Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of a Proposed Rule Change Relating to Binary Options, 54705-54708 [E7-18963]

Download as PDF Federal Register / Vol. 72, No. 186 / Wednesday, September 26, 2007 / Notices • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NASDAQ–2007–077 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–NASDAQ–2007–077. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of Nasdaq. 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–NASDAQ–2007–077 and should be submitted on or before October 17, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.9 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–18955 Filed 9–25–07; 8:45 am] SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56477; File No. SR– NASDAQ–2007–056] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Granting Approval of Proposed Rule Change and Amendment No. 2 Thereto, To Retroactively Modify Pricing for Nasdaq Members Using the Nasdaq Market Center September 20, 2007. On June 1, 2007, The NASDAQ Stock Market LLC (‘‘Nasdaq’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to make retroactive to February 12, 2007, certain modifications to Nasdaq’s fee schedule to address transition issues arising from its commencing operations as a national securities exchange. On July 27, 2007, Nasdaq filed Amendment No. 1. On August 6, 2007, Nasdaq withdrew Amendment No. 1 and filed Amendment No. 2, which replaced the text of the original filing in its entirety. The proposed rule change was published for notice and comment in the Federal Register on August 15, 2007.3 The Commission received no comments on the proposal. The Commission has carefully reviewed the proposed rule change and finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange 4 and, in particular, the requirements of Section 6(b)(4) of the Act,5 which requires that Nasdaq’s rules provide for the equitable allocation of reasonable dues, fees and other charges among its members and issuers and other persons using its facilities. With respect to Rule 7013, the Commission believes it is appropriate to eliminate Tape A revenue sharing for Nasdaq members trading non-Nasdaq securities because this change restores the status quo with respect to Tape A revenue sharing that existed prior to Nasdaq’s transition to exchange operation on February 12, 2007. With respect to Rule 7014, the Commission believes that it is appropriate to delete BILLING CODE 8010–01–P mstockstill on PROD1PC66 with NOTICES 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 56228 (August 8, 2007), 72 FR 45848. 4 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 5 15 U.S.C. 78f(b)(4). 2 17 9 17 CFR 200.30–3(a)(12). VerDate Aug<31>2005 17:57 Sep 25, 2007 Jkt 211001 PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 54705 the rule in its entirety because Nasdaq began trading all securities, including non-Nasdaq securities, on a single trading platform on February 12, 2007; thus, a pricing distinction for trading non-Nasdaq securities is not appropriate. The Commission also believes that the remainder of Rule 7014 can be eliminated because the rule references obsolete practices or is duplicative of other Nasdaq rules. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,6 that the proposed rule change (SR–NASDAQ– 2007–056) be, and it hereby is, approved. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.7 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–18956 Filed 9–25–07; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56471; File No. SR–OCC– 2007–08] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of a Proposed Rule Change Relating to Binary Options September 19, 2007. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 notice is hereby given that on June 28, 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 primarily by OCC. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 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 permit OCC to clear and settle various types of binary options, including ‘‘fixed return options’’ to be listed by the American Stock Exchange (‘‘Amex’’) and binary options on broad-based securities indexes proposed to be listed by the Chicago Board Options Exchange (‘‘CBOE’’). 