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February 21, 2013

Cleared OTC Options Are "Covered Securities" Under Section 18(b)(1)(C)

The staff of the Division of Corporation Finance has informed the Options Clearing Corporation (OCC) that cleared OTC Options are "covered securities" under Securities Act Section 18(b)(1)(C). The staff concurred in OCC's opinion that over-the-counter options cleared by OCC pursuant to its By-Laws and Rules (Cleared OTC Options) are equal in seniority to OCC-issued standardized options that are listed on a national securities exchange named in Securities Act Section 18(b)(1)(A) or in Rule 146(b) (Listed Options).

OCC, a registered clearing agency and the world's largest equity derivatives clearing organization, requested interpretive guidance regarding Section 18(b)(1)(C) as applied to Cleared OTC Options. Previous guidance had confirmed that "Other Options" would be considered "covered securities" under Section 18(b)(I)(C), but "Other Options" was expressly limited to options listed on a national securities exchange that is not an Exempt Market and thus would not extend to Cleared OTC Options, which are entered into bilaterally and submitted to OCC for clearance through one or more providers of trade affirmation services. OCC stated that its initial Cleared OTC Options will consist of equity index options on the S&P 500 Index.

In its letter, OCC stated that it believes that all Cleared OTC Options are covered securities under the plain language of Section 18(b)(1)(C). Section 18(b)(1)(C) applies to a security of "the same issuer that is equal in seniority ... to a security" that is listed on an exempt market. OCC stated that every Cleared OTC Option meets this definition because, among other factors, the options are securities of the same issuer, listed on named exchanges, and equal in seniority to the Listed Options. The Cleared OTC Options are "equal in seniority" to Listed Options, OCC argued, because all options cleared by OCC have equal claims against OCC's assets and equal protection under a "backup system" that assures OCC's ability to perform its obligations under the options that it issues. OCC also submitted an opinion letter to the Commission staff in support of its analysis, which is attached to the incoming letter.

Attorneys: (Sidley Austin LLP)

Companies: The Options Clearing Corporation

RegulatoryActivity: Derivatives

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