[Federal Register: August 19, 2008 (Volume 73, Number 161)]
[Notices]
[Page 48423-48425]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19au08-83]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58353; File No. SR-OCC-2008-16]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of a Proposed Rule Change Relating to the Cash
Dividend Threshold
August 13, 2008.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on July 24, 2008, The Options
Clearing Corporation (``OCC'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change 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 from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change would mitigate inconsistencies that may
result under the current policy for adjusting stock option contracts.
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\
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\2\ The Commission has modified the text of the summaries
prepared by OCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The purpose of the proposed rule change is to mitigate
inconsistencies that may result under the current policy for adjusting
stock option contracts. In February 2007, the Commission approved rule
change SR-OCC-2006-01, which amended Section 11A of Article VI of the
OCC By-Laws governing adjustments to options in response to cash
dividends or distributions.\3\ Under the new adjustment policy, cash
dividends paid by a company otherwise than pursuant to a policy or
practice of paying dividends on a quarterly or other regular basis
would be deemed ``special'' and would normally trigger a contract
adjustment provided the value of the adjustment is at least $12.50 per
option contract. This new adjustment policy will become effective for
cash dividends announced on or after February 1, 2009.
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\3\ Securities Exchange Act Release No. 55258 (February 8,
2007), 72 FR 7701 (February 16, 2007).
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However, certain inconsistencies may result when the threshold of
``$12.50 per option contract'' is applied to all options on the
affected underlying security. For example, if a $.10 special cash
dividend is declared, the standard-size 100 share option would not be
adjusted (because the value is less than $12.50). However, a previously
adjusted 150 share option (reflecting a 3 for 2
[[Page 48424]]
split) would be adjusted (because the value is $15 per contract).
Adjusting some but not all options of the same class in response to the
same dividend event, especially if the 100 share option is not
adjusted, could be confusing to investors, and OCC's Securities
Committee (consisting of representatives of each of the options
exchanges and OCC) determined that this potential confusion should be
avoided.
OCC considered modifying the threshold to specify $.125 per share
instead of $12.50 per contract. This approach would address all
standard-size (100 share) contracts that currently exist plus adjusted
contracts that come into existence in response to splits, etc. However,
exchanges have proposed to introduce ``maxi'' size contracts. Applying
the same per share threshold to a 1,000 and 100 share option could
sometimes result in significant value being left on the table in the
case of the 1,000 share option. Taking the same example of a $.10 per
share special dividend, neither option would be adjusted if the
threshold were $.125 per share. This would result in a loss of only $10
per contract for the 100 share option, but the loss would be $100 per
contract for the 1,000 share option. For this reason, a per share
threshold is not being proposed.
Greater consistency across contracts of varying sizes can be
achieved by retaining the $12.50 per contract threshold in all cases
but adding a qualification specifying that if a corresponding standard-
size contract exists on the underlying security, previously adjusted
contracts will be adjusted only if the corresponding standard-size
contract is also adjusted. For example, if a 100 share option and a 150
share option (previously adjusted for a 3 for 2 split) exist, the 150
share option would be adjusted for a special cash dividend only if the
100 share standard option would also be adjusted for that dividend.
Stated differently, OCC proposes to refer back to the preadjustment
standard-size option (if any exist) in deciding whether or not to
adjust a previously adjusted option. Thus a 150 share option that was
derived from a 100 share option as a result of a 3 for 2 split would be
referred back to the 100 share option. A 1,500 share option (previously
adjusted for a 3 for 2 split) would be referred back to the 1,000 share
option (the ``standard'' size option for a ``maxi'' contract). Thus,
the qualification specifies ``only if the corresponding standard-size
option contract is also adjusted.''
This qualification achieves greater consistency because in most
cases all contracts on the same underlying security would be adjusted
if the 100 share contract is adjusted. The qualification also would
allow a 1,000 share ``standard'' contract to be adjusted independently
of a 100 share contract. Also, it could happen that an adjusted
contract exists but not the corresponding standard contract, or a
contract calling for delivery of fewer than 100 shares may exist (e.g.,
as a result of a spinoff adjustment). In these cases, the qualification
would be inapplicable and a straightforward application of the $12.50
threshold would determine whether an adjustment would be made. The
following are examples of the qualification to the $12.50 per contract
threshold.
