Self-Regulatory Organizations; The Options Clearing Corporation; Order Granting Approval of a Proposed Rule Change Relating to Credit Default Options, 32693-32695 [E7-11370]

Download as PDF 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 (http://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 VerDate Aug<31>2005 18:30 Jun 12, 2007 10 17 Jkt 211001 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 (http://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 Fmt 4703 Sfmt 4703 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]. E:\FR\FM\13JNN1.SGM 13JNN1 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 VerDate Aug<31>2005 18:30 Jun 12, 2007 Jkt 211001 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. E:\FR\FM\13JNN1.SGM 13JNN1 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). VerDate Aug<31>2005 18:30 Jun 12, 2007 Jkt 211001 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, http://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 SECURITIES AND EXCHANGE COMMISSION PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 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). E:\FR\FM\13JNN1.SGM 13JNN1

Agencies

[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]


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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 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.
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    \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.
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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\
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    \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.
---------------------------------------------------------------------------

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

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