83 FR 3782 - Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify OCC's Rules Regarding the Exercise Procedures for Certain Options on Futures

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 18 (January 26, 2018)

[Federal Register Volume 83, Number 18 (Friday, January 26, 2018)]
[Notices]
[Pages 3782-3784]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-01358]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82543; File No. SR-OCC-2018-003]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify OCC's Rules Regarding the Exercise Procedures for Certain 
Options on Futures

January 19, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 11, 2018, 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. OCC filed the proposed rule change 
pursuant to Section 19(b)(3)(A) \3\ of the Act and Rule 19b-4(f)(4)(ii) 
\4\ thereunder so that the proposal was effective upon filing with the 
Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(4)(ii).
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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 concerns modifications to OCC's 
Rules regarding the exercise procedures for certain options on futures 
in order to conform to changes proposed by Nasdaq Futures, Inc. 
(``NFX''), a futures market for which OCC clears such contracts. The 
proposed changes to OCC's Rules can be found in Exhibit 5 to the 
filing. All terms with initial capitalization that are not otherwise 
defined herein have the same meaning as set forth in the By-Laws and 
Rules.\5\
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    \5\ 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 proposed rule change is to amend OCC's Rules to 
permit a futures market that lists certain options on futures to 
instruct OCC to: (1) Eliminate a Clearing Member's ability to provide 
contrary instructions with respect to such futures options, and (2) 
permit automatic exercise of futures options that are call options and 
that settle at exactly the strike price for the option (i.e., an ``at-
the-money'' futures option). These amendments to OCC's Rules would 
accommodate certain corresponding amendments to the rules of NFX, for 
which OCC clears relevant futures option contracts, and would not apply 
to any options on security futures to the extent OCC clears such 
products in the future.\6\
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    \6\ Options on security futures currently do not trade on the 
exchange for which OCC clears security futures. The proposed rule 
change would not apply to any securities, but rather futures 
products (i.e., options on futures that are not security futures) 
that are subject to the exclusive jurisdiction of the Commodity 
Futures Trading Commission (``CFTC''). See infra note 16.
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Contrary Instructions
    NFX has proposed to eliminate the ability of the holders of certain 
futures options contracts to provide ``contrary instructions'' or 
``contrary exercises'' to the futures markets with respect to such 
contracts.\7\ NFX has advised OCC that the New York Mercantile 
Exchange, Inc. (``NYMEX'') has already made comparable changes to its 
rules for certain comparable options traded on NYMEX based on market 
feedback.\8\ NFX would like to replicate these changes for the 
comparable options contracts traded on NFX, none of which are options 
on security futures.
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    \7\ See SR-NFX-2017-56, filed December 15, 2017 with the CFTC.
    \8\ See NYMEX Submission No. 17-272 filed July 21, 2017 with the 
CFTC. The filing also amended the rules of the Commodity Exchange, 
Inc. (``COMEX'') to make comparable changes for certain options 
traded on COMEX.
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    A contrary instruction allows an option holder to exercise an 
``out-of-the-money'' option to receive the underlying futures contract 
or to abandon an ``in-the-money'' option. Existing OCC Rule 1305 
governs the exercise procedures for American and European-styled 
options on futures cleared by OCC that settle into the underlying 
futures contract. Subparagraph (c) of Rule 1305 provides

[[Page 3783]]

for the automatic exercise of such options that are in-the-money at 
expiration by ``such threshold amount as [OCC] may from time to time 
establish with respect to particular classes of options,'' unless the 
Clearing Member instructs OCC not to exercise such in-the-money 
options. The provision also incorporates by reference certain 
operational aspects of the exercise-at-expiration procedures for listed 
options found in OCC Rule 805. Neither Rule 1305 nor Rule 805 provide a 
futures market with the ability to limit contrary instructions. 
Consequently, OCC proposes to add a new paragraph (d) to Rule 1305 that 
would provide futures markets with this ability in order to accommodate 
NFX's proposal to prohibit the use of contrary instructions. The 
proposed ability would not apply, however, to options on security 
futures cleared by OCC to the extent OCC clears such products in the 
future.
At-the-Money Options
    Existing Rules 1305 and 805 are silent on what happens to options 
that expire at-the-money. By specifying what happens to options that 
expire in-the-money (i.e., automatic exercise), OCC's Rules indicate 
that options expiring at-the-money would be treated as if they were 
out-of-the-money and not automatically exercised, and therefore the 
holders would not automatically buy (or sell) futures contracts or 
equity securities at the strike price. NFX has proposed to amend its 
own rules regarding the treatment of certain at-the-money options. In 
order to accommodate these proposed changes at NFX, OCC proposes to add 
a new paragraph (e) to Rule 1305, which would permit a futures market 
to instruct OCC that futures options that are call options and settle 
at-the-money should be treated as if they settled in-the-money and 
futures options that are put options and settle at-the-money should be 
treated as if they settled out-of-the-money. However, the proposed 
ability would not apply to options on security futures that are cleared 
by OCC to the extent OCC clears such products in the future. Therefore, 
in the case of a call option the holder of the option would 
automatically buy the underlying futures contract at the option strike 
price, and in the case of a put option the holder would not 
automatically sell the underlying futures contract at the option strike 
price.
Timing of Implementation
    OCC proposes that the proposed amendments to Rule 1305 would apply 
to any futures option for which a futures market has instructed OCC to 
apply the exercise procedures specified in Rules 1305(d) and/or (e).
(2) Statutory Basis
    Section 17A(b)(3)(F) of the Act,\9\ 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, to foster cooperation and coordination with persons 
engaged in clearance and settlement, and, in general, to protect 
investors and the public interest. OCC believes that the proposed rule 
change is consistent with Section 17A(b)(3)(F) of the Act \10\ and the 
rules and regulations thereunder, because it would grant the futures 
markets for which OCC clears futures options contracts the ability to 
coordinate OCC's exercise procedures with the futures market's 
treatment of at-the-money options and to prohibit the use of contrary 
instructions, thereby promoting the prompt and accurate clearance and 
settlement of securities and derivatives transactions, fostering 
cooperation and coordination with persons engaged in clearance and 
settlement, and, in general, protecting investors and the public 
interest.
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ Id.
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    Rule 17Ad-22(e)(21) \11\ requires that a covered clearing agency 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, in part, be efficient and effective 
in meeting the requirements of its participants and the markets it 
serves. OCC believes that granting futures markets, like NFX, this 
flexibility would encourage efficiency and coordination across the 
market as a whole and reduce potential sources of operational risk for 
market participants. A lack of conformity in futures option contract 
terms across different futures markets could reduce efficiency and pose 
operational risks to market participants and would require them to 
undertake additional monitoring. OCC therefore believes that the 
proposed rule change is reasonably designed to comply with the 
requirements of Rule 17Ad-22(e)(21).\12\
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    \11\ 17 CFR 240.17Ad-22(e)(21).
    \12\ Id.
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    The proposed rule change is not inconsistent with the existing 
rules of OCC, including any other rules proposed to be amended.

