[Federal Register Volume 59, Number 215 (Tuesday, November 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27564]
[[Page Unknown]]
[Federal Register: November 8, 1994]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34926; International Series Release No. 739; File Nos.
SR-OCC-94-04; SR-OOC-94-05; SR-OCC-94-07]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving Proposed Rule Changes Relating to Flexibly Structured
Foreign Currency Options, Inverse Foreign Currency Options, Inverse
Cross-Rate Foreign Currency Options, and Flexibly Structured Cross-Rate
Foreign Currency Options
November 1, 1994.
On April 25, 1994, May 13, 1994, and June 6, 1994, The Options
Clearing Corporation (``OCC'') filed proposed rule changes (File Nos.
SR-OCC-94-04, SR-OCC-94-05, SR-OCC-94-07) respectively with the
Securities and Exchange Commission (``Commission'') pursuant to Section
19(b) of the Securities Exchange Act of 1934 (``Act'').\1\ Notice of
the proposals was published in the Federal Register on May 20, 1994,
July 19, 1994, and July 20, 1994, to solicit comments from interested
persons.\2\ No comments were received. As discussed below, this order
approves the proposed rule changes.
---------------------------------------------------------------------------
\1\15 U.S.C. 78s(b) (1988).
\2\Securities Exchange Act Release Nos. 34064 (May 13, 1994), 59
FR 26535, [File No. SR-OCC-94-04] (notice of filing of proposed rule
change relating to flexibly structured foreign currency options);
34351 (July 12, 1994), 59 FR 36811, [File No. SR-OCC-94-05] (notice
of filing of a proposed rule change relating to inverse foreign
currency options and inverse cross-rate options); and 34360 (July
13, 1994), 59 FR 37114, [File No. SR-OCC-94-07] (notice of filing of
proposed rule change relating to flexibly structured cross-rate
foreign currency options).
---------------------------------------------------------------------------
I. Description
The purpose of the proposed rule changes are to allow OCC to issue,
clear, and settle customized strike options on foreign currencies,
flexibly structured cross-rate foreign currency option contracts,
inverse foreign currency options, and inverse cross-rate foreign
currency options.
The first proposal, OCC File No. SR-OCC-94-04, enables OCC to
accommodate the clearance and settlement of customized strike options
on foreign currencies to be traded on the Philadelphia Stock Exchange
(``Phlx'').\3\ Customarized strike options are a type of flexibly
structured options where the underlying security is a foreign currency.
Currently, the underlying security for flexibly structured options is
an index group. Flexibly structured index options permit the parties to
establish for each option trade the expiration date, the exercise
style, the exercise price, the cap interval, and the method to be used
for establishing the current index value for purposes of settling
expiration date exercises. Customized strike options on foreign
currencies extend to foreign currency options the ability of the
trading parties to designate the exercise price of their choice.
Customized strike options are available for all currently listed
foreign currency options including cross-rate foreign currency options
but excluding cash-spot foreign currency options.\4\ The customized
strike option contracts also may be either American style or European
style options and may have any expiration dates currently available
including cross rate dates of up to three years in the future as in
long-term options.
---------------------------------------------------------------------------
\3\Securities Exchange Act Release No. 33959 (April 25, 1994),
59 FR 22698, [File No. SR-Phlx-(Notice of filing of Phlx's proposal
relating to adoption of a customized strike facility for foreign
currency options).
\4\The following currencies currently underlie foreign currency
option contracts: (1) Australian dollars, (2) British pounds, (3)
Canadian dollars, (4) German Deutsche marks, (5) European Economic
Community currency units, (6) French francs, (7) Japanese yen, and
(8) Swiss francs.
---------------------------------------------------------------------------
To accommodate customized strike options, OCC is adding the
definition of ``flexibly structured options'' to Section 1 of Article
XV (``Foreign Currency Options'') which will include customized strike
options. OCC Rule 602(b) also is being amended to broaden the
definition of premium margin to include flexibly structured index
options, customized strike options, and other types of flexibly
structured options. Currently, the definition only encompasses flexibly
structured index options.
