SEC Division of Corporation Finance no-action letter: The Options Clearing Corporation

Securities Act of 1933 Section 18

February 1, 2012

Response of the Office of Chief Counsel Division of Corporation Finance

Re:

The Options Clearing Corporation Incoming letter dated January 25, 2012

You have requested that we provide interpretive guidance regarding Section 18(b)(1)(C) of the Securities Act of 1933. Specifically, you have asked for confirmation that we concur in your view that Options Clearing Corporation-issued standardized options (“OCC standardized options”) that are listed on a national securities exchange that is not named in Section 18(b)(1)(A) of the Securities Act or in Rule 146(b) under the Securities Act (“Other Options”) are equal in seniority to OCC standardized options that are listed on a national securities exchange that is named in Section 18(b)(1)(A) or in Rule 146(b) (“Listed Options”), and would therefore be “covered securities” under the “equal in seniority” language of Section 18(b)(1)(C) of the Securities Act.

Based on the facts presented and in reliance on the supporting opinion of counsel that the Other Options would have equal priority with Listed Options with respect to the distribution of assets and payment of amounts due to option holders, the Division is of the view that Other Options are equal in seniority to Listed Options, and therefore are “covered securities” under Section 18(b)(1)(C) of the Securities Act.

This interpretive response is limited to OCC standardized options that are listed on a national securities exchange. In addition, this position is based on the representations made to the Division in your letter and on the supporting opinion of counsel. Different facts or conditions might require different conclusions.

Sincerely,

Thomas J. Kim Chief Counsel and Associate Director

Incoming Letter:

The Incoming Letter is in Acrobat format.

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SIDLEY AUSTIN LLP BEIJING NEW YORK
ONE SOUTH DEARBORN STREET BRUSSELS PALO ALTO SIDELEYI CHICAGO, IL 60603 CHICAGO SAN FRANCISCO (312) 853 7000 DALLAS SHANGHAI (312) 853 7036 FAX FRANKFURT SINGAPORE GENEVA SYDNEY HONG KONG TOKYO LONDON WASHINGTON, D.C. LOS ANGELES jmcdanlel(!sldley.com (312) 853 2665 FOUNDED 1866 January 25, 2012

Submitted via Mail and E-mail
Thomas 1. Kim
Chief Counsel and Associate Director
Division of Corporation Finance
Richard Holley III
Assistant Director
Division of
Trading and Markets
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549-1090
Re: Request for Interpretive Guidance on Section 18(b)(1)(C) of the Securities Act of 1933 (the "Securities Act") as it Relates to Exchange-Traded Options. Gentlemen:
Weare wrting on behalf of our client, The Options Clearng Corporation ("OCC"), to request that the Commssion staff provide interpretive guidance regarding Section 18(b)(1)(C) of the Securties Act of 1933 (the "Securities Act"). Specifically, we would appreciate

confirmation that the Commission staff concurs in our view that OCC-issued "stadardized options" (as defined in Rule 9b-1 under the Securities Exchange Act of 1934 (the "Exchange Act")) that are listed on a national securities exchange that is not named in Section 18(b)(1)(A) i ("Other Options") are "equal in seniority" to of the Securties Act or in Rule 146(b)

standardized options that are listed on national securities exchanges that are named in Section 18(b)(1)(A) or in Rule 146(b) ("Listed Options") and would therefore be "covered securities" under the "equal in seniority" language of Section l8(b)(1)(C) for puroses of federal

preemption of state securities registration requirements under Section 18( a) of the Securties Act. Subparagraph (C) applies to "a security of the same issuer that is equal in seniority or that is a i 17 CFR §230.l46(b), promulgated under Section 18(b)(l)(B) of the Securties Act.

senior securty to a securty" listed or authorized for listing on national securties exchanges

specified in the statute or in a Commission rule promulgated under Section 18(b)(1).2
I. Backf!round
OCC is a clearing agency registered under Section 17 A of the Securties Exchange Act of 1934 (the "Exchange Act"), and is the world's largest derivatives clearing organzation. OCC clears all transactions in listed options effected on any of the U.S. national securties exchanges that trade options and is deemed to be the "issuer" of such options for securties law puroses. Historically, OCC has issued and cleared only classes of options that are listed on at least one of the markets named under Section 18(b)(1)(A) of the Securties Act (the "Named Exchanges") or in Rule 146(b) (referred to collectively as "Exempt Markets"). Therefore, the options so cleared by OCC are "covered securities" under these provisions. However, certain options exchanges, including the C2 Options Exchange, are not named either in Section 18(b)(1)(A) or in Rule 1 46(b ). When such an exchange proposes to trade options that are not identical to options traded on one of the Exempt Markets, the question arises whether such options are neverteless "covered securties" under Section 18(b)(1). For the reasons stated below, OCC believes that all Listed Options and Other Options that it issues and clears are "covered securties." We are requesting an interpretation from the Commission staff that the staf concurs that Oter Options are "covered securities" pursuant to Section 18(b)(1)(C).
II. Statutory Interpretation of Section 18 of the Securities Act