(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \13\ 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. 
This proposed rule change would not inhibit access to OCC's services or 
disadvantage or favor any particular user in relationship to another, 
and it will be applied uniformly to all Clearing Members. The proposed 
rule change is intended to accommodate NFX's proposed rule change, 
which is designed to bring the terms of the futures options contracts 
listed by NFX into conformity with those listed by other futures 
markets. Accommodating such a change would help promote a level playing 
field among market participants trading futures options by ensuring 
that such contracts could have identical terms. For the foregoing 
reasons, OCC believes the proposed rule change is in the public 
interest, would be consistent with the requirements of the Act 
applicable to clearing agencies, and would not impact or impose a 
burden on competition.
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    \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

    Pursuant to Section 19(b)(3)(A) of the Act,\14\ and Rule 19b-
4(f)(4)(ii) thereunder,\15\ the proposed rule change is filed for 
immediate effectiveness because it effects a change in an existing 
service of OCC that (i) primarily affects the clearing operations of 
OCC with respect to products that are not securities, i.e., options on 
futures that are not security futures,\16\ and (ii) does

[[Page 3784]]

not significantly affect any securities clearing operations of OCC or 
any rights or obligations of OCC with respect to securities clearing or 
persons using such securities clearing services.
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(4)(ii).
    \16\ Section 3(a)(10) of the Act defines a ``security'' as ``any 
note, stock, treasury stock, security future, security-based swap, 
bond, debenture, certificate of interest or participation in any 
profit-sharing agreement or in any oil, gas, or other mineral 
royalty or lease, any collateral-trust certificate, preorganization 
certificate or subscription, transferable share, investment 
contract, voting-trust certificate, certificate of deposit for a 
security, any put, call, straddle, option, or privilege on any 
security, certificate of deposit, or group or index of securities 
(including any interest therein or based on the value thereof), or 
any put, call, straddle, option, or privilege entered into on a 
national securities exchange relating to foreign currency, or in 
general, any instrument commonly known as a `security'; or any 
certificate of interest or participation in, temporary or interim 
certificate for, receipt for, or warrant or right to subscribe to or 
purchase, any of the foregoing; but shall not include currency or 
any note, draft, bill of exchange, or banker's acceptance which has 
a maturity at the time of issuance of not exceeding nine months, 
exclusive of days of grace, or any renewal thereof the maturity of 
which is likewise limited.'' 15 U.S.C. 77b(a)(1). Section 3(a)(55) 
of the Exchange Act defines ``security future'' as ``a contract of 
sale for future delivery of a single security or of a narrow-based 
security index, including any interest therein or based on the value 
thereof, except an exempted security.'' 15 U.S.C. 78c(a)(55). An 
option on a futures contract that is not a security future does not 
meet the definition of ``security'' and therefore is a product that 
is subject to the exclusive jurisdiction of the CFTC.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.\17\
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    \17\ Notwithstanding its immediate effectiveness, implementation 
of this rule change will be delayed until this change is deemed 
certified under CFTC Rule 40.6.
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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-2018-003 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-2018-003. 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 and on OCC's website at 
https://www.theocc.com/about/publications/bylaws.jsp.
    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-2018-003 and 
should be submitted on or before February 16, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Eduardo A. Aleman,
Assistant Secretary.
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    \18\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2018-01358 Filed 1-25-18; 8:45 am]
 BILLING CODE 8011-01-P