Notice2022-10735
Self-Regulatory Organizations; The Options Clearing Corporation; Order Granting Approval of Proposed Rule Change by The Options Clearing Corporation Concerning Cash-Settled FLEX ETF Options
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Published
May 19, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 97 (Thursday, May 19, 2022)</title>
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[Federal Register Volume 87, Number 97 (Thursday, May 19, 2022)]
[Notices]
[Pages 30531-30533]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-10735]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94910; File No. SR-OCC-2022-003]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Granting Approval of Proposed Rule Change by The Options Clearing
Corporation Concerning Cash-Settled FLEX ETF Options
May 13, 2022.
I. Introduction
On March 16, 2022, the Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2022-003 (``Proposed Rule Change'')
pursuant to Section 19(b) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to amend various
provisions of the OCC By-Laws and Rules to accommodate the issuance,
clearance and settlement of flexibly structured options on exchange-
traded funds (``fund shares'' or ``ETFs'') that are cash-settled
(``Cash-Settled Flex ETF Options'').\3\ The Proposed Rule Change was
published for public comment in the Federal Register on April 4,
2022.\4\ The Commission received no comments regarding the substance of
the Proposed Rule Change.\5\ This order approves the Proposed Rule
Change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Notice of Filing infra note 4, 87 FR at 19566.
\4\ Securities Exchange Act Release No. 94542 (Mar. 29, 2022),
87 FR 19566 (Apr. 4, 2022) (File No. SR-OCC-2022-003) (``Notice of
Filing'').
\5\ The Commission received one comment letter that addressed
market conduct generally; however, additional discussion is
unnecessary because the comment letter does not bear on the purpose
or legal basis of the Proposed Rule Change. The comment on the
Proposed Rule Change is available at <a href="https://www.sec.gov/comments/sr-occ-2022-003/srocc2022003.htm">https://www.sec.gov/comments/sr-occ-2022-003/srocc2022003.htm</a>.
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II. Background \6\
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\6\ Capitalized terms used but not defined herein have the
meanings specified in OCC's Rules and By-Laws, available at <a href="https://www.theocc.com/about/publications/bylaws.jsp">https://www.theocc.com/about/publications/bylaws.jsp</a>.
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The NYSE American Exchange (``NYSE American'') received approval to
list Cash-Settled Flex ETF Options as a variation of the currently-
traded, physically-settled equity flex options.\7\ Cash-Settled Flex
ETF Options generally have the same characteristics as physically-
settled equity flex options, except Cash-Settled Flex ETF Options are
cash-settled, not physically-settled, with a settlement amount based on
the difference between the price of the underlying security on the date
of exercise and the strike price of the exercised option.
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\7\ Securities Exchange Act Release No. 88131 (Feb. 5, 2020), 85
FR 7806 (Feb. 11, 2020) (File No. SR-NYSEAmer-2019-038).
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OCC submitted the Proposed Rule Change because its rules do not
allow for the settlement of equity options in cash, except in two
specific circumstances: (i) The underlying security undergoes a
corporate action resulting in the conversion of the option deliverable
to only cash,\8\ or (ii) the underlying security is otherwise
[[Page 30532]]
unavailable for delivery.\9\ Within the By-Laws and Rules, certain
provisions apply to physically-settled options and certain provisions
apply to cash-settled options. To accommodate the Cash-Settled Flex ETF
Option product, OCC proposes to revise its By-Laws and Rules to do the
following: (i) Make distinctions between Cash-Settled Flex ETF Options
and physically-settled options on the same underlying security; (ii)
clarify that certain provisions that currently apply only to
physically-settled options will also apply to Cash-Settled Flex ETF
Options; and (iii) exclude application of certain provisions to Cash-
Settled Flex ETF Options that otherwise would apply to all cash-settled
options.
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\8\ See OCC By-Laws Article VI, Section 11A, Interpretations and
Policies .05.
\9\ See OCC By-Laws Article VI, Section 19(c).
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OCC proposes the following modifications to its By-Laws to
distinguish physically-settled flexibly structured options from Cash-
Settled Flex ETF Options:
<bullet> In Article I (Definitions), Section 1(F)(8), OCC proposes
to revise the definition of ``Flexibly Structured Option'' to (i) allow
such options to be physically-settled or cash-settled depending on the
listing exchange's rules, and (ii) state that Cash-Settled Flex ETF
Options would not be fungible with physically-settled flexibly
structured options and would not be consolidated with standard options
listed after a flexibly-structured option with the same strike,
expiration date, and underlying security, as is the case with a
physically-settled flexibly structured option that is fungible.
<bullet> In Article I (Definitions), Section 1(S)(12), OCC proposes
to revise the definition of ``Series'' to state that the options of the
same series have the same settlement method.
<bullet> In Article I (Definitions), Section 1(V)(1), OCC proposes
to revise the definition of ``Variable Terms'' to recognize that in
addition to the variable terms itemized in the definition, flexibly-
structured options on fund shares may be either physically- or cash-
settled.
<bullet> In Article XVII (Index Options and Certain Other Cash-
Settled Options), Introduction, OCC proposes to revise the introduction
to add flexibly-structured options that cash-settle to the list of
options for which Article XVII of the By-Laws applies.