We believe that all exchange-traded options are covered securities under the plai statutory language of Section 18(b)(1 )(C) of the Securties Act. In 1996, Congress adopted the National Securities Markets Improvement Act ("NSMI"i because "the system of dual Federal and state securties regulation (had) resulted in a degree of duplicative and unecessar regulation,,,4 which raised the cost of c~ital to American issuers of securties without providing commensurate protection. to investors. NSMIA amended Section 18 to (i) provide for the exclusive federal regulation of securties listèd on one of the Named Exchanges and (ii) provide the Commission with discretionar authority to extend similar preemptive treatment to securities listed on another national securities exchange (or tiers or segments thereof) with listing stadards substantially similar to those of the Named Exchanges.6 Specifically, NSMIA modified Section 18 to preclude any state from requiring registration or quaification of "covered securties," defined under Section 18(b)(1) to include a securty that is:
2 Securities Act, § 18(b)(l)(C), 15 V.S.C. § 77r (201 1).

3 National Securities Markets Improvement Act of 1996, Pub. L. 104-290,110 Stat. 3416 (October 11,1996). 4 H.R. Conf. Rep. No. 864, 104th Cong., 2d Sess. (1996). 51d. 6 Securities Act § 18(a), 15 V.S.C. § 77r (2011).

(A) Listed, or authorized for listig, on the New York Stock Exchange or the American Stock Exchange, or listed, or authorized for listing, on the National Market System of the Nasdaq Stock Markee (or any successor to such entities); (B) Listed, or authorized for listing, ona national securties exchange (or tier or segment thereof) that has listing stadards that the Commssion determines by .rule (on its own initiative or on the basis of a petition) are substatially similar to the listing standards applicable to securties described in subparagraph (A); or (C) a securty of the same issuer that is equal in seniority or that is a senior securty to a security described in par (A) or (B) above.s. Pursuat to a series of rule makngs with respect to Rule 146,9 the Commission exercised its authority to designate as covered securties for the puroses of Section 18, securties listed on the following Exempt Markets: Tier I of the NYSE Arca, Inc., Tier I of NASDAQ OMX PHLX

LLC, the CBOE, options listed on the International Securities Exchange, LLC, and the Nasdaq Capital Market. The preemptive exemption of Section 18 applies to securties listed or Exempt Market and is not limited to transactions occurng on those markets. Thus, if an option is a securty listed on an Exempt Market, the option will be a covered securty when the same option is sold in a transaction that taes place in another market. authorized for listing on the

When anOCC-issued option is an Other Option that is not deemed to be the "same option" as one listed on an Exempt Market, Section 18(b)(1)(C) should neverteless be

applicable. We believe that all Listed Options and Other Options should be deemed to be plain language of Section l8(b)(1 )(C), which applies to a securty of "the same issuer that is equa in seniority . . . to a securty" that is listed on an Exempt Market. "covered securties" under the

The analysis is straightforward. Every exchange-traded option cleared by OCC is: (i) a securty of the same issuer (i.e., acC); (ii) all OCC-issued options are "equal in seniority," (iii) most standardized options are listed on Exempt Markets, therefore (iv) any OCC-issued option not listed on an Exempt Market is neverteless a "covered securty" under Section 18(b)(1 )(C) because it is an option of the same issuer that is equal in seniority. Although the term "equal in seniority" is not defined in the Securities Act, the term "senior security" is defined in Section 18(d)(4) thereof to mean "any bond, debenture, note, or similar obligation or instrent constituting a securty and evidencing indebtedness, and any stock of a class having priority over any other class as to distrbution of assets or payment of dividends." Under ths defition, no class or series of OCC-issued options could be deemed to be a "senior securty" to any other class or series of such options. More generally, securties are understood to be equal in seniority to one another when holders of those securties have equa priority agaist. the assets of the issuer in the distribution of assets or payment of dividends. Thus, a. preferred stock or a debt securty is said to be senior to common stock whereas two 7 The Nasdaq Stock Market has since become a national securtie.s exchange. 8 Securities Act § 18(b)(I), 15 U.S~C. § 77r (201 1).

