Self-Regulatory Organizations; Options Clearing Corporation; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating to the Clearance and Settlement of Over-the-Counter Options, 1107-1111 [2012-112]
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Federal Register / Vol. 77, No. 5 / Monday, January 9, 2012 / Notices
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act.7 At any time
within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. If the Commission
takes such action, the Commission shall
institute proceedings to determine
whether the proposed rule should be
approved or 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:
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Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
No. SR–Phlx–2011–180 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
No. SR–Phlx–2011–180. This file
number should be included on the
subject line if email 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 Web site viewing and
printing 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 the
Exchange. All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File No. SR–Phlx–2011–
180 and should be submitted on or
before January 30, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.8
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–100 Filed 1–6–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66090; File No. SR–OCC–
2011–19]
Self-Regulatory Organizations;
Options Clearing Corporation; Notice
of Filing of Proposed Rule Change, as
Modified by Amendment No. 1 Thereto,
Relating to the Clearance and
Settlement of Over-the-Counter
Options
January 3, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b-4 thereunder 2
notice is hereby given that on December
20, 2011, The Options Clearing
Corporation (‘‘OCC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change. On January 3, 2012, OCC filed
Amendment No. 1 to the proposed rule
change. The propose rule change as
amended by Amendment No. 1 is
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
8 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
7 15
U.S.C. 78s(b)(3)(A)(ii).
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and Amendment No. 1 to 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
allow OCC to provide central clearing of
OTC options beginning in the first
quarter of 2012.
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 these statements.
(A) Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
The purpose of this proposed rule
change is to allow OCC to provide
central clearing of OTC options
beginning in the first quarter of 2012.
OCC will clear the proposed OTC
options in a manner that is highly
similar to the manner in which it clears
listed options, with only such
modifications as are appropriate to
reflect the unique characteristics of OTC
options.
OTC Options
The initial OTC options to be cleared
by OCC will consist of options on equity
indices published by Standard & Poor’s
Financial Services LLC (‘‘S&P’’).3 OCC
has entered into a license agreement
with S&P that allows OCC to clear OTC
options on the S&P 500 Index, the S&P
MidCap 400 Index and the S&P Small
Cap 600 Index. OCC may clear OTC
options on other indices and on
individual equity securities in the
future. OTC options will have
predominantly common terms and
characteristics, but also include unique
terms negotiated by the parties.
Transactions in OTC options will not be
executed through the facilities of any
3 OCC indicated that if it intends to clear
additional non-S&P OTC products it will file a
proposed rule change with the Commission
pursuant to Section 19(b)(2) of the Act. Telephone
conference between Steve Szarmack, Vice President
and Associate General Counsel, OCC, and Pamela
Kesner, Special Counsel, Securities and Exchange
Commission Division of Trading and Markets on
December 22, 2011.
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exchange, but will instead be entered
into bilaterally and submitted to OCC
for clearance through one or more
providers of trade affirmation services.4
OTC options will be similar to
exchange-traded standardized equity
index options called ‘‘FLEX Options’’
that are currently traded on certain
options exchanges.5 FLEX Options are
exchange-traded put and call options
that allow for customization of certain
terms. For example, FLEX index
Options traded on the Chicago Board
Options Exchange have six
customizable terms: (1) underlying
index, (2) put or call, (3) expiration date,
(4) exercise price, (5) American or
European exercise style, and (6) method
of calculating settlement value. OCC is
the issuer and guarantor of FLEX
Options and clears FLEX Options traded
on multiple exchanges.
Similar to FLEX Options, a limited
number of variable terms of OTC
options will be allowed for
customization, with a specified range of
values that may be assigned to each, as
agreed between the buyer and seller.
Parties submitting transactions in OTC
options for clearing by OCC will be able
to customize six discrete terms: (1)
Underlying index 6 (2) put or call; (3)
exercise price; (4) expiration date; (5)
American or European exercise style;
and (6) method of calculating exercise
settlement value on the expiration date.7
The variable terms and permitted values
will be specified in the proposed
Section 6 of Article XVII of the By-Laws.
With respect to future OTC options
accepted for clearing, OCC intends that
such future OTC options will conform
to the general variable terms and limits
on the variable terms set forth in
4 The initial provider of the trade affirmation
services in connection with the OTC options will
be MarkitServ.
5 Note that FINRA Rule 2360(a)(16) refers to FLEX
Options as ‘‘FLEX Equity Options’’, which it
defines as ‘‘any options contract issued, or subject
to issuance by, The Options Clearing Corporation
whereby the parties to the transaction have the
ability to negotiate the terms of the contract
consistent with the rules of the exchange on which
the options contract is traded.’’ OCC does not
believe this definition would capture OTC options
as they are not traded on any exchange.
Nevertheless, as discussed below, OCC is working
with FINRA to amend certain of FINRA’s rules to
clarify the proper application of such rules to OTC
options.
6 Initially, however, the S&P 500 Index will be the
only permitted underlying index.
7 The expiration date of an OTC option must fall
on a business day. The method of determining the
exercise settlement value of an OTC option on its
expiration date may be either the opening
settlement value or the closing settlement value of
the underlying index (calculated by S&P using the
opening or closing price, as applicable, in the
primary market of each component security of the
underlying index on the specified expiration date),
in each case as reported to OCC by CBOE.
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proposed Section 6 of the By-Laws, and
will either amend the Interpretations
and Policies thereunder to specify
additional requirements for specific
OTC options or publish such
requirements on OCC’s Web site.
Clearing of OTC Options
OCC proposes to clear OTC options
subject to the same basic rules and
procedures used for the clearance of
listed index options. The proposed rules
require that the counterparties to the
OTC options must be eligible contract
participants (‘‘ECPs’’), as defined in
Section 3a(65) of the Securities
Exchange Act of 1934, as amended (the
‘‘Exchange Act’’) and Section 1a(18) of
the Commodity Exchange Act, as
amended (the ‘‘CEA’’).8 Because an OTC
option will be a ‘‘security’’ as defined in
the Exchange Act of 1934, the proposed
rules also require that the transactions
be cleared through a clearing member of
OCC that is registered with the
Commission as a broker-dealer or one of
the small number of clearing members
that are ‘‘non-U.S. securities firms’’ as
defined in OCC’s By-Laws.9 OCC is not
proposing to require clearing members
to meet any different financial standards
for clearing OTC options. However,
clearing members must be specifically
approved by OCC to clear OTC options
in order to assure operational readiness.