<bullet> In Article XVII (Index Options and Certain Other Cash-
Settled Options), Section 1(C)(4), OCC proposes to revise the
definition of ``Class of Options'' to state that flexibly-structured
options that cash-settle shall constitute a different class of options
from physically-settled options on the same underlying interest.
OCC also proposes the following modifications to its By-Laws and
Rules to require the application of certain provisions to Cash-Settled
Flex ETF Options that otherwise would apply only to physically-settled
options, and to exclude Cash-Settled Flex ETF Options from certain
provisions that otherwise would apply to all cash-settled options:
<bullet> In Article I (Definitions), Section 1(C)(15), OCC proposes
to revise the definition of ``Clearing Member'' to state that a
Clearing Member is not an ``Index Clearing Member'' solely by virtue of
being approved to clear Cash-Settled Flex ETF Options.
<bullet> In Article I (Definitions), Section 1(R)(5), OCC currently
defines ``Reporting Authority'' when used with respect of any cash-
settled contract to mean the source that OCC uses as the official
source for the current price or value of the underlying interest. OCC
proposes to revise this definition to state that the reporting for
Cash-Settled Flex ETF Options will be the same source used by OCC for
physically-settled equity options with the same underlying interest.
According to OCC, this change is designed to facilitate the use of the
same closing price for automatic exercise determinations on both
physically- and cash-settled options with the same underlying security,
thereby ensuring that expiration processing for a Cash-Settled Flex ETF
Option will align with expiration processing for a physically-settled
product on the same underlying security.\10\
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\10\ See Notice of Filing, supra note 4, at 19567.
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<bullet> In Article XVII (Index Options and Certain Other Cash-
Settled Options), Section 1(R)(3), defines ``Reporting Authority''
specifically in the context of index options and certain other cash-
settled options. OCC proposes to revise this definition to explicitly
exclude Cash-Settled Flex ETF Options and to state that the reporting
authority for Cash-Settled Flex ETF Options is the same source used by
OCC for physically-settled equity options.
<bullet> Article XVII (Index Options and Certain Other Cash-Settled
Options), Sections 3(a) and 3(h) currently state that the adjustment
provisions of Article VI, Section 11A do not apply to cash-settled
equity contracts. To ensure that adjustment decisions for Cash-Settled
Flex ETF Options and physically-settled options on the same underlying
are the same, OCC is proposing to add language to this section to state
that Article VI, Section 11A of the By-Laws applies to Cash-Settled
Flex ETF Options.
<bullet> Article XVII (Index Options and Certain Other Cash-Settled
Options), Section 4(a)(2) states the method by which the exercise
settlement amount for exercised contracts of an affected series is
fixed for index options and certain other cash-settled options. OCC
proposes to amend this provision to state that the exercise settlement
amount for Cash-Settled Flex ETF Options shall be determined by using
the last reported sale price for the underlying security during regular
trading hours, which is consistent with the expiration closing price
determination for physically-settled options under OCC's Rule 805(j).
<bullet> Chapter VI (Margins), Rule 610 (Deposits in Lieu of
Margin) allows Clearing Members to use specific deposits of the
underlying security as collateral to cover short customer positions on
call options. Specific deposits fully cover a short call position
because the Clearing Member pledges the security, in the appropriate
amount, that must be delivered if the call option writer is assigned.
OCC proposes to modify Rule 610 to disallow specific deposits for Cash-
Settled Flex ETF Options because such options do not require delivery
of the underlying security upon assignment.\11\
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\11\ OCC would, however, allow escrow deposits to be made for
Cash-Settled Flex ETF Options.
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<bullet> Chapter VIII (Exercise and Assignment), Rule 805(j)
(Expiration Exercise Procedure) states that the ``closing price'' used
for any underlying security in Rule 805 is the last reported sale price
for the underlying security during regular trading hours (as determined
by OCC) on the trading day immediately preceding the expiration date,
or on the expiration date if the expiration date is a trading day, on
such national securities exchange or other domestic securities market
as OCC shall determine. OCC proposes to revise Rule 805(j) to state
explicitly that the same definition of ``closing price'' applies to
underlying securities for Cash-Settled Flex ETF Options.
<bullet> Chapter XVIII (Index Options and Certain Other Cash
Settled Options), Rule 1804(a) (Expiration Exercise Procedure for Cash-
Settled Options) generally provides for the expiration exercise
procedure for cash-settled options. OCC is proposing to add an
interpretation and policy to Rule 1804 to clarify that, notwithstanding
its general application to cash-settled options, the determination of
the closing price for an underlying security of a flexibly-structured
cash-settled equity
[[Page 30533]]
option is the same as the determination of the closing price per Rule
805(j).
<bullet> In Chapter XVIII (Index Options and Certain Other Cash
Settled Options), Rule 1804 (Expiration Exercise Procedure for Cash
Settled Options), OCC proposes to revise Rule 1804(a) and Rule 1804(b)
to state that Cash-Settled Flex ETF Options will be deemed exercised on
expiration if the strike price is $0.01 or more in-the-money in
accordance with the provisions of Rule 805(d). The change would set the
threshold for automatic exercise of Cash-Settled Flex ETF Options at
the threshold established for physically-settled equity options rather
than the $1.00 per contract threshold established in Rule 1804.
