Supplement to the Options Disclosure Document

May 9, 2007

On May 3, 2007, the SEC approved a supplement to the Options Disclosure Document (ODD). The ODD contains general disclosures on the characteristics and risks of trading standardized options. The recently approved supplement to the ODD reflects certain changes in The Options Clearing Corporation's (the OCC) rules and the rules of certain options markets, as more fully described below:

  • Part I reflects modifications made to the definition of "ordinary cash dividend or distribution (i.e., cash dividends and distributions for which no adjustment is made);

  • Part II reflects changes made to eliminate the need to round adjusted exercise prices in certain circumstances and to provide more precise compensation for fractional shares eliminated by rounding;

  • Parts III through V supersede and replace the February 2003 Supplement to the ODD. Part III pertains to options on interests in investment companies and similar entities. Part IV pertains to special exercise settlement procedures or restrictions that may be imposed upon the occurrence of certain extraordinary events. Part V discloses that a registration statement and prospectus for the options covered by the ODD are no longer available.

  • Part VI pertains to an expansion in the OCC's authority to adjust the multiplier for yield-based Treasury options and to fix the cash settlement amount for such options in certain circumstances;

  • Part VII reflects the adoption of rules by certain options markets that permit, in very limited circumstances, the cancellation or adjustment of a transaction entered into at a premium based on an erroneously reported value for the underlying interest; and

  • Part VIII, which supersedes paragraph 1 of the March 2000 Supplement to the ODD, pertains to the acceleration of the expiration date of options on equity securities in certain circumstances.

As with other supplements to the ODD, this supplement should be read in conjunction with the current ODD titled Characteristics and Risks of Standardized Options.

 

NASD Rule 2860(b)(11) requires that a member deliver the current ODD, as amended to include this supplement, to each customer at or prior to the time the customer is approved to trade options. In addition, the rule provides that a member must distribute a copy of each amendment to the ODD to each customer to whom the member previously delivered the ODD. Members may distribute the amendment in various ways including, but not limited to, one of the following ways:

  1. A firm may choose to conduct a mass mailing of the supplement to all of its customers approved to trade options who have already received the ODD; or

  2. A firm may distribute the supplement to a customer, who has already received the ODD, not later than the time a confirmation of a transaction in the category of options to which the amendment pertains is delivered to such customer.1

Members are reminded that they may electronically transmit documents that they are required to furnish to customers under NASD rules, including the ODD and amendments thereto, provided the member adheres to the standards contained in the May 1996 and October 1995 Securities Exchange Commission Releases2 and as discussed in Notice to Members 98-3 (January 1998).

Please see the SEC approval order, the ODD supplement and NASD Rule 2860(b)(11) for additional information.

 

1 In this instance, the supplement pertains to all options issued by the OCC; accordingly, the supplement must be delivered not later than the time a confirmation of any OCC issued option is delivered to the customer.

2 See Securities Act Release No. 7288 (May 9, 1996) 61 FR 24644 (May 15, 1996) and Securities Act Release No. 7233 (October 6, 1995) 60 FR 53458 (October 13, 1995).