Notice2025-19099
Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change by The Options Clearing Corporation Concerning Adjustments to Cleared Contracts
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 1, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 188 (Wednesday, October 1, 2025)</title>
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[Federal Register Volume 90, Number 188 (Wednesday, October 1, 2025)]
[Notices]
[Pages 47470-47486]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-19099]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104104; File No. SR-OCC-2025-017]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change by The Options Clearing
Corporation Concerning Adjustments to Cleared Contracts
September 26, 2025.
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 September 25, 2025, The Options Clearing
Corporation (``OCC'' or ``Corporation'') 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 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 concerns proposed changes to OCC's By-
Laws and Rules pertaining to cleared contract adjustments (the
``Proposal''). Specifically, the proposed changes would (i) relocate
OCC's existing provisions in its By-Laws related to adjustments to
proposed Chapter XXVIII of the Rules, with certain non-substantive
clarifying changes thereto; (ii) consolidate provisions regarding OCC's
adjustment authority and practices for actively traded products with
similar methods of adjustments,\3\ such as adjustments to stock futures
with provisions for adjustments to stock options, to eliminate
duplicative provisions; (iii) set forth certain new provisions to
provide greater detail describing OCC's current practices in making
adjustment determinations (e.g., by specifying additional circumstances
when OCC will generally not make an adjustment or specifying additional
factors guiding adjustment determinations); and (iv) update references
to current adjustment By-Laws sections relating to the governance of
changes to the By-Laws and Rules.
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\3\ By-Law adjustment provisions for products that do not
currently trade will not be consolidated in the proposed Rules at
this time. Article XIV, Sections 3A and 3B (Adjustments for Binary
Options), Article XV, Section 4 (Adjustments for Foreign Currency
Options), Article XVI, Section 3 (Adjustments for Yield-Based
Treasury Options), Article XXIV, Section 4 (Adjustments for BOUNDS),
and Article XXVI (Adjustments for Packaged Spread Options) will
remain in the By-Laws but would be updated as part of the Proposal
to reflect references to other adjustment provisions that are
proposed for relocation to the Rules.
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OCC filed Exhibits 5A and 5B of filing SR-OCC-2025-017,
respectively, as the proposed amendments to OCC's By-Laws and Rules and
Exhibit 3A of filing SR-OCC-2025-017 as a comparison of the proposed
changes to OCC's By-Laws and Rules. Highlighted text in Exhibit 3A
indicates places where OCC proposes to consolidate currently separate
provisions for options contracts and stock futures; the highlighted
text shows stock futures-related provisions that OCC proposes to add to
an option contract-related provision to allow for such single provision
to govern both options contracts and stock futures. All capitalized
terms not defined herein have the same meaning as set forth in the OCC
By-Laws and Rules.\4\
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\4\ OCC's By-Laws and Rules can be found on OCC's public
website: <a href="https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules">https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules</a>.
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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
OCC is proposing changes to its By-Laws and Rules related to
adjustment of options contracts. The proposed changes would (i)
relocate the existing By-Law provisions concerning adjustments to
proposed Chapter XXVIII of the Rules, with certain non-substantive
clarifying changes thereto; (ii) consolidate provisions regarding
adjustments between certain products with similar provisions to
eliminate duplicative provisions; (iii) set forth certain new
adjustment provisions to provide greater detail describing OCC's
current practices in making adjustment determinations (e.g., by
specifying additional circumstances in which OCC will generally not
make an adjustment); and (iv) update references to current
[[Page 47471]]
adjustment By-Laws sections contained in other adjustment provisions of
the By-Laws for products not actively trading with the newly proposed
Rules.
Background
Certain corporate actions that affect an underlying security--such
as declaration of dividends or distributions, stock splits, rights
offerings, reorganizations, or the merger or liquidation of an issuer--
may require an adjustment to the terms of the overlying derivatives,
like the options that are cleared and settled by OCC. The future
occurrence of corporate actions is not always foreseeable at the time
parties enter a derivatives trade, and therefore the occurrence of such
a corporate action is not priced into the economics of the trade.
Because derivative contract positions of trading parties may exist for
weeks, months or years after the position was established, corporate
actions may occur during the life of the contract that affect the
economic position of the parties. In general, an adjustment to a
contract in such cases is intended to maintain the economic value of
the existing positions by mirroring what occurs to the underlying
security to the extent possible and within the parameters established
in the OCC By-Laws.
An example in the stock options context is useful to help
illustrate these points. Assume that the issuer of stock XYZ announces
a 2-for-1 stock split. The stock split will result in twice the number
of shares of XYZ at half the pre-split price. That is, if there were
1,000 shares of XYZ before the 2-for-1 split (with each share having a
value of $58), immediately post the split there will be 2,000 shares of
XYZ with each share having a value of $29. Now consider these
consequences in the context of a related options contract covering XYZ.
Assume that prior to the announcement (when XYZ was still trading at
$58 per share), Investor 1 wrote a call option on XYZ with an exercise
price of $60. Assume further that Investor 2 bought that same series of
call option having an exercise price of $60 and paid the related
premium. When the 2-for-1 split causes the number of XYZ shares to
double and the price of each XYZ share to fall to $29, Investor 2 will
no longer be in the same economic position in the option contract
unless some additional and corresponding action is taken to adjust its
terms. This is because Investor 2 as the option holder will only profit
from exercising the call option if the price of XYZ shares is above
$60. Now that the XYZ shares are valued at $29 due to the 2-for-1
split, the chances of that occurring are substantially diminished
(i.e., the market price of the XYZ shares would have to increase by
more than $31 prior to the expiration of the option), even though at
the time Investor 2 bought the option the market price of XYZ would
have only needed to increase by more than $2 dollars prior to the
expiration for Investor 2 to be able to realize a profit from
exercising the option.\5\
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\5\ Example excludes premium cost, taxes, commissions, or other
fees that may impact the profitability of an option position.
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The manner in which OCC would generally handle the option contract
adjustment in this example is described in Characteristics and Risks of
Standardized Options, which is commonly referred to as the Options
Disclosure Document (``ODD'').\6\ It states in relevant part:
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\6\ Unless a broker-dealer furnishes or has furnished to its
customer a copy of the definitive ODD, it is prohibited under
Exchange Act Rule 9b-1 from accepting an order from the customer to
purchase or sell an option contract in a class covered by the ODD
and from approving the customer's account for trading of such
options. See 17 CFR 240.9b-1.
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When a stock distribution, stock split, or stock dividend
results in the issuance of one or more whole shares of stock for
each outstanding share--such as a 2-for-1 or 3-for-1 split--as a
general rule the number of shares will not be adjusted. Instead, the
number of outstanding options will be proportionately increased, and
the exercise price will be proportionately decreased.
Example: Before a 2-for-1 stock split, an investor holds an
option on 100 shares of XYZ stock with an exercise price of $60.
After adjustment for the split, he will hold two XYZ options, each
on 100 shares and each with an exercise price or $30.\7\
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\7\ See ODD at 19 (June 2024), available at <a href="https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document">https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document</a>.
OCC currently has broad authority to effect contract adjustments on
a case-by-case basis. The factors typically used to inform whether OCC
will make an adjustment to a contract are: (a) the fairness to holders
and writers (or purchasers and sellers) of the affected contracts; (b)
the maintenance of a fair and orderly market in the affected contracts;
(c) consistency of interpretation and practice; (d) the efficiency of
exercise settlement procedures; and (e) the coordination with other
clearing agencies of the clearance and settlement of transactions in
the underlying interest. OCC also maintains a Securities Committee,
consisting of one designated representative of each Securities Exchange
\8\ and the Chief Executive Officer of OCC, that is authorized to adopt
certain statements of policy or interpretations having general
application to specified types of events or OCC cleared contracts.\9\
The purpose of the Securities Committee is to help guide adjustment
policy for new or unusual situations as needed, consistent with OCC's
By-Laws and Rules.
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\8\ Consistent with OCC's rules, a Securities Exchange means a
national securities exchange or national securities association that
has qualified for participation in OCC as an ``Equity Exchange'' or
``Non-Equity Exchange'' pursuant to either Article VIIA or VIIB of
OCC's By-Laws. See OCC By-Laws, Article I, Section 1.
\9\ OCC notes that it filed as proposed rule changes stated
policies, practices, or interpretations as required under Section 19
of the Exchange Act and Rule 19b-4 thereunder. 17 CFR 240.19b-
4(a)(6).
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OCC will generally not make an adjustment to an options or futures
contract with respect to ordinary dividends or distributions that are
routinely made by the issuer. This is because ordinary dividends or
distributions may be factored into the economic expectations of the
parties to an options or futures contract even though the event has not
yet been formally announced or declared. OCC notes that when OCC makes
a determination to adjust an options or futures contract, all market
participants holding options or futures contracts are uniformly subject
to OCC's adjustment determination.
Proposed Consolidation of Adjustments Provisions Into OCC Rule Chapter
XXVIII
Currently, provisions related to adjustments are found in multiple
sections of OCC's By-Laws. The provisions related to options contract
adjustments are set forth in Article VI, Section 11 and 11A of the By-
Laws. The provisions related to futures contracts and futures options
adjustments are set forth in Article XII, Sections 3, 4, and 4A of the
By-Laws. Similarly, provisions relating to adjustments for cash settled
foreign currency options and index options and certain other cash-
settled options (e.g., flexibly structured options) are currently set
forth in Article XXII, Section 3 and Article XVII, Section 3
respectively. OCC proposes to consolidate all of these provisions
related to adjustments into a single, new Chapter XXVIII of OCC's Rules
to promote clarity, consistency, and understanding of OCC's Rules.\10\
OCC believes that this will improve the readability and understanding
of OCC's provisions regarding adjustments by
[[Page 47472]]
having a single chapter of OCC's Rules that governs adjustments for all
instruments. OCC believes this will facilitate greater understanding of
OCC's regulatory framework in this area, which OCC believes is in the
public interest and would further the protection of investors. OCC also
proposes to make certain clarifying edits to certain of these
provisions. Where there are substantively similar provisions for
different instruments--e.g., where OCC's adjustment determinations are
the same for options contracts and futures contracts--OCC's proposes to
consolidate such provisions for the same reason of promoting clarity,
consistency, and understanding of OCC's Rules and handling of
adjustments. Similarly, OCC also proposes to add headers to most of the
paragraphs or subparagraphs in italicized text to briefly preview and
describe in a few words the purpose of the provision in order to
improve the readability of the Rules.\11\
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\10\ OCC also believes that these provisions are better
organized as Rules rather than continuing to be maintained in OCC's
By-Laws. This is because typical corporate by-laws address
governance and administrative matters and do not address derivatives
contract adjustments. Relocating the adjustment provisions into the
Rules would therefore incrementally help OCC reshape its By-Laws in
a manner that better reflects typical corporate bylaws.
\11\ These headers can be seen in italicized text in Exhibit 3A
of filing SR-OCC-2025-017. In addition, OCC proposes to replace
internal cross-references throughout the proposed Rules to ensure
that they correspond to the correct Rule provision(s).
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Set forth below is a brief description of each of the five newly
proposed Rules in Chapter XXVIII (Rules 2801 through 2805), followed by
a table that sets forth a list of current OCC By-Law provisions related
to adjustments and where they have been redesignated under proposed
Chapter XXVIII of OCC's Rules.\12\ The third column in each table
describes notable changes or consolidations from the current By-Law
provision to the new Chapter XXVIII Rule provision. Newly proposed
provisions are described separately in the next section of this
proposed rule change.
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\12\ OCC proposes to adjust all internal cross-references within
adjustment provisions in its current By-Laws to correspond to the
appropriate Chapter XXVIII Rule provision.
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Proposed Rule 2801--Adjustment by the Corporation
OCC proposes to set forth in Rule 2801 its general authority to
make adjustments, the factors that OCC considers in making adjustments
and to specify that adjustment determinations are within the sole
discretion of OCC. The table below describes where current By-Law
provisions are being relocated to proposed Rule 2801 and notable
changes to such provisions.
Table 1--Proposed Rule 2801 Changes
[Footnotes at end of table.]
------------------------------------------------------------------------
Proposed Chapter
Current By-Law provisions XXVIII Rule Notable changes
------------------------------------------------------------------------
Section 11(a) and (b) of Rule 2801-- OCC proposes to
Article VI (Adjustment Adjustment by change the section
Policies and Procedures). the Corporation. title from
Section 3 of Article XXII ``Adjustment
(relating to adjustments on Policies and
futures and futures options). Procedures'' to
``Adjustment by the
Corporation,'' add
clarifying headers
(e.g., by creating a
new section (b) as
``Factors''
considered by OCC
and redesignating
current Section
11(b) as Rule
2801(c)). OCC also
proposes to move the
second to last
sentence of Section
11(a) of Article VI
describing the
authority of OCC's
Securities Committee
to adopt certain
statements of policy
or interpretation to
proposed Rule
2802(a) described
below.\a\ A modified
version of the last
sentence of Section
11(a) of Article VI
(describing that OCC
will apply the
factors set forth in
Rule 2801(b) in
making an adjustment
determination based
on its knowledge at
the time of such
determination) is in
Rule 2801(b).\b\
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\a\ See Exhibit 3A of filing SR-OCC-2025-017, n.5. OCC also proposes
other non-substantive changes, such as to delete certain extraneous
language or redundant language (e.g., proposed Rule 2801(c) would
begin by reading ``Every adjustment determination of the Corporation .