6 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 7 17 E:\FR\FM\26SEN1.SGM 26SEN1 54706 Federal Register / Vol. 72, No. 186 / Wednesday, September 26, 2007 / Notices 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.2 mstockstill on PROD1PC66 with NOTICES (A) Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change The purpose of the proposed rule change is to permit OCC to clear and settle binary options, including fixed return options (‘‘FROs’’) to be listed and traded by Amex3 and binary options on broad-based indexes proposed to be listed and traded by CBOE.4 Binary options (sometimes referred to as ‘‘digital’’ options) are all-or-nothing options that pay a fixed amount if exercised in the money and otherwise pay nothing. Until recently, OCC did not clear any binary options other than credit default options (‘‘CDOs’’) traded on CBOE. CBOE and OCC recently were granted approval for CBOE to trade and for OCC to clear related products called credit default basket options (‘‘CDBOs’’).5 General characteristics of binary options, excluding features unique to CDOs and/or CDBOs that were already described in OCC’s prior rule changes, are described below, followed by an explanation of the specific rule changes being proposed by OCC. Description of Binary Options. Binary options are cash-settled options that have only two possible payoff outcomes, either a fixed exercise settlement amount or nothing at all. They are subject to automatic exercise. The underlying interest of a binary option may be one or more securities, an index of securities, or some other measure; however, OCC presently intends to clear only binary options that are within the definition of a ‘‘security’’ as determined 2 The Commission has modified parts of these statements. 3 Securities Exchange Act Release No. 56251 (August 14, 2007), 72 FR 46523 (August 20, 2007) (File No. SR–Amex–2004–27). 4 File No. SR–CBOE–2006–105. 5 Securities Exchange Act Release Nos. 56275 (August 17, 2007), 72 FR 47097 (August 22, 2007) (File No. SR–CBOE–2007–026) and 56288 (August 20, 2007), 72 FR 49034 (August 27, 2007) (File No. SR–OCC–2007–06). VerDate Aug<31>2005 17:57 Sep 25, 2007 Jkt 211001 by the Commission. In its capacity as a ‘‘derivatives clearing organization’’ regulated by the Commodity Futures Trading Commission (‘‘CFTC’’), OCC may in the future propose to clear binary options that are commodity options subject to the jurisdiction of the CFTC. A binary option, other than a CDO or CDBO, is in the money and will be automatically exercised if its underlying interest value, when measured against its exercise price, is determined to meet the criteria for automatic exercise as specified in the Exchange Rules of the listing Exchange.6 For example, in the case of a ‘‘finish high fixed return option,’’ such option will be automatically exercised and settled for a fixed amount of cash if its underlying interest value is above its exercise price at expiration. In the case of a ‘‘finish low fixed return option,’’ such option will be automatically exercised and settled for a fixed amount of cash if its underlying interest value is below its exercise price at expiration. The rules proposed in this current filing for binary options are intended to be sufficiently generic to be the basis for clearing binary options proposed to be listed by Amex and CBOE as well as other binary options in the future. By-Law and Rule Amendments Applicable to Binary Options. In order to provide a framework of rules that can accommodate clearance and settlement of various kinds of binary option products, OCC proposes to broaden the By-Law Article and Rule Chapter covering CDOs and CDBOs. (1) Terminology—Article I, Section 1 and Article XIV, Section 1 ‘‘Binary option’’ would be defined in Article XIV, Section 1 of the By-Laws, and the definition would be crossreferenced in Article I of the By-Laws. The definitions of ‘‘option contract’’ and ‘‘type of option’’ in Article I of the By-Laws would be amended to include a binary option. OCC proposes to redefine the term ‘‘class’’ in Article XIV, Section 1 so that it will apply to binary options generally. To be within the same class, binary options other than CDOs or CDBOs must cover the same underlying interest and have otherwise identical terms except for exercise price (if any) and expiration date. The definition of ‘‘exercise price’’ in Article I would be replaced with respect to binary options with a revised 6 CDOs and CDBOs, on the other hand, do not have exercise prices. A CDO or CDBO will be deemed to be in the money and will be automatically exercised if a credit event occurs at any time prior to the last day of trading. PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 definition in Article XIV, Section 1 which would recognize that binary options will be settled by a fixed cash payment. The exercise price of a binary option is neither an amount that is paid in exchange for an underlying interest nor is it used to determine the exercise settlement amount as in the case of other cash-settled options. In the case of a binary option other than a CDO or CDBO, the exercise price of a binary option is simply a defined value or range of values for the underlying interest. If the underlying interest value falls within the defined range at expiration of such binary