Exercise of an OTC option will be
settled by payment of cash by the
assigned writer and to the exercising
holder through OCC’s cash settlement
system on the business day following
exercise in exactly the same manner as
is the case with exercise settlement of
listed index options. As in the case of
listed index options, the exercisesettlement amount will be equal to the
difference between the current value of
the underlying interest and the exercise
price of the OTC option, times the
multiplier that determines the size of
the OTC option. In the case of OTC
index options on the S&P 500, the
multiplier will be fixed at 1. The
multipliers for additional OTC index
options that OCC may in the future clear
may be fixed at such value as OCC
determines and provides for in its ByLaws and Rules.
OCC will calculate clearing margin for
the OTC options using its STANS
margin system on the same basis as for
listed index options. Because OCC
currently clears listed options on all
three of the underlying indexes on
which OCC is currently licensed to clear
8 See
proposed Section 6(f), Article XVII of the
By-Laws.
9 See proposed Interpretation and Policy .10 of
Section 1, Article V of the By-Laws.
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OTC options, and because the
customizable terms of these OTC
options are relatively limited and the
range of values that customizable terms
may be given is limited, OCC does not
believe that valuation and risk
management for these OTC options
present any difficult challenges.
Nevertheless, as discussed further
below, OCC is proposing a special closeout rule to be used in the unlikely event
that OCC would be unable to close out
positions in OTC options of a failed
clearing member through existing
procedures.
OTC options may be carried in a
clearing member’s firm account, in
market-maker accounts or in its
securities customers’ account, as
applicable. Although customer positions
in OTC options will be carried in the
securities customers’ account (an
omnibus account), OCC will use a
‘‘customer ID’’ to identify positions of
individual customers based on
information provided by clearing
members.10 However, positions are not
presently intended to be carried in
individual customer sub-accounts, and
positions in OTC options will be
margined at OCC in the omnibus
customers’ account on the same basis as
listed options. If a clearing member
takes the other side of a transaction with
its customer in an OTC option, the
transaction will result in the creation of
a long or short position (as applicable)
in the clearing member’s customers’
account and the opposite short or long
position in the clearing member’s firm
account. The positions could also be
includable in the internal crossmargining account, subject to any
necessary regulatory approvals.
The trade data of an OTC option trade
will be entered into the system of
MarkitSERV or another trade affirmation
vendor approved by OCC for this
purpose (the ‘‘OTC Trade Source’’). OCC
will permit additional OTC Trade
Sources in the future in response to
sufficient market demand from OCC’s
clearing members and subject to the
ability of any such OTC Trade Source to
meet OCC’s requirements for
operational readiness and
interoperability with OCC’s systems, as
well as requirements with respect to
relevant business experience and
reputation, adequate personnel and
expertise, financial qualification and
such other factors as OCC deems
relevant. The trade may be affirmed
through one of two methods: (i) both
10 Such customer IDs are necessary in order to
allow OCC to comply with certain terms of OCC’s
license agreement with S&P. As described further
below, customer IDs will be used for other purposes
as well.
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sides of the trade enter the trade details
into the system of the OTC Trade Source
and the trade details are compared and
matched by the OTC Trade Source; or
(ii) one party to the trade enters the
trade details into the system of the OTC
Trade Source and the other party to the
trade then views the information and
affirms it if it is correct. Whichever
method is used, OCC will receive a
matched trade from the OTC Trade
Source. Note that, in either case, the
OTC Trade Source merely acts as a
messaging system among the parties and
OCC to affirm the terms that are agreed
to by the parties bilaterally and to
transmit that information to OCC. It will
be permissible for parties to submit
trades for clearance that were entered
into bilaterally at any time in the past,
provided that the eligibility for
clearance will be determined as of the
date the trade is submitted to OCC for
clearance.11 The OTC Trade Source will
process the trade and submit it as a
matched trade to OCC for clearing. If
OCC accepts the trade, OCC will so
notify the OTC Trade Source, which
will notify the submitting parties.
Customers of clearing members may
have direct access to the OTC Trade
Source for purposes of entering or
affirming trade data and receiving
communications regarding the status of
transactions, in which case mechanisms
will be put in place for a clearing
member to authorize a customer to enter
a trade for the clearing member’s
customers’ account or for the clearing
member to affirm a trade once entered.
In order for a clearing member to be
approved for clearing OTC options, the
clearing member must enter into a
standard agreement with MarkitServ (or
another OTC Trade Source, if and when
OCC enters into arrangements with
other OTC Trade Sources). At launch,
OTC options will not be subject to the
same clearing member trade assignment
rules and procedures through which
exchange-traded options can be cleared
by a clearing member other than the
executing clearing member. This
functionality may be added at a later
date. OCC and MarkitSERV will adopt
procedures to permit a customer that
has an account with Clearing Member A
(‘‘CM A’’) to enter into an OTC option
transaction with Clearing Member B
(‘‘CM B’’) and have the position
included in its account at CM A and
cleared in CM A’s customers’ account at
OCC.
11 OCC’s license agreement with S&P imposes
certain minimum requirements relating to time
remaining to expiration of the OTC option, as
detailed in proposed Interpretation and Policy .01
of Section 6, Article XVII of the By-Laws.
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OTC options will be fungible with
each other to the extent that there are
OTC options in the system with
identical terms. However, OCC will not
treat OTC options as fungible with
index options listed on any exchange,
even if an OTC option has terms
identical to the terms of the exchangelisted option.
Clearing members that carry customer
positions in cleared OTC options will be
subject to all OCC rules governing OCCcleared options generally, as well as all
applicable rules of the SEC and of any
self-regulatory organization, including
the Financial Industry Regulatory
Authority (‘‘FINRA’’), of which they are
a member.
Regulatory Status of the OTC Options
An OTC option will be a ‘‘security’’ as
defined in both the Securities Act of
1933, as amended (the ‘‘Securities Act’’)
and, as noted above, the Exchange Act.
