Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change To Accommodate Certain Physically-Settled Options on U.S. Treasury Securities, 6378-6379 [2013-01929]

Download as PDF 6378 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68712; File No. SR–OCC– 2012–23] Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change To Accommodate Certain PhysicallySettled Options on U.S. Treasury Securities January 23, 2013. I. Introduction On November 30, 2012, The Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change SR–OCC– 2012–23 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder.2 The proposed rule change was published for comment in the Federal Register on December 17, 2012.3 The Commission received no comment letters. This order approves the proposed rule change. II. Description of the Proposed Rule Change The purpose of this proposed rule change is to accommodate the clearing of physically-settled options on certain U.S. Treasury notes and U.S. Treasury bonds (‘‘Treasury Options’’) traded by NASDAQ OMX PHLX, LLC (‘‘PHLX’’).4 OCC’s current By-Laws and Rules (collectively, ‘‘Rules’’) accommodate options on Treasury securities, but the options on Treasury securities contemplated by the Rules are no longer traded and are different from the Treasury Options that PHLX intends to trade in certain respects. Accordingly, OCC is amending the Rules, as described below, to accommodate such Treasury Options as well as to streamline Chapter XIV of its rulebook by re-numbering certain rules and deleting unused and ‘‘reserved’’ rules. Since PHLX Treasury Options are limited to European-style options on Treasury notes and bonds with a unit of trading of $10,000, OCC is removing provisions and references within Chapter XIV of the Rules to Americanstyle options on Treasury securities, Treasury bills as an eligible underlying interest for options on Treasury mstockstill on DSK4VPTVN1PROD with 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Securities Exchange Act Release No. 68403 (December 11, 2012), 77 FR 74705 (December 17, 2012). 4 See Securities Exchange Act Release No. 67976 (October 4, 2012), 77 FR 61794 (October 11, 2012) (SR–Phlx–2012–105) 2 17 VerDate Mar<15>2010 20:43 Jan 29, 2013 Jkt 229001 securities, and ‘‘mini options’’ on Treasury securities. In addition, OCC is removing from the Rules the defined term ‘‘adjusted exercise price,’’ which related only to options on Treasury bills and consequently is no longer needed, and is updating other definitions within the Rules to reflect the limiting of the underlying interests for Treasury Options to Treasury bonds and notes. Furthermore, since OCC is not currently permitting escrow deposits to be made in connection with the clearing of Treasury Options, it is removing related provisions in Section 2 of Article XIII. OCC generally will apply current expiration date exercise procedures to Treasury Options, and will require delivery settlement for exercised and assigned Treasury Options to be effected on a broker-to-broker basis through the Fixed Income Clearing Corporation (‘‘FICC’’).5 As not all OCC clearing members are participants of the Government Securities Division (‘‘GSD’’) of FICC, OCC is permitting clearing members to designate, with proper advance notice to OCC, a representative that is a GSD participant who would be responsible for inputting trade information into FICC’s systems for delivery settlement purposes.6 On the expiration date for a Treasury Option, OCC will produce an exercise and assignment report identifying the delivering and receiving clearing members and other relevant delivery information. Clearing members that are obligated to purchase or sell Treasury securities as a result of the exercise or assignment of positions in Treasury Options will be required to submit the terms of such trades to FICC’s real time trade matching system. If the trade information submitted by the delivering and receiving clearing member matches within FICC’s system, FICC becomes obligated to guarantee settlement of the trade pursuant to FICC’s rules, at the point in time at which FICC makes available to the delivering and receiving clearing members a report indicating the trade has been compared. At that time, OCC’s obligation to guarantee delivery settlement will be terminated. Delivery settlement through FICC includes delivery of the underlying securities against payment of the aggregate purchase price increased by the amount of accrued interest. If a trade does not match, the delivering and receiving OCC 5 Clearing members interested in Treasury Options have advised OCC that it would be operationally more efficient for them if delivery settlement were effected in this manner. 