<bullet> In Chapter VIII (Exercise and Assignment), Rule 805
(Expiration Exercise Procedure), Interpretation and Policy .03 states
that the exercise procedures set forth in Rule 805 apply to flexibly-
structured equity options. OCC proposes to add language excepting from
application of Rule 805(d) American-style Cash-Settled Flex ETF Options
subject to delayed settlement for any deliverable component. Similarly,
in Chapter XVIII (Index Options and Certain Other Cash Settled
Options), Rule 1804 (Expiration Exercise Procedure for Cash Settled
Options), OCC is proposing to add language to Rule 1804(a) to state
explicitly that Rule 805(d) does not apply to American-style Cash-
Settled Flex ETF Options that have a deliverable component subject to
delayed settlement. OCC states that the changes are necessary because
any such option with a pended delivery component on its expiration date
should not be automatically exercised, as the total value of the option
deliverable can only be estimated.\12\ OCC anticipates this outcome
would be rare, and likely the result of a contract adjustment that
involves cash in lieu of fractional shares that have yet to be
finalized on an option's expiration date.
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\12\ See Notice of Filing, supra note 4, at 19568.
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III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Exchange Act directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to such organization.\13\ After carefully
considering the Proposed Rule Change, the Commission finds that the
proposal is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to OCC. More
specifically, the Commission finds that the Proposed Rule Change is
consistent with Section 17A(b)(3)(F) of the Exchange Act \14\ as
described in detail below.
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\13\ 15 U.S.C. 78s(b)(2)(C).
\14\ 15 U.S.C. 78q-1(b)(3)(F).
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Section 17A(b)(3)(F) of the Exchange Act requires, among other
things, that a clearing agency's rules are designed to promote the
prompt and accurate clearance and settlement of securities transactions
and, to the extent applicable, derivative agreements, contracts, and
transactions.\15\ Based on its review of the record, and for the
reasons described below, the Commission believes that the proposed
changes to its By-Laws and Rules are reasonably designed to be
consistent with the prompt and accurate clearance and settlement of
securities transactions and derivative agreements, contracts, and
transactions for which OCC is responsible.
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\15\ Id.
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The Proposed Rule Change would amend the By-Laws and Rules to
maintain consistency between OCC's By-Laws and Rules and NYSE
American's rules as applied to the clearance and settlement of Cash-
Settled Flex ETF Options. To maintain consistency with NYSE American's
rules, the Proposed Rule Change ensures that OCC is able to provide two
different types of settlement methods for flexibly-structured ETF
options, in order to accommodate the clearance and settlement of Cash-
Settled Flex ETF Options in addition to physically-settled options.
Maintaining this congruence between OCC and NYSE American's rules
provides assurance to market participants that the two self-regulatory
organizations are treating the clearance and settlement processes of
the Cash-Settled Flex ETF Option product in the same manner. This is
consistent with facilitating the prompt and accurate clearance and
settlement of these products.
OCC proposes numerous By-Law and Rule changes to distinguish
between physically-settled flexibly structured options and Cash-Settled
Flex ETF Options. The Commission believes that these changes will make
clear to market participants that, despite certain similarities, these
two products are entirely distinct and should be treated as such for
clearance and settlement purposes. In particular, the Proposed Rule
Change states that Cash-Settled Flex ETF Options are not fungible with
physically-settled flexibly structured options, and that the two
products are not to be consolidated even if they have the same strike,
expiration date, and underlying security. As such, the proposed changes
provide unambiguous requirements for clearing and settling such
transactions, and the Commission believes that the resulting clarity
may facilitate prompt and accurate clearance and settlement by avoiding
confusion or errors.
Additionally, OCC proposes numerous By-Law and Rule changes to
state that certain provisions that currently apply only to physically-
settled options will also apply to Cash-Settled Flex ETF Options, while
other provisions that currently apply to all cash-settled options will
not apply to Cash-Settled Flex ETF Options. The proposed changes are
designed to treat the Cash-Settled Flex ETF Options like all other Flex
ETF options instead of as cash-settled options generally, given the
difference in the form of settlement and the lack of fungibility.
Accordingly, the changes to OCC's By-Laws and Rules facilitate the
prompt and accurate clearance and settlement of these transactions.
The Commission believes, therefore, that the proposal to revise
OCC's By-Laws and Rules to accommodate the clearance and settlement of
Cash-Settled Flex ETF Options is consistent with the requirements of
Section 17A(b)(3)(F) under the Exchange Act.\16\
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\16\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the
Exchange Act, and in particular, the requirements of Section 17A of the
Exchange Act \17\ and the rules and regulations thereunder.
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\17\ In approving this Proposed Rule Change, the Commission has
considered the proposed rules' impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\18\ that the Proposed Rule Change (SR-OCC-2022-003) be,
and hereby is, approved.
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\18\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-10735 Filed 5-18-22; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on May 19, 2022.
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