, commodity futures, and/or futures options need not 
put up an additional

[[Page 15792]]

$150,000 minimum Clearing Fund contribution. OCC would expand this 
exemption to also apply to commodity options.
    The proposed rule change is consistent with the purposes and 
requirements of Section 17A of the Act because it provides for the 
clearance of various commodity futures and options products without 
adversely affecting the prompt and accurate clearance and settlement of 
transactions in securities options, the prompt and accurate clearance 
and settlement of securities transactions, or the protection of 
securities investors and the public interest. The proposed rule change 
accomplishes this purpose by applying substantially the same rules and 
procedures to transactions in futures products that OCC applies to 
transactions in securities options. The proposed rule change is not 
inconsistent with any rules of OCC, including any rules proposed to be 
amended.

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

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

(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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(iii) of the Act \5\ and Rule 19b-4(f)(4) \6\ promulgated 
thereunder because the proposal changes effects a change in an existing 
service of a registered clearing agency that (i) does not adversely 
affect the safeguarding of securities or funds in the custody or 
control of the clearing agency or for which it is responsible and (ii) 
does not significantly affect the respective rights or obligations of 
the clearing agency or persons using the service. At any time within 
sixty days of the filing of the proposed rule change, the Commission 
may summarily abrogate 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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    \5\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \6\ 17 CFR 240.19b-4(f)(4).
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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-comments@sec.gov. Please include 
File Number SR-OCC-2009-04 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 Number SR-OCC-2009-04. 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. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of OCC. 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-2009-04 and should be 
submitted on or before April 28, 2009.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
Florence E. Harmon,
Deputy Secretary.
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    \7\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E9-7710 Filed 4-6-09; 8:45 am]

BILLING CODE 8010-01-P