[Federal Register Volume 60, Number 217 (Thursday, November 9, 1995)]
[Notices]
[Pages 56625-56628]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27825]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36453; File No. SR-OCC-95-16]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing and Order Granting Accelerated Approval of Proposed
Rule Change Relating to Customized Expiration Dates
November 2, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934,\1\ notice is hereby given that on September 11, 1995, The Options
Clearing Corporation (``OCC'') filed with the Securities and Exchange
Commission the proposed rule change (File No. SR-OCC-95-16) as
described in Items I and II below, which Items have been prepared
primarily by OCC. On September 22, 1995, and on October 27, 1995, OCC
filed amendments to the proposed rule change.\2\ The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons and to grant accelerated approval of the
proposed rule change.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ Letters from Jean M. Cawley, OCC, to Jerry W. Carpenter,
Assistant Director, Division of Market Regulation, Commission
(September 22, 1995, and October 27, 1995).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The proposed rule change seeks to amend OCC's by-laws and rules to
accommodate the Philadelphia Stock Exchange's (``PHLX'') proposal to
permit market participants to select customized expiration dates for
flexibly structured currency option contracts \3\ listed in PHLX's
customized currency options program.\4\
\3\ ``Flexibly structured option'' with respect to foreign
currency options means a foreign currency option having an
expiration date, an exercise price, or an exercise style that are
customized within exchange specified limits by the parties to the
transaction.
\4\ For a description of PHLX's proposal, refer to Securities
Exchange Act Release No. 36131, International Series Release No. 844
(August 22, 1995), 60 FR 44927 [File SR-PHLX-95-52] (notice of
filing of proposed rule change by PHLX relating to customized
expiration dates for customized foreign currency options).
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\5\
\5\ The Commission has modified the text of the summaries
submitted by OCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
PHLX has proposed to add a new feature to its customized currency
options program that will allow program participants to select any
business day other than an exchange \6\ holiday for exchange designated
holiday as an expiration date for flexibly structured currency option
contracts. Any flexibly structured currency option contract with a
customized expiration date (``customized expiration date currency
option contracts'') will expire at 9:15 A.M. Central Time on its
expiration date.\7\ Under PHLX's proposal, trading in such contracts
would cease at 8:00 A.M. Central Time on their expiration date. No new
series of flexibly structured currency option contracts with a ``same
day'' expiration date (i.e., expiration on the date that the contract
[[Page 56626]]
is opened) may be opened, but trading in an existing series of
customized expiration date currency option contacts will be permitted
until 8:00 A.M. on their expiration date such that open positions in
the contracts may be reduced or increased. In accordance with PHLX's
filing,\8\ PHLX member organizations will be required to utilize a pro
rata methodology for allocation of exercises of customized expiration
date currency option contracts, which OCC has assigned to the PHLX
member organizations. OCC is modifying its rules to require that
clearing member procedures for allocating exercise assignments shall be
made in accordance with the requirements set forth in exchange rules
rather than on a first in, first out basis or on a random selection
basis. Furthermore, OCC will assign to its clearing members any
exercise instructions with respect to a short position in customized
expiration date currency option contracts using a pro rata methodology
rather than OCC's current random assignment procedures.\9\ PHLX
believes that customized expiration dates will permit institutional
market participants to hedge their exchange rate exposure more
accurately than by trading a contract that expires on a date that PHLX
has selected.
\6\ The term ``exchange'' is defined in Article I, section E.
(4) of OCC's by-laws as a national securities exchange or an
national securities association which has qualified for
participation in OCC pursuant to the provisions of Article VII of
OCC's by-laws.
\7\ According to PHLX's filing (SR-PHLX-95-52), customized
option contracts with expiration dates corresponding to the
expiration dates for non-customized option contracts (i.e., option
contracts customized in other respects but which expire on normal
mid-month or end-of-month expiration dates) would not be treated as
customized expiration date currency option contracts. Those
contracts still would expire at 10:59 P.M. Central Time, the
expiration time for all option contracts other than customized
expiration date currency option contracts, even if a market
participant intentionally or unintentionally designates such
contracts as customized expiration date currency option contracts.
Supra, note 3.
\8\ Supra note 4.
\9\ The pro rata assignment methodology is described in detail
later in this approval order.
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In order to accommodate these enhancements to PHLX's customized
foreign currency options program, certain changes to OCC's by-laws,
rules, and stated practices are necessary. In general, the proposed
changes provide for the morning expiration of customized expiration
date currency option contracts and pro rata procedures to be used for
assigning exercises in connection with such option contracts. Position
processing and exercise settlement of customized expiration date
currency option contracts will occur using OCC's existing procedures.
