[Federal Register Volume 85, Number 20 (Thursday, January 30, 2020)]
[Notices]
[Pages 5491-5493]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-01644]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88030; File No. SR-OCC-2020-001]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change To Modify the Fees for
Exercise Notices Submitted After the Deadlines and To Change the
Deadline for Submitting a Late Exercise Notice on Non-Expiration Dates
January 24, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on January 14, 2020, the Options Clearing
Corporation (``OCC'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by OCC. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
This proposed rule change by OCC would amend Rules 801 and 805 to
modify the fees for exercise notices submitted after the deadlines and
to amend Rule 801 to change the deadline for submitting a late exercise
notice on non-expiration dates. The proposed changes to OCC's Rules are
included in Exhibit 5 of the filing. Material proposed to be added to
OCC's Rules as currently in effect is marked by underlining and
material proposed to be deleted is marked with strikethrough text. All
terms with initial capitalization that are not otherwise defined herein
have the same meaning as set forth in the By-Laws and Rules.\3\
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\3\ OCC's By-Laws and Rules can be found on OCC's public
website: http://optionsclearing.com/about/publications/bylaws.jsp.
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II. Clearing Agency'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.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
(1) Purpose
The purpose of this rule filing is to: (1) Amend Rule 801 for
exercises on non-expiration dates and Rule 805 for exercises on
expiration dates to modify the fee applied to exercise notices that are
submitted to OCC after the start of critical processing (``late
exercise notices''), and (2) amend Rule 801 to change the deadline by
which late exercise notices are to be submitted to OCC for exercises on
non-expiration dates from 6:30 a.m. CT (7:30 a.m. ET) to 6:00 a.m. CT
(7:00 a.m. ET).
Background
Rule 801 addresses the exercise of options other than at
expiration. Subject to certain conditions, Rule 801(d) grants the Chief
Executive Officer, Chief Operating Officer, or any delegate of such
officer the discretion to permit a Clearing Member to file an exercise
notice after the prescribed deadline solely for the purpose of
correcting a bona fide error on the part of the
[[Page 5492]]
Clearing Member or a customer.\4\ However, the requesting Clearing
Member must pay OCC a $75,000 fee per line item for a late exercise
notice.\5\ Similarly, Rule 805, which addresses exercises on
expiration, imposes a $75,000 fee per line item on a Clearing Member
that submits an exercise notice after the prescribed deadline.\6\
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\4\ The current deadline for submitting exercise notices other
than at expiration is 6:00 p.m. CT.
\5\ A line item is an exercise instruction which includes the
account, series, and quantity to be exercised.
\6\ The current deadline for submitting exercise notices at
expiration is 8:00 p.m. CT on monthly standard Friday expirations,
7:00 p.m. CT on weekly Friday expirations, and 6:30 p.m. CT on
Monday and Wednesday expirations. Any exercise notice submitted
after these expiration deadlines until the ``expiration time'' of
the option, which is currently 10:59 p.m. CT as set forth in Article
1, Section 1(E)(23) of the By-Laws, would be treated as a late
exercise notice. Rule 805(d)(2) also provides for the ability to
submit a notice to not exercise an in-the-money option (i.e., a
contrary exercise). OCC does not allow for the submission of
contrary exercise notices after these expiration deadlines.
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Rule 801(d) further provides that the deadline for submitting late
exercise notices for exercises other than at expiration is 6:30 a.m.
CT, and that OCC will notify Clearing Members with short positions that
they have been assigned a late exercise notice by 8:00 a.m. CT.\7\
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\7\ As discussed below, OCC is proposing to change the deadline
for submitting late exercises under Rule 801(d). OCC is not,
however, proposing to make any changes to the deadline for
submitting late exercises under Rule 805 (i.e., the expiration time
for an option).
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Discussion
In 2008, OCC raised the late exercise fee from $20,000 to $75,000
per line item in Rules 801 and 805 in response to the increased amount
of late exercise notices it had received in the prior two years.\8\ As
noted in connection with that change, the late exercise fee is intended
as an incentive for OCC Clearing Members to be especially diligent in
processing exercise notices and to improve back office procedures,
while at the same time while preserving their ability to correct bona
fide operational errors. OCC believes that the increase achieved its
intended purpose at the time of improving Clearing Members' processing
proficiency and significantly reduced the amount of late exercise
notices.
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\8\ See Exchange Act Release No. 59046 (December 3, 2008), 73 FR
75486 (December 11, 2008) (SR-OCC-2007-16).