(A) If a corresponding standard size contract exists:
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$.09 Dividend $.13 Dividend
Shares Contract ($Value) Adjust? ($Value) Adjust?
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100................................... Standard................. 9.00 NO........................ 13.00 YES.
133................................... 4/3 split................ 11.97 NO........................ 17.29 YES.
150................................... 3/2 split................ 13.50 NO........................ 19.50 YES.
10.................................... Spinoff.................. 0.90 NO........................ 1.30 NO.
177................................... Merger................... 15.93 NO........................ 23.01 YES.
1000.................................. Standard................. 90.00 YES....................... 130.00 YES.
1500.................................. 3/2 split................ 135.00 YES....................... 195 YES.
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$.02 Dividend $.01 Dividend
Shares Contract ($Value) Adjust? ($Value) Adjust?
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100................................... Standard................. 2.00 NO........................ 1.00 NO.
133................................... 4/3 split................ 2.66 NO........................ 1.33 NO.
150................................... 3/2 split................ 3.00 NO........................ 1.50 NO.
10.................................... Spinoff.................. 0.20 NO........................ 0.10 NO.
177................................... Merger................... 3.54 NO........................ 1.77 NO.
1000.................................. Standard................. 20.00 YES....................... 10.00 NO.
1500.................................. 3/2 split................ 30.00 YES....................... 15.00 NO.
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(B) If the 100 share standard size contract does not exist:
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$.09 Dividend $.13 Dividend
Shares Option ($Value) Adjust? ($Value) Adjust?
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133................................... 4/3 split................ 11.97 NO........................ 17.29 YES.
150................................... 3/2 split................ 13.50 YES....................... 19.50 YES.
10.................................... Spinoff.................. 0.90 NO........................ 1.30 NO.
177................................... Merger................... 15.93 YES....................... 23.01 YES.
1000.................................. Standard................. 90.00 YES....................... 130.00 YES.
1500.................................. 3/2 split................ 135.00 YES....................... 195 YES.
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The new adjustment policy approved in File No. SR-OCC-2006-01 will
take effect beginning with dividends announced on and after February 1,
2009. OCC intends this proposed rule change to take effect at the same
time,
[[Page 48425]]
but these changes will not be implemented until the exchanges have
conducted appropriate educational efforts and definitive copies of an
appropriate supplement to the options disclosure document,
Characteristics and Risks of Standardized Options, are available for
distribution.
OCC believes that the proposed rule change is consistent with the
purposes and requirements of the Act because it is designed to promote
the prompt and accurate clearance and settlement of transactions in
securities options, to remove impediments to and perfect the mechanism
of a national system for the prompt and accurate clearance and
settlement of such transactions, and, in general, to protect investors
and the public interest. It accomplishes this by reducing
inconsistencies in the adjustment of stock option contracts. The
proposed rule change is not inconsistent with the existing By-Laws and
Rules of OCC, including any rules proposed to be amended.
(B) Self-Regulatory Organization's Statement on Burden on Competition
OCC does not believe that the proposed rule change would impose any
material burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
Written comments were not and are not intended to be solicited with
respect to the proposed rule change, and none have been received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period: (i) As the
Commission may designate up to ninety days of such date 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 such proposed rule change or
(B) Institute proceedings to determine whether the proposed rule
change should be 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:
Electronic Comments
Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml) or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-OCC-2008-16 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2008-16. 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 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 inspection and
copying 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 OCC and on OCC's Web
site at http://www.theocc.com/publications/rules/proposed_changes/sr_
occ_08_16.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-
2008-16 and should be submitted on or before September 3, 2008.
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\4\
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\4\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-19132 Filed 8-18-08; 8:45 am]
BILLING CODE 8010-01-P