Self-Regulatory Organizations; The Options Clearing Corporation; Order Granting Approval of a Proposed Rule Change Relating to the Purchase of OCC Stock by Participant Exchanges and the Rights of Participant Exchanges on Liquidation of OCC

[Federal Register Volume 64, Number 185 (Friday, September 24, 1999)]
[Notices]
[Pages 51820-51822]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-24915]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41884; File No. SR-OCC-99-06]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Relating to the 
Purchase of OCC Stock by Participant Exchanges and the Rights of 
Participant Exchanges on Liquidation of OCC

September 17, 1999.
    On March 15, 1999, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-OCC-99-06) 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 May 26, 1999.\2\ No comment 
letters were received. For the reasons discussed below, the Commission 
is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 41422 (May 18, 1999) 64 
FR 28543.
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I. Description

    The rule change updates the provisions of OCC's Certificate of 
Incorporation, By-Laws, and Stockholders Agreement that relate to the 
purchase of OCC stock by participant exchanges and the rights of

[[Page 51821]]

those exchanges in the event of OCC's liquidation. The rule change 
makes two substantive changes. First, it increases the maximum purchase 
price for OCC stock from $333,333 to $1,000,00 per exchange. Second, in 
the event of OCC's liquidation, it limits distributions to exchanges 
that first became stockholders after December 31, 1998, to the amounts 
that such exchanges paid for their stock plus a pro rata share of any 
increase in OCC's retained earnings after December 31, 1998.

Increase in Maximum Purchase Price

    Article VII, Section 2 of OCC's By-Laws provides that an options 
exchange that wishes to become a participant in OCC must purchase 5,000 
shares of Class A Common Stock and 5,000 shares of Class B Common Stock 
of OCC.\3\ Previously, the price was an amount equal to book value as 
of the close of the preceding month but not less than $250,000 nor more 
than $333,333. As of December 31, 1998, the book value of 10,000 shares 
of OCC stock was $6,365,100, so the effective purchase price is the 
maximum price of $333,333.
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    \3\ Class A Common Stock is voted to elect OCC's nine member 
directors. Class B Common Stock is voted, as a class, to elect OCC's 
public and management directors. Each participant exchange holds a 
separate series of Class B Common Stock that entitles it to elect 
one exchange director.
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    The $333,333 maximum dates from 1975, when OCC (then named Chicago 
Board Options Exchange Clearing Corporation) became the common clearing 
facility for listed options. Recently, OCC engaged Deloitte & Touche, 
LLP (``Deloitte'') to recommend a fair price for participation in OCC 
in view of the length of time that had elapsed since the maximum was 
fixed and the prospect of new options markets becoming participant 
exchanges of OCC.\4\ Deloitte arrived at a value of $1,080,000 for a 
20% interest in OCC.
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    \4\ See, e.g., Securities Exchange Act Release No. 41439 (May 
24, 1999), 64 FR 29367 (notice of filing of application for 
registration as a national securities exchange by the International 
Securities Exchange LLP).
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    The rule change increases the maximum price for an interest in OCC 
to $1,00,000, which approximates the amount recommended by Deloitte. 
According to OCC, the $1,000,000 amount also approximates the value in 
1999 dollars of $333,333 in 1975.\5\ Therefore, OCC believes that 
increasing the maximum price to $1,000,000 would tend to equalize the 
investment required of new exchanges with the investments expressed in 
1999 dollars made by OCC's present participant exchanges in the mid-
1970's.\6\
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    \5\ OCC has informed the Commission that based on the All Urban 
Consumer CPI, $333,333 on January 1, 1975, would amount of 
$1,009,932 in 1999, and that using the General Consumer Price Index, 
$333,333 on January 1, 1975, would amount to $1,056,518 in 1999.
    \6\ OCC's current participant exchanges (which include the 
American Stock Exchange, the Chicago Board Options Exchange, the 
Pacific Exchange, and the Philadelphia Stock Exchange) acquired 
their stock in OCC between 1973 and 1976.
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    In addition, OCC's rules previously specified a minimum purchase 
price of $250,00 if the book value of a proportionate interest in OCC 
would be less than that amount. The rule change eliminates the minimum 
price because OCC believes that the book value of a proportionate 
interest in OCC greatly exceeds $250,000 today and is likely to 
continue to do so.