917 CFR
230. 146(b).

classes of common stock or two issues of debt securties may be equal in seniority to one another if, by their terms, neither has such a priority over the other. All Listed Options and Oter Options issued by OCC are "equa in seniority" because all options cleared by OCC have equal claims against OCC's assets and equa protection under OCC's "backup system" that assures acc's abilty to perform its obligations under the options that it issues. The "backup system"

includes financial requirements for clearing members that make a clearng member default unikely; oce s margin requiements designed to fuly collateralize a defaulting clearg member's potential obligations including risk margin to cover anticipated market movements; clearing fud contrbutions of all clearing members, which may be applied on a pro rata basis to losses incured by OCC if a defaulting clearg member's own collateral deposits prove to be insuffcient; and the abilty to assess. each clearng member up to an additional 100% of its existing clearng fud contrbution if needed. No class or series of options has a priority over any other class or series' with respect to the resources available to meet any distrbution or payment owed by oec with respect to such options. We therefore believe that it is clearly the case that all Other Options issued by OCC are equal in seniority to all Listed Options issued by oec.IO , .
III. Historical Treatment of Options
In addition to the statutory language of Section 18, there is a long history suggesting that all OCC-issued Other Options should be considered to be equal in seniority to all.OCC-issued Listed Options. Section 18 of the Securties Act appears to have been modeled on, and its provisions are similar to, the exchange-listed exemption in the Uniform Securties Act.l1 the 10 We should also point out that we do not interpret the Section l8(b)(l) preemptive exemption as applied to

standardized options to car with it an exemption for an underlying securty that might be deemed to be offered and

or sold as a result of a transaction in, or exercise of, the overlying option. OCC generally requires that securities underlying physically settled options must be "covered securities" in their own right at the time the option is purchased or sold. This letter therefore requests an interpretation only with respect to the status of Other Options and not with respect to the status of any underlying security. 11 The proposition applies to both of the 1956 and the 2002 versions of the Uniform Securties Act. Section 402(a)(8), the exchange-listed exemption from the Uniform Securities Act of 1956, provides:
any security listed or approved for listing upon notice of issuance on the New York Stock Exchange, the American Stock Exchange, or the Midwest Stock Exchange r, or listed on the (insert names of appropriate regional stock exchanges)); any other security of the same issuer which is of senior or substatially equal ran; any security called for by subscription rights or warants so listed or approved; or any waiant or right to purchase or subscribe to any of the foregoing. The version ofthe exchange-listed exemption in the Uniform Securities Act of 2002 is as follows:
a federal covered security specified in Section 18(b)(l) of the Securities Act of 1933 (which by its terms includes the "equal in seniority" provision L or by rule adopted under that provision or a security lised or approved for listing on another securities market specified by rule under this (Act); a put or a call option contract; a warant; a subscription right on or with respect to such securities; or an option or similar derivative securty on a securty or an index of securties or foreign curencies issued by a clearg agency registered under the Securities Exchange Act of 1934 and listed or designated for trding on a national. securties exchange, a facilty of a national securties exchange, or a facilty of a national securities

association registered under the Securties Exchange Act of 1934 or an offer or sale, of the underlying securty in connection with the offer, sale, or exercise of an option or other security that was exempt when

model statute designed to guide each state in drafing its securties law. The Uniform Securties Act has been in existence for over 80 years. For many years, before the enactment of NSMIA and the adoption of the preemptive exemption under Section 18, OCC relied on exchange listed exemptions, including language parallel to the "equal in seniority" provisions in Section

18(b )(1 )(C), in many states. (The correspondig provision under the Uniform Securities Act of 1956 refers to securties of "equal ran," which we interpret as equivalent to "equal in the "equa ran" analysis to standardized options issued by OCC.12 The historical treatment of options under state law therefore supports our view that the "equa in seniority" provisions of Section seniority.") A number of states issued interpretations recognzing the applicabilty of

l8(b)(1)(C) are applicable to Oter Options.
iv. Additional Reasons to Issue the Requested Interpretation

We also note that C2 is eligible to be designated as an Exempt Market under Section l8(b)(1 )(B) because it has listing standards that are "substatially similar" to the listing stadards of the Named Exchanges identified in Section 18(b)(1)(A). (Indeed, all of the national securties exchanges that list standardized options have substatially similar listing stadards for such

options, and. these listing stadards are required to be fied with and approved by the Commission.) C2 has requested that the Commssion amend Rule 146(b) to add C2 to the list of Exempt Markets. Until the Commission has had sufcient time to consider such an amendment, however, an interpretation under Section 18(b )(1 )(C) would allow new exchanges such as C2 to compete on a more level playing field with the existing options exchanges while their requests for designation are pending.
V. Conclusion