The term ``FLEX option'' in Section 1 (``Definitions'') of Article
XVII (``Index Options'') is being changed to ``flexibly structured
option'' in order to make that term more generic. For the same reason,
all references to FLEX options in OCC's by-laws and rules are being
changed to flexibly structured options. In addition, the definition of
the term flexibly structured option in Section 1 of Article XVII is
being modified to clarify that such definition is applicable only to
flexibly structured index options. A separate definition of flexibly
structured options applicable to foreign currency options is being
added to Section 1 of Article XV.
The inverse foreign currency options and inverse cross-rate foreign
currency options proposal, OCC File No. SR-OCC-94-05, will enable OCC
to clear and settle inverse foreign currency options and inverse cross-
rate foreign currency options. Currently, foreign currency option
contracts are quoted in U.S. dollars (``USDs''), premium is paid in
USDs, and the foreign currency is delivered upon exercise. Under the
proposed rule change, inverse foreign currency and cross-rate foreign
currency option contracts will be quoted in the foreign currency,
premium will be paid in the foreign currency, and USDs will be
delivered upon exercise. For example, the existing French franc
(``FF'')/USDs foreign currency option contract is quoted in USDs,
premium is paid is USDs, and FF are delivered upon exercise. Whereas,
the inverse USDs/FF contract will be quoted in FF, the premium will be
paid in FF, and USDs will be delivered upon exercise. The proposed
inverse cross-rate foreign currency option contract will be the inverse
of existing cross-rate foreign currency option contracts.
Inverse foreign currency and cross-rate foreign currency options
will be processed and margined like existing foreign currency and
cross-rate foreign currency option contracts and in accordance with
existing banking arrangements. To accommodate these new foreign
currency options only a few changes of OCC's by-laws and rules are
needed.
To accommodate inverse for currency and cross-rate foreign currency
options, a definition of ``currency'' is being added to Article I,
Section 1 of OCC's By-laws.\5\ The term currency will clarify that the
price quote, the premium to be paid, and the deliverable or underlying
currency for a foreign currency option contract will sometimes have
terms of USDs and other times have terms of a foreign currency. Due to
this change, where appropriate in OCC's by-laws and rules the
references to foreign currency as the deliverable or as the underlying
currency for a foreign currency option contract and references to USDs
as the trading currency for foreign currency option contract are being
changed to the general term currency.
---------------------------------------------------------------------------
\5\Currency is defined as any standard unit of the official
medium of exchange of a sovereign government including the European
Currency Unit (``ECU'').
---------------------------------------------------------------------------
A definition of ``settlement time'' is being added to the
definition section of Article XV to accommodate inverse foreign
currency options. Settlement time for foreign currency options will
distinguish between foreign currency options settling in the United
States and outside the United States.\6\ Because of the difference in
settlement times, the definition of settlement time in Article I,
Section 1 is being amended to clarify that such time does not apply to
foreign currency options settling outside the United States.
---------------------------------------------------------------------------
\6\Foreign currency options settling in the United States will
settle at 9:00 A.M. Central Time on the first business day
immediately following the day on which OCC receives a report of a
matched trade with respect to such transaction from the exchange on
which such transaction was effected. Foreign currency options
settling outside the United States will settle at 11:00 A.M. local
time in the country of origin of the trading currency, or at such
other time as OCC may specify, on the first business day in that
country immediately following the day on which OCC receives a report
of a matched trade with respect to such transaction from the
exchange where the trade occurred.
---------------------------------------------------------------------------
The definition of the term ``class of options'' in the definition
section of Article XV and Article XXII is being amended to provide that
with respect to foreign currency and cash-settled foreign currency
options, a class of options means all option contracts of the same type
and style covering the same underlying currency and having the same
unit of trading and the same trading currency.\7\
---------------------------------------------------------------------------
\7\Under the amended definition, existing foreign currency
contracts covering the same underlying foreign currency will be in
one class, and the inverse contracts, which will have a different
trading currency, will be in another class.