OCC will be the ‘‘issuer’’ of the OTC
options. The OTC options will be
neither ‘‘swaps’’ nor ‘‘security-based
swaps’’ for purposes of the Dodd-Frank
Wall Street Reform and Consumer
Protection Act (‘‘Dodd-Frank’’).12
Most of OCC’s clearing members are
members of FINRA and subject to
FINRA’s rules, which have different
provisions for ‘‘listed’’ and ‘‘OTC
options’’ and contain various definitions
distinguishing between the two. In some
cases, OTC options would fall into
neither category under FINRA’s
definitions and in other cases, they
would fall within what OCC perceives
to be the wrong category. OCC has
suggested to FINRA that it amend
certain of its rules to clarify the proper
application of such rules to cleared OTC
options.
Proposed By-Law and Rule Changes
The specific proposed changes to
OCC’s By-Laws and Rules to provide for
the clearing of OTC options relate
primarily to: (i) Specification of
customizable terms; (ii) procedures for
submission and acceptance of trades for
clearance; and (iii) specification of
criteria for eligibility of clearing
members to clear transactions in OTC
options and limitation of the types of
customers for whom clearing members
may effect transactions in OTC options.
12 Section 1a(47)(A)(i) of CEA, as added by
Section 721(a)(21) of Dodd-Frank, defines ‘‘swaps’’
broadly to include options on indices. However,
Section 1a(47)(B)(iii) of the CEA excludes from the
‘‘swap’’ definition any option on any index of
securities that is subject to the Securities Act and
the Exchange Act. A contract that is excluded from
the definition of a ‘‘swap’’ under Section 1a(47)(B)
(other than Section 1a(47)(B)(x)) is not a ‘‘securitybased swap’’ for purposes of Section 3a(68) of the
Exchange Act.
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Otherwise, the currently proposed OTC
options will be cleared and settled
under the same provisions applicable to
clearance of listed index options. Many
of the proposed amendments are selfexplanatory, and we have therefore
attempted to confine the following
discussion to a broad overview with
specific explanation only where the
reasons for the change may be less
obvious.
Article I of the By-Laws contains
defined terms used throughout the ByLaws and Rules. OCC proposes to
modify certain existing definitions and
include certain new definitions in order
to incorporate OTC options into existing
rules and facilitate the creation of new
provisions unique to OTC options.
Throughout the By-Laws and Rules,
OCC proposes to replace the term
‘‘Exchange transaction,’’ which is
currently defined in Article I, in
relevant part, as ‘‘a transaction on or
through the facilities of an exchange for
the purchase, writing or sale of a cleared
contract’’ with the term ‘‘matched
trade’’ so as to make the relevant
portions of the By-Laws and Rules
applicable to transactions in OTC
options as well as listed options.
‘‘Matched trade’’ is proposed to be
defined in Article I to include
transactions ‘‘effected on or through the
facilities of an exchange’’ or ‘‘affirmed
through the facilities of an OTC Trade
Source’’ in order to include transactions
in both listed options and OTC options.
The current definition of ‘‘matched
trade’’ in Rule 101 is proposed to be
deleted as unnecessary given the new
definition. Much of the length of this
rule filing is attributable to the fact that
the term ‘‘Exchange transaction’’ is used
so many places in the rules. OCC has
entered into agreements in the past
which reference the term ‘‘Exchange
transaction’’ or ‘‘exchange transaction.’’
OCC is also proposing to add an
Interpretation and Policy to the new
definition of ‘‘matched trade’’ in order
to avoid any ambiguity concerning how
such terms should be interpreted in any
such agreement.
OCC proposes to add a new
Interpretation and Policy .10 to Section
1 of Article V of the By-Laws, providing
the additional criteria that must be met
by a Clearing Member in order to clear
OTC index options. Among these new
criteria are that Clearing Member
seeking to clear OTC index options on
underlying indices published by
Standard & Poor’s Financial Services
LLC (‘‘S&P’’) must execute and maintain
in effect a short-form license agreement
in such form as specified from time to
time by S&P. The current form of S&P
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short-form index license agreement is
attached hereto as Exhibit A.
The Interpretations and Policies
under Section 1, Article VI allow
clearing members to adjust their
positions with OCC for certain
enumerated reasons. OCC proposes to
amend the Interpretations and Policies
to clarify that, consistent with industry
conventions in the OTC markets,
adjustment of positions in OTC options
will be effected through a manual
process (as opposed to the electronic
process available to post-trade
adjustments in listed options), to the
extent permitted by OCC. For the same
reason, OCC is proposing to amend Rule
403 to prohibit clearing member trade
assignment (‘‘CMTA’’) transactions in
OTC options. Trade ‘‘give-ups’’ that are
effected through the CMTA process in
the case of listed options will, in the
case of OTC options, be effected through
MarkitSERV before the trades are
submitted to OCC for clearing.
Article XVII of the By-Laws governs
index options in general and OCC is
proposing amendments to Article XVII
in order to set forth the terms applicable
to the initial OTC options proposed to
be cleared by OCC—options on equity
indices published by S&P—and to
differentiate OTC index options from
other index options cleared by OCC. For
example, certain amendments to the
definitions are necessary because OTC
options will be permitted to have a
much wider range of expiration dates
and expiration times than exchangetraded options. Additional definitional
amendments ensure that OTC index
options will constitute a separate class
of options from other cash-settled index
options even if both index options have
the same terms and cover the same
underlying interest.
Section 3 of Article XVII provides for
adjustment of the terms of outstanding
index options as necessary to reflect
possible changes in the underlying
index—such as those creating a
discontinuity in the level of the index—
that could theoretically make an
adjustment necessary to protect the
legitimate expectations of holders and
writers of options on the index.
Pursuant to paragraph (g) of Section 3,
most but not all such adjustments
would be made, in the case of listed
index options, by an adjustment panel
consisting of representatives of the
exchanges on which the options are
traded. In the case of OTC options, any
such adjustments will be made by OCC
in its sole discretion. However, in
exercising that discretion, OCC may take
into consideration adjustment made by
the adjustment panel with respect to
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exchange-traded options covering the
same underlying index.13
OCC proposes to add a new Section
6 to Article XVII to set forth certain
provisions unique to OTC index
options, including the variable terms
allowed for OTC index options and the
general limitations on such variable
terms. In general, all OTC index options
must conform to the terms and
limitations set forth in Section 6, and
additional specific requirements
applicable to specific OTC index
options will either be set forth in the
Interpretations and Policies under
Section 6 or published separately on
OCC’s Web site. Section 6 also makes
clear that although OTC index options
are not fungible with exchange-traded
index options, OTC index options of the
same series (i.e., options having
identical terms) will be fungible with
each other. In addition to the terms and
limitations applicable to OTC index
options, Section 6 will establish that
clearing members will be deemed to
have made a number of representations
and warranties in connection with their
activities in OTC options each time they
affirm a matched trade entered into an
OTC Trade Source.
