Self-Regulatory Organizations; The Options Clearing Corporation; Order Granting Approval of a Proposed Rule Change Relating to Credit Default Options, 32693-32695 [E7-11370]
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Federal Register / Vol. 72, No. 113 / Wednesday, June 13, 2007 / Notices
Regulation through Nasdaq’s systems,
and Nasdaq can use such information
and supply it to the NASD, upon
request, as well. This information
includes trade reporting data, including
order time and sales data captured by
the Nasdaq system.
2. Statutory Basis
Nasdaq believes that the proposed
rule change is consistent with the
provisions of Section 6 of the Act,8 in
general, and with Section 6(b)(5) of the
Act,9 in particular, in that the proposal
is designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
Nasdaq does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, as amended.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
A. By order approve such proposed
rule change, or
B. Institute proceedings to determine
whether the proposed rule change
should be disapproved.
sroberts on PROD1PC70 with NOTICES
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, as amended, is consistent with
the Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NASDAQ–2007–037 on the
subject line.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.10
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–11369 Filed 6–12–07; 8:45 am]
8 15
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–55872; File No. SR–OCC–
2007–01]
Self-Regulatory Organizations; The
Options Clearing Corporation; Order
Granting Approval of a Proposed Rule
Change Relating to Credit Default
Options
June 6, 2007.
I. Introduction
On February 13, 2007, The Options
Paper Comments
Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
• Send paper comments in triplicate
Commission (‘‘Commission’’) proposed
to Nancy M. Morris, Secretary,
rule change File No. SR–OCC–2007–01
Securities and Exchange Commission,
pursuant to Section 19(b)(1) of the
Station Place, 100 F Street, NE.,
Securities Exchange Act of 1934
Washington, DC 20549–9303.
(‘‘Act’’).1 On March 7, 2007, OCC filed
an amendment to the proposed rule
All submissions should refer to File
change.2 Notice of the proposal was
Number SR–NASDAQ–2007–037. This
published in the Federal Register on
file number should be included on the
subject line if e-mail is used. To help the March 5, 2007.3 No comment letters
were received. This order approves the
Commission process and review your
proposed rule change as amended.
comments more efficiently, please use
only one method. The Commission will II. Description
post all comments on the Commission’s
The purpose of the proposed rule
Internet Web site (https://www.sec.gov/
change is to permit OCC to clear and
rules/sro.shtml). Copies of the
settle credit default options (‘‘CDOs’’),
submission, all subsequent
which are options related to the
amendments, all written statements
creditworthiness of an issuer or
with respect to the proposed rule
guarantor (‘‘reference entity’’) of one or
change that are filed with the
more specified debt securities
Commission, and all written
(‘‘reference obligation(s)’’). CDOs are
communications relating to the
‘‘binary’’ options that pay a fixed
proposed rule change between the
amount to the holder of the option upon
Commission and any person, other than
the occurrence of a ‘‘credit event’’
those that may be withheld from the
affecting the reference obligations.4
public in accordance with the
CDOs will be traded by the Chicago
provisions of 5 U.S.C. 552, will be
Board Options Exchange (‘‘CBOE’’).5
available for inspection and copying in
Description of Credit Default Options
the Commission’s Public Reference
Room. Copies of such filing also will be
CDOs are structured as binary options
available for inspection and copying at
that are automatically exercised and the
the principal office of the Nasdaq. All
exercise settlement amount payable if a
comments received will be posted
‘‘credit event’’ occurs at any time prior
without change; the Commission does
to the last day of trading. A ‘‘credit
not edit personal identifying
event’’ is generally defined as any
information from submissions. You
failure to pay on any of the reference
should submit only information that
1 15 U.S.C. 78s(b)(1).
you wish to make available publicly. All
2 The March 7, 2007, amendment reflects OCC’s
submissions should refer to File
determination to seek approval for the credit default
Number SR–NASDAQ–2007–037 and
options
should be submitted on or before July 5, option product only and not for binarytechnicalin
general. Because Amendment No. 1 is
in
2007.
nature, the Commission is not republishing the
BILLING CODE 8010–01–P
U.S.C. 78f.
9 15 U.S.C. 78f(b)(5).
32693
PO 00000
CFR 200.30–3(a)(12).
Frm 00088
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notice of filing for public comment.
3 Securities Exchange Act Release No. 55362
(February 27, 2007), 72 FR 9826.
