[Federal Register Volume 60, Number 1 (Tuesday, January 3, 1995)]
[Notices]
[Pages 158-159]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-32253]
[[Page 158]]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35149; File No. SR-OCC-94-08]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving a Proposed Rule Change Relating to Flexibly Structured
Index Options Denominated in a Foreign Currency
December 23, 1994.
On August 19, 1994, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change (File No. SR-OCC-94-08) pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act).\1\ Notice of
the proposal was published in the Federal Register on October 19,
1994.\2\ No comment letters were received. For the reasons discussed
below, the Commission is approving the proposed rule change.
\1\15 U.S.C. 78s(b)(1) (1988).
\2\Securities Exchange Act Release No. 34837 (October 13, 1994),
59 FR 52852.
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I. Description of the Proposal
On September 23, 1993, the Commission approved a proposed rule
change filed by OCC to accommodate the clearance and settlement of
flexibly structured index options.\3\ Flexibly structured index options
exhibit virtually the same characteristics as regular index options;
therefore, OCC establishes long and short flexibly structured index
option positions in clearing member accounts in precisely the same way
it currently does for regular index options. OCC incorporates flexibly
structured index options in its premium settlement, margin collection,
exercise notice, exercise assignment, and exercise/expiration statement
processes without significant changes to those processes. Premiums and
exercise prices for the flexibly structured index options that
currently are being traded are denominated in United States dollars.
Parties to a transaction in such an option may customize certain terms
of the option including the expiration date, the exercise style, the
exercise price, the cap interval in the case of capped-style options,
and the method to be used for establishing the current index value for
purposes of settling expiration date exercises.
\3\Securities Exchange Act Release No. 31912 (February 23,
1993), 58 FR 11879 [File No. SR-OCC-92-33] (order approving proposed
rule change relating to flexibly structured index options).
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Recently, the Chicago Board Options Exchange (``CBOE'') amended its
rules regarding flexibly structured index options\4\ in order to allow
premiums and exercise prices of such options to be denominated in
foreign currencies rather than in United States dollars.\5\
Accordingly, OCC is amending its By-Laws and Rules in order to clear
and settle these options which OCC calls Flexibly Structured Index
Options Denominated in a Foreign Currency (``FX Index Options'').
\4\Securities Exchange Act Release No. 34203 (June 13, 1994), 59
FR 31658 [File No. SR-CBOE-93-33] (order approving a proposed rule
change relating to FLEX options designated in foreign currencies).
\5\Premium and exercise prices for these non-United States
dollars flexibly structured index options may be denominated in any
of the foreign currencies currently underlying foreign currency
options. Those currencies include: (1) Australian dollars, (2)
British pounds, (3) Canadian dollars, (4) European Economic
Community currency units, (5) French francs, (6) German Deutsche
marks, (7) Japanese yen, and (8) Swiss francs.
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To accommodate the clearance and settlement of FX Index Options,
Article XXIII is being added to the Article of OCC By-Laws. Because FX
Index Options are a type of index option, the OCC By-Laws governing
index options, Article XVII, is being incorporated into new Article
XXIII and is being made applicable to FX Index Options. In addition,
because FX Index Options will settle in a foreign currency, certain of
the OCC By-Laws governing Cross-Rate Foreign Currency Options in
Article XX also are being incorporated into new Article XXIII where
appropriate. For example, those By-Laws governing extraordinary events,
adjustments, and the payment of premiums are being incorporated into
the new article.
A Chapter XXIV is being added to the OCC Rules to accommodate FX
Index Options. FX Index Options will be exercised pursuant to the rules
governing existing index options. Accordingly, the rules governing
exercise, assignment, allocation, and the exercise settlement date from
Chapter XVIII, which pertains to index options, is being incorporated
into new Chapter XXIV. In addition, the settlement procedure for FX
Index Options will be the same as the procedure for existing index
options. Exercised FX Index Options will be settled through the payment
of an exercise settlement amount, which is the difference between the
aggregate exercise price and the aggregate current index value.
Accordingly, the rules governing exercise settlement and the exercise
settlement date from Chapter XVIII are being incorporated into new
Chapter XXIV. Because FX Index Options will settle in a foreign
currency, certain settlement obligations of a party to an FX Index
Option contract will be similar to the settlement obligations of a
party to a cross-rate foreign currency option contract. Therefore,
certain rules governing settlement obligations from Chapter XXI, which
pertains to cross-rate foreign currency options, are being incorporated
into new Chapter XXIV. Specifically, these include the obligation to
set up bank accounts and the consequence of failing to pay a foreign
currency. Finally, FX Index Options will be margined like cross-rate
foreign currency options in that the margin requirement will be
calculated in the applicable trading currency and then converted to
United States dollars. Consequently, the language of Rule 2111
governing margin requirements for cross-rate foreign currency options
is being incorporated into new Chapter XXIV.
Two additional changes to the OCC By-Laws and an additional change
to OCC's Rules also are being made. Specifically, the term ``FX index
option clearing member'' is being added to the definition of ``clearing
member'' in Article I, Section 1 of the By-Laws. In addition, the
reference to the term ``FLEX'' in the definition of clearing member is
being changed to ``flexibly structured option'' in order to make that
term more generic. Finally, OCC Rule 401 is being amended to require
that the currency in which the option is denominated, the expiration
date of the option contract as opposed to the expiration month, and the
cap price, if any, be included in the Report of Matched Trades.
II. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder and particularly with the requirements of Section
17A(b)(3)(F).\6\ Section 17A(b)(3)(F) requires that the rules of a
clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions, and to assure the
safeguarding of securities and funds in the custody or control of the
clearing agency or for which it is responsible. The Commission believes
that OCC's proposed rule change meets these requirements by
establishing a framework in which existing OCC systems, rules, and
procedures are extended to the processing of the FX Index Options. OCC
should be able to implement the clearance and settlement of the FX
Index Options without much difficulty because FX Index Options are
similar to regular index options and cross-rate foreign currency
options currently cleared by OCC. The Commission believes that the use
of [[Page 159]] OCC's systems for the clearance and settlement of FX
Index Options should facilitate promptness and precision.
\6\15 U.S.C. 78q-1(b)(3)(F) (1988).
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III. Conclusion
The Commission finds that the proposal is consistent with the
requirements of the Act, particularly with Section 17A(b)(3)(F) 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-94-08) be, and hereby
is, approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\7\
\7\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-32253 Filed 12-30-94; 8:45 am]
BILLING CODE 8010-01-M