. .'' rather than ``Every adjustment determination under the By-Laws
or Rules of the Corporation . . .'').
\b\ This sentence of Proposed Rule 2801(b) would also replace the last
sentence of Section 3(b) of Article XII of the By-Laws with respect to
stock futures, which currently sets forth a substantively similar
provision (stating that OCC shall apply the factors set forth in
Section 4 of Article XII in light of the circumstances known to it at
the time such determination is made).
Proposed Rule 2802--Statements of Adjustment Policies and
Interpretations
OCC proposes to set forth in Rule 2802 certain adjustment policies
and interpretations, including a description of OCC's Securities
Committee, including its composition, governance, and authority to
adopt statements of policy or interpretation having general application
to specified types of events. The table below describes where current
By-Law provisions are being relocated to proposed Rule 2802 and notable
changes to such provisions.
Table 2--Proposed Rule 2802 Changes
[Footnotes at end of table.]
------------------------------------------------------------------------
Proposed Chapter
Current By-Law provisions XXVIII Rule Notable changes
------------------------------------------------------------------------
Sections 11(a), (b) and (c) of Rule 2802(a)-- OCC proposes to
Article VI. Statements of describe in Rule
Policies and 2802(a)(1) the
Interpretations authority of the
Regarding Securities Committee
Adjustments of to adopt statements
Option Contracts. of policy or
interpretation and
to specify the types
of options for which
it may make such
statements of policy
or
interpretation.\a\
OCC would also add
non-substantive
language such as
headers to promote
clarity, such as by
adding the header in
proposed Rule
2802(a)(2) (taken
from Section 11(c)
of Article VI of the
By-Laws)
``Securities
Committee
Composition and
Governance.'' \b\
Proposed Rule
2802(a)(2) relocates
Section 11(c) of
Article VI of the By-
Laws with only non-
substantive
changes.\c\
[[Page 47473]]
Section 3(a) of Article XII... Rule 2802(b)-- OCC proposes to
Statements of relocate the third
Adjustments of sentence of Article
Futures and XII, Section 3(a) to
Futures Options. Rule 2802 so that
statements on
policies for both
stock options
contracts and stock
futures are located
within the same
rule.\d\
------------------------------------------------------------------------
\a\ Specifically, OCC proposes to specify that such policies or
interpretations may be made for stock option contracts, Treasury
securities option contracts, yield-based Treasury option contracts,
debt securities option contracts, foreign currency option contracts,
cash-settled foreign currency option contracts, index option contracts
or other cash-settled option contracts. OCC proposes to add text to
the beginning of Rule 2802(a)(1) specifying that the Securities
Committee's authority under (a)(1) is ``[i]n addition to the policies
contained in this Chapter . . .'' in order to make clear that the
Securities Committee's authority to adopt statements and policies is
additional to the policies set forth in Chapter 28. OCC also proposes
to modify the title of Rule 2802 to provide that it relates to
``Statements of Adjustment Policies and Interpretations'' rather than
simply ``Adjustment Policies and Interpretations'' in order to promote
clarity that the Securities Committee's function is to issue such
statements.
\b\ OCC proposes to delete text in current Section 11(c) of Article VI
of the By-Laws that describes the Securities Committee's authority as
being able to ``make certain determinations with respect to cleared
contracts'' and replace this with ``adopt certain statements of policy
or interpretations under paragraph (a) above'' because this would more
accurately describe the Securities Committee's authority and is more
germane to the purpose of proposed Rule 2802(a)(2).
\c\ See n.6 of Exhibit 3A of filing SR-OCC-2025-017. For example, these
non-substantive edits include changing a reference from ``him'' to
``them.'' OCC also proposes as a non-substantive edit to modify the
numbering convention in describing the Securities Committee under
(a)(2) from using Arabic numerals to instead use romanettes, to
promote consistency with numbering conventions in OCC's Rules.
\d\ Currently, Section 11(a) of Article VI of the By-Laws provides that
the Securities Committee may adopt statements of policy or
interpretation ``to specified types of events or specified kinds of
cleared contracts.'' For futures and futures options, proposed Rule
2802(c) would provide that OCC may adopt statements of policy or
interpretations having general application to specified types of
events, which corresponds to Article XII, Section 3(a) of the By-Laws
(third sentence), which currently provides (among other things) that
the Corporation may ``adopt statements of policy or interpretations
having general application specified types of events. OCC proposes to
delete text from Article XII, Section 3(a) of the By-Laws specifying
that this authority is policy or interpretation authority is ``in
addition to determining adjustments to futures and futures options on
a case-by-case basis,'' because that authority would be set forth
under proposed Rules 2804 and 2805.
Proposed Rule 2803--Adjustments for Stock Option Contracts and Stock
Futures
OCC proposes to set forth in Rule 2803 provisions related to
adjustments for stock option contracts and stock futures. OCC proposes
to combine substantially similar provisions related to adjustments for
stock option contracts and stock futures into a single Rule. The table
below describes where current By-Law provisions are being relocated to
proposed Rule 2803 and notable changes to such provisions.
Table 3--Proposed Rule 2803 Changes
[Footnotes at end of table.]
------------------------------------------------------------------------
Proposed Chapter
Current By-Law provisions XXVIII Rule Notable changes
------------------------------------------------------------------------
Section 11A of Article VI of Rule 2803 (a) and OCC proposes to
the By-Laws;. (b)--Adjustments consolidate
Section 3(b) of Article XII for Stock substantively
(regarding stock Futures. Options and similar provisions
Section 3(a) of Article XVII Stock Futures. currently located in
(regarding certain flexibly Section 11A of
structured options).. Article VI and
Section 3(b) of
Article XII of the
By-Laws into
proposed Rule 2803
to describe the
circumstances when
OCC may make an
adjustment (e.g.,
where a dividend is
issued).
OCC proposes to add
headers to improve
readability (e.g.,
by specifying that
2803(a) relates to
``Corporate Actions;
Adjustments Policies
and Procedures'')
and other non-
substantive changes
(e.g., to reorganize
the option or stock
future contract
terms that OCC may
adjust (such as the
exercise price and
unit of trading) as
a numbered list).\a\
OCC also proposes to
relocate Article
XVII, Section 3(a)
of the By-Laws to
proposed Rule
2803(a) to make
clear that proposed
Rule 2803 applies to
flexibly structured
options on fund
shares that are cash
settled.\b\
Section 11A(c) of Article VI Rule 2803(c) and OCC proposes to
(clause (x)); \c\. (c)(1)--Events consolidate
Section 3(c) of Article XII not normally substantively
(regarding stock futures). resulting in a similar provisions
contract describing events
adjustment. that will generally
not result in an
adjustment currently
located in Section
11A(c) of Article VI
(clause (x)) and
Section 3(c) of
Article XII
(regarding stock
futures) into
proposed Rule
2803(c).\d\
Interpretation and Policy .01 Rule OCC proposes to set
to Section 11A of Article VI 2803(c)(1)(i)--F forth in Rule
(third sentence of first actors 2803(c)(1)(i) the
paragraph \e\ and first considered in factors that OCC may
sentence of second making consider in
paragraph); \f\ and adjustment determining whether
Interpretation and Policy determinations. to make an
.01(a) to Section 3 of adjustment by
Article XII (regarding stock consolidating
futures) (last sentence of certain provisions
first paragraph \g\ and first currently set forth
sentence of the second in Policy .01 to
paragraph) \h\. Section 11A of
Article VI and
Policy .01(a) to
Section 3 of Article
XII of the By-Laws.
In so doing, OCC
proposes combining
substantively
identical provisions
in its By-Laws for
options and stock
futures to
consolidate OCC's
rules and improve
readability. OCC
proposes to set
forth these factors
as lettered items
(items (A) through
(D)) rather than as
a single sentence to
improve readability.
OCC does not propose
substantive changes
to these provisions.
[[Page 47474]]
Interpretation and Policy.01 Rule 2803(c)(1) OCC proposes to
to Section 11A of Article VI (ii)(A) describe the meaning
(first sentence); \i\ (describing cash of an ``ordinary
Interpretation and Policy dividends and distribution'' in
.01(a) to Section 3 of distributions the context of cash
Article XII (regarding stock deemed to be an dividends or
futures) (first sentence) \j\. ``ordinary distributions in
distribution''). Rule
2803(c)(1)(ii)(A) by
combining
substantively
similar provisions
currently set forth
in the first
sentence of
Interpretation and
Policy .01 to
Section 11A of
Article VI and to
Interpretation and
Policy .01(a) to
Section 3 of Article
XII to the By-
Laws.\k\ OCC does
not propose
substantive changes
to meaning of what
is considered an
``ordinary
distribution.''
Interpretation and Policy .09 Rule OCC proposes to
to Section 11A of Article VI; 2803(c)(1)(ii)(B specify that an
\l\ and Interpretation and ) (specifying ``ordinary
Policy .10 to Section 3 of that interest distribution''
Article XII (regarding stock payments on generally includes
futures) \m\. index-linked interest payments on
securities will index-linked
generally be securities in Rule
considered an 2803(c)(1)(ii)(B) by
``ordinary combining
distribution''). substantively
similar provisions
currently set forth
in the first
sentence of
Interpretation and
Policy .09 to
Section 11A of
Article VI and to
Interpretation and
Policy .10 to
Section 3 of Article
XII to the By-
Laws.\n\ OCC does
not propose
substantive changes
to this provision--
i.e., OCC does not
propose any
different treatment
of interest payments
on index-linked
securities as part
of the Proposal.
Interpretation and Policy .01 Rule OCC proposes to
to Section 11A of Article VI 2803(c)(1)(iii) describe the meaning
(second sentence); \o\ and (A) (describing of an ``ordinary
Interpretation and Policy when stock distribution'' in
.01(b) to Section 3 of dividends and the context of stock
Article XII (regarding stock distributions dividends or
futures) \p\. are deemed to be distributions in
an ``ordinary Rule
distribution''). 2803(c)(1)(iii)(A)
and (B) by combining
substantively
similar provisions
currently set forth
in the first
sentence of
Interpretation and
Policy .01 to
Section 11A of
Article VI and to
Interpretation and
Policy .01(b) to
Section 3 of Article
XII to the By-
Laws.\q\ OCC does
not propose
substantive changes
to meaning of what
stock dividends or
distributions are
generally considered
an ``ordinary
distribution.''
Interpretation and Policy .01 Rule 2803(c)(1) OCC proposes to
to Section 11A of Article VI (iv)(A) describe certain
(last sentence of second (describing types of dividends
paragraph); \r\ dividends and or distributions not
Interpretation and Policy distributions deemed to be an
.01(a) to Section 3 of generally not ``ordinary
Article XII (regarding stock deemed ordinary). distribution'' in
futures) (last sentence of Rule
second paragraph) \s\. 2803(c)(1)(iv)(A)
(specifically when
OCC does not expect
such distribution to
be provided
regularly) by
combining
substantively
similar provisions
currently set forth
in Interpretation
and Policy .01 to
Section 11A of
Article VI and to
Interpretation and
Policy .01(a) to
Section 3 of Article
XII to the By-
Laws.\t\ OCC does
not proposes
substantive changes
to these provisions.
Interpretation and Policy .08 Rule OCC proposes to
to Section 11A of Article VI 2803(c)(1)(iv)(B describe certain
(clause (i)); \u\ and ) (describing types of dividends
Interpretation and Policy .08 how or distributions not
to Section 3 of Article XII distributions of deemed to be an
(regarding stock futures) short and long ``ordinary
(clause (i)) \v\. term capital distribution'' in
gains are Rule
ordinarily not 2803(c)(1)(iv)(B)
considered an (specifically
ordinary distributions of
distribution). short-term and long-
term capital gains)
by combining
substantively
similar provisions
currently set forth
in Interpretation
and Policy .08 to
Section 11A of
Article VI and to
Interpretation and
Policy .08(a) to
Section 3 of Article
XII to the By-
Laws.\w\ OCC does
not propose
substantive changes
to these provisions.
Interpretation and Policy .08 Rule OCC proposes to
to Section 11A of Article VI 2803(c)(1)(iv)(C describe when
(clause (ii)); \x\ and ) (describing certain types of
Interpretation and Policy .08 when certain dividends or
to Section 3 of Article XII distributions distributions on
(regarding stock futures) resulting from index fund shares
(clause (ii)) \y\. certain events are not deemed to be
on an index will an ``ordinary
not be distribution'' in
considered an Rule
``ordinary 2803(c)(1)(iv)(C) by
distribution''). combining
substantively
similar provisions
currently set forth
in Interpretation
and Policy .08 to
Section 11A of
Article VI and to
Interpretation and
Policy .08(a) to
Section 3 of Article
XII to the By-
Laws.\z\ OCC does
not propose
substantive changes
to these provisions.