Chapter IV of the Rules sets forth the
requirements for reporting of matched
trades to OCC, and Rule 401 thereunder
governs reporting of transactions in
listed options by participant Exchanges.
OCC is proposing to add new Rule 404
to govern the details of reporting of
matched trades in OTC options by an
OTC Trade Source.
As discussed above, positions in OTC
options will generally be margined in
the same manner as positions in listed
options using STANS and pursuant to
Chapter VI of the Rules. However, OCC
proposes to amend Rule 611 to establish
different procedures for the segregation
of long positions in OTC options for
margining purposes. Long positions in
listed options are held in a clearing
member’s customers’ account or firm
non-lien account and by default are
deemed to be ‘‘segregated,’’ meaning
that they are not subject to OCC’s lien
and are given no collateral value when
determining the margin requirement in
the account. Such positions may be
unsegregated only when a clearing
member instructs OCC to unsegregate a
long position and represents to OCC that
the long position is part of a spread
transaction carried for a single customer
whose margin requirement on the
corresponding short position has been
13 Because index options, unlike options on
individual stocks, rarely, if ever, require
adjustments, allocation of the adjustment authority
may have little practical significance.
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reduced in recognition of the spread.
OCC will then unsegregate the long
position and so reduce OCC’s margin
requirement. However, in case of long
positions in OTC options that are
carried in a clearing member’s
customers’ account and for which OCC
has received a customer ID, OCC
proposes that it will automatically
unsegregate such long positions if OCC
identifies a qualifying short position in
OTC options carried under the same
customer ID. Clearing members will not
be required to give an affirmative
instruction to OCC to unsegregate a long
position in OTC options or make a
separate representation regarding the
spread transaction. Instead, by carrying
a qualifying spread position in a
customer account, clearing members are
deemed to have represented to OCC that
the customer’s margin has been reduced
in recognition of the spread. Based on
discussion with the clearing members, it
is OCC’s understanding that, in practice,
broker-dealers reduce customers’ margin
requirements to reflect spread positions.
Therefore, OCC believes that automatic
recognition of such spreads by OCC
together with the deemed representation
will greatly increase operational
efficiency while providing equal
assurance that long positions in OTC
options will be unsegregated only if an
identified customer will receive the
benefit of the reduced margin required
for spread transactions.
Rule 1001 sets forth the amount of the
contribution that each clearing member
is required to make to the clearing fund.
OCC proposes to amend Rule 1001(c) so
that, for purposes of calculating the
daily average number of cleared
contracts held by a clearing member in
open positions with OCC during a
calendar month (which number is used
in turn to determine the clearing
member’s contribution to the clearing
fund), open positions in OTC options
will be adjusted as needed to account
for any differences between the
multiplier or unit of trading with
respect to OTC options relative to nonOTC options covering the same
underlying index or interest so that OTC
options and non-OTC options are given
comparable weight in the
computation.14
In general, the rules in Chapter XI
governing the suspension of a clearing
member will apply equally to clearing
members that transact in OTC options.
Rule 1106 provides broad authority for
14 For example, the index multiplier applicable to
OTC index options on the S&P 500 Index will be
fixed at 1. See proposed Interpretation and Policy
.01 of Section 6, Article XVII of the By-Laws. In
comparison, the index multiplier applicable to
listed index options is 100.
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tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 5 / Monday, January 9, 2012 / Notices
OCC to close out open positions in
options carried by a suspended clearing
member ‘‘in the most orderly manner
practicable.’’ OCC is proposing to
amend Rule 1106 to add an additional
provision with respect to positions in
OTC options. The Commission has
recently approved an OCC rule change
providing OCC the authority to use an
auction process as one of the means by
which OCC may close out open
positions in listed options carried by a
suspended clearing member.15 OCC
anticipates it will use this auction
process for OTC options as well. As an
additional protection, however, OCC is
proposing to amend Rule 1106 to give
OCC the authority, in extraordinary
circumstances, to fix a liquidation value
for open OTC options positions of a
suspended clearing member if OCC
determines that fixing a close-out value
is the most orderly manner of closing
out such positions. This procedure
would mean that one or more clearing
members having the opposite side of
options of the same series as those held
by the defaulting clearing member could
have their positions involuntarily closed
out and would be required to accept or
pay the close-out value of the positions
as determined by OCC. OCC anticipates
that the likelihood of having to exercise
this authority is small, and that the
authority would only be exercised in the
event that OCC is unable to find a
counterparty willing to purchase, or
assume the obligations of, open long
and short positions of the suspended
clearing member at an appropriate value
either through the regular OTC market
or through the auction process.
Nevertheless, in view of the fact that
positions in OTC index options are
expected to be large and that there may
be no active trading market in options
with terms precisely identical to the
terms of the OTC index options in
question, OCC believes that this is an
appropriate failsafe provision.
OCC believes that the proposed
changes to OCC’s By-Laws are
consistent with the purposes and
requirements of Section 17A of the
Exchange Act because they are designed
to permit OCC to perform clearing
services for products that are subject to
the jurisdiction of the CFTC without
adversely affecting OCC’s obligations
with respect to the prompt and accurate
clearance and settlement of securities
transactions or the protection of
securities investors and the public
interest. The proposed rule change is
not inconsistent with any rules of OCC.
15 See Securities Exchange Act Release 65654
(October 28, 2011), 76 FR 68238 (November 3,
2011).
VerDate Mar<15>2010
16:26 Jan 06, 2012
Jkt 226001
(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 relating to the
proposed rule change have not been
solicited or received. OCC will notify
the Commission of any written
comments received by OCC.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate 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 or disapprove
the proposed rule change or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
Electronic Comments
1111
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing 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 filings
will also be available for inspection and
copying at the principal office of OCC
and on OCC’s Web site at https://
www.optionsclearing.com/components/
docs/legal/rules_and_bylaws/
sr_occ_11_19_a_1.pdf. 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–
2011–19 and should be submitted on or
before January 30, 2012.