4 ‘‘Binary’’ options (also sometimes referred to as
‘‘digital’’ options) are ‘‘all-or-nothing’’ options that
pay a fixed amount if automatically exercised and
otherwise pay nothing.
5 Securities Exchange Act Release Nos. 55251
(February 7, 2007), 72 FR 7091 (February 14, 2007)
(notice of filing of proposed rule change); 55871
(June 6, 2007) (order approving proposed rule
change) [File No. SR–CBOE–2006–84].
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32694
Federal Register / Vol. 72, No. 113 / Wednesday, June 13, 2007 / Notices
obligations or any other occurrence that
would constitute an ‘‘event of default’’
or ‘‘restructuring’’ under the terms of
any of the reference obligations and that
the listing exchange has determined
would be a credit event for purposes of
the CDO. The payout or settlement
amount for a single exercised option
CBOE CDO will be $100,000.
By-Law and Rule Amendments
Applicable to CDOs
In order to accommodate trading in
CDOs, OCC is adding a new By-Law
Article and a new Chapter to its Rules
to incorporate several new defined
terms and procedures for clearing and
settling CDOs.
sroberts on PROD1PC70 with NOTICES
1. Terminology—Article I, Section 1 and
Article XIV, Section 1 of the By-Laws
The definition of ‘‘expiration time’’ in
Article I of the By-Laws is modified to
be a default provision to permit the
expiration time to be defined differently
for different classes of options. The
definition of ‘‘option contract’’ in
Article I of the By-Laws is amended to
include a credit default option and to
provide a more generic definition of
‘‘cash-settled option.’’
‘‘Adjustment event’’ is defined in
Article XIV by reference to the rules of
the listing exchange. Similarly, ‘‘credit
event’’ is defined by reference to
exchange rules. The terms ‘‘credit event
confirmation’’ and ‘‘credit event
confirmation deadline’’ are used,
respectively, to refer to the notice that
must be provided by the listing
exchange or other reporting authority to
OCC that a credit event has occurred
(and that a CDO will therefore
automatically be exercised) and to the
deadline for receipt of such notice if it
is to be treated as having been received
on the business day on which it is
submitted. Credit event confirmations
received after the deadline on the
expiration date but before the expiration
time will be given effect but may result
in delayed exercise settlement.
OCC is also defining the term
‘‘exercise settlement amount’’ in Article
XIV for purposes of credit default
options. The exercise settlement amount
of a credit default option is the amount
specified by the exchange on which the
option is traded that will be paid in
settlement of an automatically exercised
option. CBOE has specified the exercise
settlement amount for a single CDO as
$100,000. OCC’s proposed definition
would permit an exchange to specify a
different exercise settlement amount.
The exercise settlement amount will be
determined by the exchange at the time
of listing when the exchange fixes the
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other variable terms for the options of a
particular class or series.
OCC is replacing the definitions of
‘‘variable terms,’’ ‘‘premium,’’ and
‘‘multiplier’’ in Article I with revised
definitions in Article XIV, Section 1 that
are applicable to credit default options.
The term ‘‘class’’ is also redefined in
Article XIV, Section 1. To be within the
same class, CDOs must have the same
reporting authority, which OCC
anticipates will ordinarily be the listing
exchange. This is necessary because of
the degree of discretion that the
reporting authority will have in
determining whether a credit event has
occurred.
CDOs will be a category of options
where exercise is triggered by a discrete
event such as a ‘‘credit event’’ affecting
the ‘‘reference obligations’’ issued by a
‘‘reference entity,’’ which terms are
defined to have the meanings given to
them in the rules of the listing
exchange. The term ‘‘underlying
interest’’ is defined to be the reference
obligation(s) with respect to which the
credit event will or will not occur.
2. Terms of Cleared Contracts—Article
VI, Section 10(e)
A new paragraph (e) is added to
Article VI, Section 10 so that an
exchange is required to designate the
exercise settlement amount, expiration
date, and exercise price for a series of
credit default options at the time the
series is opened for trading. Section
10(e) also reminds the reader that credit
default options are subject to adjustment
under Article XIV.
3. Rights and Obligations—Article XIV,
Section 2
Article XIV, Section 2 defines the
general rights and obligations of holders
and writers of credit default options. As
noted above, the holder of a credit
default option that is automatically
exercised has the right to receive the
fixed exercise settlement amount from
OCC, and the assigned writer has the
obligation to pay that amount to OCC.
