The Ontario Securities Commission has amended its ban on exercising put options, allowing shareholders who had bought the options as insurance against a stock-price decline to sell shares under the options.
However, the more general ban on trading in Sino-Forest's stock remains, and neither speculative option traders nor company insiders will be allowed to exercise their put options.
A put option entitles a holder to sell a set number of shares at a predetermined price to the option issuer on a fixed date. When the OSC issued a cease-trading order on Sino-Forest's stock on Aug. 26, the trading of options was included in the ban. There are about 8,993 put-option contracts outstanding, representing about 899,300 shares of Sino-Forest – less than 1 per cent of the company's 246 million shares outstanding.
Without the OSC decision, shareholders who had bought the put options as protection for their investment, amid rumours and uncertainty swirling around the company, faced the prospect of seeing their options become useless – some as soon as this Saturday, when the September options are due to expire.
Canadian Derivatives Clearance Corp. – the derivatives arm of TMX Corp., which filed the application to the OSC earlier this week asking the regulator to lift the ban – declined to comment on Thursday's ruling. In its application, the CDCC had argued that the put contracts do not constitute a "trade" of the stock, but rather the fulfilment of an agreement to buy and sell the shares that predated the trading ban.
"The exercise of the put contracts does not constitute an investment decision, but merely the realization of the financial consequences of the investment decision made at the time the put contracts were entered into," the CDCC said. "It is analogous to permitting the settlement of a trade that was previously executed or agreed."
"It's a relatively sane outcome to a crazy situation," said Steve Sosnick, equity risk manager at Timber Hill LLC, a Connecticut-based market-maker that has both long and short positions in various Sino-Forest options.
"It was terrifying to think that long put positions could have been essentially vaporized. That would have set a very dangerous precedent," he said.
The OSC issued the temporary cease-trading order amid allegations that Sino-Forest "and certain of its officers and directors provided information to the public in documents required to be filed or furnished under Ontario securities laws that may have been false or misleading." Last week, the OSC extended the order until Jan. 25. The regulator has been investigating allegations that Sino-Forest inflated the size and value of its Chinese timber assets.
The OSC still will not allow the exercise of put options by people who do not already hold the shares – essentially, speculative holders of the options – nor will it allow company insiders to exercise any options.
David Parkinson