Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change by The Options Clearing Corporation Concerning Adjustments to Cleared Contracts

<NOTICE> SECURITIES AND EXCHANGE COMMISSION <DEPDOC>[Release No. 34-104104; File No. SR-OCC-2025-017]</DEPDOC> <SUBJECT>Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change by The Options Clearing Corporation Concerning Adjustments to Cleared Contracts</SUBJECT> <DATE>September 26, 2025.</DATE> Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act” or “Act”), <SU>1</SU> <FTREF/> and Rule 19b-4 thereunder, <SU>2</SU> <FTREF/> 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. <FTNT> <SU>1</SU>  15 U.S.C. 78s(b)(1). </FTNT> <FTNT> <SU>2</SU>  17 CFR 240.19b-4. </FTNT> <HD SOURCE="HD1">I. Clearing Agency's Statement of the Terms of Substance of the Proposed Rule Change</HD> 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, <SU>3</SU> <FTREF/> 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 T="03">e.g.,</E> 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. <FTNT> <SU>3</SU>  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. </FTNT> 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. <SU>4</SU> <FTREF/> <FTNT> <SU>4</SU>  OCC's By-Laws and Rules can be found on OCC's public website: <E T="03">https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.</E> </FTNT> <HD SOURCE="HD1">II. Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change</HD> 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. <HD SOURCE="HD2">(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change</HD> <HD SOURCE="HD3">1. Purpose</HD> 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 T="03">e.g.,</E> by specifying additional circumstances in which OCC will generally not make an adjustment); and (iv) update references to current adjustment By-Laws sections contained in other adjustment provisions of the By-Laws for products not actively trading with the newly proposed Rules. <HD SOURCE="HD3">Background</HD> 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 ( <E T="03">i.e.,</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. <SU>5</SU> <FTREF/> <FTNT> <SU>5</SU>  Example excludes premium cost, taxes, commissions, or other fees that may impact the profitability of an option position. </FTNT> 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”). <SU>6</SU> <FTREF/> It states in relevant part: <FTNT> <SU>6</SU>  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. <E T="03">See</E> 17 CFR 240.9b-1. </FTNT> <EXTRACT> 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. <E T="03">Example:</E> 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. <E T="03">available at https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document.</E> </FTNT> OCC currently has broad authority to effect contract adjustments on a case-by-case basis. The factors typically use ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 127k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━