For the above reasons, we respectfuly request that the Commission staf confirm our interpretation that all Other Options issued by OCC, to the extent not listed on Exempt Markets, are neverteless "covered securities" pursuant to Section l8(b)(1)(C). Such an interpretation would be consistent with the plain lang~age of the statute and the historical treatment of options under similar provisions of state law. .

the option or other securty was written or issued; or an option or a derivative security designated by the Securities and Exchange Commission under Section 9(b) of the Securities Exchange Act of 1934. While the Uniform Securties Act of 2002, if adopted in uniform form, would appear to exempt all OCC-issued standardized options and render reliance on Section 18(b)(l) unecessar, it has thus far been adopted in only a

minority of states.

12 Based upon a review of files in our possession, jurisdictions in which the securities administrator has

acknowledged the applicabilty of the "equal ra" exemption to classes of OCC-issued options include the

following: Alabama, Arkansas, Delaware, Kentucky, Montana, Nebraska, New Hampshire, New Jersey, Oklahoma, Oregon, Puerto Rico, Tennessee, Virginia, West Virginia and Wyoming.

If you have any questions regarding this request, please do not hesitate to contact the undersigned at 312-853-2665 or James Brown at The Options Clearng Corporation, One Nort Wacker Drive, Suite 500, Chicago, IL 60606 or at 312-322-6855. V~tr7/Y1&~ James R. McDanel JRMds Cc:
Wiliam H. Navin, OCC
Jean M. Cawley, OCC

SIDLEY AUSTIN LLP BEIJING NEW YORK
ONE SOUTH DEARBORN STREET BRUSSELS PALO ALTO SIDi:ËVI CtllCAGO,lL 603 CHICAGO SAN FRANCISCO (312) 853 700 DALlS StNGHAI (312) 853 7036 FAX FRAKFURT SINGAORE GENEVA SYDNE HONG KONG TOKYO LONDON WASHINGTON, D.C, LOS ANGELES FOUNDED 1868 Deeember 16,2011 Submitted vi Mail and E-mail

Securties and Exchage Commission
100 F Street, N.E.
Washigton, DC 20549-1090

Attention: Thomas J. Ki, Chief Counsel and Asociate Dirctor Re: Opinion in Support of Request for Interpretation of Seetion 18(b)(1)(C) UDder the Seeurities Act of 1933 (tbe "Seeurities Act") as it Relates to Excbange- Traded

Options.
Ladies an Getlemen:
We ar wrting on behaf of our client, The Options Cleag Corporation, a Delaware

corpration ("OCC"), to respond to the request of the Commission sta tht acc provide an opinion of counl as to cert matters relating to the captioned reques. By lett of even date,

a copy of which is atthed hereto, we ar submittng a request on behaf of OCC for an

interpretation regarding Section 18(b)(1)(C) of the Securties Act. Specifically, we ar asking for confiation tht the Commssion sta concur in our view tht acC-issued "stadadized

options" (as defined in Rule 9b- 1 under the Securties Exchange Act of 1934 (the "Exchange Act'')) that ar listed on a nationa securties exchage tht is not naed in Section 18(b)(1)(A) of the Securties Act or in Rule 1 46(b) i ("Other Options") are "equa in seniority" to stadadize options tht ar listed on nationa securties exchanges that ar naed in Section

18(b)(1)(A) or in Rule 146(b) ("Listed Options") and would therefore be "covere securties" under Section 18(b)(1)(C) for puroses of federa preemption of state securties registration requirements under Section 18(a) of the Securties Act. Subparaph (C) applies to "a securty of the same issuer that is equa in seniority or that is a senior seurty to a securty" listed or authorized for listing on nationa securties exchages specified in the statute or in a Commssion rue promulgated under Section 18(b )(1).2 i i 7 CFR §230.l46(), promulgated under Secon 18(b XI)() of the Securties Act. i Securties Act, § 18(bXIXC), 15 V.S.C. § 77r (201 I).