6 OCC has no obligation to such designated representative and is harmless against any claims based on the designated representative’s actions or delays in acting or failures to act. PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 clearing members will be required to notify OCC within such time as OCC may specify of such failure on the first business day after the expiration date. If no such notification is made within the deadline, pursuant to proposed Rule 1403(d), OCC’s obligation to guarantee settlement will be extinguished as of such deadline, regardless of whether settlement was actually completed. In the event OCC is given timely notification of a failure to match on the first business day after the expiration date, the clearing members would be required to attempt to resolve the failure such that settlement could occur through FICC by a deadline specified by OCC on the second business day following the expiration date. If the failure is not resolved and the trade has not matched by the deadline on the second business day after the expiration date, the delivering and receiving OCC clearing members will be required to notify OCC within such time as OCC may specify of such failure. If no such notification is made within the deadline, pursuant to proposed Rule 1404(a), OCC’s obligation to guarantee settlement will be extinguished as of such deadline, regardless of whether settlement was actually completed. If OCC receives timely notification, pursuant to proposed Rule 1404(a), that the second submission attempt at FICC failed to result in a match, OCC will assess and pay damages, if any, incurred by the delivering or receiving clearing member, as applicable, in connection with the failure to match. OCC will also be authorized to debit the amount of such damages from the account of the delivering or receiving clearing member, as applicable. Under Rule 1404, in the event the non-defaulting clearing member buys or sells the underlying Treasury security, the non-defaulting clearing member will be required to promptly notify OCC of the price paid or received, as applicable, and OCC will take this information into account in assessing damages. However, OCC will not be bound to accept these prices in assessing damages, and will be able to make an independent determination of damages. Proposed Rule 1404 provides that OCC’s determination of damages is at OCC’s sole discretion, final, and binding on all parties. Such ‘‘failure to match’’ procedures will limit OCC’s liability in the event of a default by one of its clearing members. OCC will collect and hold margin from clearing members with Treasury Option delivery or receipt obligations until the exercise settlement date, unless OCC receives notification of a failure to match, in which case OCC will E:\FR\FM\30JAN1.SGM 30JAN1 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Notices continue to hold margin until either the trade is deemed settled or damages have been assessed and paid to the nondefaulting clearing member. Rule 1405 clarifies that OCC may pursue disciplinary action against clearing members who fail to discharge the delivery, payment, and notification obligations as set forth in Rules 1403 and 1404. In addition to the above changes relating to the terms of and settlement process for Treasury Options, OCC is revising Section 5 of Article XIII of the By-Laws regarding the handling of shortages of Treasury Securities. These revisions provide OCC with broader discretion in determining whether a shortage exists and simplify the procedures to be used in this situation. III. Discussion Section 17A(b)(3) (F) of the Act 7 requires that, among other things, that the rules of a clearing agency are designed to promote the prompt and accurate clearance and settlement of securities transactions, and to the extent applicable derivative agreements, contracts, and transactions, to safeguard securities and funds in its custody or control or for which it is responsible, and to protect investors and the public interest. The proposed rule change accomplishes these purposes, by among other things, updating OCC’s existing rule provisions to accommodate Treasury