4. Adjustments of Credit Default
Options—Article XIV, Section 3;
Determination of Occurrence of Credit
Event—Article XIV, Section 4
Article XIV, Section 3 provides for
adjustment of CDOs in accordance with
the rules of the listing exchange. CBOE’s
rules provide for adjustment of CDOs in
the case of certain corporate events
affecting the reference obligations, and
OCC proposes simply to defer to the
rules and to the determinations of the
listing exchange pursuant to its rules.
Accordingly, OCC will have no
PO 00000
Frm 00089
Fmt 4703
Sfmt 4703
responsibility for adjustment
determinations with respect to CDOs.
Similarly, Section 4 provides that the
listing exchange for a class of CDOs will
have responsibility for determining the
occurrence of a credit event that will
result in automatic exercise of the
options of that class. The listing
exchange has the obligation to provide
a credit event confirmation to OCC in
order to trigger the automatic exercise.
5. Exercise and Settlement—Chapter XV
of the Rules and Rule 801
Credit default options will not be
subject to the exercise-by-exception
procedures applicable to most other
options under OCC’s Rules but would
instead be automatically exercised at
expiration if the specified criterion for
exercise is met. The procedures for the
automatic exercise of credit default
options, as well as their assignment and
settlement (including during periods
when a clearing member is suspended),
are set forth in Rules 1501 through 1505
of new Chapter XV and in revised Rule
801(b).
6. Special Margin Requirements—Rule
601; Deposits in Lieu of Margin—Rule
1506
OCC will not initially margin CDOs
through its usual ‘‘STANS’’ system.
Because of CDOs’ fixed payout feature,
further systems development is needed
to accommodate these options in
STANS. Until such development is
completed, OCC has initially
determined to require that writers of
such options post margin in a fixed
amount that will be set at 100% of the
fixed exercise settlement amount
applicable to each series of CDOs. OCC
would have discretion to reduce the
requirement to something less than
100% if research, analysis, and
experience suggest that a lower
percentage is sufficient. Initially, long
positions in CDOs will be valued at zero
and will provide no offset against
margin requirements on shorts. Again,
based on research, analysis, and
experience, OCC may determine to give
some value to the longs. Ultimately,
CDOs will be incorporated into the
STANS system and will be valued and
margined on a risk basis.
OCC does not propose to accept
escrow deposits in lieu of clearing
margin for credit default options.
Therefore, Rule 1506 states that Rule
610, which otherwise would permit
such deposits, does not apply to credit
default options.
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Federal Register / Vol. 72, No. 113 / Wednesday, June 13, 2007 / Notices
7. Acceleration of Expiration Date—Rule
1507
This provision permits OCC to
accelerate the expiration date of a credit
default option when the option is
deemed to have been exercised on any
day prior to the expiration date.
III. Discussion
Section 17A(b)(3)(F) of the Act
requires that the rules of a clearing
agency be designed to promote the
prompt and accurate clearance and
settlement of securities transactions.6
The Commission finds the proposed
rule change to be consistent with
Section 17A(b)(3)(F) of the Act because
it is designed to promote the prompt
and accurate clearance and settlement of
transactions in, including exercises of,
credit default options and to remove
impediments to and perfect the
mechanism of a national system for the
prompt and accurate clearance and
settlement of such transactions.7 These
purposes are accomplished by having
the clearance and settlement of CDOs
take place at OCC and by OCC applying
substantially the same rules and
procedures to CDOs as it applies to
similar transactions in other cash-settled
options.
On the basis of the foregoing, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act and in
particular Section 17A of the Act and
the rules and regulations thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (File No. SR–
OCC–2007–01) as modified by
Amendment No. 1 be and hereby is
approved.
sroberts on PROD1PC70 with NOTICES
U.S.C. 78q–1(b)(3)(F).
approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
8 17 CFR 200.30–3(a)(12).
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18:30 Jun 12, 2007
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June 5, 2007.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 2 thereunder,
notice is hereby given that on May 25,
2007, the Philadelphia Stock Exchange,
Inc. (‘‘Phlx’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II, below, which Items have
been prepared by the Phlx. The
Exchange filed the proposal as a ‘‘noncontroversial’’ rule change pursuant to
Section 19(b)(3)(A) of the Act 3 and Rule
19b–4(f)(6) thereunder,4 which rendered
the proposal 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).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(6).