---------------------------------------------------------------------------
The term ``trading currency'' in Article I, Section 1 of OCC's by-
laws is being amended. Trading currency will be currency, rather than
foreign currency, in which premium and/or exercise prices are
denominated for a class of foreign currency options or cross-rate
foreign currency options. The changes will clarify that the two
components of the trading currency, the premium and the exercise price,
may be either a foreign currency or USDs.
The amendments to Rule 1605(a)(2) concerning the netting scheme
will clarify that netting will first occur within the same class of
options. To accommodate the changes to the definition of class of
options, the proposed changes to Rule 1605(a)(3) will clarify that
following the netting of settlement obligations within a class, netting
will occur across classes of foreign currency and inverse foreign
currency options.
The Introduction of Chapter XVI, which governs foreign currency
options, is being amended to clarify that Chapter XVI is applicable
only to option contracts where either the trading currency or the
underlying security is a foreign currency and the other side of the
contract is USDs. The Introduction of Chapter XXIII, which governs
cash-settled foreign currency options, is being amended to clarify that
Chapter XXIII is applicable only to cash-settled option contracts where
either the trading currency or the underlying security is a foreign
currency. The Introduction to Chapter XXI, which governs cross-rate
foreign currency options, is being amended to clarify that with the
beginning of percentage quoting at the Phlx, premium and exercise
prices of cross-rate foreign currency options will not always be in the
same currency.
The flexibility structured cross-rate foreign currency options
proposal, OCC File No. Sr-OCC-94-07, enables OCC to issue, clear, and
settle new flexibly structured cross-rate foreign currency option
contracts proposed for trading by the Phlx through its customized
option facility.\8\ Under the proposal, options may be traded on any
combination of currencies currently underlying foreign currency option
contracts. Because these new products will be margined and settled like
the existing cross-rate option contracts, OCC's by-laws and rules do
not need to be revised.
---------------------------------------------------------------------------
\8\For a description of the Phlx proposed rule change, refer to
Securities Exchange Act Release No. 34308 (July 5, 1994), 59 FR
35551, [File No. SR-Phlx-94-18] (notice of filing of proposed rule
change).
---------------------------------------------------------------------------
II. Discussion
The Commission believes the proposals are consistent with the
purposes and requirements of Section 17A of the Act.\9\ Specifically,
Section 17A(a)(2) of the Act\10\ directs the Commission to facilitate
the establishment of a national system for the prompt and accurate
clearance and settlement of securities transactions.
---------------------------------------------------------------------------
\9\15 U.S.C. 78q-1 (1988).
\10\15 U.S.C. 78q-1(a)(2) (1988).
---------------------------------------------------------------------------
The over-the-counter (``OTC'') market for foreign currency options
has developed, in part, to meet the needs of brokers and investors that
require increased flexibility for the purpose of satisfying particular
investment objectives. OCC's issuing, clearing, and settling of
customized strike options should bring into the national clearance and
settlement system options transactions that otherwise would be cleared
and settled outside the system. Thus, brokers and investors will have
the ability to tailor options transactions to meet their specific needs
and at the same time, will have the benefit of having those
transactions cleared and settled through OCC with its risk analysis and
risk reduction procedures.
OCC has represented that flexibility structured foreign currency
options can be treated and processed like the current foreign currency
option products. Therefore, OCC may implement the clearance and
settlement of flexibility structured foreign currency options with only
minimal changes to its by-laws and rules. Since these proposed foreign
currency products are a natural extension of the foreign currency
products currently cleared by OCC, OCC should have little difficulty
processing these products.
III. Conclusion
For the reasons stated above, the Commission finds that OCC's
proposals are consistent with Section 17A of the Act.\11\
---------------------------------------------------------------------------
\11\15 U.S.C. 78q-1 (1988).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule changes (File Nos. SR-OCC-94-04, SR-
OCC-94-05, SR-OCC-94-07) be, and hereby are, approved.
\12\15 U.S.C. 78s(b)(2) (1988).
---------------------------------------------------------------------------
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\13\
---------------------------------------------------------------------------
\13\17 CFR 200.30-3(a)(12) (1994).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-27564 Filed 11-7-94; 8:45 am]
BILLING CODE 6717-01-M