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In 2017, OCC received four late exercise notices.\9\ This amount
was significantly more than the four late exercise notices OCC had
received in the seven years preceding 2017, and it prompted OCC to
review the late exercise fee again. OCC discussed the issue on November
9, 2017 with the OCC Roundtable, which is an OCC-sponsored advisory
group comprised of representatives from OCC's participant exchanges, a
cross-section of OCC clearing members, and OCC staff. These discussions
noted the dollar amount at issue in connection with each of the four
late exercises in 2017, which reflected the amount of dividends
received by the person submitting the late exercise as a result of
receiving the underlying shares. These dividend amounts ranged from
$188,000 to $375,810.\10\ As a result of these discussions, OCC's
Roundtable agreed that it was appropriate to increase the late exercise
fee to $250,000 per line item for late exercise notices submitted under
Rules 801 and 805. Consistent with the purposes of the late exercise
fee noted above, the Roundtable believed this amount would be in a
range to incent OCC Clearing Members to be especially diligent in
processing exercise notices while at the same time still allowing firms
to correct bona fide errors.
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\9\ Until recently, OCC had not received a late exercise notice
from a Clearing Member since these ones in 2017. On December 14,
2019, OCC received three late exercise notices from a Clearing
Member.
\10\ The dividend amounts for the recent December 14, 2019 late
exercise notices ranged from $93,600 to $436,800.
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In connection with the four late exercise notices received in 2017,
OCC also reviewed its procedures for processing a late exercise. OCC
Rule 801(d) provides that the current deadline for a Clearing Member to
formally request a late exercise for an exercise on a non-expiration
date is 6:30 a.m. CT and that OCC must notify the assigned Clearing
Members by 8:00 a.m. CT of the late exercise. Given the compressed
timeframe in which to process a late exercise (i.e., 6:30 a.m. CT to
8:00 a.m. CT) and that they are an exception to the normal processing
routine, OCC's procedures for processing a late exercise involve
significant resources. They include a review of the positions of the
Clearing Member, escalation of the request to senior management, random
assignment of the exercise to Clearing Members holding the short
position, and a detailed communication to those assigned Clearing
Members. The late exercises in 2017 have shown the 6:30 to 8:00 a.m. CT
window is a narrow window for OCC staff to properly process the
exercise and assignments without delays, and OCC therefore believes it
needs another 30 minutes to process the late exercises. Accordingly,
OCC is proposing to change the deadline for the submission of late
exercises to 6:00 a.m. CT from the current 6:30 a.m. CT deadline. OCC
also discussed this proposal with the OCC Roundtable in connection with
discussions noted above and they agreed with it.
(2) Statutory Basis
Section 17A(b)(3)(F) of the Act \11\ requires, among other things,
that the rules of a clearing agency be designed to promote the prompt
and accurate clearance and settlement of securities and derivatives
transactions. OCC believes that the proposed rule change is consistent
with this provision because it would promote the prompt and accurate
clearance and settlement of securities transactions by providing an
incentive for Clearing Members to improve back office processing with
respect to identifying and handling positions for which an exercise
notice is to be submitted, while preserving their ability to correct
bona fide operational errors. Similarly, providing OCC an additional 30
minutes in which to process a late exercise notice is consistent with
this provision because it is designed to help OCC process such notices
without delays. As noted, OCC discussed both of these changes with the
OCC Roundtable and they agreed with them. The proposed rule change is
not inconsistent with the existing rules of OCC, including any other
rules proposed to be amended.
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\11\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \12\ requires that the rules of a
clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the Act. OCC does not believe that the
proposed rule change would impact or impose any burden on
competition.\13\ The proposed rule change would not affect the
competitive dynamics between Clearing Members in that it would apply to
all Clearing Members equally. The proposed rule change also would not
inhibit access to OCC's services or disadvantage or favor any
particular user in relationship to another. In this regard, as
described above, the proposed rule change is designed to further
facilitate the prompt and accurate clearance and settlement of
securities transactions. It is designed to incent Clearing Members to
be especially diligent in processing exercise notices and to improve
back office procedures, while at the same time preserving their
[[Page 5493]]
ability to correct bona fide operational errors
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\12\ 15 U.S.C. 78q-1(b)(3)(I).
\13\ 15 U.S.C. 78q-1(b)(3)(I).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments on the proposed rule change 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 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate 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 or disapprove the 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 email to [email protected]. Please include
File Number SR-OCC-2020-001 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-2020-001. This file
number should be included on the subject line if email 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 website (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 website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of OCC.
All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
All submissions should refer to File Number SR-OCC-2020-001 and
should be submitted on or before February 20, 2020.
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\14\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-01644 Filed 1-29-20; 8:45 am]
BILLING CODE 8011-01-P