SECURITIES AND EXCHANGE COMMISSION (Release No. 34-58349; File No. SR-OCC-2008-15 Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Binary Options August 12, 2008 Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934, 1 notice is hereby given that on July 23, 2008, The Options Clearing Corporation (“OCC”) filed with the Securities and Exchange Commission the proposed rule change as described in Items I, II and III below, which Items have been prepared primarily by OCC. OCC filed the proposed rule change pursuant to Section 19(b)(3)(A)(i) of the Act 2 and 19b-4(f)(1) thereunder 3 so that the proposal was effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change The proposed rule change would clarify how a listing exchange may define the exercise settlement amount for binary options and that escrow deposits are not permitted in lieu of margin with respect to binary options on any underlying interest.
2 II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, OCC included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. OCC has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
The purpose of the proposed rule change is to clarify, in two respects, the application of OCC’s By-Laws and Rules to certain binary options. OCC currently clears the following types of binary options: credit default options, credit default basket options, and “other binary options.” 4 “Other binary options” include “fixed return options” traded on the American Stock Exchange LLC (“Amex”) and binary options on broad-based indexes traded on the Chicago Board Options Exchange, Incorporated (“CBOE”). “Other binary options” are European-style options that will be automatically exercised if the value of the underlying interest at expiration when measured against its exercise price is determined to meet the criteria for automatic exercise as specified in the rules of the listing exchange. All binary options, when automatically exercised, have a fixed exercise settlement amount that does not vary depending upon how much
In June 2007 and August 2007, the Commission approved changes to OCC’s Rules designed to accommodate credit default options and credit default basket options, respectively. Securities Exchange Act Release Nos. 55872 (June 6, 2007), 72 FR 32693 (June 13, 2007) [SR-OCC-200701] and 56288 (Aug. 20, 2007), 72 FR 49034 (Aug. 27, 2007) [SR-OCC-2007-06]. In November 2007, the Commission approved additional changes to OCC’s Rules designed to accommodate binary options, including fixed return options and binary options on broad-based indexes. Securities Exchange Act Release No. 56875 (Nov. 30, 2007), 72 FR 69274 (Dec.7, 2007) [SR-OCC-2007-08].
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3 the option is in the money. The present rule filing addresses two unrelated points concerning “other binary options.” The first issue addressed in this filing relates to the description of the fixed exercise settlement amount. CBOE’s proposed rules for binary options on broad-based indexes define the fixed exercise settlement amount as the product of the multiplier for that option and another fixed value, both established by CBOE at or before the opening of trading in a series of
