Standardized Options – Who’s Your Daddy?

A securities call option is a derivative security representing the right, but not the obligation, to acquire an underlying security. When the person selling an option is also the issuer of the underlying security, then there is no question that that person is also the issuer of the option. See Section 2(a)(4) of the Securities Act of 1933 and California Corporations Code Section 25010.

The Options Clearing Corporation

Exchange traded options involve a different dynamic. The SEC first permitted national securities exchanges to trade standardized options in the early 1970s. Because the option holder (i.e., the person holding the right to acquire the underlying security) must look to the option writer (i.e., the person obligated to perform), clearing agencies, such as The Options Clearing Corporation, were created so that the option holders could look to the systems created by a clearing agency’s rules, rather than the individual option writers for performance. Founded in 1973, the OCC claims to be the world’s largest equity derivatives clearing organization. The SEC determined that the OCC should be deemed the issuer of standardized options. See Release No. 33-6411 (June 24, 1982) [47 FR 28688]. Initially, all transactions in standardized options were registered under the Securities Act on Form S-1. This must have been an exceedingly cumbersome process. It wasn’t until 2003 that the SEC exempted standardized options from all provisions of the Securities Act (other than the anti-fraud provisions of Section 17) provided that the options are issued by a registered clearing agency and traded on a national securities exchange registered under Section 6(a) of the Securities Exchange Act of 1934 or on a national securities association registered under Section 15A(a) of the Exchange Act. SEC Rule 238 and Release Nos. 33-8171; 34-47082.

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