Interpretation and Policy .01 Rule OCC proposes to
to Section 11A of Article VI 2803(c)(1)(v) replace text from
(last sentence of the first (describing how Interpretation and
paragraph) \aa\. OCC determines Policy .01 to
whether a Section 11A of
dividend is Article VI in Rule
issued on a 2803(c)(1)(v) to
quarterly or provide that where a
other regular question arises as
basis). to whether a
dividend or
distribution was
declared pursuant to
a policy of paying
such dividend/
distribution
quarterly or on
another regular
basis, such question
shall be determined
by OCC. OCC does not
propose substantive
changes to this
provision other than
to change the phrase
``shall be referred
to the Corporation
for determination''
to ``shall be
determined by the
Corporation.'' This
change is to make
the Rule more
accurate because no
entity refers these
to OCC--rather, OCC
identifies and makes
these
determinations.
Interpretation and Policy .02 Rule OCC proposes to
to Section 11A of Article VI; 2803(c)(3)(i) consolidate
and Interpretation and Policy (describing substantively
.02 to Section 3 of Article poison pill similar provisions
XII (regarding stock futures) rights among currently located in
(fifth and sixth sentences) events not the Interpretation
\bb\. ordinarily and Policy .02 to
resulting in Section 11A of
adjustments). Article VI and fifth
and sixth sentences
Interpretation and
Policy .02 to
Section 3 of Article
XII, which specify
(among other things)
that OCC will not
ordinarily make an
adjustment to
reflect the issuance
of so-called
``poison pill''
rights that are not
immediately
exercisable, trade
as a unit or
automatically with
the underlying
security, and may be
redeemed by the
issuer. OCC does not
propose substantive
changes to these
provisions.
[[Page 47475]]
Interpretation and Policy .03 Rule OCC proposes to
to Section 11A of Article VI; 2803(c)(3)(ii) consolidate
and Interpretation and Policy (describing a substantively
.03 to Section 3 of Article tender offer or similar provisions
XII (regarding stock futures) exchange offer currently located in
\cc\. as among events Interpretation and
not ordinarily Policy .03 to
resulting in Section 11A of
adjustments). Article VI and
Interpretation and
Policy .03 to
Section 3 of Article
XII of the By-Laws,
which specify (among
other things) that
OCC will not
ordinarily make an
adjustment to
reflect a tender
offer or exchange
offer irrespective
of whether the offer
is made by the
issuer or a third
party and whether
the offer is for
cash, securities or
other property.\dd\
OCC does not propose
substantive changes
to the these
provisions.
Interpretation and Policy .04 Rule OCC proposes to
to Section 11A; and 2803(c)(3)(iii) consolidate
Interpretation and Policy .04 (describing substantively
to Section 3 of Article XII changes in similar provisions
(regarding stock futures) capital currently located in
\ee\. structure as the Interpretation
among events not and Policy .04 to
ordinarily Section 11A of
resulting in Article VI and
adjustments). Interpretation and
Policy .04 to
Section 3 of Article
XII of the By-Laws,
which specify (among
other things) that
OCC will not
ordinarily adjust a
contract to reflect
changes in the
capital structure of
an issuer where all
of the underlying
securities
outstanding in the
hands of the public
(other than
dissenters' shares)
are not changed into
another security,
cash or other
property. OCC does
not propose
substantive changes
to these provisions.
Section 11A(d) of Article VI; Rule 2803(d) OCC proposes to
Section 3(d) of Article XII (describing relocate current
(regarding stock futures) events Section 11A(d)(i)--
\ff\. ordinarily (iii) of Article VI
resulting in of the By-Laws as
contract Rule 2803(d)(1)(i)--
adjustments). (iii) to describe
when OCC ordinarily
will make an
adjustment for
distributions of
combinations of
shares. OCC proposes
to add a header as
Rule 2803(d)(1) to
clarify that these
adjustments are
circumstances where
the distribution of
additional shares of
the underly security
by the issuer of the
security are not
deemed to be
``ordinary dividends
and distributions''
pursuant to proposed
Rule 2803(c).\gg\
OCC also proposes to
consolidate Section
3(d) of Article XII
of the By-Laws,
which sets forth
substantively
similar provisions
with respect to
stock futures into
Rule 2803(d)(1),
with added language
to clarify that the
provision governs
both options
contract adjustments
and stock
futures.\hh\ OCC
does not propose
substantive changes
to the these
provisions.
Interpretation and Policy .05 Rule 2803(d)(2) OCC proposes to
to Section 11A of Article VI; (describing relocate
and Interpretation and Policy adjustments in Interpretation and
.05 to Section 3 of Article the case of cash Policy .05 to
XII (regarding stock futures) mergers and Section 11A of
\ii\. similar events). Article VI of the By-
Laws, which
generally governs
adjustments to
options contracts
where an underlying
security is
converted into a
right to receive a
fixed amount of
cash. OCC also
proposes to
consolidate
Interpretation and
Policy .05 to
Section 3 of Article
XII of the By-Laws,
which sets forth
substantively
similar provisions
with respect to
stock futures into
Rule 2803(d)(2).\jj\
OCC does not propose
substantive changes
to these provisions.
Interpretation and Policy .06 Rule 2803(d)(3) OCC proposes to
to Section 11A of Article VI; (describing replace
and Interpretation and Policy adjustments in Interpretation and
.06 to Section 3 of Article the case of a Policy .06 to
XII (regarding stock futures) reorganization, Section 11A of
\kk\. stock merger or Article VI and
a cash and stock Interpretation and
merger or a Policy .06 to
similar event). Section 3 of Article
XII of the By-Laws,
which currently
governs adjustments
in the case of
corporate
reorganizations or
similar events that
result in an
automatic share for
share exchange of
shares will
ordinarily be
adjusted by
replacing such
underlying security
with a like number
of units of the
shares of the
resulting
company.\ll\ OCC
proposes to
consolidate these
substantively
similar option
contract and stock
future provisions
into new Rule
2803(d)(3) to
provide that
``[w]hen an
underlying security
is converted into a
right to receive
another security or
a combination of
another security and
cash, such as in a
merger,
reorganization, or
similar event, the
Corporation shall
adjust outstanding
option contracts and
stock futures by
replacing such
underlying security
with the like number
of units of the
shares of the
resulting company or
cash in an amount
per share or unit
equal to the
conversion or
redemption price.''
OCC does not believe
that the revised
language represents
a substantive
change, as both the
existing and revised
provisions provide
that option and
stock future holders
will receive a like
number of units of
shares of the
resulting
company.\mm\
Interpretation and Policy .07 Rule 2803(d)(4) OCC proposes to
to Section 11A of Article VI; (describing consolidate
and Interpretation and Policy subsequent Interpretation and
.07 to Section 3 of Article adjustments for Policy .07 to
XII (regarding stock futures) conversion to a Section 11A of
\nn\. debt security or Article VI and
a preferred Interpretation and
stock). Policy .07 to
Section 3 of Article
XII of the By-Laws,
which govern
additional
adjustments for
options contracts
and stock futures
respectively when an
underlying security
is converted in
whole or in part
into a debt security
or a preferred
stock, into proposed
Rule 2803(d)(4). OCC
proposes non-
substantive edits to
these provisions to
combine the options
and stock futures
provisions \oo\ and
to improve
readability.\pp\
[[Page 47476]]
Interpretation and Policy .02 Rule 2803(d)(5) OCC proposes to
to Section 3 of Article XII (describing relocate the second
(regarding stock futures) rights through third
(second through fourth distributions sentences of
sentences) \qq\. with respect to Interpretation and
stock futures). Policy .02 to
Section 3 of Article
XII without
substantive edit.
Section 11A(e) of Article VI Rule 2803(e) OCC proposes to
of the By-Laws; and Section (describing consolidate and
3(e) of Article XII adjustments for relocate current
(regarding stock futures) other Section 11A(e) of
\rr\. distributions Article VI and
not addressed Section 3(e) of
elsewhere in Article XII of the
OCC's Rules). By-Laws as proposed
Rule 2803(e) to
govern other types
of distributions not
addressed elsewhere
in OCC's Rules. OCC
proposes to add
language to make
clear that the
consolidated Rule
applies to both
options and stock
futures.\ss\ OCC
also proposes to
relocate text from
these By-Laws
provisions which
provides that OCC
has the authority to
the determine the
value of distributed
property to proposed
Rule 2803(j). OCC
does not otherwise
propose substantive
changes to these By-
Law provisions.
Section 11A(f) of Article VI; Rule 2803(f) OCC proposes to
and Section 3(f) of Article (describing consolidate and
XII (regarding stock futures) corporate relocate current
\tt\. actions not Section 11A(f) of
otherwise Article VI and
provided for in Section 3(f) of
OCC's adjustment Article XII of the
Rules). By-Laws as proposed
Rule 2803(e) to
govern other
corporate actions
not otherwise
provided for in
OCC's Rules. OCC
proposes to add
language to make
clear that the
consolidated Rule
applies to both
options and stock
futures.\uu\ OCC
does not otherwise
propose substantive
changes to these By-
Law provisions.
Section 11A(g) of Article VI; Rule 2803(g) OCC proposes to
and Section 3(g) of Article (providing that consolidate and
XII (regarding stock futures) adjustments relocate current
\vv\. pursuant to Section 11A(g) of
proposed Rule Article VI and
2803 will become Section 3(g) of
effective on the Article XII of the
``ex-date''). By-Laws as proposed
Rule 2803(g) to
provide that
adjustments under
proposed Rule 2803
will become
effective on the
``ex-date''
established by the
primary market for
the underlying
security. OCC
proposes to add
language to make
clear that the
consolidated Rule
applies to both
options and stock
futures.\ww\ OCC
does not otherwise
propose substantive
changes to these By-
Law provisions.
Section 11A(h) of Article VI; Rule 2803(h) OCC proposes to
and Section 3(h) of Article (describing consolidate and
XII (regarding stock futures) OCC's rounding relocate current
\xx\. process for Section 11A(h) of
adjustments). Article VI and
Section 3(h) of
Article XII of the
By-Laws as proposed
Rule 2803(h) to
describe how OCC
performs rounding of
exercise prices or
settlement prices.
OCC proposes to add
language to make
clear that the
consolidated Rule
applies to both
options and stock
futures.\yy\ OCC
does not otherwise
propose substantive
changes to these By-
Law provisions.
Section 11A(e) of Article VI Rule 2803(j) OCC proposes to
(last sentence); and Section (regarding OCC's relocate the last
3(e) of Article XII (last authority to sentence from
sentence) (regarding stock determine the Section 11A(e) of
futures) \zz\. cash value of Article VI of the By-
any distributed Laws (which is also
property). the last sentence of
and Section 3(e) of
Article XII of the
By-Laws) as the
first sentence of
Proposed Rule
2803(j). OCC
proposes to add an
additional new
provision to
proposed Rule
2803(j), which is
described below in
this proposed rule
change.\aaa\ OCC
does not otherwise
propose substantive
changes to this By-
Law provision.
Section 11A(i) of Article VI; Rule 2803(n) OCC proposes to
and Section 3(i) of Article (describing consolidate and
XII (regarding stock futures) OCC's authority relocate current
\bbb\. to make Section 11A(i) of
exceptions to Article VI and
the general Section 3(i) of
rules governing Article XII of the
adjustments). By-Laws as proposed
Rule 2803(n) to set
forth OCC's
authority to make
exceptions to its
general rules
governing
adjustments. OCC
proposes non-
substantive changes
to the phrasing of
these By-Law
provisions and
changes to internal
cross-references
therein.\ccc\
Section 3(j) of Article XII Rule 2803(o) OCC proposes to
(regarding stock futures) (describing relocate Section
\ddd\. adjustment of 3(j) of Article XII
stock futures of the By-Laws as
using amounts Rule 2803(o) without
reported by an substantive change.
exchange). The only change
would be to update
internal cross-
references and add
the phrase ``of this
Rule'' following the
reference to
paragraph (c) in the
first sentence.
------------------------------------------------------------------------
\a\ OCC would also specify that OCC may adjust any of these contract
terms or any combination of them with respect to all outstanding stock
option contracts and stock futures in that underlying security in the
sentence preceding the numbered list, rather than at the end of the
list. See n.9 of Exhibit 3A of filing SR-OCC-2025-017. OCC also
proposes to add specificity to item 2 of the numbered list regarding
the unit of trading to specify that OCC may adjust the ``unit of
trading in the case of an options contract or the unit of trading (or
settlement price) in the case of a stock futures.'' Similarly, item 3
of the list would specify that OCC may adjust the exercise price ``in
the case of an options contract.'' These changes are intended to
provide greater clarity to OCC's Rules to make clear, for example,
that OCC would not adjust the ``exercise price'' in the case of a
stock future because stock futures do not involve a settlement price.