Although "equal in seonty" is not defined in the Securties Act, "senior seurty" is defied in Section 18(d)(4) therof to mean "any bond, debentue, note, or similar obligation or intrent constuting a securty and evidencing indebtedness, and any stok of a class havig

pnonty over any other clas as to distbution of asets or payment of dividends." Ou view is of the same issuer would be "equal in seniority" to one another provided that no such seurty would have priority over any othr as to distrbution of assets and payment that differnt securties

of amounts due to the holders of such securties under the tes of those securties. To suprt

the issuace of the reuested interetation, the Commssion staha reuested tht OCC fush an opinion of counsel th Oter Options would have equa pnority with List Options with respect to distbution of assets and payment of amounts due to option holders. For the reasns stated below, it is our opinon tht ths would be the case.
I. ScoDe of ODiiion

Our opinion applies to all Listd Options and Oter Options that ar or may in the futu be issue puruat to the By-Laws and Rules of OCC as they are now in effect. An OCC-issued

option contract is an uncertficated securty the terms of which ar contaed in or determined in acordance with the By-Laws and Rules of OCC; and ther is no separte wrting that constitutes an OCC-issued option contract. We have examed: OCC's Certficate of Incorption; the By-Laws and Rules of OCC; the form of agreement by which OCC Clearng

Membe agèe to be bound by the By-Laws and Rules of the Corpration; the Restate Paricipant Exchage Agreement among OCC and the national securties exchages th list options cleard by OCC; and such other documents as we have deemed necessar for pmpses of ths opinon. Ou opinon is limited to the federa laws of the United Stas (including the Securties Act and the Exchange Act). the Genera Corporaton Law of the State of Delaware (OCC's domicile), and the laws of the State of Ilinois, which govern the contrtual relations between DCC and its Clearg Members as stated in Arcle ix, Secon 10 of such By-Laws.
II. Nature of OCC's Obli2ations to ODtion Holders Pursuant to OCC's Bv Laws and Rules
Arcle VI, Section 5 ofOCC's By-Laws ("Obligations of the Corporation") provides, "Upon the acceptace of an Exchage tranaction by the Corpration (i.e., DCq. the nghts of the pares to such trtion shall be solely agast the Corpration and th Corpration shall be obligate to

the pares in acordace with the provisions of the By-Laws and the Rules.',J An "Exchage tranaction" is defied in Arcle i, Section i of the By-Laws in respect of an Exchage othr than an internona market to mea "a traction on or thugh the facilties of an Exchage for the purchae. wrtig or sae of a cleard contrt or for the closing out of a long or short position in a cleaed contrt." An "Exchage" includes any national seurties exchange or

nationa securties association that ha quaified for paricipation in DeC, some of which ar naed in Secion 18(b)(1)(A) and othrs of which are not. A "clear contrt," defined in

3 OCC's obligations in re of options ru only to the Cleang Membe that is or who ac as the agent of, the holder of the option. Cusomer, in tu, look to the brer carng their account for perfonnce. (1e broker must either be an OCC Cleang Member or have argements to clear though an OCC Cleang Member.) Accordingly, references in this opinion to OCC's obligations to option holders should be interprete to mean OCC's obligation to the Cleaing Member who either is, or who represets, the option holder.

Aricle i, Section 1, is any derivative contract cleared by OCC4 and expressly includes a "cleared securty," whch in tu is defied as an '''option contrct' (other than a futues option or commodity option), a securty futue or a BOUN."s Arcle VI, Section 6 of the By-Laws ("Issuance of Cleaed Contrts") sttes, in

peent par:
The Corpraon shal be the issuer of all clear contrs purhasd in Exchange

trtions. . .. Any such cleared contrct shall ca the rights and obligations set fort

in the By-Laws and Rules applicable to the parcular cleaed contrt and shall contain

the varable tenns6 as ageed upon by the Puhasing Clearng Member and Sellng Cleag Member (or by Exchage Members authorized to give up the names of such Clearng Members) as shown on the trde infonnation filed by them with the Exchage on which such opeing purhas transation occured and which is trmitt to the

Corporation in a report of matched tres submitt by such Exchage. . .. Unless and until a cleaed contrt is issued as provided by the By-Laws, the Corpration shall have

no obligation in respect thereof.
An "Interetation and Policy" following Section 6 states fuer:

The Corpraion is substtute thugh novation as the buyer to ever seller and the seller to every buyer and is the obligor to the extent set fort in the Rules with respect to

obligations owig to persons havig positions in cleaed contrts. With resct to

cleared seurties, oee is deemed to be the "isser" as tht te is dermed in Section

2(a)(4) of the Securties Act of 1933 and Secton 3(a)(8) of the Securties Exchage Act of 1934. OCC serves the sae fuctiona role with respect to cleaed contrts tht are governed by the Commodity Exchange Act, and the terms "issuer," "issuace," etc. are therefore use to refer to OCC's role with respct to all clea contract. Under its By-Laws and Rules, oec's obligations in respect of an option contrct tht it isses consist of (i) peormance of the option in accordance with its tes if and when the option is exercise by a Clearg Membe, and (ii) payment of the purha price or "premiwn" to the Clearing Member that is, or represents, the holder of the option if and when the option is sold in an Exchage tranction. Perfonnance of an option upon exercise consists either of: (i) in the cae of a physicaly-setted option, delivery of the underlying securty against payment of the