option, the option will be automatically exercised; otherwise, the option will expire unexercised. A CDO or CDBO is said to have no exercise price. OCC proposes to redefine the term ‘‘underlying interest’’ in Article XIV, Section 1 so that it will apply to binary options generally. In the case of a binary option other than a CDO or CDBO, the underlying interest is the underlying security, securities, index, basket, or measure whose value is compared to such option’s exercise price to determine whether the option is in the money and will be automatically exercised. In conjunction with the revised definitions of ‘‘exercise price’’ and ‘‘underlying interest,’’ OCC also proposes to add a new defined term, ‘‘underlying interest value,’’ to Article XIV, Section 1. When used with respect to a binary option other than a CDO or CDBO, underlying interest value means the value or level of the unit of trading of the underlying interest at any point in time as reported by the reporting authority. A new definition for the term ‘‘unit of trading’’ would state ‘‘unit of trading’’ when used with respect to a binary option means the quantity of the underlying interest on which the underlying interest value is based and is ordinarily a single share in the case of binary options on individual equity securities or one (1) In the case of binary index options. The terms ‘‘unit of trading’’ and ‘‘underlying interest value’’ would not be applicable to CDOs and CDBOs. Other terms that were created or amended for CDOs and CDBOs will be modified to apply to binary options generally. (2) Terms of Cleared Contracts—Article VI, Section 10(e) Paragraph (e) of Article VI, Section 10 would be further amended to apply to binary options generally. E:\FR\FM\26SEN1.SGM 26SEN1 Federal Register / Vol. 72, No. 186 / Wednesday, September 26, 2007 / Notices mstockstill on PROD1PC66 with NOTICES (3) General Rights and Obligations— Article XIV, Section 2B Article XIV, Section 2B would define the general rights and obligations of holders and writers of binary options other than CDOs or CDBOs. As noted above, the holder of a binary option that is automatically exercised would have the right to receive the fixed exercise settlement amount from OCC, and the assigned writer would have the obligation to pay that amount to OCC. (4) Adjustments of Binary Options Other than CDOs or CDBOs—Article XIV, Section 3A; Unavailability or Inaccuracy of Final Underlying Interest Value— Article XIV, Section 5; Determination of Final Underlying Interest Value— Article XIV, Section 6 Article XIV, Section 3A would describe the methods by which binary options other than CDOs or CDBOs generally will be adjusted if adjustments are deemed to be necessary. Special adjustment rules are needed because of the fixed, cash-settlement feature of binary options. For instance, under Article VI, Section 11A(d), which governs adjustment of other equity options, if there is a stock dividend, distribution, or split whereby a whole number of shares of the underlying security is issued for each outstanding share, the exercise price is proportionately reduced, and the number of option contracts is increased by the number of shares issued with respect to each share of the underlying security. This adjustment would be inappropriate for binary options for which the underlying interest is an equity security. For example, an XYZ option with an exercise price of $50 would be adjusted to become two XYZ options, each with an exercise price of $25. Because the fixed exercise settlement amount of a binary option is intended to remain at $100, this adjustment would increase the total payout upon exercise to $200. To avoid this result, Article XIV, Section 3A(a)(4) would provide that the number of option contracts would not proportionally increase and only the exercise price would be adjusted. The other provisions of Article XIV, Section 3A are similar to Article VI, Section 11A, with appropriate modifications for binary options. In order to maintain consistency with adjustment policies for physically settled stock options where such consistency is appropriate, certain changes in the treatment of dividends that were proposed in SR–OCC–2006– 01 to become effective at a future date, will become effective on the same date for binary options on single stocks. VerDate Aug<31>2005 17:57 Sep 25, 2007 Jkt 211001 Article XIV, Section 3A(b) would govern adjustments of binary options for which the underlying interest is an index of equity securities and would be similar to Article XVII, Section 3, which governs index options, with appropriate modifications to reflect unique features of binary options. For instance, because binary options do not have an index multiplier, the Securities Committee would generally adjust the