\b\ Currently, Section 3(a) of Article XVII provides that ``Except in
the case of flexibly structure options on fund shares that are cash
settled, Section 11A of Article VI of the By-Laws shall not apply to
cash-settled option contracts.'' OCC proposes a non-substantive
rephrasing of this provision as ``For the avoidance of doubt, flexibly
structured options on fund shares that are cash settled are governed
by this Rule 2803.'' See n.10 of Exhibit 3A of filing SR-OCC-2025-017.
OCC also proposes to reiterate this provision in proposed Rule 2804
(which governs adjustments of index options and futures and certain
other cash-settled options and futures) to provide additional clarity
that flexibly structured options on fund shares that are cash settled
are governed by Rule 2803 (and not Rule 2804). See n.57 of Exhibit 3A
of filing SR-OCC-2025-017.
\c\ Clause (x) currently provides that as a general rule, there will be
no adjustment to reflect ordinary cash dividends or distributions or
ordinary stock dividends or distributions.
\d\ See n.11 of Exhibit 3A of filing SR-OCC-2025-017.
[[Page 47477]]
\e\ This provision provides: ``The Corporation will determine on a case-
by-case basis whether other dividends or distributions are `ordinary
distributions' or whether they are dividends or distributions for
which an adjustment should be made.''
\f\ This provision describes the factors that OCC may take into account,
which include without limitation, the issuer's stated dividend payment
policy, the issuer's characterization of a particular dividend or
distribution as ``regular,'' ``special,'' ``accelerated,'' or
``deferred.''
\g\ This provision is identical to the third sentence of the first
paragraph of Interpretation and Policy .01 to Section 11A of Article
VI cited above but applies to stock futures.
\h\ This provision is identical to the first sentence of the second
paragraph of Interpretation and Policy .01 to Section 11A of Article
VI cited above.
\i\ This provision describes the meaning of an ``ordinary cash dividend
or distribution,'' generally providing that cash dividends or
distributions (regardless of size) by the issuer of the underlying
security which OCC believes to have been declared pursuant to a policy
of paying such dividend or distributions on a quarterly or other
regular basis will generally be deemed an ordinary cash dividend or
distribution.
\j\ This provision is substantively similar to the first sentence of
Interpretation and Policy .01 to Section 11A of Article VI cited
immediately above.
\k\ See n.13 of Exhibit 3A of filing SR-OCC-2025-017.
\l\ This provision provides in relevant part that interest payments on
index-linked securities will, as a general rule, be deemed to be
``ordinary cash dividends or distributions.''
\m\ This provision is substantively similar to Interpretation and Policy
.01 to Section 11A of Article VI cited immediately above.
\n\ See n.14 of Exhibit 3A of filing SR-OCC-2025-017.
\o\ This provision sets forth the criteria by which OCC will generally
consider a stock dividend or distribution to be considered an
``ordinary stock dividend or distribution,'' such as where the stock
dividend does not exceed 10% of the number of shares outstanding at
the close of trading on the declaration date and where OCC believes
the distribution was declared pursuant to a policy or practice of
paying such dividend or distribution on a quarterly basis.
\p\ This provision is substantively similar to the second sentence of
Interpretation and Policy .01 to Section 11A of Article VI cited
immediately above.
\q\ See n.15 of Exhibit 3A of filing SR-OCC-2025-017.
\r\ This provision currently provides that, normally, OCC shall classify
a cash dividend or distribution as non-ordinary when it believes that
similar dividends or distributions will not be paid on a quarterly or
other regular basis.
\s\ This provision is substantively similar to the last sentence of the
second paragraph of Interpretation and Policy .01 to Section 11A of
Article VI cited immediately above.
\t\ See n.17 of Exhibit 3A of filing SR-OCC-2025-017.
\u\ This provision provides that distributions of short-term and long-
term capital gains in respect of fund shares by the issuer thereof
shall not, as a general rule, be deemed to be ``ordinary
distributions''
\v\ This provision substantively similar to clause (i) of Interpretation
and Policy .08 to Section 11A of Article VI cited immediately above.
\w\ See n.18 of Exhibit 3A of filing SR-OCC-2025-017.
\x\ This provision generally provides that other distributions in
respect of fund shares by the issuer thereof, as a general rule, shall
not be deemed to be an ``ordinary distribution'' if the fund meets
certain criteria (e.g., the fund distributes short-term or long-term
capital gains, the fund tracks the performance of an index that
underlies a class of index options or index futures and the
distribution on the fund shares includes a dividend or other
distribution on a portfolio security that resulted in an adjustment of
the index divisor).
\y\ This provision substantively similar to clause (ii) of
Interpretation and Policy .08 to Section 11A of Article VI of the By-
Laws cited immediately above.
\z\ See n.19 of Exhibit 3A of filing SR-OCC-2025-017.
\aa\ See n.20 of Exhibit 3A of filing SR-OCC-2025-017.
\bb\ See n.23 of Exhibit 3A of filing SR-OCC-2025-017.
\cc\ See n.24 of Exhibit 3A of filing SR-OCC-2025-017.
\dd\ OCC proposes to add a cross reference to Rule 2803(d)(2), which
would govern adjustments for cash mergers and similar events.
\ee\ See n.25 of Exhibit 3A of filing SR-OCC-2025-017.
\ff\ See n.28 of Exhibit 3A of filing SR-OCC-2025-017.
\gg\ OCC also proposes to add non-substantive clarifying language to
proposed Rule 2803(d)(i)--(iii) to, for example, add the phrase ``in
the event of'' to precede a description of the type of distribution
(e.g., a stock dividend, stock split, or reverse stock split) and to
specify that the type of distribution is caused by the issuer (e.g., a
stock split ``for which the issuer of the security issues'' some
number of shares).
\hh\ See highlighted text of proposed Rule 2803(d)(1) of Exhibit 3A of
filing SR-OCC-2025-017, which notes relevant language from Section
3(d) of Article XII of the By-Laws that has been added to make Rule
2803(d) also apply to stock futures. For example, OCC would add
language to proposed Rule 2803(d)(1)(ii) to note that that, in the
event of certain distributions other than a whole number of shares,
OCC would proportionately reduce the exercise price ``in case of
options contracts, or the last settlement price established, in the
case of stock futures.''
\ii\ See n.29 of Exhibit 3A of filing SR-OCC-2025-017.
\jj\ Specifically, OCC proposes to add language from Interpretation and
Policy .05 to Section 3 of Article XII of the By-Laws that OCC will
adjust outstanding options ``and outstanding stock futures to replace
such underlying interest with cash'' in an amount per share or unit
equal to the conversion or redemption price.''
\kk\ See n.30 of Exhibit 3A of filing SR-OCC-2025-017.
\ll\ These provisions also specify that, because the securities are
generally exchanged only on the books of the issuer and the resulting
company (and are not generally exchanged physically), deliverable
shares will ordinarily include certificates that are denominated on
their face as shares in the original issuer, but which, as a result of
the corporate transaction, represent shares in the resulting company.
OCC proposes to delete this language because OCC does not believe that
such specificity is necessary. In all adjustments under this provision
relating to share for share exchanges, the result will be shares of
the resulting company.
\mm\ Proposed Rule 2803(d)(3) adds language to address a stock and cash
merger, which was previously not addressed explicitly in OCC's By-
Laws.
\nn\ See n.31 of Exhibit 3A of filing SR-OCC-2025-017.
\oo\ Currently, Interpretation and Policy .07 to Section 11A of Article
VI provides that the further adjustment (in contemplation of
conversion to a debt security or a preferred stock) applies to
outstanding options ``that have been adjusted to call for delivery of
such debt security or preferred stock.'' OCC proposes to replace this
text with language from Interpretation and Policy .07 to Section 3 of
Article XII (which currently only applies to stock futures) to provide
that the further adjustment applies to outstanding options or stock
futures ``that have been adjusted by replacing the original underlying
security with the security into which the original underlying security
has been converted.'' OCC believes that this change is not material
because ``the adjustment of an outstanding option to call for delivery
of such debt security or preferred stock'' would necessarily require
replacement of the original underlying security with the security into
which the original underlying security has been converted. OCC also
proposes to add the word ``such'' to the first sentence of proposed
Rule 2803(d)(4) before the clause ``. . . as in a merger'' to promote
clarity in the Rule that this a merger is just one example of the type
of corporate action contemplated by the Rule.
\pp\ OCC also proposes non-substantive edits to streamline the text of
the Rule, such as by replacing the clause ``shall be further adjusted,
effective as of the ex-date for each payment of interest or dividends
thereon, to call for delivery of the securities distributed as
interest or dividends thereon'' with ``shall be further adjusted to
call for delivery of the securities distributed as interest or
dividends, effective as of the ex-date for each payment of interest or
dividends.''
\qq\ See n.32 of Exhibit 3A of filing SR-OCC-2025-017.
\rr\ See n.33 of Exhibit 3A of filing SR-OCC-2025-017.
\ss\ For example, OCC proposes to add text to part (i) of the proposed
Rule to note that OCC shall make certain adjustments to the exercise
price in effect ``in the case of an option or the last settlement
price established in the case of a stock future.'' OCC also proposes
to add the word ``alternatively'' just before part (ii) of the
proposed Rule to improve readability.
\tt\ See n.34 of Exhibit 3A of filing SR-OCC-2025-017.
\uu\ Specifically, OCC proposes to add the phrase ``and stock futures''
to the proposed Rule.
[[Page 47478]]
\vv\ See n.35 of Exhibit 3A of filing SR-OCC-2025-017.
\ww\ Specifically, OCC proposes to add the phrase ``and stock futures''
to the proposed Rule.
\xx\ See n.36 of Exhibit 3A of filing SR-OCC-2025-017.
\yy\ Specifically, OCC proposes to add the phrase ``and stock futures''
in two instances to the proposed Rule, as well as references to the
``settlement price'' in four instances where the proposed Rule
references the exercise price with respect to options contracts.
\zz\ See n.38 of Exhibit 3 of filing SR-OCC-2025-017.
\aaa\ See infra n.28 and accompanying text.
\bbb\ See n.43 of Exhibit 3A of filing SR-OCC-2025-017.
\ccc\ For example, OCC proposes to delete the phrase ``[n]otwithstanding
the general rules set forth in paragraphs (c) through (h) of this
Section 11A'' with ``[t]he Corporation shall have the power to make
exceptions to the general ules set forth in paragraphs (c) through (i)
of this Rule.'' Proposed Rule 2803(i), relating to election mergers
and similar events, is described below in this proposed rule change.
\ddd\ See n.44 of Exhibit 3A of filing SR-OCC-2025-017.
Proposed Rule 2804--Adjustments of Index Options and Futures and
Certain Other Cash-Settled Options and Futures
OCC proposes to set forth in Rule 2804 provisions related to
adjustments for index options and futures and certain other cash-
settled options and futures. Proposed Rule 2804 would primarily
consolidate into a single Rule provisions currently located in Section
3 of Article XVII and Section 4 of Article XII of the By-Laws. The
table below describes where current By-Law provisions are being
relocated to proposed Rule 2804 and notable changes to such provisions.
Table 4--Proposed Rule 2804 Changes
[Footnotes at end of table.]
