Document ID: SEC-2007-0626-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Options Clearing Corp.
Posted Date: 2007-05-03T04:00Z

[Federal Register: May 3, 2007 (Volume 72, Number 85)]
[Notices]               
[Page 24648-24650]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03my07-111]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55681; File No. SR-OCC-2007-03]

 
Self-Regulatory Organizations; the Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to Amendment No. 5 of the Restated Participant Exchange 
Agreement

April 27, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ notice is hereby given that on March 13, 2007, 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 substantially 
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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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

    The proposed rule change would amend the Restated Participant 
Exchange Agreement (``RPEA'') between and among OCC and its six 
participant exchanges, which are the American Stock Exchange LLC, the 
Boston Stock Exchange, Inc., the Chicago Board Options Exchange, Inc., 
the International Securities Exchange, LLC (``ISE''), NYSE Arca, Inc., 
and the Philadelphia Stock Exchange, Inc.

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

    The proposed rule change amends Sections 2(g) and 23 of the RPEA 
that obligates the participant exchanges to indemnify OCC against 
specified losses incurred in connection with the introduction of new 
products.
1. Background
    New derivative products pose a variety of legal risks to OCC. While 
OCC generally declines to clear a product if it believes that there are 
valid concerns as to the product's legality, there can be no assurance 
that a product's legality will not be later challenged. Litigating such 
matters can be expensive, and an adverse outcome or settlement could 
result in substantial liabilities to OCC.

[[Page 24649]]

    New products sometimes raise intellectual property (``IP'') issues. 
For example, in January 2005 when the ISE proposed to trade unlicensed 
options on SPDRs, Standard & Poor's parent company, the McGraw-Hill 
Companies, sued ISE and OCC asserting that a license was required not 
only to trade options on a proprietary index but also options on an 
exchange trade fund (``ETF'') based on a proprietary index.\4\ In May 
2005, when ISE proposed to trade unlicensed options on DIAMONDS, Dow 
Jones & Company filed a similar action against ISE and OCC.\5\ (The two 
lawsuits were later consolidated and eventually dismissed by court 
order, which order was upheld on appeal.) \6\ More recently, ISE and 
OCC were sued by the Chicago Board Options Exchange, Incorporated 
(``CBOE'') and two co-plaintiffs that asserted that ISE had proposed to 
trade unlicensed options on the S&P 500 Index and the Dow Jones 
Industrial Average in violation of exclusive license arrangement 
between CBOE and each of its co-plaintiffs.\7\
---------------------------------------------------------------------------

    \4\ The McGraw-Hill Companies, Inc. v. International Securities 
Exchange, Inc. and The Options Clearing Corporation, 05 Civ. 112 
(HB) (U.S.D.C. S.D.N.Y.) In consideration of OCC's agreeing to clear 
unlicensed SPDR options, ISE agreed to indemnify OCC against any 
resulting liabilities or expenses.
    \5\ Dow Jones & Company, Inc. v. International Securities 
Exchange, Inc. and The Options Clearing Corporation, 05 CV 4954 
(U.S.D.C. S.D.N.Y.) As in the SPDR case, id., ISE agreed to 
indemnify OCC against any resulting liabilities or expenses.
    \6\ Dow Jones & Co. v. International Securities Exchange, Inc., 
451 F.3d 295 (2d Cir. 2006).
    \7\ Chicago Board Options Exchange, Incorporated, et al v. 
International Securities Exchange, LLC and The Options Clearing 
Corporation, 06 CH 24798, Circuit Court of Cook County, Ill., 
Chancery Division.
---------------------------------------------------------------------------

    The current RPEA between and among OCC and the six options 
exchanges obligates the exchanges to indemnify OCC against specified 
losses (e.g., losses resulting from an exchange's violation of the Act 
or the RPEA or failure to make adequate disclosure regarding a product 
that it trades). However, the current RPEA does not generally obligate 
the exchanges to indemnify OCC against losses resulting from a 
product's illegality or against IP liability.\8\
---------------------------------------------------------------------------

    \8\ OCC's clearing agreement for futures products, which was 
drafted more recently than the RPEA, contains broader 
indemnification provisions. It obligates the futures exchange to 
indemnify OCC against losses resulting from the exchange's violation 
of ``any law or governmental regulation'' and contains an express 
indemnity for IP liability.
---------------------------------------------------------------------------

2. Discussion
    OCC is not obligated to clear a product if doing so would be 
illegal or would violate the IP rights of others.\9\ However, legal 
issues are not always identifiable in advance. For example, claims that 
a new product violates IP rights of third parties may not surface until 
after the product is already trading. Even when an issue is identified 
in advance, OCC's assessment of its seriousness may be erroneous.
---------------------------------------------------------------------------

    \9\ Section 3 of the RPEA provides that if a proposed underlying 
interest does not fall within certain specified categories, OCC 
cannot be required to clear options on it without the approval of 
its Board. Even when the interest does fall within the specified 
categories (e.g., a securities index), OCC could not be required to 
clear options on it if doing so would be unlawful.
---------------------------------------------------------------------------

    For these reasons, no matter how carefully OCC analyzes new 
products, there will often be some legal risk. To mitigate this risk, 
OCC and its participant exchanges are amending the RPEA to obligate an 
exchange that introduces a new product to provide indemnification 
similar to that required of futures exchanges for which OCC provides 
clearing services.\10\ The terms of the amendment reflect the agreement 
of each participant exchange to severally, and not jointly, indemnify 
OCC and specified affiliates against losses and expenses incurred in 
connection with any action based on any options claim (i.e., a claim 
that the exchange does not have the right to trade an option or that 
the trading of such option by the exchange, that the issuance of such 
option by OCC or that the clearance and settlement of trades therein or 
exercises thereof by OCC would violate the IP or other rights of a 
third party).\11\ In addition, the amendment redesignates and makes 
certain technical changes in preexisting indemnification 
provisions.\12\
---------------------------------------------------------------------------

    \10\ See e.g., Filings No. SR-OCC-2006-18 (futures clearing 
agreement with PBOT) and 2003-06 (futures clearing agreement with 
CFE).
    \11\ New Sections 23(c) through (g) of the RPEA.
    \12\ See Section 1 of Amendment No. 5 and redesignated Sections 
23(c) and (h) of the RPEA.
---------------------------------------------------------------------------

    OCC believes that the proposed change is consistent with Section 
17A of the Act of 1934 and the rules promulgated thereunder because it 
reduces the legal exposure borne by OCC in connection with issuing and 
clearing new derivative products introduced by its participant 
exchanges and thereby strengthening OCC's ability to perform its duties 
as a registered clearing agency. OCC further states that the proposed 
change contributes to the safeguarding of securities and funds in the 
custody or control of OCC and that the proposed rule change is not 
inconsistent with the existing rules of OCC, including any other 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

    OCC has not solicited or received written comments relating 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)(iii) of the Act \13\ and Rule 19b-4(f)(4) \14\ thereunder 
because it effects a change in an existing OCC service that does not 
adversely affect the safeguarding of securities or funds in OCC's 
custody or control or for which it is responsible and does not 
significantly affect the respective rights or obligations of OCC or 
persons using the service. At any time within 60 days of the filing of 
the proposed rule change, the Commission may summarily abrogate such 
rule 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.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \14\ 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 No. SR-OCC-2007-03 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 No. SR-OCC-2007-03. This file 
number

[[Page 24650]]

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 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-
2007-03 and should be submitted on or before May 24, 2007.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-8429 Filed 5-2-07; 8:45 am]

BILLING CODE 8010-01-P