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.16
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–112 Filed 1–6–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
• Use the Commissions Internet
comment form (https://www.sec.gov/
rules/sro.shtml) or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–OCC–2011–19 on the
subject line.
[Release No. 34–66086; File No. SR–Phlx–
2011–181]
Paper Comments
January 3, 2012.
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–OCC–2011–19. This file
number should be included on the
subject line if email 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
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
21, 2011, NASDAQ OMX PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
PO 00000
Frm 00063
Fmt 4703
Sfmt 4703
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Access
Service Fees
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend the
following Access Service Fees: (i) the
Trading/Administrative Booths and
16 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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]]>Agencies
[Federal Register Volume 77, Number 5 (Monday, January 9, 2012)]
[Notices]
[Pages 1107-1111]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-112]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66090; File No. SR-OCC-2011-19]
Self-Regulatory Organizations; Options Clearing Corporation;
Notice of Filing of Proposed Rule Change, as Modified by Amendment No.
1 Thereto, Relating to the Clearance and Settlement of Over-the-Counter
Options
January 3, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that
on December 20, 2011, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change. On January 3, 2012, OCC filed Amendment No. 1 to
the proposed rule change. The propose rule change as amended by
Amendment No. 1 is 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 and Amendment
No. 1 to the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change would allow OCC to provide central
clearing of OTC options beginning in the first quarter of 2012.
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 these
statements.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The purpose of this proposed rule change is to allow OCC to provide
central clearing of OTC options beginning in the first quarter of 2012.
OCC will clear the proposed OTC options in a manner that is highly
similar to the manner in which it clears listed options, with only such
modifications as are appropriate to reflect the unique characteristics
of OTC options.
OTC Options
The initial OTC options to be cleared by OCC will consist of
options on equity indices published by Standard & Poor's Financial
Services LLC (``S&P'').\3\ OCC has entered into a license agreement
with S&P that allows OCC to clear OTC options on the S&P 500 Index, the
S&P MidCap 400 Index and the S&P Small Cap 600 Index. OCC may clear OTC
options on other indices and on individual equity securities in the
future. OTC options will have predominantly common terms and
characteristics, but also include unique terms negotiated by the
parties. Transactions in OTC options will not be executed through the
facilities of any
[[Page 1108]]
exchange, but will instead be entered into bilaterally and submitted to
OCC for clearance through one or more providers of trade affirmation
services.\4\
---------------------------------------------------------------------------
\3\ OCC indicated that if it intends to clear additional non-S&P
OTC products it will file a proposed rule change with the Commission
pursuant to Section 19(b)(2) of the Act. Telephone conference
between Steve Szarmack, Vice President and Associate General
Counsel, OCC, and Pamela Kesner, Special Counsel, Securities and
Exchange Commission Division of Trading and Markets on December 22,
2011.
\4\ The initial provider of the trade affirmation services in
connection with the OTC options will be MarkitServ.
---------------------------------------------------------------------------
OTC options will be similar to exchange-traded standardized equity
index options called ``FLEX Options'' that are currently traded on
certain options exchanges.\5\ FLEX Options are exchange-traded put and
call options that allow for customization of certain terms. For
example, FLEX index Options traded on the Chicago Board Options
Exchange have six customizable terms: (1) underlying index, (2) put or
call, (3) expiration date, (4) exercise price, (5) American or European
exercise style, and (6) method of calculating settlement value. OCC is
the issuer and guarantor of FLEX Options and clears FLEX Options traded
on multiple exchanges.
---------------------------------------------------------------------------
\5\ Note that FINRA Rule 2360(a)(16) refers to FLEX Options as
``FLEX Equity Options'', which it defines as ``any options contract
issued, or subject to issuance by, The Options Clearing Corporation
whereby the parties to the transaction have the ability to negotiate
the terms of the contract consistent with the rules of the exchange
on which the options contract is traded.'' OCC does not believe this
definition would capture OTC options as they are not traded on any
exchange. Nevertheless, as discussed below, OCC is working with
FINRA to amend certain of FINRA's rules to clarify the proper
application of such rules to OTC options.
---------------------------------------------------------------------------
Similar to FLEX Options, a limited number of variable terms of OTC
options will be allowed for customization, with a specified range of
values that may be assigned to each, as agreed between the buyer and
seller. Parties submitting transactions in OTC options for clearing by
OCC will be able to customize six discrete terms: (1) Underlying index
\6\ (2) put or call; (3) exercise price; (4) expiration date; (5)
American or European exercise style; and (6) method of calculating
exercise settlement value on the expiration date.\7\ The variable terms
and permitted values will be specified in the proposed Section 6 of
Article XVII of the By-Laws. With respect to future OTC options
accepted for clearing, OCC intends that such future OTC options will
conform to the general variable terms and limits on the variable terms
set forth in proposed Section 6 of the By-Laws, and will either amend
the Interpretations and Policies thereunder to specify additional
requirements for specific OTC options or publish such requirements on
OCC's Web site.
---------------------------------------------------------------------------
\6\ Initially, however, the S&P 500 Index will be the only
permitted underlying index.
\7\ The expiration date of an OTC option must fall on a business
day. The method of determining the exercise settlement value of an
OTC option on its expiration date may be either the opening
settlement value or the closing settlement value of the underlying
index (calculated by S&P using the opening or closing price, as
applicable, in the primary market of each component security of the
underlying index on the specified expiration date), in each case as
reported to OCC by CBOE.
---------------------------------------------------------------------------
Clearing of OTC Options
OCC proposes to clear OTC options subject to the same basic rules
and procedures used for the clearance of listed index options. The
proposed rules require that the counterparties to the OTC options must
be eligible contract participants (``ECPs''), as defined in Section
3a(65) of the Securities Exchange Act of 1934, as amended (the
``Exchange Act'') and Section 1a(18) of the Commodity Exchange Act, as
amended (the ``CEA'').\8\ Because an OTC option will be a ``security''
as defined in the Exchange Act of 1934, the proposed rules also require
that the transactions be cleared through a clearing member of OCC that
is registered with the Commission as a broker-dealer or one of the
small number of clearing members that are ``non-U.S. securities firms''
as defined in OCC's By-Laws.\9\ OCC is not proposing to require
clearing members to meet any different financial standards for clearing
OTC options. However, clearing members must be specifically approved by
OCC to clear OTC options in order to assure operational readiness.