4 Arcle I, Secon l.C(lO) ofOCC's By-Laws provides: "The term "clear contr mean a cleared secun or

a commodity fu, futu options or commodity optin that is cleared by the Corpration." 5 A "BOUND" is an opûon product provided for in OCC's By-Laws and Rules, but not curtly trded.

6 "Varable tenns" ar the busines tens of the option fixed by the national securties exchanges on which such

options are listed or, in certin cass, the paries to such options and not pre"bd by the ace's By-Laws and Rules. These include the identificaon of the security that is the subjec of th option, the durtion of the option, a specification of Amenca or Europe exercise style, and the strke pnce.

exercise price7; or (ii) in the case of a cash-settled option such as an index option, to par the holder the "exercise settement amount" as defined for the pacular kind of option contr.

OCC's obligatons under physically-settled stock option contr ar set fort in Arcle

VI, Section 9 of the By-Laws. Secton 9(a) governs cal options:
Subject to the provisions of the By-Laws and Rules of the Corporation, the holder of a single Amerca-stle call option contrt has the right, begi at the tie such option contrt is issued puruat to ths Arcle VI and expirg at the expiron tie therefor

on the Satuday imedately followig the thrd Friday of the expiration month of such option contrt, to purha frm the Corpration at the aggate exerise price the number of unts of the underlyig seurty represente by such option contract. . . . Subject to the provisions of the By-Laws and Rules of the Corpration, the holder of a single Europe-stle call option contrct has the right on (and only on) the expiration da, expirig at the expiration tie therfor on suh date, to purchae frm the

Corpraon at the aggegate exercise price the numbe of unts of the underlying seurty reresete by such opton contrct. . . .
Section 9(b) correspondingly governs put options:
Subject to the provisions of the By-Laws and Rules of the Corpration, the holder of a single America-stle put option contrt has the right, begig at the tie such option contrct is issued puruant to ths Arcle VI and expirg at the expirtion time therefor on the Satday immedately follòwig the thrd Friday of the expirtion month of such option contrac to sell to the Corpraion at the aggregate exercise price the nwnber of

unts of the underlying securty reprsented by such option contrct. . .. Subject to th

prvisions of the By-Laws and Rules of the Corporation, the holder of a single European￾stle put option contrt ha the right on (and only on) the expiration date, expirg at the

expiron tie therefor on such date, to sell to the Corpration at the aggregate exercise

price the number of unts of the underlying securty represented by such option contrt. 7 OCC's obligation would be to deliver the undelying seurty or other underlying interest to th holder of a call option agnst payment of the exercise pnce and to pay the exercise pnce to the holder of a put option agast delivery of the unerlying i~terest. 8 "Eercise settement amunt" is defied in Arcle xiv, Section I in respect of

bina options and rage option.

9 OCC satfies it obligaons to deliver or make payment for underlyng stocks purant to Chapter ix of its Rules. Delivery and payment ar effecd though the facilities of th National Securties Cleang Corpraon, or a similar "corrspondnt cleag corpration" within the meaing of the OCC Rules. Puuat to Rule 901(c), OCC's

obligations ar deemed satisfied once settement obligations ar reported to and not rejected by the corrpondent clearg corpraon prior to the tie when it bemes unconditionally obligated. in accordce with its rules, to effec settement in respect thereof or to close out the securties contrct aring therefim, other than obligaions OCC may have to its corrspondent cleag corpration. However, Chpter IX al provides proedurs thugh

which OCC may dir delivery aga payment on a "broker-ta-broker" basis, and, if the assigned option wmer fals to delive (in th ca of a cal) or receive (in the cas of a put) seties to or from th exerising option holder, Rules 910 and 911 provide buy-in an sell-out prours, respctively, and obligate OCC in effect to make

the exercising option holder whole for any loss on such buy-in or sell-out. OCC's obligations under these rules are

The "General Rights and Obligatons of Holders and Writers" of other kinds of options are set fort in the parcular Arcle of the By-Laws applicable to tht paicular kid of options.