5 The Trading Phase Date was the ‘‘[f]inal date for
full operation of Regulation NMS-compliant trading
systems [by exchanges] that intend[ed] to qualify
their quotations for trade-through protection under
Rule 611 [during the roll-out of Regulation NMS].’’
See Securities Exchange Act Release No. 55160
(January 24, 2007), 72 FR 4202 (January 30, 2007).
6 The All Stocks Phase Date is the date that full
industry compliance with Rules 610 and 611 of
Regulation NMS, 17 CFR 242.610 and 611, begins.
Currently, the All Stocks Phase Date is scheduled
to be August 20, 2007. See Securities Exchange Act
Release No. 55160 (January 24, 2007), 72 FR 4202
(January 30, 2007). However, should the
Commission change the All Stocks Phase Date, the
changes to Phlx Rule 185A adopted in this
proposed rule change will remain in effect until
that new date.
2 17
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–11370 Filed 6–12–07; 8:45 am]
7 In
Self-Regulatory Organizations;
Philadelphia Stock Exchange, Inc.;
Notice of Filing and Immediate
Effectiveness of Proposed Rule
Change Relating to the Modification of
Phlx Rule 185A
The Phlx proposes to amend Phlx
Rule 185A, which clarified the entry,
routing and other requirements of
certain orders on XLE, the Exchange’s
electronic equity trading system, prior
to March 5, 2007, the Trading Phase
Date,5 to make certain provisions of the
rule applicable until the All Stocks
Phase Date.6 The text of the proposed
rule change is available on Phlx’s Web
site, https://www.phlx.com, at Phlx’s
For the Commission by the Division of
Market Regulation, pursuant to delegated
authority.8
6 15
[Release No. 34–55860; File No. SR–Phlx–
2007–41]
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
IV. Conclusion
BILLING CODE 8010–01–P
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COMMISSION
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32695
principal office, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Phlx 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. The Phlx 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
1. Purpose
The purpose of the proposed rule
change is to clarify the obligation of XLE
Participants when submitting certain
XLE order types before the All Stocks
Phase Date. Phlx Rule 185A, Orders and
Order Execution—Temporary, was
adopted in November 2006, to clarify
the entry, routing and other
requirements of certain orders on XLE
in the period before the Trading Phase
Date.7 Phlx Rule 185A was subsequently
amended twice.8 Each amendment
addressed the period before the Trading
Phase Date.
Phlx Rule 185A clarified the routing
of orders from XLE to other
marketplaces,9 the entry of Intermarket
Sweep Orders and IOC Cross Orders
marked by the XLE Participant entering
the order as meeting the requirement of
an intermarket sweep order,10 the
requirements for certain IOC Cross
Orders marked as Benchmark,11 and the
requirements for certain IOC Cross
Orders marked as Qualified Continent
Trades.12 At this time, Phlx proposes to
delete the provisions of Phlx Rule 185A
that applied to routing and modify the
remaining provisions of the rule to make
them applicable to the period prior to
the All Stocks Phase Date.
Specifically Phlx Rule 185A(a) is
being modified to delete provisions
7 See Securities Exchange Act Release No. 54760
(November 15, 2006), 71 FR 67687 (November 22,
2006) (SR–Phlx–2006–76).
8 See Securities Exchange Act Release Nos. 55044
(January 5, 2007), 72 FR 1361 (January 11, 2007)
(SR–Phlx–2006–92) and 54788 (November 20,
2006), 71 FR 68877 (November 28, 2006) (SR–Phlx–
2006–77).
9 See Phlx Rule 185A(a).
10 See Phlx Rule 185A(b).
11 See Phlx Rule 185A(c).
12 See Phlx Rule 185A(d).
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[Federal Register Volume 72, Number 113 (Wednesday, June 13, 2007)]
[Notices]
[Pages 32693-32695]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-11370]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55872; File No. SR-OCC-2007-01]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Granting Approval of a Proposed Rule Change Relating to Credit
Default Options
June 6, 2007.