Change in Liquidation Rights

    The rule change establishes a new scheme for the distribution of 
OCC's net assets if OCC were to liquidate. Under the new scheme, 
holders of Class A Common Stock and Class B Common Stock would first be 
paid the par value of their shares ($10.00 per share). Next, each 
holder of Class B Common Stock would receive a distribution of 
$1,000,000, allowing it to recover the value of its investment in 1998 
dollars. Next, an amount equal to OCC's stockholders' equity at 
December 31, 1998, minus the distributions described in the two 
preceding sentences would be distributed to those exchanges that 
acquired their Class B Common Stock before December 31, 1998. Finally, 
any excess assets (i.e. post-1998 retained earnings) would be 
distributed equally to all holders of Class B Common Stock. OCC's 
intention is to allow each exchange to recover its investment but to 
reserve OCC's present retained earnings for those participant exchanges 
that were stockholders during the period when the retained earnings 
were being accumulated.

Technical and Conforming Changes

    The rule change revises the last sentence of Article VII, Section 2 
of the By-Laws. Previously, that provision stated that if OCC fails or 
is unable to purchase a stockholder's shares when required under the 
Stockholders Agreement, the stockholder may sell its shares ``to a 
person who is qualified under Section 1 of this Article VII for 
participation in [OCC] as an `Exchange' and who is not then a 
stockholder of [OCC].'' However, Section 1 of Article VII provides that 
in order to be qualified for participation in OCC as an exchange, a 
securities exchange or securities association must already have 
purchased stock in OCC. The rule change eliminates the circularity of 
the provision by allowing the stockholder to sell its shares to any 
national securities exchange or national association that has effective 
rules for the trading of options and who is not then a stockholder in 
OCC. The rule change also makes conforming changes to the Stockholders 
Agreement.
    Article VII, Section 3 is amended to reflect previous rule changes 
providing for public directors and to eliminate an obsolete requirement 
that the stockholders renew their voting agreement every ten years. 
Article VII, Section 4 is amended to reflect the fact that the 
Participant Exchange Agreement between OCC and its participant 
exchanges now specifically refers to options disclosure documents 
required under Exchange Act Rule 9b-1.\7\
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    \7\ 17 CFR 240.9b-1.
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    Section 10(a) of the Stockholders Agreement is amended to increase 
proportionately with the increase in the purchase price of OCC stock 
the dollar discounts that OCC will apply if it repurchases a 
participant exchange's stock within six years of the date when the 
stock was acquired. Section 12 of the Stockholders Agreement, which 
governs contributions to capital by the American Stock Exchange and the 
Chicago Board Options Exchange if another OCC stockholder sells its 
stock to OCC, is deleted in its entirety because it is obsolete.

II. Discussion

    Section 17A(b)(3)(D) of the Act \8\ requires that the rules of a 
clearing agency provide for the equitable allocation of reasonable 
dues, fees, and other charges among its participants. The Commission 
believes that the proposed rule change is consistent with OCC's 
obligations under Section 17A(b)(3)(D) because the rule change should 
ensure that the price that participant exchanges are required to pay 
for OCC stock reflects the value of those shares and that participant 
exchanges all pay equal amounts for OCC stock after purchase prices are 
adjusted for inflation. In addition, the rule change should provide for 
an equitable distribution of assets to OCC's participant exchanges if 
OCC were to liquidate.
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    \8\ 15 U.S.C. 78q-1(b)(3)(D).
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III. 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 with Section 17A of the Act and the rules and regulations 
thereunder.

[[Page 51822]]

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. OCC-99-06) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-24915 Filed 9-23-99; 8:45 am]
BILLING CODE 8010-01-M