------------------------------------------------------------------------
Proposed Chapter
Current By-Law provisions XXVIII Rule Notable changes
------------------------------------------------------------------------
Section 3(b) of Article XVII Rule 2804(a) OCC proposes to
(regarding index options and (governing consolidate and
certain other cash-settled adjustment of relocate Section
options); and Section 4A(b) index options 3(b) of Article XVII
of Article XII (regarding and futures and and Section 4 of
stock futures) \a\. certain other Article XII as
cash-settled proposed Rule
options and 2804(a). Proposed
futures). Rule 2804(a) would
generally provide
that, in the case of
cash-settled options
or cash-settled
futures that do not
require physical
delivery of the
underlying interest
(except as expressly
provided otherwise
in the Rules \b\
relating to a
particular cleared
contract)
determinations as to
whether and how to
adjust the terms of
such instruments to
reflect events
affecting the
underlying interest
shall be made by OCC
in accordance with
Rule 2801. The
notable changes from
the baseline By-Law
provisions include:
(i) specifying that
proposed Rule
2804(a) applies to
cash settled options
or cash-settled
futures that ``do
not require physical
delivery of the
underlying
interest''; \c\ (ii)
delete text
describing the
factors OCC would
consider in making
an adjustment
decision and replace
it with a cross-
reference to Rule
2801.\d\ OCC also
proposes to specify
in proposed Rule
2804(a) that
flexibly structure
options on fund
shares that are cash
settled are governed
by proposed Rule
2803.\e\ Finally,
OCC proposes to
replace Section
4A(b) of Article XII
of the By-Laws,
which currently sets
forth OCC's
authority to adjust
the underlying
interest, unit of
trading, settlement
price or any other
terms of a futures
contract that does
not require physical
delivery of the
underlying
interest.\f\
Section 3(c) of Article XVII Rule 2804(b) OCC proposes to
(regarding index options and (governing the consolidate and
certain other cash-settled addition, relocate Section
options); and Section 4(a) of deletion or 3(c) of Article XVII
Article XII (regarding stock change to index and Section 4(a) of
futures) \g\. components). Article XII of the
By-Laws as proposed
Rule 2804(b) to set
forth OCC's
adjustment practices
with respect to
changes to index
components that
underlie an index
option contract,
index futures
contract, or
variance futures
that have an index
as their reference
variable.\h\ OCC
does not propose
substantive changes
to these
provisions.\i\
Section 3(d) of Article XVII Rule 2804(c) OCC proposes to
(regarding index options and (governing a consolidate and
certain other cash-settled change to an relocate Section
options); and Section 4(b) index 3(d) of Article XVII
and 4(d) of Article XII multiplier, and Section 4(b) and
(regarding stock futures) \j\. calculation (d) of Article XII
method, or of the By-Laws as
underlying index proposed Rule
or reference 2804(c) to set forth
index). the conditions
precedent and
adjustment practices
where there is a
change to an index
multiplier,
calculation method,
or the underlying
index or reference
index with respect
to an index option
contract, index
futures contract or
variance futures
contract.\k\ OCC
proposes to
reorganize these
provisions into two
parts to improve
readability and
describe in proposed
Rule 2804(c)(1) the
conditions when OCC
will make
adjustments to these
contracts and in
proposed Rule
2804(c)(2) the
adjustment
practices.\l\ OCC
proposes to restate
the condition for an
adjustment to an
underlying variance
currently set forth
in Section 4(d) of
Article XII of the
By-Laws as proposed
Rule
2804(c)(1)(iii).\m\
OCC does not propose
substantive changes
to these provisions.
[[Page 47479]]
Section 3(e) of Article XVII Rule 2804(d) OCC proposes to
(regarding index options and (governing the consolidate and
certain other cash-settled substitution of relocate Section
options); and Section 4(c) of a successor 3(e) of Article XVII
Article XII (regarding stock index). and Section 4(c) of
futures) \n\. Article XII of the
By-Laws as proposed
Rule 2804(d) to
address when OCC may
substitute another
index (a ``successor
index'' may be
substituted for an
index option, index
futures contract, or
variance futures
contract.\o\ OCC
proposes to
reorganize these
provisions into
three separate
subparts (as
proposed Rule
2804(d)(1)-(3). OCC
proposes to relocate
the final sentence
of Section 4(c) of
Article XII of the
By-Laws, which is
specific only to
index futures
contracts and
variance futures as
proposed Rule
2804(d)(3).\p\ OCC
does not propose
substantive changes
to these provisions.
Section 3(f) of Article XVII Rule 2804(e) OCC proposes to
(regarding index options and (addressing relocate Section
certain other cash-settled where the 3(f) of Article XVII
options) \q\. underlying of the By-Laws in
relative proposed Rule
performance 2804(e) to address
index is below events where the
zero). value of an
underlying relative
performance index
falls below zero.
OCC does not propose
substantive changes
to these
provisions.\r\
Section 3(g) of Article XVII Rule 2804(f) OCC proposes to
(regarding index options and (addressing the relocate Section
certain other cash-settled elimination of 3(g) of Article XVII
options) \s\. an individual of the By-Laws in
reference proposed Rule
security). 2804(f) to address
events where any
individual reference
security in an
underlying relative
performance index is
eliminated.\t\ OCC
does not propose
substantive changes
to these provisions.
Section 4(e) of Article XII Rule 2804(g) OCC proposes to
(regarding stock futures) \u\. (governing relocate Section
adjustments of 4(e) of Article XII
options on index of the By-Laws as
futures or proposed Rule
variance 2804(g) to provide
futures). that where OCC
adjusts an index
futures or variance
futures contract
underlying a futures
option, such futures
option ordinarily
will be adjusted to
provide, upon
exercise, for
delivery of the
futures contract as
adjusted by OCC.
Section 3(h) and Rule 2804(h) OCC proposes to
Interpretations and Policies (rule combine and
.01 of Section 3 of Article application and relocated 3(h) and
XVII (regarding index options adjustment Interpretations and
and certain other cash- authority for Policies .01 of
settled options. OTC options). Section 3 of Article
XVII of the By-Laws
to Rule 2804(g).
Reference to
applicability of
Article VI, Sections
11 and 11A are
removed as they are
included in Rule
2804(a) as
references to Rules
2801 and 2803.
------------------------------------------------------------------------
\a\ See n.55 and 56 of Exhibit 3A of filing SR-OCC-2025-017.
\b\ Currently, Section 3 of Article XVII of the By-Laws provides an
exception for any other provision expressly relating to a particular
cleared contract in OCC's ``By-Laws and Rules.'' As proposed, Rule
2804 would note that such exception only arises where OCC's ``Rules''
(and not By-Laws) expressly provide for different treatment. The
reason for this change is because OCC is, through this proposed rule
change, relocating all of its adjustment authority to its Rules, which
obviates the need to also incorporate its By-Laws in this carve-out.
\c\ Currently, Section 3(b) of Article XVII of the By-Laws provides that
it applies to cash settled options that have ``a single commodity as
their underlying interest.'' OCC proposes to delete the condition, add
cash-settled futures, and replace the qualifying condition as cash-
settled options or cash-settled futures that ``do not require physical
delivery of the underlying interest.'' OCC proposes this change
because all cash settled options that have a single commodity as their
underlying interest also do not require physical delivery of the
underlying interest.
\d\ Specifically, OCC proposes to delete text from current Section 3 of
Article XVII of the By-Laws specifying that OCC would make an
adjustment decision based on its judgment as to what is appropriate
for the protection of investors and the public interest and taking
account factors such as fairness to buyers and sellers, maintaining a
fair and orderly market, and consistency of interpretation and
practice. Each of these same considerations are set forth in proposed
Rule 2801(b) (which also includes additional considerations such as
the efficiency of exercise settlement procedures and coordination with
other clearing agencies). As a result, OCC believes that the same
factors would be considered for the adjustment of instruments covered
by proposed Rule 2804, plus additional relevant considerations set
forth in Rule 2801(b).
\e\ Currently, Section 3(a) of Article XVII of the By-Laws specifies
that ``[e]xcept in the case of flexibly structured options on fund
shares that are cash settled, Section 11A of Article VI of the By-Laws
shall not apply to cash-settled option contracts.'' OCC proposes in
this proposed rule change to replace Section 11A of Article VI of the
By-Laws with proposed Rule 2803. As a result, the new language in
proposed Rule 2804 relating to flexibly structured options would
remain the same--i.e., it would continue to specify that flexibly
structured options are governed by Section 11A, now redesignated as
proposed Rule 2803. See n.57 of Exhibit 3A of filing SR-OCC-2025-017.
\f\ Proposed Rule 2804(a) differs from current Section 4A(b) of Article
XII of the By-Laws in that it would no longer specify that OCC may
``adjust the underlying interest, unit of trading, settlement price or
any other terms of such futures contract.'' OCC believes that these
details are not necessary because it is captured in OCC's general
authority, stated in proposed Rule 2804(a), to ``adjust the terms'' of
the contracts. Section 4A(b) of Article XII of the By-Laws also
describes the factors that would be considered by OCC in making an
adjustment determination, which OCC proposes to replace with the cross-
reference to proposed Rule 2801.
\g\ See n.58 of Exhibit 3A of filing SR-OCC-2025-017.
\h\ Section 3(c) of Article XVII and Section 4(a) of Article XII of the
By-Laws are substantially similar to one another, both providing that
OCC will not ordinarily make adjustments to such contracts in the
event that index components are added to or deleted from the
underlying index or reference index.
\i\ OCC proposes certain non-substantive changes and rephrasing of
certain of the provisions, such as by splitting the current text of
Section 3(c) of Article XVII and Section 4(a) of Article XII of the By-
Laws into proposed Rule 2804(b)(1) and (2) and by revising the first
sentence of these provisions to provide ``[e]xcept as provided by
paragraph (b)(2), the Corporation ordinarily will not . . .'' in lieu
of ``[n]o adjustments will ordinarily be made in . . . However, if . .
.'' OCC also proposes to add the final sentence of Section 4(a) of
Article XII of the By-Laws regarding variance futures as the final
sentence of proposed Rule 2804(b)(2).
\j\ See n.59 of Exhibit 3A of filing SR-OCC-2025-017.
\k\ Section 3(d) of Article XVII and Section 4(b) of Article XII of the
By-Laws are substantially similarly to one another, but the former
address index options contracts while the latter addresses index
futures contracts/variance futures contracts. Given these
similarities, OCC proposes to combine these provisions so that they
are addressed in a single Rule and add language to effect this
combination (e.g., by adding references to ``buyers and sellers'' of
index futures/variance futures contracts rather than just ``holders
and writers'' of index options or by replacing a reference to ``the
index securities'' with ``the constituents of the index'' given that
OCC). OCC also proposes in proposed Rule 2804(c)(1)(ii) to revise the
phrase ``an underlying index or reference index'' with ``an index that
is an underlying interest or reference variable'' to allow the
proposed Rule to apply to index options, index futures options, and
variance futures. This same change is proposed (for the same reason)
in Rule 2804(d)(2) where the phrase ``underling index or reference
index'' would be replaced with ``underling interest or reference
variable.''
[[Page 47480]]
\l\ To accomplish this reorganization, OCC proposes to add new
introductory language to proposed Rule 2804(c)(1) providing that
``[t]he Corporation shall make adjustments to an index option
contract, index futures contract, or variance futures contract if . .
.'' and in proposed Rule 2804(c)(2) providing that ``[in] the event an
above condition occurs . . .'' OCC proposes to update the current
cross-reference to Section 3(e) in current Section 3(d) of Article
XVII to Section 3(d) of the By-Laws with a cross-reference to proposed
Rule 2804(e).
\m\ The second part of Section 4(d) of Article XII of the By-Laws
describing the adjustments that OCC would make to variance futures
would be set forth in proposed Rule 2804(c)(2).
\n\ See n.60 of Exhibit 3A of filing SR-OCC-2025-017.
\o\ Section 3(e) of Article XVII and Section 4(c) of Article XII of the
By-Laws are substantially similar to one another, but the former
address index options contracts while the latter addresses index
futures contracts/variance futures contracts. Given these
similarities, OCC proposes to combine these provisions so that they
are addressed in a single Rule. OCC proposes to add introductory
language to proposed Rule 2804(d)(1) to make clear the purpose of the
Rule by providing that ``[t]he Corporation may substitute another
index (a `successor index') as the underlying interest or reference
variable if . . .'' and to delete the current introductory phrase
``[i]n the event . . .''
\p\ OCC proposes to add introductory language to proposed Rule
2804(d)(3) to make clear that such provision is specific just to index
futures contracts and variance futures. OCC also proposes to update
the internal cross reference to Section 5 of Article XII in this
provision, rather than Section of 5 of ``this Article'' as the
provision is being moved to proposed Rule 2804(d)(3).
\q\ See n.61 of Exhibit 3A of filing SR-OCC-2025-017.
\r\ OCC proposes to add text to the first sentence of this provision to
make clear that it applies to ``a cash-settled option or future,''
consistent with how Section 3(f) of Article XVII of the By-Laws
applies today.
\s\ See n.62 of Exhibit 3A of filing SR-OCC-2025-017.
\t\ OCC proposes certain non-substantive edits to this provision to
delete the introductory phrase ``[i]n the event that . . .'' and an
extraneous reference to an underlying relative performance index
``defined in the preceding paragraph'' as such phrases are unnecessary
and improve readability. The paragraph that precedes current Section
3(g) of Article XVII of the By-Laws (Section 3(f)) does not define a
relative performance index, so this reference is obsolete. A
``relative performance index'' refers to an index that measures the
relative performance of two components, generally using relative total
return.
\u\ See n.63 of Exhibit 3A of filing SR-OCC-2025-017.
Proposed Rule 2805--Adjustment of Cash-Settled Foreign Currency Options
and Futures
OCC proposes to set forth in Rule 2805 provisions related to
adjustment of cash-settled foreign currency options and futures.
Proposed Rule 2805 would consolidate into a single Rule provisions
currently located in Section 3 of Article XXII and Section 4A(a) of
Article XII of the By-Laws. The table below describes where current By-
Law provisions are being relocated to proposed Rule 2805 and notable
changes to such provisions.
Table 5--Proposed Rule 2805 Changes
[Footnotes at end of table.]
