Document ID: SEC-2006-1068-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Options Clearing Corp.
Posted Date: 2006-08-18T04:00Z

[Federal Register: August 18, 2006 (Volume 71, Number 160)]
[Notices]               
[Page 47854-47856]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18au06-137]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54305; File No. SR-OCC-2006-11]

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

 August 11, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 23, 2006, 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) 
of the Act \2\ whereby 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

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

    The proposed rule change would amend OCC's By-Laws and Rules to 
accommodate ``quarterly options'' (i.e., a series of options or index 
options that expires on the last business day of the calendar quarter) 
which have been proposed for trading by the International Securities 
Exchange (``ISE'').

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.\3\
---------------------------------------------------------------------------

    \3\ The Commission has modified parts of these statements.
---------------------------------------------------------------------------

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

    Quarterly options in general have the same terms as conventional 
options

[[Page 47855]]

except that (a) quarterly options expire on the last business day of a 
calendar quarter and (b) all quarterly index options would be settled 
based on the level of the underlying index at the close on the day of 
exercise (``P.M. Settled'') rather than the level of the index at the 
opening on that day (``A.M. Settled''). In addition, certain 
modifications in exercise procedures are necessary to accommodate the 
business day expiration of quarterly options.
    Because of concerns with quoting capacity, ISE filed and the 
Commission has approved a proposed rule change that allows ISE to list 
quarterly options under a pilot program that is limited both in 
duration and in the number of classes of quarterly options that may 
trade.\4\ Specifically, for an initial one-year period following the 
first trade date (``Pilot Period'') ISE would list series of quarterly 
options in (a) up to five options classes already listed on ISE that 
are either (i) index options or (ii) options on exchange traded funds 
and (b) options classes that are selected by any other exchanges that 
list quarterly options under a similar pilot program. If ISE decides to 
continue to list quarterly options at the end of the Pilot Period, ISE 
would have to file an additional rule filing with the Commission as 
well as a pilot program report analyzing a variety of data, including 
the impact of the pilot program on the capacity of ISE, the Options 
Price Reporting Authority, and market data vendors. If ISE decides to 
cease listing quarterly options at the end of the Pilot Period or if 
the Commission were to refuse to approve a rule change permitting 
quarterly options to continue to trade, ISE would not list any 
additional series and would permit only closing transactions in open 
series.
---------------------------------------------------------------------------

    \4\ Securities Exchange Act Release Nos. 53857 (June 1, 2006), 
71 FR 31246 (May 24, 2006) and 54113 (July 7, 2006), 71 FR 39694 
(July 13, 2006) [File No. SR-ISE-2006-24].
---------------------------------------------------------------------------

    ISE notes in its filing that there is a risk of confusion with 
respect to quarterly options series and other options in the same 
class. The risk of confusion is lessened with respect to conventional 
options because those options cannot expire in the same week as 
quarterly options. However, short term options, which are one-week 
options that normally are listed on a Friday and expire on the next 
following Friday, could expire on the same day as quarterly options. In 
order to lessen the likelihood of confusion with respect to short term 
options and quarterly options in the same class, ISE will not list a 
series of short term options if that series would expire on the same 
date as a series of quarterly options in the same class.\5\ Because of 
their differing expiration dates, quarterly options are not be fungible 
with conventional options or short term options.
---------------------------------------------------------------------------

    \5\ Supplementary Material .02(b) to ISE Rule 2009.
---------------------------------------------------------------------------

    Because quarterly options differ from conventional options and 
short term options only in their expiration date, the P.M. settlement 
feature of quarterly index options, and other modifications relating to 
business day expiration, quarterly options can be cleared and settled 
by OCC with relatively minor revisions to OCC's By-Laws and Rules. A 
new defined term for ``quarterly options'' is added to Article I of the 
By-Laws, and the definition of ``expiration date'' in that Article is 
amended to clarify that quarterly options do not expire on the same 
date as conventional options. Rules 801 and 805 are amended to include 
quarterly options among the exceptions to the general rule that options 
may not be exercised on the business day before their expiration date. 
Rules 801 and 1804 are amended to provide for the automatic exercise of 
quarterly index options when those options are in-the-money by a 
specified amount. Finally, a reference in Article XVII to ``quarterly 
index expiration options'' or ``QIX,'' which are no longer traded, has 
been removed to avoid confusion. A conforming reference to short term 
options has been added to Rule 801(b) to provide clarity that such 
options on indexes are subject to automatic exercise, as presently 
provided in Rule 1804(c).
    OCC believes that the proposed rule change is consistent with the 
purposes and requirements of Section 17A of the Act because it is 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions, to foster cooperation and coordination with 
persons engaged in the clearance and settlement of securities 
transactions, to remove impediments to and perfect the mechanism of a 
national system for the prompt and accurate clearance and settlement of 
securities transactions, and, in general, to protect investors and the 
public interest. The proposed changes promote these objectives by 
applying to quarterly options the same basic governing principles that 
are applicable to other classes of options. The proposed changes are 
not inconsistent with the existing By-Laws and rules of OCC, including 
those 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 \6\ and Rule 19b-4(f)(4) \7\ promulgated 
thereunder because the proposal effects a change in an existing service 
of OCC that (A) does not adversely affect the safeguarding of 
securities or funds in the custody or control of OCC or for which it is 
responsible and (B) does not significantly affect the respective rights 
or obligations of OCC 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.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \7\ 17 CFR 240.19b-4(f)(4).
---------------------------------------------------------------------------

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-2006-11 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-2006-11. This 
file

[[Page 47856]]

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, 100 F Street, 
NE., Washington, DC 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of OCC and on OCC's 
Web site at http://www.optionsclearing.com.

    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-2006-11 
and should be submitted on or before September 8, 2006.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
 [FR Doc. E6-13617 Filed 8-17-06; 8:45 am]

BILLING CODE 8010-01-P