I. Introduction
On February 13, 2007, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'')
proposed rule change File No. SR-OCC-2007-01 pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ On March
7, 2007, OCC filed an amendment to the proposed rule change.\2\ Notice
of the proposal was published in the Federal Register on March 5,
2007.\3\ No comment letters were received. This order approves the
proposed rule change as amended.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ The March 7, 2007, amendment reflects OCC's determination to
seek approval for the credit default option product only and not for
binary options in general. Because Amendment No. 1 is technical in
nature, the Commission is not republishing the notice of filing for
public comment.
\3\ Securities Exchange Act Release No. 55362 (February 27,
2007), 72 FR 9826.
---------------------------------------------------------------------------
II. Description
The purpose of the proposed rule change is to permit OCC to clear
and settle credit default options (``CDOs''), which are options related
to the creditworthiness of an issuer or guarantor (``reference
entity'') of one or more specified debt securities (``reference
obligation(s)''). CDOs are ``binary'' options that pay a fixed amount
to the holder of the option upon the occurrence of a ``credit event''
affecting the reference obligations.\4\ CDOs will be traded by the
Chicago Board Options Exchange (``CBOE'').\5\
---------------------------------------------------------------------------
\4\ ``Binary'' options (also sometimes referred to as ``
digital'' options) are ``all-or-nothing'' options that pay a fixed
amount if automatically exercised and otherwise pay nothing.
\5\ Securities Exchange Act Release Nos. 55251 (February 7,
2007), 72 FR 7091 (February 14, 2007) (notice of filing of proposed
rule change); 55871 (June 6, 2007) (order approving proposed rule
change) [File No. SR-CBOE-2006-84].
---------------------------------------------------------------------------
Description of Credit Default Options
CDOs are structured as binary options that are automatically
exercised and the exercise settlement amount payable if a ``credit
event'' occurs at any time prior to the last day of trading. A ``credit
event'' is generally defined as any failure to pay on any of the
reference
[[Page 32694]]
obligations or any other occurrence that would constitute an ``event of
default'' or ``restructuring'' under the terms of any of the reference
obligations and that the listing exchange has determined would be a
credit event for purposes of the CDO. The payout or settlement amount
for a single exercised option CBOE CDO will be $100,000.
By-Law and Rule Amendments Applicable to CDOs
In order to accommodate trading in CDOs, OCC is adding a new By-Law
Article and a new Chapter to its Rules to incorporate several new
defined terms and procedures for clearing and settling CDOs.
1. Terminology--Article I, Section 1 and Article XIV, Section 1 of the
By-Laws
The definition of ``expiration time'' in Article I of the By-Laws
is modified to be a default provision to permit the expiration time to
be defined differently for different classes of options. The definition
of ``option contract'' in Article I of the By-Laws is amended to
include a credit default option and to provide a more generic
definition of ``cash-settled option.''
``Adjustment event'' is defined in Article XIV by reference to the
rules of the listing exchange. Similarly, ``credit event'' is defined
by reference to exchange rules. The terms ``credit event confirmation''
and ``credit event confirmation deadline'' are used, respectively, to
refer to the notice that must be provided by the listing exchange or
other reporting authority to OCC that a credit event has occurred (and
that a CDO will therefore automatically be exercised) and to the
deadline for receipt of such notice if it is to be treated as having
been received on the business day on which it is submitted. Credit
event confirmations received after the deadline on the expiration date
but before the expiration time will be given effect but may result in
delayed exercise settlement.
OCC is also defining the term ``exercise settlement amount'' in
Article XIV for purposes of credit default options. The exercise
settlement amount of a credit default option is the amount specified by
the exchange on which the option is traded that will be paid in
settlement of an automatically exercised option. CBOE has specified the
exercise settlement amount for a single CDO as $100,000. OCC's proposed
definition would permit an exchange to specify a different exercise
settlement amount. The exercise settlement amount will be determined by
the exchange at the time of listing when the exchange fixes the other
variable terms for the options of a particular class or series.
OCC is replacing the definitions of ``variable terms,''
``premium,'' and ``multiplier'' in Article I with revised definitions
in Article XIV, Section 1 that are applicable to credit default
options. The term ``class'' is also redefined in Article XIV, Section
1. To be within the same class, CDOs must have the same reporting
authority, which OCC anticipates will ordinarily be the listing
exchange. This is necessary because of the degree of discretion that
the reporting authority will have in determining whether a credit event
has occurred.