Options, as proposed for trading by PHLX, and implementing a settlement process designed to minimize the risks of settlement failures for investors. Furthermore, Section17A(a)(2)(A)(ii) of the Act 8 directs the Commission to facilitate the establishment of linked and coordinated facilities for clearance and settlement of transactions in securities and securities options. The proposed rule change accomplishes this end by utilizing the existing infrastructure of two clearing agencies (OCC and FICC) to create a more operationally efficient exercise settlement process for Treasury Options, traded by PHLX. mstockstill on DSK4VPTVN1PROD with IV. Conclusion On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act and in particular with the requirements of Section 17A of the Act 9 and the rules and regulations thereunder. 7 15 U.S.C. 78q–1(b)(3)(F) U.S.C. 78q–1(a)(2)(ii)). 9 15 U.S.C. 78q–1. 8 15 VerDate Mar<15>2010 20:43 Jan 29, 2013 Jkt 229001 It is therefore ordered, pursuant to Section 19(b)(2) of the Act,10 that the proposed rule change (File No. SR– OCC–2012–23) be and hereby is approved.11 For the Commission by the Division of Trading and Markets, pursuant to delegated authority.12 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–01929 Filed 1–29–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68721; File No. SR– NASDAQ–2013–008] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 5710 January 24, 2013. 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 January 10, 2013, The NASDAQ Stock Market LLC (‘‘NASDAQ’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II, below, which Items have been prepared by the Exchange. 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 the Substance of the Proposed Rule Change The Exchange proposes to amend Rule 5710 so that the Exchange may list Linked Securities 3 that provide for three times accelerated payment at maturity. The Exchange requests that the Commission waive the 30-day operative delay period contained in Exchange Act Rule 19b–4(f)(6)(iii).4 The text of the proposed rule change is available at http:// nasdaq.cchwallstreet.com/, at the Exchange’s principal office, and at the Commission’s Public Reference Room. 10 15 U.S.C. 78s(b)(2). approving the proposed rule change, the Commission considered the proposal’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 12 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 For a discussion of Linked Securities, see Rule 5710. 4 17 CFR 240.19b–4(f)(6)(iii). 11 In PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 6379 II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of this proposed rule change is to amend Rule 5710(d) so that the Exchange may list Linked Securities that provide for three times accelerated payment at maturity.5 In changing one word in Rule 5710, the Exchange is conforming its rule to the established listing rules of other exchanges. This proposed amendment to Rule 5710(d) is based, word-for-word, on NYSE Arca (‘‘Arca’’) Equities Rule 5.2(j)(6)(A)(d) and NYSE Section 703.22(B)(6) of the Listed Company Manual. NASDAQ, Arca, and NYSE all have rule provisions stating that pursuant to Rule 19b–4(e) under the Act 6 a loss or negative payment at maturity of a Linked Security 7 may be accelerated by a multiple of the performance of an underlying asset (known as the ‘‘acceleration provision’’). However, in Rule 5710 NASDAQ sets the multiple for the acceleration provision at ‘‘twice’’; 8 whereas Arca and NYSE both set the acceleration 5 The proposal is applicable only to non-option products. 6 17 CFR 240.19b–4(e). 7 Where NASDAQ refers to ‘‘Linked Securities’’ in its Rule 5710, NYSE and Arca refer to these products as ‘‘Index-Linked Securities.’’ On all exchanges, Linked Securities are based on the performance of various Reference Assets. For a more detailed discussion of Reference Assets, see Rule 5710. 8 See Rule 5710(d). See also Securities Exchange Act Release Nos. 59663 (March 31, 2009), 74 FR 15552 (April 6, 2009) (SR–NASDAQ–2009–018) (notice of filing and immediate effectiveness relating to revisions and restructuring of the NASDAQ listing rules, and transference of Rule 5710(d) from Rule 4420(m)); and 57269 (February 5, 2008), 73 FR 8092 (February 12, 2008) (SR– NASDAQ–2008–08) (order approving listing standards in Rule 4420(m) to allow twice (2x) the performance of the underlying index, indexes, or Reference Asset). E:\FR\FM\30JAN1.SGM 30JAN1

