[Federal Register Volume 75, Number 179 (Thursday, September 16, 2010)]
[Notices]
[Pages 56631-56633]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-23106]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62879; File No. SR-OCC-2010-15]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Interpret By-Laws as to Dividend Adjustments
September 9, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on August 31, 2010, The
Options Clearing Corporation (``OCC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change described
in Items I and II below, which items have been prepared primarily by
OCC. The Commission is publishing this notice to solicit comments on
the proposed rule change from interested parties.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The purpose of the proposed rule change is to amend Interpretation
and Policy .01 under Article VI, Section 11A of OCC's By-Laws to allow
the Securities Committee under certain conditions to cease adjusting
for recurring cash dividends previously deemed to be non-ordinary
dividends.
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.\2\
---------------------------------------------------------------------------
\2\ The Commission has modified the text of the summaries
prepared by OCC.
---------------------------------------------------------------------------
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The principal purpose of this rule change is to amend
Interpretation and Policy .01 under Article VI, Section 11A of OCC's
By-Laws. Under that Interpretation, cash dividends or distributions of
an issuer which are deemed by the Securities Committee \3\ to be non-
ordinary will usually result in an adjustment to the terms of listed
stock options.\4\
---------------------------------------------------------------------------
\3\ The Securities Committee is comprised of one designated
representative of each participant exchange and the Chairman of OCC
or his designee. The OCC representative is not a voting member of
the Committee except in cases of tie votes. Article VI, Section
11(c) of OCC's By-Laws.
\4\ Generally speaking, a cash dividend or distribution would be
deemed to be ``ordinary'' if it is declared pursuant to a policy or
practice of paying such dividends on a quarterly or other regular
basis. Dividends paid outside such practice would be considered
``non-ordinary.'' Non-ordinary cash dividends usually would trigger
an adjustment to options contracts subject to the minimum size
requirement. Article VI, Section 11A, Interpretation and Policy .01
of OCC's By-Laws. See Securities Exchange Act Release No. 55258
(February 8, 2007).
---------------------------------------------------------------------------
OCC is proposing to amend Interpretation .01 to allow the
Securities Committee under certain conditions to cease adjusting for
recurring cash dividends previously deemed to be non-ordinary
dividends. Interpretation .01 under Section 3 of Article XII of OCC's
By-Laws, which provides that non-ordinary (as determined by OCC) cash
dividends or distributions of an issuer will usually occasion an
adjustment to the terms of listed stock futures, would similarly be
amended. The discussion below addresses the proposed amendments to
Interpretation .01 of Section 11A of Article VI, but the purpose behind
those changes is equally applicable to the changes proposed to
Interpretation .01 of Section 3 of Article XII.\5\
---------------------------------------------------------------------------
\5\ Stock futures likewise are adjusted in response to non-
ordinary cash dividends or distributions. See Article XII, Section
3, Interpretation and Policy .01, of OCC's By-Laws. See Securities
Exchange Act Release No. 46595 (October 3, 2002).
---------------------------------------------------------------------------
[[Page 56632]]
The amendment was prompted by a series of cash dividends declared
by Diamond Offshore Corporation (``DO''). DO characterized these
dividends as ``special'' and differentiated them from the company's
``regular'' cash dividends. These ``special'' and ``regular'' DO
dividends have customarily gone ``ex-distribution'' on the same date.
Initially, the Securities Committee deemed these ``special'' dividends
to be non-ordinary under Interpretation .01 and appropriately adjusted
listed options in response.\6\ Since Interpretation .01 was revised
effective February 1, 2009, DO options have been adjusted for five
successive quarterly ``special'' dividends. Notwithstanding that these
dividends were characterized by DO as ``special'' dividends and clearly
differentiated from the company's ``regular'' dividends, OCC and the
options exchanges have received strong feedback from investors that
such dividends have been declared so consistently and thereby have
achieved such predictability that they should no longer be considered
``non-ordinary'' for adjustment purposes. Furthermore, the options
exchanges and many OCC clearing member firms believe that the
proliferation of option strikes caused by successive quarterly
adjustments will have an adverse affect on liquidity and occasion other
adverse operational effects.\7\ The Securities Committee also solicited
the opinion of participant members of the OCC Clearing Member
Roundtable regarding this issue.\8\ The Roundtable strongly supported
authorizing the Securities Committee to cease adjusting for ``special''
cash dividends whose consistency and predictability of payment have
been demonstrated.
---------------------------------------------------------------------------
\6\ In like manner, options on Oil Service HLDRS Trust (OIH)
which contain DO as a component security and make pro-rata
distributions in response to DO dividends, were also adjusted.
\7\ The standard method of adjustment is to reduce strike prices
by the amount of the dividend. Options with ``standard'' strike
prices are then reintroduced by the listing option exchange(s). With
each successive adjustment, this process is repeated, proliferating
strike prices. Liquidity naturally gravitates to the options with
standard strike prices at the expense of liquidity for options with
non-standard strikes.
