Subject: File No. SR-OCC-2006-01
From: MIke Ianni

April 5, 2006

This rule (adjustment for dividends) should be challenged as it will create lots of uncertainty in the markeplace and as such many will be hurt by it. The reality is that this new rule will give more power to the OCC as the threshold for adjusting dividends is dramatically lowered.

The current proposed rule change is very similar to the current SSF rules for adjustments. That is, if the dividend is deemed "special' then an adjustment takes place. Let me give you two controversial rulings that took place in the SSF markets:

Example #1

One controversial ruling happened in the fall of 2003 when BBY announced an initial dividend of .30 with subsequent quarterly dividends of .10.

http://www.optionsclearing.com/mark...memos/19252.pdf

The OCC ruled it special and made an adjustment. I didn't agree - so I spoke to one of the people on the panel who made the decision and I was astonished to find out that he knew next to nothing about this dividend.

1st phone call: Initially he told me that it was ruled a special dividend thus adjusted because he saw it reported as a "special" dividend on "Bloomberg". Can you believe that one? I told him that just because Bloomberg reports it this way doesn't mean the company considers it "special". He said he would get back to me. (He needed another story)

2nd phone call: So he calls me back later and says that since it was BBY's first dividend - that there was no way to predict such a dividend thus an adjustment was made. Can you believe this one? I told him about how MSFT surprised the market by declaring a dividend in Jan 2003 that surprised the market (first one) and there was no adjustment to MSFT's SSF indicating an inconsistency. He said he would get back to me. (He needed another excuse)

3rd phone call: He calls me back a few days later and says that BBY did not indicate any forward guidance on the dividend when announced thus it was deemed special (note: that this new proposed rule actually stipulates this for new dividends). Little does he know that in the press release it does provide guidance (see below). When I informed him of this - silence once again and this time he states that someone else will get back to me. BTW, MSFT did not provide any guidance after their initial dividend and in fact later paid an annual dividend as MSFT called it 8 months later (with no adjustment again).

MINNEAPOLIS--(BUSINESS WIRE)--Oct. 21, 2003-- The Board of Directors of Best Buy Co., Inc. (NYSE:BBY) today declared a cash dividend of 40 cents per common share, the first cash dividend ever declared by the Company. The dividend of 30 cents per common share is payable on Dec. 9, 2003, to shareholders of record as of the close of business on Nov. 18, 2003. A quarterly dividend of 10 cents per common share is payable on Jan. 28, 2004, to shareholders of record as of the close of business on Jan. 7, 2004. The two dividend payments allow Best Buy to commence its currently desired rhythm of paying $0.40 per share per fiscal year.

4th phone call: Lead counsel for the OCC contacts me days later and states that the "ONLY" difference between the MSFT ruling and the BBY ruling was that MSFT attributed their dividends to the previous quarters while BBY did not and that is why the BBY dividend was deemed "special". Little did she know that on the conference call dated October 21, 2003 the CEO of BBY states exactly that within the first few minutes of the call - "that the dividend was attributable to the previous three quarters". She was stunned when I told her and this time she said she would listen to the conference call and get back to me. (By the way the conference call is still available at the link below: (via webcasts: Dated Oct 21, 2003: Cash Dividend)

http://www.companyboardroom.com/company.asp?client=cbticker=bby

I assumed another excuse was coming but this time I got the two page legal document via email that basically says that the OCC looks at each situation on a "case by case" basis and their rulings are final.

Interesting to note was that I, an individual investor, had done way more work than the OCC - I had actually called the company (BBY) and this was something that the OCC had not even done - even several days after I had brought up the inconsistency.

Example #2

On February 1st 2006, Phelps Dodge announced a special dividend of $4.00. (under 10%)
http://phx.corporate-ir.net/phoenix.zhtml?c=95336p=irol-newsArticleID=811600highlight=

None of the equity option prices changed because it was obvious that no adjustment would take place ( than 10%). However, in the SSF market where these proposed rules are the same - there was lots of uncertainty until a final decision was made on February 6th (5 days later).

http://www.optionsclearing.com/market/ssf_memos/21415.pdf

Please take a look at the pricing of the SSF futures between Feb 1st and Feb 6th and you will see that the market makers/participants were not sure how to price the options as they traded as if no adjustment would be made and as if an adjustment would be made. In fact, the decision that the OCC made was not an "obvious" one. Phelps Dodge had indicated that they would pay $1.5 billion to shareholders in the form of dividends in December 2005 - that is, they would be paying a few large dividends in 2006 and you can clearly see that the company states this again in their press release that announced this $4.00 dividend - so their in fact was some guidance that more dividends of the $5.00 magnitude they paid in Dec 2005 were coming. On the flip side they did call it a "special" dividend. The bottom line is that there was uncertainty with this type of "proposed adjustment rule" and NO uncertainty with the current 10% rule.

Lowering the threshold to adjust options will dramatically increase the number of rulings and in some cases the decision will not be an easy one (PD example) creating uncertainty and in other cases the OCC may make inconsistent decisions (BBY decision) and lets not forget the potential conflict of interest - OCC owned indirectly by B/D's - making decisions that could transfer large amounts of money to their indirect owners.

So, who in their right mind wants them ruling on more issues?