For example,
Arcle XVI of the By-Laws ("Index Options and Oter Cas-Setted Options") provides in Secton 2(a) thereof:
Subjec to the provisions of the By-Laws and Rules, the holder of a single America-stle ca-setted option contract other th a delayed st option contrct has the right, beginng at the tie such option is issued pursuat to Arcle VI of the By-Laws and

expirg at th expiration time therfor on the expiraion da, to recive the exercise

settement amount frm th Corpration in accordace with Exchage Rules and the By-

Laws and Rules. Subject to the provisions of the By-Laws and Rules, the holder of a single Amercan delayed sta option contrt ha the right, beginnng afer the option's exerise price is set and expirig at the expiration time for such option on the expiron dae, to recive the exerise settement amount from the Corpration in accrdance with Exchange Rules and the By-Laws and Rules. io OCC makes settlement with respct to premiums due to seller of options thoug its daly cah settement system. Cash payments due to Clearng Members on any business day ar

netted to a single payment owig to or from acc in each acwit of eah Cleang Member, and any amounts owig to a Cleag Member in respect of option contrts are pad by OCC to the ba account designated by the Cleag Member. acc's Rule S02(b) provides:
Subject to Rule 505, at or before the settlement tie on eah business day, the Corporation shal be obligated to pay a Clearg Member (provided the Cleag Membe ha depsited all magin requi to be depsited puruat to Chpter VI) the amount of

any net daly premium and varation payments II in an account shown to be due frm the Corpration to suh Clearg Member on the Daily Position Report for such account for such day. Simlar provisions apply to payments owed in respect of exerising holders of cah-setted options. For exaple, Rule 1806(d) provides:

Subject to Rule 50S at or before the settement time on each exercise settement date for ca-setted options, the Corpration shall be obligated to pay to the Clearng Member (provided the Cleag Member ha deposited all margi requied to be deposite puruat to Chapter VI of th Rules and has deposited the ful amount of any net daily

the sae for al classe of options to which they apply, and they make no disticton based upon the exchange or

maret on which an option wa puras or the paicular clas of options involved.
10 OCC's pcrfonam obligaions for other ty of options ar defied in Aricles XLI though XVII, XX, xxii thugh XXN, and XXVI ofOCC's By-Laws.

11 "Varon payment" is defind in Arcle I, Sectn LV(3) ofOCC's By-Laws to mea, "te 'mar-ta-maret' payment or 'varaton margi' payment that a buyer or seller of futues is obligate to pay to, or entitled to collec frm, (OCe) frm tie to tie in accordae with the By-Laws an Rules applicable to futu."

premiwn due to the Corpration under Rule 502) the net settement amount in any account shown to be due frm the Corporation to such Cleang Member on the report referred to in pargraph (b) of ths Rule for such day. None of the obligatons of the Corpration to option holders describe above make any distincton whaver as to priority of clais or payment with ret to Listed Options as

opposed to Oter Options. No provision of the By-Laws or Rules provides for the subordiaton of clais with respct to Listd Options as opposed to Other Options (or vice ver), and no such

distinctions are made bas upon the identity of the exchage or maret on which an option trsation origiteS.12 Eah option contrct reresents an unecured contr claim of the Cleag Member who is, or who represents, the option holder agai OCC for performce of the option, including payments due thereunder, in accordace with its tes. ACCrdingly, it is

our opinon tht all Oter Options ar "equa in seniority" to all Listed Options in the se tht

al such optons have equa priority with resct to distbution of assets, and payment of

amounts due, to option holders. m. Resources or OCC OCC's reurce for meeting its obligations to option holders consist firs of the corronding obligations tht Clearg Members th are, or reresent, option wrters have to oce. The novation of matched tres referr to above rets in a clearg system that is always in baance-i.e., for every option contrt on which oec owes peonnce obligations th is always a "short" option contrt reresenting the obligation of an OCC Cleang Member to render the sae peormance to OCC. The fiancial stdar applicable to OCC Clearng Membe are set fort in Chapter II of OCC's Rules. In order to secu the peormance obligations of Cleag Membes, DCC reuirs, pursuat to Chapter VI of its Rules, that Cleang Members deposit margi consstg of cah, securties or lettrs of credit meeting the

requients ofOCC's Rule 604. OCC taes a securty intest in all assets (other than long

option positions that ar "segrgated" puruant to Rule 611 ) in each account.
In addition, Cleang Membes ar required to make contrbutions to OCC's Clearng Fun puruat to Arcle VIII of the By-Laws. The Clearng Fund contrbutions of a Cleang