\8\ The OCC Roundtable is an OCC sponsored advisory group
comprised of representatives from OCC's participant exchanges, OCC,
a cross-section of OCC clearing members, and industry service
bureaus. The Roundtable considers operational improvements that may
be made to increase efficiencies and lower costs in the options
industry.
---------------------------------------------------------------------------
The proposed amended Interpretation .01 enumerates factors that the
Securities Committee may take into account in determining whether a
dividend is ``ordinary.'' Importantly, it allows the Securities
Committee to reclassify as ``ordinary'' dividends previously deemed
``non-ordinary.'' The conditions under which this may occur are as
follows: (1) The issuer discloses that it intends to pay such dividends
or distributions on a quarterly or other regular basis, (2) the issuer
has paid such dividends or distributions for four or more consecutive
months or quarters or two or more years after the initial payment,
whether or not the amounts paid were the same from period to period, or
(3) the Securities Committee determines for other reasons that the
issuer has a policy or practice of paying such dividends or
distributions on a quarterly or other regular basis.\9\
---------------------------------------------------------------------------
\9\ These same factors would be used by OCC to reclassify a
recurrent non-ordinary dividend as ``ordinary'' with respect to its
determination to adjust stock futures.
---------------------------------------------------------------------------
It is the intent of the Securities Committee that any such
recharacterization of a dividend as ``ordinary'' would be announced in
advance to investors. For example, after adjusting for a given
dividend, OCC would announce that subsequent dividends of the same
nature would no longer occasion adjustment.\10\ A discussion of the new
adjustment approach also will be included in published interpretative
guidance.\11\ Clean and marked copies of the interpretative guidance
are attached as Exhibit 5 to the OCC filing of the proposed rule
change. The marked copy shows changes from the current language.
---------------------------------------------------------------------------
\10\ OCC will follow a similar practice with respect to stock
futures.
\11\ Securities Exchange Act Release Nos. 58059 (June 30, 2008)
and 59442 (February 24, 2009). Consistent with past practice, the
interpretative guidance will be available on OCC's public Web site
but not incorporated into OCC's By-Laws and Rules. Other technical
or clarifying changes have also been made to update the guidance.
For example, the use of the term ``special dividend'' has been
removed in favor of the term ``non-ordinary.''
---------------------------------------------------------------------------
In fairness to existing holders of open interest (especially DO and
OIH) who may have assumed option positions with the belief that OCC
would continue to adjust for recurring ``special'' dividends, OCC has
determined that the portion of Interpretation .01, which allows
recharacterization of dividends as ordinary will be effective only for
dividends and distributions announced after February 1, 2012. This date
is chosen because it occurs after the latest expiration of all existing
open interest in DO and OIH options (inclusive of LEAPS options). All
existing open interest and any positions created with new expiration
dates occurring before February 1, 2012, will thus be ``grandfathered''
under the current adjustment approach for these dividends.\12\
---------------------------------------------------------------------------
\12\ For consistency, the changes to the Interpretation relating
to stock futures also will not be effective until February 1, 2012.
---------------------------------------------------------------------------
OCC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act \13\ and the rules and
regulations thereunder applicable to OCC because it provides for the
prompt and accurate clearance and settlement of securities
transactions, ensures the protection of investors and reduces
unnecessary costs and burdens on them and persons facilitating
transactions on their behalf. It does so by responding to strong
investor feedback regarding the need to cease treating certain cash
dividends or distributions as ``non-ordinary'' for adjustment purposes
based on the consistent declaration of such dividends, by publishing
information regarding those factors which would lead OCC to make such a
determination, and by reducing the likelihood of series proliferation
in the case of options contracts. The proposed rule change is not
inconsistent with the existing rules of OCC, including any other rules
proposed to be amended.
---------------------------------------------------------------------------
\13\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
(B) Self-Regulatory Organization's Statement on Burden on Competition
OCC does not believe that the proposed rule change will have any
impact on or impose any burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
No written comments relating to the proposed rule change have 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
The foregoing rule change has become effective upon filing pursuant
to Section 19(b)(3)(A)(i) of the Act \14\ and Rule 19b-4(f)(1) \15\
thereunder because the proposed rule constitutes an interpretation with
respect to the meaning, administration, or enforcement of an existing
rule. At any time within sixty days of the filing of such rule change,
the Commission summarily may temporarily suspend such rule change if it
appears to the Commission that such action is
[[Page 56633]]
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act.
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78s(b)(3)(A)(i).
\15\ 17 CFR 240.19b-4(f)(1).
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
Send an e-mail to [email protected]. Please include
File Number SR-OCC-2010-15 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-2010-15. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule changes that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Section, 100 F Street,
NE., Washington, DC 20549, on official business days between the hours
of 10 a.m. and 3 p.m. Copies of such filings also will be available for
inspection and copying at the principal office of OCC and on OCC's Web
site at http://www.theocc.com. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-OCC-2010-15 and should be submitted on or before October
7, 2010.
---------------------------------------------------------------------------
\16\ 17 CFR 200.30-3(a)(12).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\16\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-23106 Filed 9-15-10; 8:45 am]
BILLING CODE 8010-01-P