exercise price of a binary option of which the underlying interest is an index of equity securities to get the appropriate result. Article XIV, Section 5, would give OCC the authority to fix the underlying interest value for a binary option other than a CDO or CDBO and to rely on that value for determining whether such binary option would be exercised under circumstances similar to those in which OCC may currently fix the exercise settlement amount for index options. Article XIV, Section 6 would provide, in essence, that the underlying interest value of a series of binary options at expiration, other than CDOs or CDBOs, would be determined by the Exchange or Exchanges on which such series is traded subject to any overriding provision of OCC’s By-Laws and Rules. If a series of options is traded on more than one Exchange, OCC could use the underlying interest value received from the Exchange deemed by OCC to be the principal Exchange, or OCC could employ a procedure to derive a single value based on some or all of the values received. (5) Exercise and Settlement—Chapter XV of the Rules and Rule 801 Binary options would not be subject to the exercise-by-exception procedures applicable to most other options under OCC’s Rules but would instead be automatically exercised prior to or at expiration if the specified criterion for exercise is met. The procedures for the automatic exercise of binary options, as well as assignment and settlement of exercises (including provisions applicable to a suspended Clearing Member), would be set forth in Rules 1501 through 1505 of new Chapter XV and in revised Rule 801(b). (6) Margin Requirements—Rule 601; Deposits in Lieu of Margin—Rule 1506 OCC would margin binary options through its usual ‘‘STANS’’ system. STANS has been modified to accommodate the particular binary options to be traded by Amex and the binary index product currently proposed by CBOE. CDOs and CDBOs will be margined as described in the applicable rule filings cited above. PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 54707 OCC is not proposing to accept escrow deposits in lieu of clearing margin for binary options. Therefore, Rule 1506 would state that Rule 610, which otherwise would permit such deposits, does not apply to binary options. (7) Acceleration of Expiration Date— Rule 1507(d) This new provision would accelerate the expiration date of a binary option other than a CDO or CDBO when OCC determines in its discretion that the underlying interest value of such option has become fixed prior to the expiration of the option (e.g., where the equity security underlying a binary option has been converted by a merger into the right to receive a fixed amount of cash). If the option is out of the money, it would expire unexercised. Otherwise, it would be automatically exercised. The proposed changes to OCC’s ByLaws and Rules are consistent with the purposes and requirements of Section 17A of the Act because they are designed to promote the prompt and accurate clearance and settlement of transactions in, including exercises of, binary options, and to foster cooperation and coordination with persons engaged in the clearance and settlement of such transactions, to remove impediments to and perfect the mechanism of a national system for the prompt and accurate clearance and settlement of such transactions, and in general to protect investors and the public interest. The proposed rule change accomplishes this purpose by applying substantially the same rules and procedures to these transactions as OCC applies to similar transactions in other cash-settled options except to the extent that special rules and procedures are required in order to accommodate unique features of binary options. (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 Within thirty-five days of the date of publication of this notice in the Federal E:\FR\FM\26SEN1.SGM 26SEN1 54708 Federal Register / Vol. 72, No. 186 / Wednesday, September 26, 2007 / Notices Register or within such longer period (i) As the Commission may designate up to ninety 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 the proposed rule change or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. 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: mstockstill on PROD1PC66 with NOTICES 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–OCC–2007–08 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–2007–08. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://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, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of OCC and on OCC’s Web site at https:// www.optionsclearing.com. All VerDate Aug<31>2005 17:57 Sep 25, 2007 Jkt 211001 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–2007–08 and should be submitted on or before October 17, 2007. For the Commission by the Division of Market Regulation, pursuant to delegated authority.7 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–18963 Filed 9–25–07; 8:45 am] BILLING CODE 8010–01–P DEPARTMENT OF STATE [Public Notice 5942] Bureau of International Security and Nonproliferation; Determination Under the Arms Export Control Act Department of State. Notice. AGENCY: ACTION: Pursuant to Section 654(c) of the Foreign Assistance Act of 1961, as amended, notice is hereby given that the Assistant Secretary of State for International Security and Nonproliferation has made a determination pursuant to Section 73 of the Arms Export Control Act and has concluded that publication of the determination would be harmful to the national security of the United States. Dated: September 20, 2007. John C. Rood, Assistant Secretary of State for International Security and Nonproliferation, Department of State. [FR Doc. E7–19000 Filed 9–25–07; 8:45 am] BILLING CODE 4710–27–P DEPARTMENT OF STATE [Public Notice 5943] Bureau of International Security and Nonproliferation; Imposition of Nonproliferation Measures on Two Iranian Entities and a North Korean Entity, Including a Ban on U.S. Government Procurement Bureau of International Security and Nonproliferation, Department of State. ACTION: Notice. AGENCY: SUMMARY: The U.S. Government has determined that three foreign entities 7 17 PO 00000 CFR 200.30–3(a)(12). Frm 00070 Fmt 4703 Sfmt 4703 have engaged in proliferation activities that warrant the imposition of measures pursuant to Executive Order 12938 of November 14, 1994, as amended by Executive Order 13094 of July 28, 1998 and Executive Order 13382 of June 28, 2005. DATES: Effective Date: September 26, 2007. FOR FURTHER INFORMATION CONTACT: On general issues: Pam Durham, Office of Missile Threat Reduction, Bureau of International Security and Nonproliferation, Department of State (202–647–4931). On import ban issues, Rochelle Stern, Director Policy Planning and Program Management, Office of Foreign Assets Control, Department of the Treasury (202–622–2500). On U.S. Government procurement ban issues: Gladys Gines, Office of the Procurement Executive, Department of State (703– 516–1691). SUPPLEMENTARY INFORMATION: Pursuant to the authorities vested in the President by the Constitution and the laws of the United States of America, including the International Emergency Economic Powers Act (50 U.S.C. 170, et seq.) (IEEPA), the National Emergencies Act (50 U.S.C. 1601, et seq.), the Arms Export Control Act (22 U.S.C. 2751, et seq.), and Section 301 of title 3, United States Code, and Executive Order 12938 of November 14, 1994, as amended, the U.S. Government determined that the following Iranian entities and North Korean entity have engaged in proliferation activities that warrant the imposition of measures pursuant to sections 4(b), 4(c), and 4(d) of Executive Order 12938: Aerospace Industries Organization (AIO), (Iran). Shahid Hemmat Industrial Group (SHIG), (Iran). Korea Mining and Development Corporation (KOMID), (North Korea). Accordingly, pursuant to the provisions of Executive Order 12938, the following measures are imposed on these entities, their subunits, and successors for two years: 1. All departments and agencies of the United States Government shall not procure or enter into any contract for the procurement of any goods, technology, or services from these entities including the termination of existing contracts; 2. All departments and agencies of the United States government shall not provide any assistance to these entities, and shall not obligate further funds for such purposes; 3. The Secretary of the Treasury shall prohibit the importation into the United States of any goods, technology, or E:\FR\FM\26SEN1.SGM 26SEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 72, Number 186 (Wednesday, September 26, 2007)]
[Notices]
[Pages 54705-54708]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-18963]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56471; File No. SR-OCC-2007-08]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to Binary Options

September 19, 2007.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 28, 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 primarily by 
OCC. 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).
---------------------------------------------------------------------------

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 
permit OCC to clear and settle various types of binary options, 
including ``fixed return options'' to be listed by the American Stock 
Exchange (``Amex'') and binary options on broad-based securities 
indexes proposed to be listed by the Chicago Board Options Exchange 
(``CBOE'').