---------------------------------------------------------------------------
\8\ See proposed Section 6(f), Article XVII of the By-Laws.
\9\ See proposed Interpretation and Policy .10 of Section 1,
Article V of the By-Laws.
---------------------------------------------------------------------------
Exercise of an OTC option will be settled by payment of cash by the
assigned writer and to the exercising holder through OCC's cash
settlement system on the business day following exercise in exactly the
same manner as is the case with exercise settlement of listed index
options. As in the case of listed index options, the exercise-
settlement amount will be equal to the difference between the current
value of the underlying interest and the exercise price of the OTC
option, times the multiplier that determines the size of the OTC
option. In the case of OTC index options on the S&P 500, the multiplier
will be fixed at 1. The multipliers for additional OTC index options
that OCC may in the future clear may be fixed at such value as OCC
determines and provides for in its By-Laws and Rules.
OCC will calculate clearing margin for the OTC options using its
STANS margin system on the same basis as for listed index options.
Because OCC currently clears listed options on all three of the
underlying indexes on which OCC is currently licensed to clear OTC
options, and because the customizable terms of these OTC options are
relatively limited and the range of values that customizable terms may
be given is limited, OCC does not believe that valuation and risk
management for these OTC options present any difficult challenges.
Nevertheless, as discussed further below, OCC is proposing a special
close-out rule to be used in the unlikely event that OCC would be
unable to close out positions in OTC options of a failed clearing
member through existing procedures.
OTC options may be carried in a clearing member's firm account, in
market-maker accounts or in its securities customers' account, as
applicable. Although customer positions in OTC options will be carried
in the securities customers' account (an omnibus account), OCC will use
a ``customer ID'' to identify positions of individual customers based
on information provided by clearing members.\10\ However, positions are
not presently intended to be carried in individual customer sub-
accounts, and positions in OTC options will be margined at OCC in the
omnibus customers' account on the same basis as listed options. If a
clearing member takes the other side of a transaction with its customer
in an OTC option, the transaction will result in the creation of a long
or short position (as applicable) in the clearing member's customers'
account and the opposite short or long position in the clearing
member's firm account. The positions could also be includable in the
internal cross-margining account, subject to any necessary regulatory
approvals.
---------------------------------------------------------------------------
\10\ Such customer IDs are necessary in order to allow OCC to
comply with certain terms of OCC's license agreement with S&P. As
described further below, customer IDs will be used for other
purposes as well.
---------------------------------------------------------------------------
The trade data of an OTC option trade will be entered into the
system of MarkitSERV or another trade affirmation vendor approved by
OCC for this purpose (the ``OTC Trade Source''). OCC will permit
additional OTC Trade Sources in the future in response to sufficient
market demand from OCC's clearing members and subject to the ability of
any such OTC Trade Source to meet OCC's requirements for operational
readiness and interoperability with OCC's systems, as well as
requirements with respect to relevant business experience and
reputation, adequate personnel and expertise, financial qualification
and such other factors as OCC deems relevant. The trade may be affirmed
through one of two methods: (i) both
[[Page 1109]]
sides of the trade enter the trade details into the system of the OTC
Trade Source and the trade details are compared and matched by the OTC
Trade Source; or (ii) one party to the trade enters the trade details
into the system of the OTC Trade Source and the other party to the
trade then views the information and affirms it if it is correct.
Whichever method is used, OCC will receive a matched trade from the OTC
Trade Source. Note that, in either case, the OTC Trade Source merely
acts as a messaging system among the parties and OCC to affirm the
terms that are agreed to by the parties bilaterally and to transmit
that information to OCC. It will be permissible for parties to submit
trades for clearance that were entered into bilaterally at any time in
the past, provided that the eligibility for clearance will be
determined as of the date the trade is submitted to OCC for
clearance.\11\ The OTC Trade Source will process the trade and submit
it as a matched trade to OCC for clearing. If OCC accepts the trade,
OCC will so notify the OTC Trade Source, which will notify the
submitting parties. Customers of clearing members may have direct
access to the OTC Trade Source for purposes of entering or affirming
trade data and receiving communications regarding the status of
transactions, in which case mechanisms will be put in place for a
clearing member to authorize a customer to enter a trade for the
clearing member's customers' account or for the clearing member to
affirm a trade once entered.
---------------------------------------------------------------------------
\11\ OCC's license agreement with S&P imposes certain minimum
requirements relating to time remaining to expiration of the OTC
option, as detailed in proposed Interpretation and Policy .01 of
Section 6, Article XVII of the By-Laws.
---------------------------------------------------------------------------
In order for a clearing member to be approved for clearing OTC
options, the clearing member must enter into a standard agreement with
MarkitServ (or another OTC Trade Source, if and when OCC enters into
arrangements with other OTC Trade Sources). At launch, OTC options will
not be subject to the same clearing member trade assignment rules and
procedures through which exchange-traded options can be cleared by a
clearing member other than the executing clearing member. This
functionality may be added at a later date. OCC and MarkitSERV will
adopt procedures to permit a customer that has an account with Clearing
Member A (``CM A'') to enter into an OTC option transaction with
Clearing Member B (``CM B'') and have the position included in its
account at CM A and cleared in CM A's customers' account at OCC.
OTC options will be fungible with each other to the extent that
there are OTC options in the system with identical terms. However, OCC
will not treat OTC options as fungible with index options listed on any
exchange, even if an OTC option has terms identical to the terms of the
exchange-listed option.
Clearing members that carry customer positions in cleared OTC
options will be subject to all OCC rules governing OCC-cleared options
generally, as well as all applicable rules of the SEC and of any self-
regulatory organization, including the Financial Industry Regulatory
Authority (``FINRA''), of which they are a member.