Member are additiona securty for the obligatons of the Clearg Member to OCC, but are also available to mae goo losses resultig from the default of other Clearg Membe or the default of a ban or other cleang organzation owing obligations to OCC. For example, Section 5(a) of Aricle vni provides that, in the event of a Cleag Member's default:
(T)he Corpration shal (afer appropriate application of other fuds in the accounts of the Cleang Member) apply the Clearng Member's Clearng Fund contrbution to the dischage of such obligation, the reimburment of such loss or expense, or the making of such payment or the fuding of such performance. If the sum of all such obligations, loss or expenses, and payments exceeds the su of the amount of the Clearng

Member's tota Clearng Fund contrbution and the amount of th other fuds of the

12 Many classes of optons ar trded on more than one exchage, and all options oftl sae senes (~e., options of

the same class havig identical stre prce, expiration dat and other tenns) ar fugible and indistinguishable frm one anoter regaless ofwhetcr thy wcre puhas on the sae or different exchanges.

Clearg Member avalable to the Corpration, and if the Cleag Member fails to pay the Corporation the amount of any such deficiency on demand, the amount of the deficieny shl be paid out of the Cleag Fund and chaged on a proportonate basis

agai all other Cleag Membe' computed contrbutons as fied at the tie, but th Clearng Member who faied to pay th deficiency shall remn liable to th Corpration for the ful amount of suh deficiency unti repayment thereof by such Clearng Member. Funds drwn from the Clearg Fund to make good such losse may be applied by OCC

withut restction to any obligations that OCC may owe to thrd pares, including to the satisfaction of payment or performce obligatons tht OCC owes to holders of options. There is no limitaon or pnority estalished for the use of such fuds tht would make them less available for satisfacon of obligations arsing frm any parcular option regarless of the exchage on which any such option wa purcha. . In addition, OCC's own available capita and swplus could be used to satisfy oce's

obligations arsing from options issued by it, also without distinction as to parcular option tys or classes and without regard to the exchange on which such options ar listed or tred or to the

identity of any similaly-situate claiant.
IV. Insolvencv of OCC
Section 27 of Arcle VI of OCC's By-Laws maes provision for the nett of nghts and
obligations of Cleag Members in the unikely event of the insolvency of OCC. Section 27 provides for the nettng of rights and obligations on an account-by-account basis without regard to the identity of the contrts or classes of options in the acounts or the exchage or market on which tractions in such contr were effected. Section 27 limits the extt to which obligations of OCC to a Clearng Member may be set off agaist obligations of the Clearng Member to OCC in conformty with, among other provisions oflaw, the Commssion's cusomer protection rues applicable to broker-dealer.13 Amounts due to the Clearng Member are then nett across accunts, again subjec to legal litations. Any net amount due frm OCC to a

Cleag Membe afr ths pro is complete is then subject to the prvisions of Section 27(g)(3), which provides: "If a Clearg Membe has a positive Net Settement Amount, it ha a claim ag the Corpration for the value of that amount as of the Termtion Time and, as a genera unseur creditor of the Corpration, may file a claim for the amount therf in th

Corpration's banptcy cas." It is our opinon that no provision in Section 27 would have th effect of subordig a Clearng Member's claim agains OCC arsing frm any Oter Option

to amounts owed by OCC in respet of any Listed Option or prvide any priority to a claim basd on the exchange or market on which a trantion wa effected.

v. Conclusion

It is our opinon tht OCC's obligations with respect to Listd Options and Otr Options are gener unse binding obligations of OCCI4; and the obligatons of OCC in repect of 13 Rules 1Sc3-3, ISc2-1 and Sc-l uner the Exchange Act. 14 Ou opinion with respect to the binding obligation of the Listed Options and the Oter Options is subject to banptcy, inslvency, reorgization, mortorium, frudulent conveyance, frudulent trsfer and other similar

Oter Options ar equa in seority to the obligations of OCC in respet of Liste Options as to priority in the distbuton of asts and payment of amounts due to option holders.

Ths opinon is provided to the st of the Securties and Exchage Commssion for the purse of supportg the issuace of the interpretation referred to abve. Very try your,

~~ LLf
~idley Aus~ LLP cc: Wiliam H. Navin

Jean M. Cawley
Atthment (1) laws relatg to or affecting crditors' nghts generally and to general equitable priciples (regaless of whether

c~side~ in a proeedig in equity or at law), including concepts of commercial reonablenes, good faith and faIT dealmg and the possible unavalabilit of spific peonnance or injunctive relief.