[[Page 54706]]

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.\2\
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    \2\ The Commission has modified parts of these statements.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to permit OCC to clear 
and settle binary options, including fixed return options (``FROs'') to 
be listed and traded by Amex\3\ and binary options on broad-based 
indexes proposed to be listed and traded by CBOE.\4\ Binary options 
(sometimes referred to as ``digital'' options) are all-or-nothing 
options that pay a fixed amount if exercised in the money and otherwise 
pay nothing. Until recently, OCC did not clear any binary options other 
than credit default options (``CDOs'') traded on CBOE. CBOE and OCC 
recently were granted approval for CBOE to trade and for OCC to clear 
related products called credit default basket options (``CDBOs'').\5\ 
General characteristics of binary options, excluding features unique to 
CDOs and/or CDBOs that were already described in OCC's prior rule 
changes, are described below, followed by an explanation of the 
specific rule changes being proposed by OCC.
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    \3\ Securities Exchange Act Release No. 56251 (August 14, 2007), 
72 FR 46523 (August 20, 2007) (File No. SR-Amex-2004-27).
    \4\ File No. SR-CBOE-2006-105.
    \5\ Securities Exchange Act Release Nos. 56275 (August 17, 
2007), 72 FR 47097 (August 22, 2007) (File No. SR-CBOE-2007-026) and 
56288 (August 20, 2007), 72 FR 49034 (August 27, 2007) (File No. SR-
OCC-2007-06).
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    Description of Binary Options. Binary options are cash-settled 
options that have only two possible payoff outcomes, either a fixed 
exercise settlement amount or nothing at all. They are subject to 
automatic exercise. The underlying interest of a binary option may be 
one or more securities, an index of securities, or some other measure; 
however, OCC presently intends to clear only binary options that are 
within the definition of a ``security'' as determined by the 
Commission. In its capacity as a ``derivatives clearing organization'' 
regulated by the Commodity Futures Trading Commission (``CFTC''), OCC 
may in the future propose to clear binary options that are commodity 
options subject to the jurisdiction of the CFTC.
    A binary option, other than a CDO or CDBO, is in the money and will 
be automatically exercised if its underlying interest value, when 
measured against its exercise price, is determined to meet the criteria 
for automatic exercise as specified in the Exchange Rules of the 
listing Exchange.\6\ For example, in the case of a ``finish high fixed 
return option,'' such option will be automatically exercised and 
settled for a fixed amount of cash if its underlying interest value is 
above its exercise price at expiration. In the case of a ``finish low 
fixed return option,'' such option will be automatically exercised and 
settled for a fixed amount of cash if its underlying interest value is 
below its exercise price at expiration. The rules proposed in this 
current filing for binary options are intended to be sufficiently 
generic to be the basis for clearing binary options proposed to be 
listed by Amex and CBOE as well as other binary options in the future.
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    \6\ CDOs and CDBOs, on the other hand, do not have exercise 
prices. A CDO or CDBO will be deemed to be in the money and will be 
automatically exercised if a credit event occurs at any time prior 
to the last day of trading.
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    By-Law and Rule Amendments Applicable to Binary Options. In order 
to provide a framework of rules that can accommodate clearance and 
settlement of various kinds of binary option products, OCC proposes to 
broaden the By-Law Article and Rule Chapter covering CDOs and CDBOs.
(1) Terminology--Article I, Section 1 and Article XIV, Section 1
    ``Binary option'' would be defined in Article XIV, Section 1 of the 
By-Laws, and the definition would be cross-referenced in Article I of 
the By-Laws.
    The definitions of ``option contract'' and ``type of option'' in 
Article I of the By-Laws would be amended to include a binary option.
    OCC proposes to redefine the term ``class'' in Article XIV, Section 
1 so that it will apply to binary options generally. To be within the 
same class, binary options other than CDOs or CDBOs must cover the same 
underlying interest and have otherwise identical terms except for 
exercise price (if any) and expiration date.