Regulatory Status of the OTC Options
An OTC option will be a ``security'' as defined in both the
Securities Act of 1933, as amended (the ``Securities Act'') and, as
noted above, the Exchange Act. OCC will be the ``issuer'' of the OTC
options. The OTC options will be neither ``swaps'' nor ``security-based
swaps'' for purposes of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Dodd-Frank'').\12\
---------------------------------------------------------------------------
\12\ Section 1a(47)(A)(i) of CEA, as added by Section 721(a)(21)
of Dodd-Frank, defines ``swaps'' broadly to include options on
indices. However, Section 1a(47)(B)(iii) of the CEA excludes from
the ``swap'' definition any option on any index of securities that
is subject to the Securities Act and the Exchange Act. A contract
that is excluded from the definition of a ``swap'' under Section
1a(47)(B) (other than Section 1a(47)(B)(x)) is not a ``security-
based swap'' for purposes of Section 3a(68) of the Exchange Act.
---------------------------------------------------------------------------
Most of OCC's clearing members are members of FINRA and subject to
FINRA's rules, which have different provisions for ``listed'' and ``OTC
options'' and contain various definitions distinguishing between the
two. In some cases, OTC options would fall into neither category under
FINRA's definitions and in other cases, they would fall within what OCC
perceives to be the wrong category. OCC has suggested to FINRA that it
amend certain of its rules to clarify the proper application of such
rules to cleared OTC options.
Proposed By-Law and Rule Changes
The specific proposed changes to OCC's By-Laws and Rules to provide
for the clearing of OTC options relate primarily to: (i) Specification
of customizable terms; (ii) procedures for submission and acceptance of
trades for clearance; and (iii) specification of criteria for
eligibility of clearing members to clear transactions in OTC options
and limitation of the types of customers for whom clearing members may
effect transactions in OTC options. Otherwise, the currently proposed
OTC options will be cleared and settled under the same provisions
applicable to clearance of listed index options. Many of the proposed
amendments are self-explanatory, and we have therefore attempted to
confine the following discussion to a broad overview with specific
explanation only where the reasons for the change may be less obvious.
Article I of the By-Laws contains defined terms used throughout the
By-Laws and Rules. OCC proposes to modify certain existing definitions
and include certain new definitions in order to incorporate OTC options
into existing rules and facilitate the creation of new provisions
unique to OTC options. Throughout the By-Laws and Rules, OCC proposes
to replace the term ``Exchange transaction,'' which is currently
defined in Article I, in relevant part, as ``a transaction on or
through the facilities of an exchange for the purchase, writing or sale
of a cleared contract'' with the term ``matched trade'' so as to make
the relevant portions of the By-Laws and Rules applicable to
transactions in OTC options as well as listed options. ``Matched
trade'' is proposed to be defined in Article I to include transactions
``effected on or through the facilities of an exchange'' or ``affirmed
through the facilities of an OTC Trade Source'' in order to include
transactions in both listed options and OTC options. The current
definition of ``matched trade'' in Rule 101 is proposed to be deleted
as unnecessary given the new definition. Much of the length of this
rule filing is attributable to the fact that the term ``Exchange
transaction'' is used so many places in the rules. OCC has entered into
agreements in the past which reference the term ``Exchange
transaction'' or ``exchange transaction.'' OCC is also proposing to add
an Interpretation and Policy to the new definition of ``matched trade''
in order to avoid any ambiguity concerning how such terms should be
interpreted in any such agreement.
OCC proposes to add a new Interpretation and Policy .10 to Section
1 of Article V of the By-Laws, providing the additional criteria that
must be met by a Clearing Member in order to clear OTC index options.
Among these new criteria are that Clearing Member seeking to clear OTC
index options on underlying indices published by Standard & Poor's
Financial Services LLC (``S&P'') must execute and maintain in effect a
short-form license agreement in such form as specified from time to
time by S&P. The current form of S&P
[[Page 1110]]
short-form index license agreement is attached hereto as Exhibit A.
The Interpretations and Policies under Section 1, Article VI allow
clearing members to adjust their positions with OCC for certain
enumerated reasons. OCC proposes to amend the Interpretations and
Policies to clarify that, consistent with industry conventions in the
OTC markets, adjustment of positions in OTC options will be effected
through a manual process (as opposed to the electronic process
available to post-trade adjustments in listed options), to the extent
permitted by OCC. For the same reason, OCC is proposing to amend Rule
403 to prohibit clearing member trade assignment (``CMTA'')
transactions in OTC options. Trade ``give-ups'' that are effected
through the CMTA process in the case of listed options will, in the
case of OTC options, be effected through MarkitSERV before the trades
are submitted to OCC for clearing.
Article XVII of the By-Laws governs index options in general and
OCC is proposing amendments to Article XVII in order to set forth the
terms applicable to the initial OTC options proposed to be cleared by
OCC--options on equity indices published by S&P--and to differentiate
OTC index options from other index options cleared by OCC. For example,
certain amendments to the definitions are necessary because OTC options
will be permitted to have a much wider range of expiration dates and
expiration times than exchange-traded options. Additional definitional
amendments ensure that OTC index options will constitute a separate
class of options from other cash-settled index options even if both
index options have the same terms and cover the same underlying
interest.
Section 3 of Article XVII provides for adjustment of the terms of
outstanding index options as necessary to reflect possible changes in
the underlying index--such as those creating a discontinuity in the
level of the index--that could theoretically make an adjustment
necessary to protect the legitimate expectations of holders and writers
of options on the index. Pursuant to paragraph (g) of Section 3, most
but not all such adjustments would be made, in the case of listed index
options, by an adjustment panel consisting of representatives of the
exchanges on which the options are traded. In the case of OTC options,
any such adjustments will be made by OCC in its sole discretion.
However, in exercising that discretion, OCC may take into consideration
adjustment made by the adjustment panel with respect to exchange-traded
options covering the same underlying index.\13\
---------------------------------------------------------------------------
\13\ Because index options, unlike options on individual stocks,
rarely, if ever, require adjustments, allocation of the adjustment
authority may have little practical significance.
