EFTA01353444.pdf

ASSIGNMENT OCC assigns exercises in standardized lots to Clear- ing Member accounts that reflect the writing of options identical to the exercised options. A description of OCC's assignment procedures is available from OCC on request at the address set forth in paragraph 1 of Chapter XI of this booklet. Assignments are ordinarily made prior to the commencement of trading on the business day following receipt by OCC of the exercise instruction. In the case of options traded in evening sessions, exercise instructions received by OCC on a business day are ordinanly assigned prior to the open- ing of trading in that day's evening session. II exercises are assigned by OCC to a Clearing Mem- ber's customers' account, the Clearing Member must then assign them to customers maintaining positions as writers of the exercised options series. The rules of the options markets require their member firms to allo- cate assignments to customers either on a random selection basis or on a "first-in, first-out" basis and to inform their customers which method is used and how it works. Regardless of the method used, option writ- ers are subject to the risk each day their options are exercisable that some or all of them may be assigned. (See the discussion in Chapter X under "Risks of Op- tion Writers.") It is possible that an option writer will not receive notification from its brokerage firm that an exercise has been assigned to him until one or more days following the date of the initial assignment to the Clearing Mem- ber by OCC. This creates a special risk for uncovered writers of physical delivery call stock options. This is discussed in paragraph 8 under "Risks of Options Writers" in Chapter X and under "Settlement" in this chapter. SETTLEMENT Settlements between brokerage firms or their agents on virtually all exercised physical delivery stock op- tions are routinely handled through stock clearing cor- porations in much the same way as ordinary purchases and sales of the underlying equity security. Promptly after the exercise and assignment of a physi- cal delivery stock option, OCC reports it to the desig- nated stock clearing corporations of the Clearing Members representing the exercising holder and the assigned writer. If neither stock clearing corporation rejects the transaction by a time specified in their 51 CONFIDENTIAL - PURSUANT TaffiESERNDS0N812 P. 6(e) CONFIDENTIAL SDNY_GM_00183996 EFTA01353444