    The definition of ``exercise price'' in Article I would be replaced 
with respect to binary options with a revised definition in Article 
XIV, Section 1 which would recognize that binary options will be 
settled by a fixed cash payment. The exercise price of a binary option 
is neither an amount that is paid in exchange for an underlying 
interest nor is it used to determine the exercise settlement amount as 
in the case of other cash-settled options. In the case of a binary 
option other than a CDO or CDBO, the exercise price of a binary option 
is simply a defined value or range of values for the underlying 
interest. If the underlying interest value falls within the defined 
range at expiration of such binary option, the option will be 
automatically exercised; otherwise, the option will expire unexercised. 
A CDO or CDBO is said to have no exercise price.
    OCC proposes to redefine the term ``underlying interest'' in 
Article XIV, Section 1 so that it will apply to binary options 
generally. In the case of a binary option other than a CDO or CDBO, the 
underlying interest is the underlying security, securities, index, 
basket, or measure whose value is compared to such option's exercise 
price to determine whether the option is in the money and will be 
automatically exercised. In conjunction with the revised definitions of 
``exercise price'' and ``underlying interest,'' OCC also proposes to 
add a new defined term, ``underlying interest value,'' to Article XIV, 
Section 1. When used with respect to a binary option other than a CDO 
or CDBO, underlying interest value means the value or level of the unit 
of trading of the underlying interest at any point in time as reported 
by the reporting authority. A new definition for the term ``unit of 
trading'' would state ``unit of trading'' when used with respect to a 
binary option means the quantity of the underlying interest on which 
the underlying interest value is based and is ordinarily a single share 
in the case of binary options on individual equity securities or one 
(1) In the case of binary index options. The terms ``unit of trading'' 
and ``underlying interest value'' would not be applicable to CDOs and 
CDBOs.
    Other terms that were created or amended for CDOs and CDBOs will be 
modified to apply to binary options generally.
(2) Terms of Cleared Contracts--Article VI, Section 10(e)
    Paragraph (e) of Article VI, Section 10 would be further amended to 
apply to binary options generally.

[[Page 54707]]

(3) General Rights and Obligations--Article XIV, Section 2B
    Article XIV, Section 2B would define the general rights and 
obligations of holders and writers of binary options other than CDOs or 
CDBOs. As noted above, the holder of a binary option that is 
automatically exercised would have the right to receive the fixed 
exercise settlement amount from OCC, and the assigned writer would have 
the obligation to pay that amount to OCC.
(4) Adjustments of Binary Options Other than CDOs or CDBOs--Article 
XIV, Section 3A; Unavailability or Inaccuracy of Final Underlying 
Interest Value--Article XIV, Section 5; Determination of Final 
Underlying Interest Value--Article XIV, Section 6
    Article XIV, Section 3A would describe the methods by which binary 
options other than CDOs or CDBOs generally will be adjusted if 
adjustments are deemed to be necessary. Special adjustment rules are 
needed because of the fixed, cash-settlement feature of binary options. 
For instance, under Article VI, Section 11A(d), which governs 
adjustment of other equity options, if there is a stock dividend, 
distribution, or split whereby a whole number of shares of the 
underlying security is issued for each outstanding share, the exercise 
price is proportionately reduced, and the number of option contracts is 
increased by the number of shares issued with respect to each share of 
the underlying security. This adjustment would be inappropriate for 
binary options for which the underlying interest is an equity security. 
For example, an XYZ option with an exercise price of $50 would be 
adjusted to become two XYZ options, each with an exercise price of $25. 
Because the fixed exercise settlement amount of a binary option is 
intended to remain at $100, this adjustment would increase the total 
payout upon exercise to $200. To avoid this result, Article XIV, 
Section 3A(a)(4) would provide that the number of option contracts 
would not proportionally increase and only the exercise price would be 
adjusted. The other provisions of Article XIV, Section 3A are similar 
to Article VI, Section 11A, with appropriate modifications for binary 
options. In order to maintain consistency with adjustment policies for 
physically settled stock options where such consistency is appropriate, 
certain changes in the treatment of dividends that were proposed in SR-
OCC-2006-01 to become effective at a future date, will become effective 
on the same date for binary options on single stocks.