------------------------------------------------------------------------
Proposed Chapter
Current By-Law provisions XXVIII Rule Notable changes
------------------------------------------------------------------------
Section 3 of Article XXII Rule 2805 OCC proposes to
(regarding cash-settled (regarding relocate Section 3
foreign currency options); adjustment of of Article XXII and
and Section 4A(a) of Article cash-settled Section 4A(a) of
XII (regarding stock futures) foreign currency Article XII of the
\a\. options and By-Laws (including
futures). Interpretation and
Policy .01 to each)
as proposed Rule
2805 to address
adjustments of cash-
settled foreign
currency options and
cash-settled foreign
currency futures.\b\
OCC proposes to set
forth Interpretation
and Policy .01 of
these By-Law
provisions as
proposed Rule
2805(b) without
substantive change.
OCC proposes to
delete a reference
in Section 3 of
Article XXII of the
By-Laws providing
that ``[t]he
provisions of
Article VI, Section
11 of the By-Laws
shall apply equally
to adjustments made
by OCC pursuant to
this Article XXII,
Section 4,'' because
these references
would be no longer
current and are not
necessary.\c\ OCC
does not propose
substantive changes
to these provisions.
------------------------------------------------------------------------
\a\ See n.55 and 56 of Exhibit 3A of filing SR-OCC-2025-017.
\b\ Currently, Section 3 of Article XVII of the By-Laws provides an
exception for any other provision expressly relating to a particular
cleared contract in OCC's ``By-Laws and Rules.'' As proposed, Rule
2804 would note that such exception only arises where OCC's ``Rules''
(and not By-Laws) expressly provide for different treatment. The
reason for this change is because OCC is, through this proposed rule
change, relocating all of its adjustment authority to its Rules, which
obviates the need to also incorporate its By-Laws in this carve-out.
\c\ Currently, Section 3(b) of Article XVII of the By-Laws provides that
it applies to cash settled options that have ``a single commodity as
their underlying interest.'' OCC proposes to delete the condition, add
cash-settled futures, and replace the qualifying condition as cash-
settled options or cash-settled futures that ``do not require physical
delivery of the underlying interest.'' OCC proposes this change
because all cash settled options that have a single commodity as their
underlying interest also do not require physical delivery of the
underlying interest.
Proposed Consolidation of Adjustments for All Instruments Cleared by
OCC Into a Single Rule Chapter
As noted above, one of the key purposes of the proposed rule change
is to consolidate into the Chapter XXVIII Rule series the various By-
Law provisions relating to adjustments for different types of
instruments cleared by OCC, including: (i) options contracts (Article
VI of the By-Laws); (ii) futures, futures options and commodity options
(Article XII of the By-Laws); (iii) index options and certain other
cash-settled options (Article XVII of the By-Laws); and (iv) cash-
settled foreign currency options (Article XXII of the By-Laws).
Currently, each of the Articles in OCC's By-Laws regarding each type of
cleared instrument has a separate provision concerning adjustments, and
in many cases these provisions are substantially similar or identical
to each other. For example, Section 11(a) of Article VI of the By-Laws
(regarding options), Section 3(b) of Article XII of the By-Laws
(regarding futures), and Section 3(b) of Article XVII (regarding index
options and certain other cash-settled options) each provide, among
other things, that OCC shall determine whether to make adjustments to
reflect particular events in respect of an underlying interest based on
OCC's judgment as to what is appropriate for the protection of
investors and the public interest, taking into account such factors as
fairness to holders and writers (or purchasers and
[[Page 47481]]
sellers) of the instruments, the maintenance of a fair and orderly
market in the affected contracts, and consistency of interpretation and
practice.\13\ Rather than setting forth separate provisions that are
substantively similar for each of these different instruments, OCC
believes Clearing Members and the public would benefit from having a
single set of Rules describing OCC's practices related to adjustments,
including the criteria OCC considers in making such adjustments.
---------------------------------------------------------------------------
\13\ The adjustment provisions for options contracts and futures
contracts also specify two additional criteria to be considered: (i)
the efficiency of exercise settlement procedures and (ii) the
coordination with other clearing agencies of the clearance and
settlement of transactions in the underlying interest. OCC proposes
that all instruments would be subject to these two additional
criteria pursuant to proposed Rule 2801, which OCC believes are also
potentially relevant considerations for determining adjustments for
index options and certain other cash-settled options.
---------------------------------------------------------------------------
To accomplish this objective, OCC proposes in a number of places to
add language to an existing provision of Section 11, Article VI of the
By-Laws, restated as a Chapter XXVIII Rule, to add mention of ``stock
future(s)'' and add other relevant text to ensure the proposed Rule
appropriately applies to stock futures (e.g., by adding mention of the
``settlement price'' of a stock future).\14\ OCC has highlighted
proposed newly added text in Exhibit 3A of filing SR-OCC-2025-017 to
indicate such changes where OCC proposes to integrate stock futures
provisions into a proposed Rule that is based off of an options-related
adjustment provision.
---------------------------------------------------------------------------
\14\ See e.g., proposed Rule 2803(h). Options contracts involve
an exercise price while a stock future involves a settlement price.
Accordingly, where OCC proposes to integrate stock futures into an
existing options-related adjustment provision, OCC proposes to add
reference to a stock future's settlement price where the current
provision references an exercise price.
---------------------------------------------------------------------------
Proposed New Provisions Related to Adjustments
OCC also proposes to add several new provisions related to its
adjustment process which are intended to codify in OCC's rules certain
practices that OCC has developed with respect to adjustments under
OCC's existing adjustment authority. OCC believes that these additions
will provide greater detail and transparency regarding OCC's current
adjustment practices. Each new provision is described below.
Distributions ``in Lieu of'' Ordinary Dividends or Distributions
OCC proposes two additions to the Rules to reflect that
distributions made in lieu of ordinary dividends or distributions will
generally not result in an adjustment regardless of the manner in which
the dividend is ultimately paid. The first of these additions applies
to cash dividends or distributions with rule text in proposed Rule
2803(c)(1)(iii)(B), providing that as a general rule, a stock dividend
or distribution by the issuer of the underlying security that is paid
in lieu of a cash dividend or distribution which otherwise would have
been an ordinary distribution as a cash dividend or distribution, will
be deemed to be ``ordinary distributions'' and therefore will generally
not warrant an option contract adjustment.\15\ This provision is
intended to clarify that where an issuer initiates some form of
distribution that is paid in lieu of a cash dividend or distribution
that would have been considered an ordinary distribution, OCC will view
such ``in lieu of'' distribution as an ordinary distribution.\16\ OCC
believes that treating such an ``in lieu of'' distribution as an
ordinary distribution where the cash dividend or distribution would
have otherwise been considered an ordinary distribution is consistent
with OCC's current adjustment rules, which are broadly designed to
treat ordinary distributions as such, even where an ordinary
distribution may be replaced with an ``in lieu of'' distribution.
---------------------------------------------------------------------------
\15\ See n.16 of Exhibit 3A of filing SR-OCC-2025-017.
\16\ For example, if an issuer normally provides a cash dividend
each quarter but in one quarter determines to provide a stock
dividend in lieu of such cash dividend, OCC will consider the stock
dividend as an ordinary distribution.
---------------------------------------------------------------------------
Second, OCC proposes Rule 2803(c)(3)(v) to provide that adjustments
generally will not be made where a dividend or distribution is
determined to be ordinary regardless of whether it is subject to a
shareholder election regarding the form in which it will be paid, such
as cash or stock. OCC believes that this proposed provision would be
consistent with Section 11A(a) of Article VI of OCC's By-Laws (replaced
by proposed Rule 2803(c)(1)), which generally provides that OCC will
not make adjustments where a stock or cash dividend or distribution is
considered to be ordinary. The purpose of this proposed Rule
2803(c)(3)(v) is to make clear that the determination of whether a
dividend or distribution is considered ordinary will generally
determine whether OCC will make an adjustment for such dividend or
distribution, notwithstanding that there may have been a shareholder
election to determine the precise form of the ordinary distribution.
Cash in Lieu of Fractional Entitlements
In certain circumstances, the terms of a corporate action on an
underlying security of an option may result in a fractional entitlement
per 100 shares of stock for which cash will be paid in lieu of the
fractional shares. In such situations, a contract adjustment that is
effective on the option in response to the corporate action on the
underlying security may result in an adjusted option deliverable that
includes a cash component in lieu of fractional shares. For example, in
the case of a stock dividend where fractional entitlements are paid as
cash in lieu of additional shares, if the issuer of XYZ stock issues a
stock dividend for all whole shares with a distribution rate of 18.2
percent, an owner of 100 shares of XYZ stock would be entitled to 18.2
shares, which may be distributed as 18 whole shares of XYZ and cash-in-
lieu amount for the 2/10 share. Such situations can result from various
types of corporate actions, such as mergers and spinoffs, among others.
OCC proposes to add several provisions to its adjustments Rules to
directly address adjustments in the context of cash in lieu of
fractional entitlements.
First, OCC proposes to add a new provision as Rule 2803(k)
providing that cash amounts in lieu of fractional share entitlements
included in adjusted deliverables will generally be made in a manner
consistent with the cash-in-lieu price used by a central securities
depository clearing agency. The purpose of this provision is to make
clear that where a stock dividend or distribution by an issuer involves
some cash amount in lieu of fractional share entitlements and OCC
determines that an adjustment is necessary pursuant to its By-Laws and
Rules, OCC will generally seek to align its distribution with the
approach taken by the central securities depository clearing agency
(i.e., Depository Trust Company) so that an option's adjusted
deliverable resulting from a corporate action reflects the amount of
cash paid in lieu of fractional shares that the holder of 100 shares of
the underlying security receives from the corporate action. This is and
has been the longstanding practice of determining cash in lieu of
fractional shares for adjusted option deliverables, as evidenced by the
following examples:
<bullet> On February 12, 2024, options on Precision BioSciences,
Inc. (``DTIL'') were adjusted in response to a 1-for-30 reverse stock
split, and the adjusted deliverable resulting from the option contract
adjustment called for 1) 3 (New) DTIL Common Shares and 2) cash in lieu
of approximately 0.3333
[[Page 47482]]
fractional DTIL Shares. After the cash-in-lieu price was available from
the central securities depository clearing agency, OCC published an
information memo stating that the price of $11.81 was used to determine
the cash-in-lieu component amount of $3.94 cash per contract (.3333 x
$11.81 = $3.94).\17\
---------------------------------------------------------------------------
\17\ See OCC Information Memo #54176, <a href="https://infomemo.theocc.com/infomemos?number=54176">https://infomemo.theocc.com/infomemos?number=54176</a>.
---------------------------------------------------------------------------
<bullet> On February 11, 2015, options on Intervest Bancshares
Corporation (``IBCA'') were adjusted in response merger with Bank of
the Ozarks, Inc. (``OZRK''), and the adjusted deliverable resulting
from the option contract adjustment called for 1) 30 OZRK Common
Shares, and 2) cash in lieu of 0.14 fractional OZRK Common Shares.
After the cash-in-lieu price was available from the central securities
depository clearing agency, OCC published an information memo stating
that the price of $33.88 was used to determine the cash-in-lieu
component amount of $4.74 cash per contract (0.14 x $33.88).\18\
---------------------------------------------------------------------------
\18\ See OCC Information Memo #36262, <a href="https://infomemo.theocc.com/infomemos?number=36262">https://infomemo.theocc.com/infomemos?number=36262</a>.
---------------------------------------------------------------------------
<bullet> On April 12, 2015, PC Mall, Inc. (``MALL'') distributed
1.2071 common shares of <a href="http://eCOST.com">eCOST.com</a>, Inc. (``ECST'') to MALL Shareholders
for each share held as a spinoff, and the adjusted deliverable
resulting from the option contract adjustment called for 1) 100 MALL
Common Shares, 2) 120 ECST Common Shares, and 3) cash in lieu of .71
fractional ECST Shares. After the cash-in-lieu price was available from
the central securities depository clearing agency, OCC published an
information memo stating that the price of $4.61was used to determine
the cash-in-lieu component amount of $3.27 cash per contract (.71 x
$4.61 = $3.27.) \19\
---------------------------------------------------------------------------
\19\ See OCC Information Memo #20861, <a href="https://infomemo.theocc.com/infomemos?number=20861">https://infomemo.theocc.com/infomemos?number=20861</a>.
---------------------------------------------------------------------------
In connection with clarifying language in Rule 2803(k), OCC notes
that in rare instances, OCC may be required to independently determine
a cash-in-lieu price for fractional shares because of the terms of the
underlying corporate action. For example, on July 13, 2007, options on
CBOT Holdings, Inc. (``BOT'') were adjusted to reflect the merger
between BOT and CME Group Inc. (``CME'').\20\ The adjusted options
deliverable became 1) 37 CME Group Inc. (``CME'') Common Shares and 2)
cash in lieu of .5 fractional CME shares. However, pursuant to the
terms of the corporate action, CME issued fractional shares instead of
paying cash in lieu of fractional shares. Because OCC cannot facilitate
settlement of fractional shares, it was determined that the closing
price from the day prior to the consummation of the merger would be
used to determine the cash-in-lieu amount. Such situations are very
uncommon, but when they do occur OCC may utilize its authority
currently in Section 11A(e) of Article VI and in proposed Rule 2803(j)
to determine the cash value of any distributed property.