Agencies

[Federal Register Volume 78, Number 20 (Wednesday, January 30, 2013)]
[Notices]
[Pages 6378-6379]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01929]



[[Page 6378]]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68712; File No. SR-OCC-2012-23]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Accommodate Certain Physically-
Settled Options on U.S. Treasury Securities

January 23, 2013.

I. Introduction

    On November 30, 2012, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change SR-OCC-2012-23 pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder.\2\ The proposed rule change was published 
for comment in the Federal Register on December 17, 2012.\3\ The 
Commission received no comment letters. This order approves the 
proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 68403 (December 11, 
2012), 77 FR 74705 (December 17, 2012).
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    The purpose of this proposed rule change is to accommodate the 
clearing of physically-settled options on certain U.S. Treasury notes 
and U.S. Treasury bonds (``Treasury Options'') traded by NASDAQ OMX 
PHLX, LLC (``PHLX'').\4\ OCC's current By-Laws and Rules (collectively, 
``Rules'') accommodate options on Treasury securities, but the options 
on Treasury securities contemplated by the Rules are no longer traded 
and are different from the Treasury Options that PHLX intends to trade 
in certain respects. Accordingly, OCC is amending the Rules, as 
described below, to accommodate such Treasury Options as well as to 
streamline Chapter XIV of its rulebook by re-numbering certain rules 
and deleting unused and ``reserved'' rules.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 67976 (October 4, 
2012), 77 FR 61794 (October 11, 2012) (SR-Phlx-2012-105)
---------------------------------------------------------------------------

    Since PHLX Treasury Options are limited to European-style options 
on Treasury notes and bonds with a unit of trading of $10,000, OCC is 
removing provisions and references within Chapter XIV of the Rules to 
American-style options on Treasury securities, Treasury bills as an 
eligible underlying interest for options on Treasury securities, and 
``mini options'' on Treasury securities. In addition, OCC is removing 
from the Rules the defined term ``adjusted exercise price,'' which 
related only to options on Treasury bills and consequently is no longer 
needed, and is updating other definitions within the Rules to reflect 
the limiting of the underlying interests for Treasury Options to 
Treasury bonds and notes. Furthermore, since OCC is not currently 
permitting escrow deposits to be made in connection with the clearing 
of Treasury Options, it is removing related provisions in Section 2 of 
Article XIII.
    OCC generally will apply current expiration date exercise 
procedures to Treasury Options, and will require delivery settlement 
for exercised and assigned Treasury Options to be effected on a broker-
to-broker basis through the Fixed Income Clearing Corporation 
(``FICC'').\5\ As not all OCC clearing members are participants of the 
Government Securities Division (``GSD'') of FICC, OCC is permitting 
clearing members to designate, with proper advance notice to OCC, a 
representative that is a GSD participant who would be responsible for 
inputting trade information into FICC's systems for delivery settlement 
purposes.\6\
---------------------------------------------------------------------------

    \5\ Clearing members interested in Treasury Options have advised 
OCC that it would be operationally more efficient for them if 
delivery settlement were effected in this manner.
    \6\ OCC has no obligation to such designated representative and 
is harmless against any claims based on the designated 
representative's actions or delays in acting or failures to act.
---------------------------------------------------------------------------