    Article XIV, Section 3A(b) would govern adjustments of binary 
options for which the underlying interest is an index of equity 
securities and would be similar to Article XVII, Section 3, which 
governs index options, with appropriate modifications to reflect unique 
features of binary options. For instance, because binary options do not 
have an index multiplier, the Securities Committee would generally 
adjust the exercise price of a binary option of which the underlying 
interest is an index of equity securities to get the appropriate 
result.
    Article XIV, Section 5, would give OCC the authority to fix the 
underlying interest value for a binary option other than a CDO or CDBO 
and to rely on that value for determining whether such binary option 
would be exercised under circumstances similar to those in which OCC 
may currently fix the exercise settlement amount for index options.
    Article XIV, Section 6 would provide, in essence, that the 
underlying interest value of a series of binary options at expiration, 
other than CDOs or CDBOs, would be determined by the Exchange or 
Exchanges on which such series is traded subject to any overriding 
provision of OCC's By-Laws and Rules. If a series of options is traded 
on more than one Exchange, OCC could use the underlying interest value 
received from the Exchange deemed by OCC to be the principal Exchange, 
or OCC could employ a procedure to derive a single value based on some 
or all of the values received.
(5) Exercise and Settlement--Chapter XV of the Rules and Rule 801
    Binary options would not be subject to the exercise-by-exception 
procedures applicable to most other options under OCC's Rules but would 
instead be automatically exercised prior to or at expiration if the 
specified criterion for exercise is met. The procedures for the 
automatic exercise of binary options, as well as assignment and 
settlement of exercises (including provisions applicable to a suspended 
Clearing Member), would be set forth in Rules 1501 through 1505 of new 
Chapter XV and in revised Rule 801(b).
(6) Margin Requirements--Rule 601; Deposits in Lieu of Margin--Rule 
1506
    OCC would margin binary options through its usual ``STANS'' system. 
STANS has been modified to accommodate the particular binary options to 
be traded by Amex and the binary index product currently proposed by 
CBOE. CDOs and CDBOs will be margined as described in the applicable 
rule filings cited above.
    OCC is not proposing to accept escrow deposits in lieu of clearing 
margin for binary options. Therefore, Rule 1506 would state that Rule 
610, which otherwise would permit such deposits, does not apply to 
binary options.
(7) Acceleration of Expiration Date--Rule 1507(d)
    This new provision would accelerate the expiration date of a binary 
option other than a CDO or CDBO when OCC determines in its discretion 
that the underlying interest value of such option has become fixed 
prior to the expiration of the option (e.g., where the equity security 
underlying a binary option has been converted by a merger into the 
right to receive a fixed amount of cash). If the option is out of the 
money, it would expire unexercised. Otherwise, it would be 
automatically exercised.
    The proposed changes to OCC's By-Laws and Rules are consistent with 
the purposes and requirements of Section 17A of the Act because they 
are designed to promote the prompt and accurate clearance and 
settlement of transactions in, including exercises of, binary options, 
and to foster cooperation and coordination with persons engaged in the 
clearance and settlement of such transactions, to remove impediments to 
and perfect the mechanism of a national system for the prompt and 
accurate clearance and settlement of such transactions, and in general 
to protect investors and the public interest. The proposed rule change 
accomplishes this purpose by applying substantially the same rules and 
procedures to these transactions as OCC applies to similar transactions 
in other cash-settled options except to the extent that special rules 
and procedures are required in order to accommodate unique features of 
binary options.

(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

    Within thirty-five days of the date of publication of this notice 
in the Federal

[[Page 54708]]

Register or within such longer period (i) As the Commission may 
designate up to ninety 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 the proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 (https://
www.sec.gov/rules/sro.shtml) or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-OCC-2007-08 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-2007-08. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (https://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, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of OCC and on OCC's Web 
site at https://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-2007-08 and should be submitted on 
or before October 17, 2007.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-18963 Filed 9-25-07; 8:45 am]
BILLING CODE 8010-01-P

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