Self-Regulatory Organizations; The Options Clearing Corporation; Notice of a Proposed Rule Change Relating to Differential Index Options

[Federal Register Volume 63, Number 217 (Tuesday, November 10, 1998)]
[Notices]
[Pages 63097-63098]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30099]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40638; File No. SR-OCC-98-09]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of a Proposed Rule Change Relating to Differential Index Options

November 4, 1998.
    Pursuant to Section 19(b) (1) of the Securities Exchange Act of 
1934 (``Act''),\1\ notice is hereby given that on August 7, 1998, 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 
primarily by OCC. The Commission is publishing this notice to solicit 
comments from interested persons on the proposed rule change.
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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

    Under the proposed rule change, OCC will amend its By-Laws and 
Rules to provide for the clearance and settlement of differential index 
options.\2\
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    \2\ The complete text of the proposed amendments to OCC's By-
Laws and Rules is included in OCC's filing, which is available for 
inspection and copying at the Commission's public reference room and 
through OCC.
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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 such 
statements.\3\
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    \3\ 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

1. Description of Differential Index Options
    The American Stock Exchange, Inc. (``AMEX'') has submitted a 
proposed rule change to the Commission to trade differential index 
options.\4\ The purpose of OCC's proposal is to provide for the 
issuance, clearance, and settlement of differential index options.
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    \4\ Securities Exchange Act Release No. 40537 (October 8, 1998), 
63 FR 56052 [File No. SR-AMEX-98-12].
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    A differential index is a measure, expressed in percentage terms, 
of the difference between the performance of one security or index 
(called the ``designated interest'') and the performance of another 
security or index (called the ``benchmark'') over the life of an 
option. The determination of the value of a differential index differs 
from the determination of the value of a standard index although both 
types of indices have a specific value at any given time.\5\
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    \5\ According to OCC, AMEX has proposed to trade Index 
Differential Options (a designated index versus a benchmark index), 
Equity Differential Options (a designed stock versus a benchmark 
index), and Paired Stock Differential Options (a designated stock 
versus a benchmark stock).
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    A differential index option, like other index options, is a cash 
settled option that entitles an exercising holder to receive and 
requires an assigned writer to pay an ``exercise settlement amount.'' 
\6\ In the case of a call, the exercise settlement amount is based on 
the extent to which the aggregate current index value exceeds the 
aggregate exercise price. In the case of a put, the exercise settlement 
amount is determined by the extent to which the aggregate exercise 
price exceeds the aggregate current index value. A differential index 
option differs from a standard index option in that its exercise 
settlement amount is based upon the difference between the relative 
performance of two securities or indices rather than the absolute 
performance of a single index. The differential index options that AMEX 
has proposed to trade are European style, meaning that they can be 
exercised only upon expiration.
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    \6\ Differential index options are index options even if the 
designated security or the benchmark security is an equity security.
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    The clearance and settlement of differential index options is 
similar to that of other index options. The reporting authority for the 
underlying differential index will be required to provide the value of 
the index to OCC as of a specified date and time.\7\ OCC will then use 
the value of the differential index to determine the exercise 
settlement amount. OCC believes that differential index options can 
readily be processed, margined, and settled pursuant to the same rules 
and

[[Page 63098]]

procedures that apply to standard index options with certain 
modifications.
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    \7\ Computation of differential index values will be the 
exclusive function of the reporting authority.
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2. Proposed Amendments to Articles I and VI of the By-Laws
    Under the proposed rule change, OCC will add a definition of 
``underlying interest'' to Article I of the By-Laws to provide a 
generic term for underlying securities, indices, currencies, and other 
underlying interests. In addition, OCC will amend Article IV, Section 
11 of the By-Laws to reflect that the term ``index group'' is no longer 
defined in relation to index options although it is still defined for 
IPs.
3. Proposed Amendments to Article XVII of the By-Laws
    OCC will amend Article XVII of the By-Laws, which applies to index 
options generally, to add specific provisions applicable to 
differential index options and to revise certain terms to be 
sufficiently generic to apply to differential index options as well as 
other index options. The term ``index group'' will be eliminated 
altogether. The term ``index security'' will be added to refer to an 
individual security included in an index of securities.\8\ The term 
``index security'' will apply to differential index options only when 
either the designated interest or the benchmark is itself an index. 
Thus, for example, an individual security that is the designated 
interest with respect to a differential index is not included in the 
definition of an ``index security.'' OCC will add other terms referring 
expressly to differential index options which OCC believes are self-
explanatory.
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    \8\ In addition, OCC will make technical amendments to the By-
Laws and Rules to conform to these definitional changes.
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    OCC will amend Article XVII, Section 2 of the By-Laws for purposes 
of clarity. OCC does not intend for this amendment to create a 
substantive change.
    OCC will modify Article XVII, Section 3 of the By-Laws to make it 
clear that as is the case with any other index option OCC will 
ordinarily make no adjustments to the terms of a differential index 
option if index securities are added to or deleted from or if their 
relative weight is changed in an underlying index that is either the 
designated interest or the benchmark for the differential index. In 
addition, OCC will make clear that it will ordinarily make no 
adjustments to the terms of a differential index option having a 
security as differential index or benchmark if certain dilutive or 
concentrative events occur, such as a stock split, or if certain 
extraordinary events occur, such as a merger of the issuer. OCC will 
reserve the right to make an adjustment to the terms of a differential 
index option only if one of the enumerated events causes significant 
discontinuity in the level of the differential index and OCC determines 
that the discontinuity has not been adequately remedied.
    In addition, OCC will make slight modifications to Article XVII, 
Section 4, relating to the unavailability or inaccuracy of index 
values, in order to incorporate provisions for differential index 
options. In addition, OCC will amend Article XVII, Section 5, relating 
to the time for determination of current index value, in order to 
eliminate the reference to index groups.
4. Proposed Amendments to Existing Rules
    OCC will modify provisions in Rule 207 to accommodate differential 
index options. In addition, OCC will modify Interpretation and Policy 
.03 under Rule 602, Rule 1801(c), and Rule 1801(e) to remove references 
to index groups with respect to index options.
    OCC believes that the proposed rule change is consistent with the 
purposes and requirements of Section 17A of the Act \9\ and the rules 
and regulations thereunder because it applies the same procedures and 
safeguards to differential index options that OCC has employed with 
respect to other index options. OCC believes that these procedures have 
proven effective in promoting the prompt and accurate clearance and 
settlement of securities transactions and in safeguarding securities 
and funds.
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    \9\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would have any 
material adverse impact 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 OCC 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
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 Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of OCC. All submissions 
should refer to File No. SR-OCC-98-09 and should be submitted by 
December 1, 1998.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-30099 Filed 11-9-98; 8:45 am]
BILLING CODE 8010-01-M