Article I, Section I of OCC's by-laws will be amended to define the
term ``expiration time.'' Option contracts presently expire at 10:59
P.M. Central Time on their expiration date. The proposed definition of
expiration time includes both that time and 9:15 A.M. Central Time
which is the time that customized expiration date currency option
contracts will expire on their expiration date. Conforming changes also
are being made to Section 9 of Article VI; Section 3 of Articles XII,
XIII, and XIV; and Section 2 of Articles XV, XVI, XVII, XX, XXII, and
XXIII of OCC's By-Laws. OCC Rule 805 concerning expiration date
exercise procedures also is being amended to incorporate the newly
defined term ``expiration time.''
The definition of ``variable terms'' in Section 1.V.(1) of Article
I of OCC's by-laws is being amended to provide that with respect to an
option contract, variable terms refers to the name of the underlying
security, the exercise price, the expiration month of such option
contract, and in the case of an option contract identified by an
exchange as being an ``any day'' option contract the expiration date of
such option contract.
The definition of ``expiration date'' in Section 1.E.(2) of
Articles XV and XX of OCC's by-laws is being amended to accommodate
customized expiration date currency option contracts. Under Section
1.E.(2), the expiration date for a customized expiration date currency
option contract will be the date reported by OCC by an exchange
pursuant to Section 7 of Article VI of OCC's by-laws and OCC Rule 401
with respect to any option contract identified by such exchange as an
``any day'' option contract. In addition, Section 1.E.(2) is being
amended to delete references to Saturday as an expiration date for
specific foreign currency and cross-rate foreign currency option
contracts. These references are unnecessary because all foreign
currency and cross-rate foreign currency contracts with a Saturday
expiration date have expired.
OCC Rule 803 concerning the assignment of exercise notices to
clearing members is being amended to eliminate the reference to the
procedures of random selection as the means used by OCC to assign
exercise notices to clearing members with open short positions in the
series of option involved.\10\ The amended rule provides for the
assignment of exercise notices in accordance with OCC procedures, which
include the proposed pro rata method of assigning exercise notices for
customized expiration date currency option contracts. Similar to the
procedures for random assignment, the pro rata assignment procedures
will be a stated policy, practice, or interpretation of proposed OCC
Rule 803 and will not be set forth in Rule 803.
\10\ OCC Rule 803 currently refers to OCC's procedures of random
selection for purposes of assigning exercise notices but does not
describe those procedures. OCC's procedures for random assignment
are considered to be a stated policy, practice, or interpretation
with respect to OCC Rule 803, and a copy of those procedures is
available from OCC on request.
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OCC Rule 804 concerning clearing members' procedures for allocating
exercise assignments is being modified to provide that the allocation
shall be made in accordance with the requirements set forth in exchange
rules. By referencing exchange rules, this change provides flexibility
in that it will encompass the current allocation procedure of Rule 804,
which currently provides that the allocation must be made on a first
in, first out basis or on a random selection basis that is consistent
with exchange rules, and it also will compass pro rata allocation or
any other method prescribed by exchange rules.
OCC also is amending Rules 1603 and 2103 regarding expiration date
exercise procedures to eliminate the distinction between Saturday and
Friday expiration date exercise procedures. The proposed changes to OCC
Rule 805 and the recent deletion of Rule 806,\11\ as well as the
expiration of all Saturday expiration date foreign currency option
contracts, make the distinction unnecessary.\12\ Accordingly, the
reference to Saturday expiration in current paragraph (a) of Rules 1603
and 2103 is being deleted. The text of paragraph (a) is otherwise
unchanged except for the deletion of its designation as paragraph (a)
and the new designation of the subparagraphs thereunder. Paragraph (b)
also is being deleted because it is no longer necessary.
\11\ OCC Rule 806 was deleted because there no longer was a need
for separate exercise processing procedures for options that expire
on weekdays. Securities Exchange Act Release No. 36385 (October 18,
1995), 60 FR 54557 [File No. SR-OCC-95-10] (approving proposed rule
change relating to the enhancement of Saturday expiration date
processing procedures.)
\12\ OCC will specify the cutoff times applicable to expiration
date processing for foreign currency options in its Operations
Manual. Those times will remain the same as those currently set
forth in OCC Rule 1603(b).
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In addition, OCC is amending Rules 1604 and 2104 to provide that an
exercise settlement date with respect to foreign currency and cross-
rate foreign currency option contracts ordinarily will be the fourth
business day \13\ after the day an exercise notice is properly
submitted to OCC. Prior to the amendment, Rules 1604 and 2104 provided
that the exercise settlement date was the third foreign business day
following the business day after the day on which an exercise notice
was properly tendered to OCC pursuant to Rule 801. As a result, an
exercise settlement date for such options could have occurred on a date
that was not a business day in respect of OCC.
\13\ Business day is defined in Article I.B.(2) of OCC's bylaws
to be a day on which OCC is open for business for the purpose of
conducting money settlement.