CDOs will be a category of options where exercise is triggered by a
discrete event such as a ``credit event'' affecting the ``reference
obligations'' issued by a ``reference entity,'' which terms are defined
to have the meanings given to them in the rules of the listing
exchange. The term ``underlying interest'' is defined to be the
reference obligation(s) with respect to which the credit event will or
will not occur.
2. Terms of Cleared Contracts--Article VI, Section 10(e)
A new paragraph (e) is added to Article VI, Section 10 so that an
exchange is required to designate the exercise settlement amount,
expiration date, and exercise price for a series of credit default
options at the time the series is opened for trading. Section 10(e)
also reminds the reader that credit default options are subject to
adjustment under Article XIV.
3. Rights and Obligations--Article XIV, Section 2
Article XIV, Section 2 defines the general rights and obligations
of holders and writers of credit default options. As noted above, the
holder of a credit default option that is automatically exercised has
the right to receive the fixed exercise settlement amount from OCC, and
the assigned writer has the obligation to pay that amount to OCC.
4. Adjustments of Credit Default Options--Article XIV, Section 3;
Determination of Occurrence of Credit Event--Article XIV, Section 4
Article XIV, Section 3 provides for adjustment of CDOs in
accordance with the rules of the listing exchange. CBOE's rules provide
for adjustment of CDOs in the case of certain corporate events
affecting the reference obligations, and OCC proposes simply to defer
to the rules and to the determinations of the listing exchange pursuant
to its rules. Accordingly, OCC will have no responsibility for
adjustment determinations with respect to CDOs.
Similarly, Section 4 provides that the listing exchange for a class
of CDOs will have responsibility for determining the occurrence of a
credit event that will result in automatic exercise of the options of
that class. The listing exchange has the obligation to provide a credit
event confirmation to OCC in order to trigger the automatic exercise.
5. Exercise and Settlement--Chapter XV of the Rules and Rule 801
Credit default options will not be subject to the exercise-by-
exception procedures applicable to most other options under OCC's Rules
but would instead be automatically exercised at expiration if the
specified criterion for exercise is met. The procedures for the
automatic exercise of credit default options, as well as their
assignment and settlement (including during periods when a clearing
member is suspended), are set forth in Rules 1501 through 1505 of new
Chapter XV and in revised Rule 801(b).
6. Special Margin Requirements--Rule 601; Deposits in Lieu of Margin--
Rule 1506
OCC will not initially margin CDOs through its usual ``STANS''
system. Because of CDOs' fixed payout feature, further systems
development is needed to accommodate these options in STANS. Until such
development is completed, OCC has initially determined to require that
writers of such options post margin in a fixed amount that will be set
at 100% of the fixed exercise settlement amount applicable to each
series of CDOs. OCC would have discretion to reduce the requirement to
something less than 100% if research, analysis, and experience suggest
that a lower percentage is sufficient. Initially, long positions in
CDOs will be valued at zero and will provide no offset against margin
requirements on shorts. Again, based on research, analysis, and
experience, OCC may determine to give some value to the longs.
Ultimately, CDOs will be incorporated into the STANS system and will be
valued and margined on a risk basis.
OCC does not propose to accept escrow deposits in lieu of clearing
margin for credit default options. Therefore, Rule 1506 states that
Rule 610, which otherwise would permit such deposits, does not apply to
credit default options.
[[Page 32695]]
7. Acceleration of Expiration Date--Rule 1507
This provision permits OCC to accelerate the expiration date of a
credit default option when the option is deemed to have been exercised
on any day prior to the expiration date.
III. Discussion
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions.\6\ The Commission
finds the proposed rule change to be consistent with Section
17A(b)(3)(F) of the Act because it is designed to promote the prompt
and accurate clearance and settlement of transactions in, including
exercises of, credit default options and to remove impediments to and
perfect the mechanism of a national system for the prompt and accurate
clearance and settlement of such transactions.\7\ These purposes are
accomplished by having the clearance and settlement of CDOs take place
at OCC and by OCC applying substantially the same rules and procedures
to CDOs as it applies to similar transactions in other cash-settled
options.
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\6\ 15 U.S.C. 78q-1(b)(3)(F).
\7\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
in particular Section 17A of the Act and the rules and regulations
thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-OCC-2007-01) as modified by
Amendment No. 1 be and hereby is approved.
For the Commission by the Division of Market Regulation,
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. E7-11370 Filed 6-12-07; 8:45 am]
BILLING CODE 8010-01-P