    On the expiration date for a Treasury Option, OCC will produce an 
exercise and assignment report identifying the delivering and receiving 
clearing members and other relevant delivery information. Clearing 
members that are obligated to purchase or sell Treasury securities as a 
result of the exercise or assignment of positions in Treasury Options 
will be required to submit the terms of such trades to FICC's real time 
trade matching system. If the trade information submitted by the 
delivering and receiving clearing member matches within FICC's system, 
FICC becomes obligated to guarantee settlement of the trade pursuant to 
FICC's rules, at the point in time at which FICC makes available to the 
delivering and receiving clearing members a report indicating the trade 
has been compared. At that time, OCC's obligation to guarantee delivery 
settlement will be terminated. Delivery settlement through FICC 
includes delivery of the underlying securities against payment of the 
aggregate purchase price increased by the amount of accrued interest. 
If a trade does not match, the delivering and receiving OCC clearing 
members will be required to notify OCC within such time as OCC may 
specify of such failure on the first business day after the expiration 
date. If no such notification is made within the deadline, pursuant to 
proposed Rule 1403(d), OCC's obligation to guarantee settlement will be 
extinguished as of such deadline, regardless of whether settlement was 
actually completed.
    In the event OCC is given timely notification of a failure to match 
on the first business day after the expiration date, the clearing 
members would be required to attempt to resolve the failure such that 
settlement could occur through FICC by a deadline specified by OCC on 
the second business day following the expiration date. If the failure 
is not resolved and the trade has not matched by the deadline on the 
second business day after the expiration date, the delivering and 
receiving OCC clearing members will be required to notify OCC within 
such time as OCC may specify of such failure. If no such notification 
is made within the deadline, pursuant to proposed Rule 1404(a), OCC's 
obligation to guarantee settlement will be extinguished as of such 
deadline, regardless of whether settlement was actually completed.
    If OCC receives timely notification, pursuant to proposed Rule 
1404(a), that the second submission attempt at FICC failed to result in 
a match, OCC will assess and pay damages, if any, incurred by the 
delivering or receiving clearing member, as applicable, in connection 
with the failure to match. OCC will also be authorized to debit the 
amount of such damages from the account of the delivering or receiving 
clearing member, as applicable.
    Under Rule 1404, in the event the non-defaulting clearing member 
buys or sells the underlying Treasury security, the non-defaulting 
clearing member will be required to promptly notify OCC of the price 
paid or received, as applicable, and OCC will take this information 
into account in assessing damages. However, OCC will not be bound to 
accept these prices in assessing damages, and will be able to make an 
independent determination of damages. Proposed Rule 1404 provides that 
OCC's determination of damages is at OCC's sole discretion, final, and 
binding on all parties. Such ``failure to match'' procedures will limit 
OCC's liability in the event of a default by one of its clearing 
members.
    OCC will collect and hold margin from clearing members with 
Treasury Option delivery or receipt obligations until the exercise 
settlement date, unless OCC receives notification of a failure to 
match, in which case OCC will

[[Page 6379]]

continue to hold margin until either the trade is deemed settled or 
damages have been assessed and paid to the non-defaulting clearing 
member.
    Rule 1405 clarifies that OCC may pursue disciplinary action against 
clearing members who fail to discharge the delivery, payment, and 
notification obligations as set forth in Rules 1403 and 1404.
    In addition to the above changes relating to the terms of and 
settlement process for Treasury Options, OCC is revising Section 5 of 
Article XIII of the By-Laws regarding the handling of shortages of 
Treasury Securities. These revisions provide OCC with broader 
discretion in determining whether a shortage exists and simplify the 
procedures to be used in this situation.

III. Discussion

    Section 17A(b)(3) (F) of the Act \7\ requires that, among other 
things, that the rules of a clearing agency are designed to promote the 
prompt and accurate clearance and settlement of securities 
transactions, and to the extent applicable derivative agreements, 
contracts, and transactions, to safeguard securities and funds in its 
custody or control or for which it is responsible, and to protect 
investors and the public interest. The proposed rule change 
accomplishes these purposes, by among other things, updating OCC's 
existing rule provisions to accommodate Treasury Options, as proposed 
for trading by PHLX, and implementing a settlement process designed to 
minimize the risks of settlement failures for investors. Furthermore, 
Section17A(a)(2)(A)(ii) of the Act \8\ directs the Commission to 
facilitate the establishment of linked and coordinated facilities for 
clearance and settlement of transactions in securities and securities 
options. The proposed rule change accomplishes this end by utilizing 
the existing infrastructure of two clearing agencies (OCC and FICC) to 
create a more operationally efficient exercise settlement process for 
Treasury Options, traded by PHLX.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78q-1(b)(3)(F)
    \8\ 15 U.S.C. 78q-1(a)(2)(ii)).
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \9\ and the 
rules and regulations thereunder.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (File No. SR-OCC-2012-23) be and 
hereby is approved.\11\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(2).
    \11\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

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

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01929 Filed 1-29-13; 8:45 am]
BILLING CODE 8011-01-P