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Furthermore, Rules 1604 and 2104 are being amended to enable OCC to
establish a later settlement date to
[[Page 56627]]
accommodate bank holidays in any country where OCC is to receive or
deliver currency or where a correspondent bank is located. OCC believes
the authority to defer the settlement date is necessary because options
are being listed on an increasing number of currencies for which market
participants may customize an expiration date. This authority will give
OCC the flexibility to ensure that its correspondent banks are open for
business on an exercise settlement date and have a sufficient amount of
time to act on instructions. The proposed amendments to Rules 1604 and
2104 also will require OCC to provide notice of such later exercise
settlement date to its clearing members. OCC presently contemplates
providing such notice through its electronic bulletin board, ONN, or C/
MACS message.
In addition, OCC is amending the Interpretations and Policies
sections to Rules 1604, 1605, 2104, and 2105 to provide that Sunday
will not be included as a business day for purposes of determining the
exercise settlement date for customized currency options because OCC's
correspondent banks will not be open to effect settlement on Sunday.
Finally, the proposal provides for modifications to OCC's stated
policies, practices, and interpretations to accommodate pro rata
assignments of exercised customized expiration date currency option
contracts. Under the proposal, OCC will assign exercise notices with
respect to customized expiration date currency option contracts to
clearing members with open short positions in the same series of
options by use of a pro rata methodology rather than a random selection
method.
Using the proposed pro rata methodology, OCC will assign short
positions in an options series based on the ratio of exercised long
contracts to total open interest in that options series. Specifically,
under the pro rata methodology the number of short contract positions
in a given series will be summed to determine the total open interest
in that series. Then, the number of exercised long contracts within
that series will be summed, and that total will be divided by the total
open interest in order to determine the exercise percentage. The number
of short contract positions in each clearing member account then will
be multiplied by the exercise percentage to determine the pro rata
assignment amount. Only whole contracts will be allocated in the first
round; therefore, any resulting decimal amounts will be ignored in that
round.
If all exercised contracts are assigned in the first round, no
further allocation will be required. However, if all exercised
contracts are not assigned in the first round, then an additional round
will be necessary. The remaining contracts will be assigned one at a
time in descending order from the short position with the largest
decimal number to the short position with the smallest decimal number.
In the event that two or more accounts have equal decimal numbers and
there is an insufficient number of long exercised positions remaining
to assign to such short positions, a random number will be used to
determine which will be assigned.
PHLX requested that OCC employ the foregoing pro rata assignment
methodology because PHLX believes that by using a pro rata assignment
methodology OCC clearing members will be able to determine at the
earliest possible time how many contracts in each short position will
be assigned and therefore will be able to assess what market action to
take to cover an assignment. Accordingly, OCC will inform clearing
members of the exercise percentage as soon as practical in the
processing cycle so that clearing members can calculate their own
assignment amounts before actual assignment reports are available from
OCC.
OCC believes the proposed rule change is consistent with the
purposes and requirements of Section 17A of the Act\14\ because the
proposal will facilitate the prompt and accurate clearance of
customized expiration date currency option contracts.
\14\ 15 U.S.C. 78q-1 (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
OCC does not believe that the proposed rule change will impose any
burden on competition.
(C) Self-Regulatory Organization's Statement on Comment on the Proposed
Rule Change Received From Members, Participants or Others
No written comments have been solicited or received. OCC will
notify the Commission of any written comments received by OCC.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Section 17A(b)(3) (F)\15\ of the Act requires the rules of a
clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions. The Commission
believes the proposal is consistent with OCC's obligations under
Section 17A(b)(3)(F) because it will facilitate the clearance and
settlement of customized expiration date currency option contracts that
will be traded at PHLX. OCC has observed that the over-the-counter
market for foreign currency options has developed in part to meet the
needs of market participants that require increased flexibility for the
purpose of satisfying particular investment objectives. The clearance
and settlement by OCC of customized expiration date currency option
contracts will enhance investors' ability to tailor options
transactions to meet their specific needs and at the same time have the
benefit of having those transactions cleared and settled through the
facilities of OCC instead of through broker-to-broker settlement.
\15\ 15 U.S.C. 78q-1(b)(3)(F)(1988).
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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 the filing. The Commission finds good cause
for so approving the proposed rule change because the proposal should
facilitate the prompt and accurate clearance and settlement of
customized expiration date currency option contracts by ensuring that
these contracts are covered by the relevant provisions of OCC by-laws,
rules, and by the relevant OCC stated policies, practices, and
interpretations when trading begins at the PHLX on November 6, 1995.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of OCC. All
submissions should refer to File No. SR-OCC-95-16 and
[[Page 56628]]
should be submitted by November 30, 1995.
On the basis of the foregoing, 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-95-16) be, and hereby
is, approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\16\
\16\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-27825 Filed 11-8-95; 8:45 am]
BILLING CODE 8010-01-M
