[Federal Register Volume 62, Number 13 (Tuesday, January 21, 1997)]
[Notices]
[Pages 3070-3071]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1361]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38165; File No. SR-OCC-96-19]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Granting Accelerated Approval of a Proposed Rule Change Relating
to the Expiration Time and Assignment Processing Procedures for Certain
Flexibly Structured Foreign Currency Options
January 14, 1997.
On December 17, 1996, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change (File No. SR-OCC-96-19) pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') to modify the
expiration time and assignment processing procedures for certain
flexibly structured foreign currency options.\1\ Notice of the proposal
was published in the Federal Register on December 23, 1996.\2\ No
comment letters were received. For the reasons discussed below, the
Commission is granting accelerated approval of the proposed rule
change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 38070 (December 20,
1996), 61 FR 68807.
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I. Description
The rule change modifies the expiration time and assignment
processing procedures for certain flexibly structured foreign currency
options, including certain flexibly structured cross-rate foreign
currency options. Under the rule, all flexibly structured foreign
currency options and flexibly structured cross-rate foreign currency
options (collectively referred to as ``flexibly structured FCOs'')
listed for trading after January 14, 1997, and expiring on or after
April 1, 1997, will expire at 10:15 a.m. Eastern Time (``ET'') instead
of 11:59 p.m. ET. Furthermore, all flexibly structured FCOs will be
subject to pro rata assignment instead of random assignment.
The Philadelphia Stock Exchange (``PHLX'') presently trades two
types of flexibly structured FCO contracts. They are (1) flexibly
structured FCOs for which market participants do not specify an
expiration date (``standard flex FCOs'') which expire on standard mid-
month and end-of-month expiration dates at 11:59 p.m. ET (this
expiration time is consistent with standard foreign currency options);
and (2) custom dated flexibly structured FCOs (``custom dated flex
FCOs'') for which market participants specify the expiration date and
which expire at 10:15 a.m. ET on such expiration date. Exercise notices
regarding standard flex FCOs are subject to random assignment
processing. Exercise notices regarding custom dated flex FCOs are
subject to pro rata assignment processing.
PHLX requested that OCC modify its rules to provide that the
expiration time for both types of flexibly structured FCOs be 10:15
a.m. ET on their expiration date, and that exercises involving such
flexibly structured FCOs be assigned pursuant to OCC's pro rata
procedures.\3\ PHLX also requested that this change be effective for
any standard flex FCOs listed for trading after January 14, 1997, with
an expiration on or after April 1, 1997. Accordingly, any standard flex
FCO contract established on or before January 14, 1997, will expire at
11:59 p.m. ET and be subject to a random assignment process. Currently,
there is open interest in standard flex FCOs expiring mid-month and
end-of-month for the months of March, April, July, September, and
October 1997.\4\ Because the existing standard flex FCOs will be exempt
from the new procedures, OCC will be required to execute two separate
processing cycles, one in the morning and one in the evening. OCC has
represented to the Commission that the execution of two separate
processing cycles will not adversely affect OCC or its participants.\5\
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\3\ The Commission has approved a proposed rule change by PHLX
regarding the trading hours, expiration times, assignment procedures
and other operational procedures for flexibly structured FCOs.
Securities Exchange Act Release No. 37718 (September 24, 1996), 61
FR 51479 [File No. SR-PHLX-96-13] (order approving proposed rule
change).
\4\ Notwithstanding the above, PHLX has indicated that it may
ask holders of existing series to direct OCC to adjust the
expiration time so that such contracts will expire at 10:15 a.m. ET
with pro rata assignment. If the holders and the writers direct OCC
to make these adjustments, OCC will act accordingly provided that
OCC receives the proper authorizations from all parties involved.
\5\ Additionally, OCC believes that the change in assignment
processing is merely a change in OCC's procedures and does not
affect the methodologies of either the random or pro rata assignment
process.
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[[Page 3071]]
Certain definitions in OCC's by-laws have been amended to be
consistent with the previously approved PHLX rules.\6\ Articles I, XV,
and XX of OCC's by-laws regarding expirations dates and times for
standard option contracts, foreign currency options, and cross-rate
foreign currency options, respectively, have been amended to better
define the distinction between standard foreign currency options and
flexibly structured FCOs and will clarify that, but for standard flex
FCOs established on or before January 14, 1997, all flexibly structured
FCOs, whether standard flex FCOs or custom dated flex FCOs, will expire
at 10:15 a.m. on the expiration date and be subject to a pro rata
assignment process. In addition, Section 1.E(4)(iii) of Articles XV and
XX of OCC's by-laws will serve as a transitional rule to govern the
expiration time and assignment processing to be used for existing
standard flex FCO contracts (i.e., standard flex FCO contracts
established on or before January 14, 1997) and to exempt such standard
flex FCO contracts from the rule change.
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\6\ The specific changes to OCC's by-laws are set forth in OCC's
proposed rule change, which is available for review through OCC and
the Commission's Public Reference Room.
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II. Discussion
Section 17A(b)(3)(F) of the Act \7\ provides that the rules of a
clearing agency must be designed to promote the prompt and accurate
clearance and settlement of securities transactions. The Commission
believes that the proposed rule change is consistent with OCC's
obligation under the Act because it will increase uniformity in the
expiration time and assignment processing procedures for all flexibly
structured FCOs. Because OCC has modified its by-laws to create uniform
expiration times for all flexibly structured FCO contracts listed for
trading after January 14, 1997 with an expiration on or after April 1,
1997 to 10:15 a.m. ET, any investor confusion resulting from the
disparate expiration times for standard flex FCOs and custom flex FCOs
should be reduced which should promote the prompt and accurate
clearance and settlement of securities transactions.
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\7\ 15 U.S.C. 78q-1(b)(3)(F).
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Furthermore, OCC's by-laws also have been modified to require that
exercise notices regarding both custom flex and standard flex FCOs be
assigned pursuant to OCC's pro rata procedures as opposed to random
assignment procedures. Under random assignment procedures, option
writers are randomly
assigned and exercised against.\8\ Under pro rata assignment, the
number of contracts assigned to a particular option writer is directly
proportional to the total number of option contracts assigned to all
option writers.\9\ Pro rata assignment should allow member participants
to ascertain their exercise exposures more quickly than with random
assignment processing. Accordingly, because standard flex FCO writers
will be able to ascertain their exposures, the rule change should
increase liquidity thereby enhancing the prompt and accurate clearance
and settlement of securities transactions.
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\8\ For example, option writers could have none, some, or all of
their positions in a particular series of contracts assigned.
\9\ For example, under pro rata processing if 25% of all
outstanding contracts in a particular series are exercised, an
individual writer will know that only 25% of its short position in
such contracts will be assigned.
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OCC has requested that the Commission find good cause for approving
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing. The Commission finds good cause for so
approving the proposed rule change prior to the thirtieth day after the
date of publication of notice of filing so that the proposal can be
implemented by January 14, 1997 in conjunction with the end of a
foreign currency options expiration cycle.
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
in particular Section 17A of the Act and the rules and regulations
thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-OCC-96-19) be and hereby is
approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3 (a) (12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-1361 Filed 1-17-97; 8:45 am]
BILLING CODE 8010-01-M
