OCC And Exchange Mechanics: Does A Late IPO Open Count As A "Trading Day" For Listed Options And Other Timing Purposes?

Depending on the type of product (debt security or derivative), determining whether there is a good trading day or whether a market disruption event has occurred is important. For structured products, the underlying program documents may reference the OCC definitions or the ISDA equity definitions. Of course, depending on the derivative, one or another of these may be relevant to determinations.

For OCC-listed options purposes, a late-opening IPO day still counts as a "trading day" as long as the U.S. securities markets are open and the IPO actually begins trading that day. There is no formal OCC rule that says that an IPO stock must trade for a minimum number of hours, and the OCC rules generally only look to whether markets are open or a closing price is available – not to any specific period during which an underlying stock traded. For non-OCC purposes, the exact definitions are important: "market open" definitions usually count the day; "stock traded" definitions count the day only if there was actual trading; and ISDA definition may count the day but it may still require consideration of the market disruption definition

With respect to listing new options, the Options Listing Procedures Plan requires the submission of a listing certificate to OCC on the trading day before options start trading and expressly defines "trading day" as a day on which the U.S. securities markets are open for business. It then says the exchange may begin trading the option class on the first trading day after the certificate is submitted and processed by OCC.

So, if an IPO opens at 1:30 p.m. or 2:30 p.m. ET on Monday and trades into the close, Monday is the IPO's first trading/IPO day for the listed options timing analysis. For example, under the SEC-approved accelerated rule for certain large IPOs, options may be listed starting on or after the second business day following the IPO day, not counting the IPO day itself. The SEC's example is: IPO on Monday, certificate submitted Tuesday, options may begin Wednesday. (Federal Register)

For the normal non-waived price test, the relevant options rules often look to whether the stock's market price was at least $3.00 for the previous three consecutive business days, measured by the closing price in the primary market. A late IPO open still gives you a Monday closing price if it actually trades and closes; if it never opens/trades that day, then you likely do not have a usable first closing-price day for that security specific test. (Listing Center)

For non-OCC purposes, the answer depends entirely on the applicable definition:

If the definition reads "Trading Day means a day on which the principal market is open for trading," a late open generally still counts because the market was open. Many securities agreements use this definition.

If the definition says "any day on which the Common Stock is traded," then the stock must actually trade. A 1:30 or 2:30 p.m. first trade would normally satisfy that, but a day with no trading would not. Some filed warrant forms use exactly this "Common Stock is traded" formulation.

If the document incorporates the ISDA equity definitions, a late opening does not by itself stop a Scheduled Trading Day from being an Exchange Business Day; ISDA's user guide says that expressly. But the late open can create a market disruption issue if the exchange opens less than one hour before the relevant valuation/exercise/knock-in/knock-out time.

If you are addressing the SEC tender offer or similar "business day" rules, that is different from a trading-day concept. For issuer tender offers, the SEC rule defines a business day as any non-weekend, non-federal-holiday day, running from 12:01 a.m. to midnight ET, so a late stock opening is irrelevant.

Originally published in REVERSEinquiries: Volume 1, Issue 5.
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