[Federal Register Volume 75, Number 198 (Thursday, October 14, 2010)]
[Notices]
[Pages 63228-63229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-25864]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63066; File No. SR-OCC-2010-13]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving Proposed Rule Change To Allow for Adjustments to the
Settlement Price of Exchange-Designated Security Futures for All Cash
Dividends or Distributions Paid by the Issuer of the Underlying
Security
October 8, 2010.
I. Introduction
On August 19, 2010, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'')
proposed rule change SR-OCC-2010-13 pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'').\1\ On August 25, 2010, OCC
amended the proposed rule change. Notice of the proposal was published
in the Federal Register on September 7, 2010.\2\ The Commission
received no comment letters in response to the proposed rule change.
For the reasons discussed below, the Commission is approving the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 62801 (August 31, 2010),
75 FR 54410.
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II. Description
The primary purpose of this proposed rule change is to revise OCC's
By-Laws to allow OCC to make adjustments to the settlement price of
exchange-designated security futures for all cash dividends or
distributions paid by the issuer of the underlying security. Under its
current rules, OCC makes such adjustments only for ``non-ordinary''
dividends. However, OneChicago, LLC (``OneChicago'') has informed OCC
that it believes there is a demand for security futures that would be
adjusted in response to all cash dividends or distributions.
Accordingly, OCC is amending Section 3 of Article XII of its By-Laws to
permit exchanges to designate certain security futures that will be
adjusted for ordinary as well as ``non-ordinary'' cash dividends and
distributions. Exchanges can continue to trade security futures that
will be adjusted only in the event of a ``non-ordinary'' dividend or
distribution.
For security futures subject to adjustment for all cash dividends
or distributions, it will be the exchange's responsibility to inform
OCC of the issuance of a cash dividend or
[[Page 63229]]
distribution and of the appropriate adjustment amount. Provided that
such information (including any corrections thereto) is reported to OCC
before an OCC-designated cut-off time prior to the ex-date, OCC will
make the appropriate adjustment to the settlement price of the security
futures contract. Such adjustments will be effective before the opening
of business on the ex-date.\3\ If the exchange fails to report dividend
or distribution information to OCC on a timely basis or reports
incorrect dividend or distribution information to OCC, then the
exchange will be able to report such information or corrected
information to OCC on the ex-date, and OCC will effect the adjustment
as soon as practicable thereafter.\4\ In the event the exchange already
opened trading in the security futures contracts affected thereby, the
exchange will provide OCC with direction on whether such trades should
be cleared or disregarded as provided for in Article VI, Section 7 of
OCC's By-Laws. Pursuant thereto, disregarded transactions will be
deemed null and void and given no effect. These procedures are intended
not only to preserve OCC's ability to initiate and conduct nightly
processing on a timely basis but also to provide the exchange with the
opportunity to report to OCC dividend or distribution information that
was not available to it before OCC's processing cut-offs or to correct
erroneously reported information so that there is an appropriate
adjustment to the settlement price for the affected contracts.
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\3\ The standard method for adjusting futures contracts in
response to cash distributions is to decrease the prior day's
settlement price by the amount of the dividend. This adjustment is
effective at the opening of business on the ex-distribution date and
parallels the adjustment made to the price of the underlying stock
by the securities exchanges on the ex-distribution date. It is
intended to ensure that no futures mark-to-the-market attributable
to the adjustment made to the stock price for the dividend will
occur.
\4\ OCC also proposes to add Interpretation and Policy .10 to
Article XII, Section 3 to provide that officially reported
settlement prices will not be adjusted (other than as provided for
in the By-Laws and Rules) except in extraordinary circumstances. The
Interpretation further provides that in no event will a completed
settlement be adjusted due to errors discovered thereafter. This
latter provision is intended to preserve the finality of money
settlements should it later be determined that an officially
reported settlement price was erroneous. The new Interpretation is
based on existing provisions of OCC's By-Laws. See, e.g., Article
XIV, Section 6, Interpretation and Policy .01; Article XVI, Section
4, Interpretation and Policy .01; and Article XVII, Section 4,
Interpretation and Policy .01.
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In connection with OneChicago's proposal, OneChicago and OCC also
have agreed to amend the Security Futures Agreement for Clearing and
Settlement Services, dated April 1, 2002, (``Clearing Agreement'') by
entering into Amendment No. 1 thereto.\5\ Amendment No. 1 would amend
Section 5 of the Clearing Agreement to permit OneChicago to designate
those security futures contracts for which adjustments will be made in
response to all cash dividends or distributions of the underlying
securities and to set forth OneChicago's obligation to furnish OCC with
notice of all relevant information regarding such dividends or
distributions so that OCC can adjust the settlement price of the
affected security future as described above. Amended Section 5 further
extends the current indemnification provided by OneChicago to OCC to
cover losses resulting from OCC's adjustment of the settlement prices
of security futures in accordance with dividend or distribution
information supplied by OneChicago or OCC's failing to adjust in the
event OneChicago did not supply OCC with information regarding such an
adjustment.
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\5\ Amendment No. 1 will be executed after the effectiveness of
this filing.
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III. Discussion
Section 19(b) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization. Section 17A(b)(3)(F) of the Act requires that the rules
of a clearing agency be designed to promote the prompt and accurate
clearance and settlement of security transactions and generally to
protect investors and the public interest.\6\ The Commission believes
that OCC's rule change is consistent with this Section because the rule
change should better enable OCC to promptly and accurately clear and
settle security futures contracts for which an exchange has designated
that the settlement prices will be adjusted to reflect the issuance of
all cash dividends or distributions on the underlying security.
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\6\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
in particular Section 17A of the Act and the rules and regulations
thereunder. In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-OCC-2010-13) be and hereby
is approved.
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-25864 Filed 10-13-10; 8:45 am]
BILLING CODE 8011-01-P