The processing of exercise notices for American style options on days other than the expiration date is not performed on a real-time basis, but rather as part of a nightly batch process by the Options Clearing Corporation (OCC). The processing sequence, which by definition results in a notification lag of at least one day to the assigned customer, is as follows:
- OCC generally allows its clearing members to submit exercise notices on behalf of the customers holding a long position electronically throughout the day, but generally no later that the start of their critical processing in the evening (Day E).
- As part of its evening position processing sequence, OCC randomly assigns the exercise notices it has received to the open interest of its clearing members. That information is then made available by OCC to its clearing members early in the morning on the following day (Day E+1).
- At the point in which that information has been made available, clearing firms such as IB have already completed their processing of that day’s trade activity in order to provide timely statements, margin and settlement information to their clients. Also, since OCC carries the customer positions of its clearing members in an omnibus manner (i.e., they do not know the identity of the customers, only the clearing firm), the clearing member must, in turn, execute a random process to assign those exercise notices to customers holding a short position in that particular option series.
- Once IB receives notice of the assignment from OCC and completes its random assignment process, the assignments will be readily posted to the Trader Workstation of the impacted accounts and reflected on the Daily Activity Statement as of that day’s close (E+1).
In addition, due to this processing sequence and the fact that a long option may have remaining time value, IB cannot automatically provide an exercise notice to OCC for any long option spread against the assigned short option as a means of offsetting the ensuing delivery obligation.
Account holders should refer to the Characteristics and Risks of Standardized Options disclosure document which is provided by IB to every option eligible customer at the point of application and which clearly spells out the risks of assignment. This document is also available online at OCC's web site.