[Federal Register: May 30, 2003 (Volume 68, Number 104)]
[Notices]
[Page 32562-32563]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30my03-117]
[[Page 32562]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47902; File No. SR-OCC-2002-14]
Self-Regulatory Organizations; the Options Clearing Corporation;
Order Granting Approval of a Proposed Rule Change Relating to
Procedures for Processing Late and Supplementary Exercise Instructions
May 22, 2003.
I. Introduction
On June 28, 2002, the Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') proposed
rule change SR-OCC-2002-14 pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal
was published in the Federal Register on March 4, 2003.\2\ No comment
letters were received. For the reasons discussed below, the Commission
is granting approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 47396 (February 24,
2003), 68 FR 10293.
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II. Description
The proposed rule change amends Rules 801(e) and 805(g) to modify
OCC's fees for processing late exercise instructions and supplementary
exercise notices and amends Rule 801(e) to establish a specific cut-off
time for accepting late exercise notices after the start of critical
processing and to eliminate OCC's ability to accept instructions to
modify a previously submitted exercise notice after the start of
critical processing.
Background
Rule 801 sets forth the procedures for submitting exercise notices
on a business day which is not an expiration date, including the
requirement that such submissions be completed by 7 p.m. (All times are
Central Time.) Rule 801(e) provides OCC with the authority to permit
clearing members to file, revoke, or modify exercise notices after 7
p.m. for the purpose of correcting bona fide errors. Authority to
accept or reject such late instructions is vested with the Chairman,
Management Vice Chairman, President, or such officer's delegate.
If a late instruction is accepted, Rule 801(e) requires the
clearing member submitting the instruction to pay a late filing fee.\3\
The fees for late instructions increase the later the notice is
received. Late instructions accepted for filing after the start of
critical processing are processed on a best efforts basis and only if
the assigned clearing member(s) can be notified before 8 a.m.
Previously submitted exercises may not be revoked after the start of
critical processing.
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\3\ Late filings, revocations, and modifications of exercise may
also be the subject of disciplinary action. Rule 801(e)(4) and
805(g).
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These late exercise procedures help provide a monetary incentive
for clearing members to take precautions to avoid exercise errors and
to identify those errors that do occur earlier in OCC's processing
cycle. The earlier late exercise notices are submitted, the easier and
less costly it is for OCC to process these exercises. Late exercise
notices submitted before the start of OCC's critical processing cycle
can be readily accommodated through standard procedures. Late exercise
notices submitted after the start of critical processing require
supplemental assignment procedures.
Rule 805 sets forth the procedures for submitting exercise notices
on expiration dates. Rule 805 permits clearing members to submit
exercise notices with respect to expiring options (``supplementary
exercise notices'') after the normal deadline but before their
expiration time (i.e., 10:59 P.M.) by following prescribed procedures.
A clearing member submitting such a supplementary exercise notice is
required to pay a late filing fee.\4\ As under Rule 801, the filing
fees increase the later the notice is received. Supplementary exercise
notices submitted in accordance with the prescribed procedures are
irrevocable.
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\4\ Late filings of supplementary exercise notices may also be
the subject of disciplinary action. See note 3 above.
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Discussion
OCC recently completed a review of these rules as a result of an
increase in the number of late instructions received from clearing
members. Based on that review, OCC is changing the applicable fee
schedules and cut-off times for processing late instructions and
supplementary exercise notices.
Fees
One of the principal purposes for charging a filing fee for late
instructions under both Rule 801 and Rule 805 is to provide an
incentive for clearing members to discover exercise errors earlier in
the processing cycle. The recent increase in the number of late
instructions has led OCC to conclude that the current fee schedules do
not provide a sufficient incentive. The current and proposed fee
schedules are as follows:
Rule 801(e)
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Submission time Current fee Proposed fee
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7 p.m.-8 p.m................ $500/any accepted $2,000/any accepted
request. request.
8:01 p.m.-start of critical $2,000/any accepted $5,000/any accepted
processing. request. request.
After start of critical $10,000/line item on $20,000/line item on
processing up until 8 any exercise notice any exercise notice
a.m.\5\. or modification accepted.\6\
accepted.
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\5\ On approval of this filing, this time will be 6:30 a.m.
\6\ On approval of this filing, only exercise notice (i.e., not
modifications) will be accepted after the start of critical
processing.
Rule 805(g)
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Submission time Current fee Proposed fee
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After the prescribed $2,000/any exercise $5,000/any exercise
deadline for the submission notice accepted. notice accepted.
of exercise instructions--
start of critical
processing.
After start of critical $10,000/line item on $20,000/line item on
processing--expiration time. any exercise notice any exercise notice
accepted. accepted.
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[[Page 32563]]
Late Exercise Cut-Off Time; Instructions To Modify
Rule 801(e) does not specify a cut-off time for the acceptance of
late exercise notices. To provide for greater consistency in processing
late exercise notices, OCC has concluded that it is desirable to
establish a uniform cut-off time (i.e., 6:30 a.m.) for their
acceptance. A 6:30 a.m. cut-off allows adequate time for OCC to process
a late exercise notice and to inform all assigned clearing members
before 8 a.m.
Finally, OCC will no longer accept modifications to previously
submitted exercise instructions after the start of critical processing.
Rule 801(e) currently provides that modifications will be accepted
after the start of critical processing on a best efforts basis, but
revocation instructions will not be accepted after the start of
critical processing. This prohibition is in place because due to the
need to back out data the procedures involved in processing revocations
are riskier than those associated with accepting a late exercise. A
modification that reduces the number of exercised contracts requires
use of the same revocation procedures. OCC therefore believes that
modifications and revocations should be treated alike. A request by a
clearing member to exercise additional contracts will be considered as
a request to file a late exercise (and not a request to modify a
previously submitted exercise notice) and will be handled pursuant to
the rules applicable to late exercise instructions.
III. Discussion
Section 17A(b)(3)(F) requires that the rules of a clearing agency
be designed to promote the prompt and accurate clearance and settlement
of securities transactions.\7\ The Commission finds OCC's proposed rule
change is consistent with section 17A(b)(3)(F) of the Act because it
should reduce the number of late exercise instructions submitted to
OCC. Late instructions are more time consuming and costly for OCC to
process and reducing the number of them submitted for processing should
promote the prompt and accurate clearance and settlement of securities
transactions.
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\7\ 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.
It is therefore ordered, pursuant to section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-OCC-2002-14) be and hereby
is approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-13496 Filed 5-29-03; 8:45 am]
BILLING CODE 8010-01-P