---------------------------------------------------------------------------
OCC proposes to add a new Section 6 to Article XVII to set forth
certain provisions unique to OTC index options, including the variable
terms allowed for OTC index options and the general limitations on such
variable terms. In general, all OTC index options must conform to the
terms and limitations set forth in Section 6, and additional specific
requirements applicable to specific OTC index options will either be
set forth in the Interpretations and Policies under Section 6 or
published separately on OCC's Web site. Section 6 also makes clear that
although OTC index options are not fungible with exchange-traded index
options, OTC index options of the same series (i.e., options having
identical terms) will be fungible with each other. In addition to the
terms and limitations applicable to OTC index options, Section 6 will
establish that clearing members will be deemed to have made a number of
representations and warranties in connection with their activities in
OTC options each time they affirm a matched trade entered into an OTC
Trade Source.
Chapter IV of the Rules sets forth the requirements for reporting
of matched trades to OCC, and Rule 401 thereunder governs reporting of
transactions in listed options by participant Exchanges. OCC is
proposing to add new Rule 404 to govern the details of reporting of
matched trades in OTC options by an OTC Trade Source.
As discussed above, positions in OTC options will generally be
margined in the same manner as positions in listed options using STANS
and pursuant to Chapter VI of the Rules. However, OCC proposes to amend
Rule 611 to establish different procedures for the segregation of long
positions in OTC options for margining purposes. Long positions in
listed options are held in a clearing member's customers' account or
firm non-lien account and by default are deemed to be ``segregated,''
meaning that they are not subject to OCC's lien and are given no
collateral value when determining the margin requirement in the
account. Such positions may be unsegregated only when a clearing member
instructs OCC to unsegregate a long position and represents to OCC that
the long position is part of a spread transaction carried for a single
customer whose margin requirement on the corresponding short position
has been reduced in recognition of the spread. OCC will then
unsegregate the long position and so reduce OCC's margin requirement.
However, in case of long positions in OTC options that are carried in a
clearing member's customers' account and for which OCC has received a
customer ID, OCC proposes that it will automatically unsegregate such
long positions if OCC identifies a qualifying short position in OTC
options carried under the same customer ID. Clearing members will not
be required to give an affirmative instruction to OCC to unsegregate a
long position in OTC options or make a separate representation
regarding the spread transaction. Instead, by carrying a qualifying
spread position in a customer account, clearing members are deemed to
have represented to OCC that the customer's margin has been reduced in
recognition of the spread. Based on discussion with the clearing
members, it is OCC's understanding that, in practice, broker-dealers
reduce customers' margin requirements to reflect spread positions.
Therefore, OCC believes that automatic recognition of such spreads by
OCC together with the deemed representation will greatly increase
operational efficiency while providing equal assurance that long
positions in OTC options will be unsegregated only if an identified
customer will receive the benefit of the reduced margin required for
spread transactions.
Rule 1001 sets forth the amount of the contribution that each
clearing member is required to make to the clearing fund. OCC proposes
to amend Rule 1001(c) so that, for purposes of calculating the daily
average number of cleared contracts held by a clearing member in open
positions with OCC during a calendar month (which number is used in
turn to determine the clearing member's contribution to the clearing
fund), open positions in OTC options will be adjusted as needed to
account for any differences between the multiplier or unit of trading
with respect to OTC options relative to non-OTC options covering the
same underlying index or interest so that OTC options and non-OTC
options are given comparable weight in the computation.\14\
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\14\ For example, the index multiplier applicable to OTC index
options on the S&P 500 Index will be fixed at 1. See proposed
Interpretation and Policy .01 of Section 6, Article XVII of the By-
Laws. In comparison, the index multiplier applicable to listed index
options is 100.
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In general, the rules in Chapter XI governing the suspension of a
clearing member will apply equally to clearing members that transact in
OTC options. Rule 1106 provides broad authority for
[[Page 1111]]
OCC to close out open positions in options carried by a suspended
clearing member ``in the most orderly manner practicable.'' OCC is
proposing to amend Rule 1106 to add an additional provision with
respect to positions in OTC options. The Commission has recently
approved an OCC rule change providing OCC the authority to use an
auction process as one of the means by which OCC may close out open
positions in listed options carried by a suspended clearing member.\15\
OCC anticipates it will use this auction process for OTC options as
well. As an additional protection, however, OCC is proposing to amend
Rule 1106 to give OCC the authority, in extraordinary circumstances, to
fix a liquidation value for open OTC options positions of a suspended
clearing member if OCC determines that fixing a close-out value is the
most orderly manner of closing out such positions. This procedure would
mean that one or more clearing members having the opposite side of
options of the same series as those held by the defaulting clearing
member could have their positions involuntarily closed out and would be
required to accept or pay the close-out value of the positions as
determined by OCC. OCC anticipates that the likelihood of having to
exercise this authority is small, and that the authority would only be
exercised in the event that OCC is unable to find a counterparty
willing to purchase, or assume the obligations of, open long and short
positions of the suspended clearing member at an appropriate value
either through the regular OTC market or through the auction process.
Nevertheless, in view of the fact that positions in OTC index options
are expected to be large and that there may be no active trading market
in options with terms precisely identical to the terms of the OTC index
options in question, OCC believes that this is an appropriate failsafe
provision.
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\15\ See Securities Exchange Act Release 65654 (October 28,
2011), 76 FR 68238 (November 3, 2011).
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OCC believes that the proposed changes to OCC's By-Laws are
consistent with the purposes and requirements of Section 17A of the
Exchange Act because they are designed to permit OCC to perform
clearing services for products that are subject to the jurisdiction of
the CFTC without adversely affecting OCC's obligations with respect to
the prompt and accurate clearance and settlement of securities
transactions or the protection of securities investors and the public
interest. The proposed rule change is not inconsistent with any rules
of OCC.
(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 relating to the proposed rule change have not been
solicited or received. OCC will notify the Commission of any written
comments received by OCC.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate 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 or disapprove the proposed rule change or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
Electronic Comments
Use the Commissions Internet comment form (https://www.sec.gov/rules/sro.shtml) or
Send an email to rule-comments@sec.gov. Please include
File Number SR-OCC-2011-19 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2011-19. This file
number should be included on the subject line if email 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 Web site viewing and
printing 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 filings will also be available for
inspection and copying at the principal office of OCC and on OCC's Web
site at https://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_11_19_a_1.pdf. 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-2011-19 and should be submitted on
or before January 30, 2012.
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\16\ 17 CFR 200.30-3(a)(12).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\16\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-112 Filed 1-6-12; 8:45 am]
BILLING CODE 8011-01-P
