[Federal Register Volume 61, Number 234 (Wednesday, December 4, 1996)]
[Notices]
[Pages 64406-64407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30813]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37985; File No. SR-OCC-96-16]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing and Order Granting Permanent Approval on an
Accelerated Basis of a Proposed Rule Change Concerning Equity TIMS
November 25, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on November 8, 1996, The
Options Clearing Corporation (``OCC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change as
described in Items I and II below, which Items have been prepared
primarily by OCC. The Commission is publishing this notice and order to
solicit comments from interested persons and to grant permanent
approval of the proposed rule change on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1) (1988).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The proposed rule change seeks permanent approval of OCC's use of
its Theoretical Intermarket Margin System (``TIMS'') for calculating
clearing margin positions in equity options.\2\ Since its initial
temporary approval of Equity TIMS in 1991, the Commission has extended
the temporary approval five times.\3\
---------------------------------------------------------------------------
\2\ Equity TIMS is a modified version of OCC's Non-Equity TIMS,
which is OCC's margin system used to calculate requirements on
options for which the underlying asset is anything but an equity
security. Securities Exchange Act Release No. 23167 (April 22,
1986), 51 FR 16127 [File No. SR-OCC-85-21] (order approving Non-
Equity TIMS). On March 1, 1991, the Commission temporarily approved
a proposed rule change that authorized OCC to use TIMS to calculate
clearing member margin requirements on equity options. At that time,
OCC phased out its previous margin system, known as the ``production
system,'' and since then has used Equity TIMS to calculate its
clearing members' margin requirements on equity option positions.
For a complete description of Equity TIMS, refer to Securities
Exchange Act Release No. 28928 (March 1, 1991), 56 FR 9995 [File No.
SR-OCC-89-12] (order approving the use of Equity TIMS to calculate
margin on equity options on a temporary basis through May 31, 1992).
\3\ Securities Exchange Act Release Nos. 30761 (May 29, 1992),
57 FR 24286 [File No. SR-OCC-92-15] (order extending the approval of
Equity TIMS through May 31, 1993); 32388 (May 28, 1993), 58 FR 31989
[File No. SR-OCC-93-06] (order extending the approval of Equity TIMS
through May 31, 1994); 34065 (May 13, 1994), 59 FR 26534 [File No.
SR-OCC-94-03] (order extending the approval of Equity TIMS through
May 31, 1995); 36003 (July 21, 1995), 60 FR 38880 [File No. SR-OCC-
95-07] (order extending the approval of Equity TIMS through May 31,
1996) and 37449 (July 17, 1996), 61 FR 38498 [File No. SR-OCC-96-06]
(order extending the approval of Equity TIMS through November 30,
1996).
---------------------------------------------------------------------------
[[Page 64407]]
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.\4\
---------------------------------------------------------------------------
\4\ The Commission has modified the text of the summaries
prepared by OCC.
---------------------------------------------------------------------------
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
Equity TIMS utilizes options price theory (i.e., an option pricing
model) to project the cost of liquidating each clearing member's long
and short equity option positions on which OCC is entitled to assert a
lien in the event of a ``worst case'' theoretical change in the price
of the underlying securities. This projected liquidation cost is then
used by Equity TIMS to calculate for each clearing member a margin
requirement to cover that cost.
OCC presented a report to Commission staff in April 1995 pursuant
to staff inquiries as to whether volatility for a ten-year period
should be used to determine equity options margin intervals. OCC's
analysis suggests that a ten-year time frame presents problems in
adequately assessing the potential future volatility of individual
equities. OCC asserts that some equities (e.g., those in initial public
offerings) with traded options experienced high volatility less then
ten years ago but now are well established, less volatile securities.
However, some equities with traded options that historically have
experienced lower volatility have experienced volatility increases due
to market factors or changes in the business climate.
Accordingly, OCC explored alternatives to using a ten-year period
for determining equity options margin intervals. As a result of its
research into such alternatives, OCC believes that the use of a four-
year stable distribution for the purposes of determining equity margin
intervals within Equity TIMS should address the Commission's concerns.
Stable distributions essentially seek to fit a probability distribution
to a sample of historical data without any implicit assumptions of
normalcy. OCC believes that stable distribution parameters will provide
it with a greater breadth and quality of information from a given
period of historical data and proposes to use a four-year period for
purposes of setting option margin intervals.
OCC believes the proposed rule change is consistent with the
requirements of Section 17A of Act and the rules and regulations
promulgated thereunder because Equity TIMS should enhance OCC's ability
to safeguard the securities and funds for which it is responsible.
(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 Comments on the
Proposed Rule Change Received From Members, Participants or Others
Written comments were not and are not intended to be solicited with
respect to the proposed rule change and none have been received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency be designed to assure the safeguarding of securities
and funds which are in the custody or control of the clearing agency or
for which it is responsible. The Commission believes that OCC's
proposal to utilize Equity TIMS meets this requirement. Because the
Commission wanted to analyze and to monitor the results of the use of
Equity TIMS before determining whether to grant permanent approval, the
Commission previously approved the proposed rule change on a temporary
basis. Because OCC's use of Equity TIMS during the temporary approval
period has resulted in better assessments of OCC's risk exposure
associated with the clearance and settlement of its clearing members'
equity option positions and has resulted in calculations of clearing
margin that more accurately reflect the risk exposure, the Commission
is now permanently approving Equity TIMS.
OCC has requested that the Commission find good cause for approving
the proposal prior to the thirtieth day after the publication of notice
of filing of the proposed rule change. The Commission finds good cause
for approving OCC's proposal prior to the thirtieth day after
publication of notice of filing because accelerated approval will allow
OCC to continue to use Equity TIMS without interruption at the
conclusion of the current temporary approval period. The Commission
notes that during the previous temporary approval periods neither OCC
nor the Commission have received any adverse comments regarding Equity
TIMS, and none are expected with regard to this filing.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submission
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submissions, 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. Sec. 552, will be available for inspection and copying in
the Commission's Public Reference Room, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filings will also be available
for inspection and copying at the principal office of OCC. All
submissions should refer to file number SR-OCC-96-16 and should be
submitted by December 26, 1996.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-OCC-96-16) be, and hereby
is, approved on an accelerated basis.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\5\
---------------------------------------------------------------------------
\5\ 17 CFR 200.30-3(a)(12) (1996).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-30813 Filed 12-3-96; 8:45 am]
BILLING CODE 8010-01-M