---------------------------------------------------------------------------
\20\ See OCC Information Memo #23267, <a href="https://infomemo.theocc.com/infomemos?number=23267">https://infomemo.theocc.com/infomemos?number=23267</a>.
---------------------------------------------------------------------------
Second, pursuant to Article VI, Section 11A(c) paragraph (y) of
OCC's By-Laws (redesignated as proposed Rule 2803(c)(2) under this
Proposal), OCC will generally not make an adjustment to a stock option
contract for any cash dividend or distribution of the underlying
security if such dividend or distribution is less than $0.125 per
share.\21\ For the avoidance of doubt, OCC proposes to note that this
provision is not applicable to cash paid in lieu of fractional share
entitlements or other distributed property. Specifically, OCC proposes
to state in Rule 2803(c)(2) that in connection with contract adjustment
determinations involving fractional entitlements (for example in
respect of stock rights, contingent value rights or other
distributions) the determination will not be subject to this general
rule.\22\ This proposed change is necessary to clarify that adjustments
in lieu of property are governed by other provisions of proposed Rule
2803. Additionally, this clarification aligns with longstanding
practices. For example, on January 31, 2013, options on LATAM Airlines
Group S.A. (``LFL'') were adjusted in response to a $ 0.011576 cash
distribution made to holder of LFL American Depositary Shares in lieu
of rights that were distributed to LFL common shareholders.\23\ The
adjustment was effected by reducing option strike prices by 0.011576
despite the fact that the distribution amount was below the $0.125
adjustment threshold established by Article VI, Section 11A,
Interpretation and Policies .08 because the $0.125 adjustment threshold
does not apply to this type of contract adjustment.
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\21\ Where the stock option contract is originally listed with a
unit of trading larger than 100 shares, the applicable threshold
under both OCC's current and proposed By-Laws and Rules, the
applicable threshold is $12.50 per contract.
\22\ See n.22 of Exhibit 3A of filing SR-OCC-2025-017. As a
result of this proposed provision, where OCC a distribution involves
cash in lieu of fractional entitlements, OCC would not be subject to
the general rule that it will not make an adjustment if the dividend
or distribution is that $0.125 per share (or $12.50 per contract
where the option contract is originally listed with a trading unit
of more than 100 shares).
\23\ See OCC Information Memo #32143, <a href="https://infomemo.theocc.com/infomemos?number=32144">https://infomemo.theocc.com/infomemos?number=32144</a>.
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Election Mergers or Similar Events
OCC proposes to add a new provision as Rule 2803(i) providing that
the deliverable resulting from an adjustment in the case of an election
merger or similar event involving shareholder elections, such as
shareholder election of a non-ordinary dividend, will generally be
based on the consideration accruing to a non-electing shareholder if
the Corporation determines in its sole discretion that it is readily
able to facilitate delivery of that consideration. The purpose of this
provision is to provide additional details to the Rules to describe the
longstanding adjustment practice for corporate action events involving
shareholder elections to reflect, to the extent possible, what a
shareholder who does not make an election will receive.\24\ For
example, on September 26, 2014, Iron Mountain Incorporated (``IRM'')
was ex-distribution a $3.62 special dividend payable in cash or stock
at the election of IRM shareholders. Pursuant to the terms of the
corporate action on the underlying security, IRM shareholders who did
not make an election for the dividend would receive the dividend in the
form of shares, and the corresponding contract adjustment to IRM
options ultimately resulted in an adjustment deliverable of 1) 110 IRM
Common Shares, and 2) $5.97 cash resulting from cash in lieu of
fractional shares.\25\ As an additional example, on February 1, 2006,
Siebel Systems, Inc. (``SEBL'') merged with Oracle Corporation, and the
merger was subject to SEBL shareholder election to receive the merger
consideration in the form of cash or stock. Pursuant to the terms of
[[Page 47483]]
the underlying corporate action, SEBL shareholders who did not make an
election received the cash consideration, and the corresponding
contract adjustment to SEBL options resulted in an adjusted option
deliverable of $1033.00 cash per option contract.\26\
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\24\ OCC notes that there may be circumstances where it is not
possible to determine the make an adjustment that aligns with the
interest of a non-electing shareholder. For example, in anticipation
of the consummation of the election merger whereby Allis-Chalmers
Energy Inc. was acquired by Seawell Limited, OCC published
Information Memos #28424 and #28448 to state that if the non-
electing merger consideration included a security that did not trade
on a U.S. market, a U.S. dollar equivalent would be determined for
the non-electing merger consideration as the adjusted options
deliverable. Although the non-electing merger consideration was
subsequently determined to be all cash as states in Information Memo
#28570, the information in Information Memos #28424 and #28448
illustrates that it is possible that the non-electing merger
consideration may not be used to determine an adjusted option
deliverable in rare circumstances. See OCC Information Memo #28424,
<a href="https://infomemo.theocc.com/infomemos?number=28424">https://infomemo.theocc.com/infomemos?number=28424</a>; OCC Information
Memo #28448 <a href="https://infomemo.theocc.com/infomemos?number=28448">https://infomemo.theocc.com/infomemos?number=28448</a>; OCC
Information Memo #28750 <a href="https://infomemo.theocc.com/infomemos?number=28570">https://infomemo.theocc.com/infomemos?number=28570</a>.
\25\ See OCC Information Memos #35275, <a href="https://infomemo.theocc.com/infomemos?number=35311">https://infomemo.theocc.com/infomemos?number=35311</a>;#35663, <a href="https://infomemo.theocc.com/infomemos?number=35663">https://infomemo.theocc.com/infomemos?number=35663</a>.
\26\ See OCC Information Memo #21403, <a href="https://infomemo.theocc.com/infomemos?number=21403">https://infomemo.theocc.com/infomemos?number=21403</a>.
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Other Events Not Ordinarily Resulting in an Adjustment
OCC proposes to add a new provision to specify an additional type
of event that will ordinarily not result in an adjustment. OCC's
current By-Laws relocated to new Rule 2803(c)(3) under this Proposal,
specify certain types of events that will ordinarily not result in an
adjustment, such as the issuance of so-called ``poison pill'' rights,
tender offers, or changes in capital structure. OCC proposes to add an
additional type of event to this list for transparency purposes to
reflect longstanding adjustment determination practices. OCC proposes
Rule 2803(c)(3)(iv) to provide that adjustments generally will not be
made to reflect a distribution of non-transferable property. OCC
proposes this addition because distributions of non-transferable
property can neither be traded on a national market nor transferred
through the facilities of a central securities depository clearing
agency. As a practical matter, there is no means to facilitate delivery
of non-transferable distributions in fulfilment of option exercises and
assignments and no trading price of the non-transferable property to
provide a value. OCC therefore has determined in the past that
adjustments would not be made for distributions of non-transferable
property. As an example, in November of 2018, Pulse Biosciences, Inc.
(``PLSE'') distributed non-transferable rights to PLSE shareholders. In
response to this non-transferable distribution, OCC issued Information
Memo #43972 to state that no adjustment would be made.\27\ In this and
other instances when adjustments are not made for a non-transferable
distribution, call option holders who receive the distribution must
exercise their options in sufficient time to become a holder of record
with entitlement to receive the distribution. OCC would, however retain
general authority pursuant to proposed Chapter XXVIII of the Rules to
make adjustments to non-transferable property on a case-by-case where
necessary.
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\27\ See OCC Information Memo #43972, <a href="https://infomemo.theocc.com/infomemos?number=43972">https://infomemo.theocc.com/infomemos?number=43972</a>.
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Cash Value Determination
Section 11A(e) of Article VI and the last sentence of Section 3(e)
of Article XII of the By-Laws both provide that OCC has authority to
determine the value of distributed property with respect to any
adjustments. As previously noted, OCC proposes to relocate this
provision as Rule 2803(j). OCC also proposes to add to Rule 2803(j)
additional text providing that OCC may use this authority in
circumstances that include but are not limited to cases in which OCC
determines that the final amount or distribution resulting from a
corporate action may not be determined for a long period. OCC proposes
to add this additional text to make clear that OCC would consider using
its authority to determine the value of distributed property when OCC
expects that it may take a long period of time to determine the final
amount of a distribution resulting from a corporate action. Where a
lengthy delay to determine the distributed property value is expected,
options or stock futures contracts may expire or mature prior the time
when the value is determined, which would leave such options and stock
futures contract holders with considerable uncertainty as to the value
of their position and their positions subject to delayed settlement for
an extended period of time. As a historical example of this type of
situation, options on Winthrop Realty Trust (``FUR'') were adjusted on
August 8, 2016, in response to the liquidation of the underlying
security. As detailed in Information Memo #39462, assets and
liabilities of the trust were transferred to a liquidating trust, and
each FUR share would be converted into a non-transferable Unit of
Beneficial Interest in the liquidating trust. Since the timing and
amount of any liquidating distributions were unknown and because the
Unit of Beneficial Interest could not be transferred, the adjustment
determination was made to set a cash value equivalent for FUR Shares
using a high and low price from the last day of trading, thereby
allowing settlement to occur in a timely manner. In certain situations,
OCC believes that it is appropriate to use its existing authority to
determine the cash value of distributed property in such circumstances.
OCC believes that adding this provision to proposed Rule 2803(j) will
provide detail regarding the anticipated use cases of such provision,
which OCC believes furthers the protection of investors and the public
interest.\28\
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\28\ 15 U.S.C. 78q-1(b)(3)(F).
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Foreign Withholding Tax
OCC proposes to add as Rule 2803(l) a provision relating to foreign
withholding tax, which would provide that, in general, all contract
adjustments will be made net of any relevant foreign withholding taxes,
with the exception of events for which local tax authorities issue
rulings that exempt certain groups from the withholding tax and it is
reasonable that U.S. investors collectively can be included in such
groups.\29\ The purpose of this provision is to make clear to market
participants that OCC's contract adjustments will ordinarily include
foreign withholding taxes unless, as noted above, there is an exception
from local tax authorities in the foreign jurisdiction for which OCC
reasonably believes U.S. investors could avail themselves. For example,
on May 12, 2023, Loma Negra Compania Industrial Argentina Sociedad
Anonima (``LOMA'') was ex-dividend a $0.4010845 distribution; however,
the contract adjustment for this event on LOMA options reduced option
strike prices by 0.3530086 as the net dividend, reduced by foreign
withholding tax and a dividend fee.\30\ In contrast, the cash
settlement adjustment for DSP Group, Inc. (``DSPG'') options in
response to the all-cash merger of DSPG with a subsidiary of Synaptics
Incorporated, did not reduce the cash settlement amount by any
withholding tax because DSPG received an Israeli Tax Authority ruling,
exempting non-Israeli shareholders from withholding.\31\ OCC
investigates withholding tax information on foreign securities
routinely and intends to adjust options taking withholding tax into
account in the manner described above when such information is readily
available.
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\29\ See n.41 of Exhibit 3A of filing SR-OCC-2025-017.
\30\ See OCC Information Memo #52394, <a href="https://infomemo.theocc.com/infomemos?number=52394">https://infomemo.theocc.com/infomemos?number=52394</a>.
\31\ See OCC Information Memo #49777, <a href="https://infomemo.theocc.com/infomemos?number=49777">https://infomemo.theocc.com/infomemos?number=49777</a>.
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Adjustments Made per Contract
OCC proposes to add as Rule 2803(m) a provision specifying that all
contract adjustments will be made on a per contract basis. As a
practical matter, all exercises and assignments of options are based on
a single contract as the lowest possible holding of an option.
Consequently, contract option adjustments must also be made on a per
contract basis. This practice is required for the proper functioning of
the exercise and assignment process;
[[Page 47484]]
however, this fact is not explicitly stated in OCC's By-Laws and Rules.
OCC proposes to add this provision to promote clarity, consistency, and
understanding of its Rules.
Proposed Updates to By-Laws Sections for Adjustment Provisions Relating
to Products Not Actively Traded
OCC's By-Laws relating to certain products that are not currently
actively traded have provisions relating to contract adjustments for
such products. These provisions generally provide that adjustments for
such products will be governed by Section 11 and/or Section 11A of
Article VI of the By-Laws or, in the case of Packaged Spread Options,
Section 3 of Article XVII of the By-Laws. As these adjustment-related
provisions of the By-Laws would be deleted under the Proposal and moved
to Chapter XXVIII of the Rules, OCC proposes to update the cross
references in the By-Laws relating to the inactive products to
correspond to the appropriate Rule provisions in Chapter XXVIII.
Specifically, OCC proposes to modify the following adjustment
related cross references for products that are not actively traded
today:
<bullet> Binary options and range options (Article XIV)--The
following cross references would be updated in Article XIV: (i) in the
bracketed language at the end of Section 3, the reference to Section 11
and 11A of Article VI of the By-Laws would be updated to refer to
Chapter XXVIII of the Rules; (ii) the reference to Section 11 of
Article VI of the By-Laws in Section 3A(a)(2) would be updated to refer
to Rule 2801 and Rule 2802; (iii) the reference to Section 11(a) of
Article VI of the By-Laws in Section 3A(d) would be updated to refer to
Rule 2801; (iv) the reference to Article VI, Section 11A of the By-Laws
in Interpretation and Policy .02 would be updated to refer to Rule
2803(c)(1)(iv); and (v) the reference to Section 11 of Article VI of
the By-Laws in Section 3B(d) would be updated to refer to Rule 2801 and
Rule 2802.
<bullet> Foreign currency options (Article XV)--The following cross
references would be updated in Article XV: (i) the reference to Article
VI, Section 11 of the By-Laws in Section 4 would be updated to refer to
Rule 2801 and Rule 2802; and (ii) in the bracketed language at the end
of Section 4, the reference to Section 11A of would be updated to refer
to Rule 2803 and the reference to Article VI of the By-Laws would be
updated to refer to Chapter XXVIII of the Rules.
<bullet> Yield-based Treasury options (Article XVI)--The following
references would be updated in Article XVI: (i) the reference to
Section 11 of Article VI of the By-Laws in Section 3(a) and (d) would
be updated to refer to Rule 2801 and Rule 2802; (ii) in the bracketed
language at the end of Section 3, the reference to Section 11 of
Article VI of the By-Laws would be updated to refer to Rule 2801 and
Rule 2802; and (iii) the reference to Section 11 of Article VI of the
By-Laws in Section 4(a)(2) would be updated to refer to Rule 2802.
<bullet> BOUNDS (Article XXIV)--The following references would be
updated in Article XXIV: (i) the references to Section 11 and Section
11A of Article VI of the By-Laws, including reference to
Interpretations and Policies following Section 11A, in Sections 4(a)
and 4(f) of Section 4 would be updated to refer to Rule 2801, Rule 2802
and Rule 2803; (ii) the references to Section 11A of Article VI of the
By-Laws in Sections 4(d) as well as the second reference to Section 11A
contained in Section 4(a) of Section 4 would be updated to refer to
Rule 2803; and (iii) in the bracketed language at the end of Section 4
would be updated to refer to Chapter XXVIII of the Rules.
<bullet> Packaged spread options (Article XXVI)--The reference in
Section 3 of Article XXVI to Section 3 of Article XVII of the By-Laws
would be changed to Rule 2804.
These proposed changes are not intended as substantive changes but
rather are necessary to ensure consistency in OCC's Rules,
notwithstanding that they pertain to products that are not currently
traded.
Proposed Updates to By-Laws Sections Governance Provisions for By-Law
and Rules Amendments
Article XI, Section 1 of the By-Laws states that amendment to
certain provisions of the By-Laws, including Sections 11 and 11A of
Article VI, requires approval of the holders of all outstanding Common
Stock of OCC. Because of the proposed relocation of the content of
Sections 11 and 11A of Article VI to Chapter XXVII of the Rules, OCC
proposes to move the requirement for stockholder approval to Section 2
of Article XI, which states the requirements for amendments to the
Rules, by including language that amendment to Chapter XXVII of the
Rules will require approval of the holders of all outstanding Common
Stock of OCC.
2. Statutory Basis
OCC believes the proposed rule change is consistent with Section
17A of the Act \32\ and the rules thereunder applicable to OCC. Section
17A(b)(3)(F) of the Act requires, among other things, that the rules of
a clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions (and, to the extent
applicable, derivative agreements, contracts, and transactions), to
remove impediments to and perfect the mechanism of a national system
for the prompt and accurate clearance and settlement of securities
transactions, and, in general, to protect investors and the public
interest.\33\ OCC believes that the proposed changes are consistent
with these provisions of Section 17A(b)(3)(F) because they would
provide greater clarity, consistency, and understanding of OCC's
adjustment practices and further the goals of Section 17A(b)(3)(F). The
primary purpose of the proposed rule change is to consolidate and
relocate OCC's current By-Law provisions related to adjustments into a
single Rule chapter (Chapter XXVII). Currently, OCC's practices with
respect to adjustments are, in many cases, described in separate By-Law
provisions that pertain to a specific type of option or derivative,
notwithstanding that such separate provisions are substantially similar
to one another. OCC believes that consolidating these provisions into a
single Rule chapter, which will allow Clearing Members and the public
to review a single Rule chapter relating to adjustments that covers all
instruments cleared and settled by OCC rather than separate By-Law
provisions specific to a particular type of contract, will improve the
readability of OCC's adjustment rules and facilitate greater
understanding of OCC's Rules and adjustment practices. OCC believes
that greater understanding of OCC's Rules in turn helps promote the
prompt and accurate clearance settlement of securities and derivatives
transactions where an adjustment may be necessary by reducing potential
uncertainty and questions that may arise among Clearing Members and
holders and writers (or buyers and sellers) of options (or derivatives)
contracts. OCC also believes that greater understanding of its Rules
and adjustment practices helps removes impediments to and helps perfect
the mechanism of a national market system for the prompt and accurate
settlement of securities transactions and, in general, promotes the
protection of investors and the public interest by similarly reducing
uncertainty as to when and how an adjustment made by OCC might occur
and the potential
[[Page 47485]]
impact on a market participant's options or futures contract.
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78q-1.
\33\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
While the majority of the proposed changes to OCC's By-Laws and
Rules would simply relocate existing By-Law provisions related to
adjustments into Chapter XXVIII of OCC's Rules without substantive
changes, OCC also proposes certain new provisions related to
adjustments, including with respect to: (i) distributions ``in lieu
of'' an ordinary dividend or distribution; (ii) cash in lieu of
fractional entitlements; (iii) election mergers or similar events; (iv)
certain other events not ordinarily resulting in an adjustment (e.g.,
for non-transferable property); (v) cash value determinations (to
provide that OCC may use its authority to determine the cash value of a
distribution when the final determination of a corporate action may not
be determined for a long period of time); (vi) foreign tax withholding;
and (vii) to specify that adjustments are made on a per contract basis.
Each of these proposed new provisions is designed to provide greater
specificity and clarity with respect to OCC's adjustment practices than
are currently set forth in OCC's By-Laws and Rules. These proposed new
provisions are also already within the scope of OCC's existing
adjustment authority, which provides OCC with broad discretion to
adjust the terms of cleared contract to reflect particular events in
respect of an underlying interest, taking into account such factors as
(among other things) the fairness to holders and writers (or purchasers
and sellers) of the affected contracts, the maintenance of a fair and
orderly market in the affected contracts, and consistency of
interpretation and practice. As such, the proposed new provisions are
generally utilized by OCC, and the additional language to the Rules
will promote additional transparency and clarity to the industry. OCC
believes that these proposed new provisions are consistent with Section
17A(b)(3)(F) because they will facilitate greater understanding of
OCC's adjustment practices, which in turn promotes the prompt and
accurate clearance and settlement of securities and derivatives
transactions, helps support the mechanism of a national systems for the
prompt and accurate clearance and settlement of securities transactions
and generally promotes the protection of investors and the public
interest by reducing uncertainty regarding when and how a contract
adjustment will be made.\34\
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\34\ For example, because OCC's By-Laws and Rules do not
currently explicitly address whether OCC would make an adjustment to
reflect a distribution of non-transferable property, market
participants could be uncertain as to whether such a distribution
might result in an adjustment that would affect their option or
derivative contract. By adding proposed Rule 2803(c)(iv) to make
clear that such a distribution will not ordinarily result in an
adjustment, such uncertainty would be reduced.
---------------------------------------------------------------------------
OCC also believes that the proposed rule changes are consistent
with Rule 17ad-22(e)(1), which requires that a covered clearing
agency's policies and procedures provide for a well-founded, clear,
transparent, and enforceable legal basis for each aspect of its
activities in all relevant jurisdictions.\35\ Specifically, OCC
believes that by improving the readability of its Rules governing
contract adjustments through the consolidation of adjustment provisions
into a single Rule chapter and by providing additional clarity with
respect to OCC's adjustment practices in a variety of different
situations, OCC policies and procedures regarding contract adjustments
will be more clear, transparent and enforceable.\36\
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\35\ 17 CFR 240.17ad-22(e)(1).
\36\ For example, if a market participant were to believe that a
distribution of non-transferable property should result in an
adjustment, such market participant might try to object to OCC not
making an adjustment in respect of such a distribution. By
specifying in proposed Rule 2803(c)(iv) that OCC ordinarily would
not make an adjustment for such a distribution, there would be
greater clarity, consistency, and understanding that this is OCC's
practice and reduce any uncertainty about the legal enforceability
of OCC's determination to not make an adjustment in such case.
---------------------------------------------------------------------------
In addition, the proposed rule change is not inconsistent with the
existing By-Laws and Rules of OCC, including any rules proposed to be
amended.
(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \37\ requires that the rules of a
clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. OCC does not
believe that the proposed rule change would impose any burden on
competition. As noted, the primary purpose of the proposed rule change
is to consolidate and relocate OCC's current By-Law provisions related
to adjustments into a single Rule chapter (Chapter XXVIII) and to set
forth certain additional provisions that provide greater specificity
regarding OCC's adjustment practices. Any adjustment made by OCC
pursuant to the Rules set forth in proposed Chapter XXVIII would apply
equally to all holders and writers (or buyers and sellers in the case
of derivatives contracts). As a result, OCC does not believe that the
proposed rule change would result in any competitive burden on market
participants. OCC notes that much of the proposed rule changes would
simply relocate existing adjustment provisions from OCC's By-Laws into
Chapter XXVIII of the Rules without substantive changes, so there would
be no change with respect to OCC's adjustments practices with respect
to such provisions that could result in a competitive burden. The newly
proposed provisions are intended to provide greater clarity regarding
OCC's existing adjustment practices which may not be expressly
described in OCC's current adjustment provisions. Such new provisions
are within OCC's existing, broad adjustment authority and would, in any
case, apply equally to all market participants such that they should
not give rise to a competitive burden on any one market participant
relative to another. For the foregoing reasons, OCC believes the
proposed rule change would not impact or impose a burden on competition
not necessary or appropriate in furtherance of the purposes of the Act.
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\37\ 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 were not and are not intended to be solicited with
respect to the proposed rule change; however, OCC did receive an
unsolicited letter from a Clearing Member regarding the methodology
used to determine cash in lieu of fractional shares.\38\ The letter
requested that OCC adopt and publish a uniform policy for a transparent
and deterministic method of determining a cash component of an adjusted
deliverable for cash in lieu of fractional shares that would also help
limit the time required to determine a cash-in-lieu component. The
letter encouraged OCC to consider a change to its current practice and
suggested instead that OCC could use the closing price from the first
day of trading after a contract adjustment is effective. OCC considered
this approach and brought the suggestion to the OCC Operations
Roundtable.\39\ The OCC Operations Roundtable overwhelmingly agreed
that the current process should not change, stating that there is
credibility to the process that uses the cash-in-lieu price as provided
by the central securities depository clearing agency.\40\ OCC also
[[Page 47486]]
believes it appropriate to continue to use its current practice of
using the cash-in-lieu price used to determine cash received by
shareholders of the underlying security in lieu of fractional shares as
it reflects what is received by shareholders of the underlying security
as a result of the corporate action that resulted in the options
adjustment. Utilizing a different method would be arbitrary and stray
from the terms of the underlying corporate action.
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\38\ OCC has filed the letter as confidential Exhibit 3B to File
No. SR-OCC-2025-017.
\39\ The Operations Roundtable consists of operations staff of a
cross-section of OCC's Clearing Members and staff of the options
exchanges.
\40\ OCC has filed notes from Operations Roundtable meetings
held on November 2, 2023 and January 30, 2024 as confidential
Exhibit 3C to File No. SR-OCC-2025-017.
---------------------------------------------------------------------------
To the Clearing Member's request for additional transparency, OCC
believes that the addition of provisions to the Rules explaining the
manner in which cash in lieu of fractional shares is determined will
provide greater clarity, consistency, and transparency for the
industry.
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 such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
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
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#a5d7d0c9c088c6cac8c8c0cbd1d6e5d6c0c68bc2cad3"><span class="__cf_email__" data-cfemail="2d5f584148004e4240404843595e6d5e484e034a425b">[email protected]</span></a>. Please include
file number SR-OCC-2025-017 on the subject line.
Paper Comments
<bullet> 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-2025-017. 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 (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of such filing will be available for inspection and
copying at the principal office of OCC and on OCC's website at <a href="https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules">https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules</a>.
Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to file number SR-OCC-2025-017 and
should be submitted on or before October 22, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
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\41\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-19099 Filed 9-30-25; 8:45 am]
BILLING CODE 8011-01-P
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