[Federal Register Volume 64, Number 22 (Wednesday, February 3, 1999)]
[Notices]
[Pages 5333-5334]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2482]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40976; File No. SR-OCC-98-11]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving a Proposed Rule Change Regarding the Calculation of the
Short Option Adjustment
January 27, 1999.
On September 10, 1998, the Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change (File No. SR-OCC-98-11) pursuant to Section
19(b)(1) of the Securities and Exchange Act of 1934 (``Act'').\1\
Notice of the proposal was published in the Federal Register on
December 23, 1998.\2\ No comment letters were received. For the reasons
discussed below, the Commission is approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 40800 (December 16,
1998), 63 FR 71179.
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I. Description
The rule change amends Rules 601 and 602 to enable OCC to use a
``sliding scale'' to calculate the short option adjustment contained in
OCC's Theoretical Intermarket Margin System (``TIMS'').\3\ The short
option adjustment is a component of the additional margin calculation
in TIMS that imposes a minimum margin amount on deep out of the money
short options.
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\3\ OCC Rule 601 describes TIMS as it applies to equity options
(``equity TIMS'') and OCC Rule 602 describes TIMS as it applies to
non-equity options (``non-equity TIMS'').
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A. Additional Margin Calculation
OCC requires its clearing members to adjust their margin deposits
with OCC in the morning of every business day based on OCC's overnight
calculations. OCC imposes a margin requirement on short positions in
each clearing member account and gives margin credit for unsegregated
long positions.\4\ Under TIMS, margin for positions in a class group is
based on premium levels at the close of trading on the preceding day
and is increased or decreased by the additional margin amount for that
class group.\5\
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\4\ A long position is unsegregated for OCC's purposes if OCC
has a lien on the position (i.e., has recourse to the value of the
position in the event that the clearing member does not perform an
obligation to OCC). Long positions in firm accounts and market-maker
accounts are unsegregated. Long positions in the clearing member's
customers' account are unsegregated only if the clearing member
submits instructions to that effect in accordance with Rule 611.
\5\ For purposes of equity TIMS, a class group consists of all
put and call options, all BOUNDS, and all stock loan and borrow
positions relating to the same underlying security. For purposes of
non-equity TIMS, a class group consists of all put and call options,
certain market baskets, and commodity options and futures (that are
subject to margin at OCC because of a cross-margining program with a
commodity clearing organization) that relate to the same underlying
asset. A non-equity TIMS class group may also contain stock loan
baskets and stock borrow baskets.
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TIMS calculates additional margin amounts using options price
theory. TIMS first calculates the theoretical liquidating value for the
positions in each class group by assuming either an increase or
decrease in the market value of the underlying asset in an amount equal
to the applicable margin interval. The margin interval is the maximum
one day price movement that OCC wants to protect against in the price
of the underlying asset.\6\ Margin intervals are determined separately
for each underlying interest to reflect the volatility in the price of
the underlying interest.
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\6\ Some combinations of positions can present a greater net
theoretical liquidating value at an intermediate value that at
either of the endpoint values. As a result, TIMS also calculates the
theoretical liquidating value for the positions in each class group
assuming intermediate market values of the underlying asset.
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TIMS then selects the theoretical liquidating value that represents
the greatest decrease (where the actual
[[Page 5334]]
liquidating value is positive) or increase (where the actual
liquidating value is negative) in liquidating value compared with the
actual liquidating value based on the premium levels at the close of
trading on the preceding day. The difference between that theoretical
liquidating value and the actual liquidating value is the additional
margin amount for that class group unless the class group is subject to
the short option adjustment.
B. Short Option Adjustment
For net short positions \7\ in deep out of the money options,
little or no change in value would be predicted given a change in value
of the underlying interest equal to the applicable margin interval. As
a result, TIMS normally would calculate additional margin amounts of
zero or close to zero for deep out of the money short options. However,
volatile markets could cause such positions to become near to or in the
money and thereby could create increased risk to OCC. OCC protects
against this risk with an adjustment to the additional margin
calculation known as the short option adjustment.\8\
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\7\ A net position in an option series in an account is the
position resulting from offsetting the gross unsegregated long
position in that series against the gross short position in that
series. After netting, an account will reflect a net short position
or a net long position for each series of options held in the
account.
\8\ The short option adjustment is described in Rule
601(c)(1)(C)(1) for equity options and Rule 602(c)(1)(ii)(C)(1) for
non-equity options. OCC recently amended Interpretation .06 to Rule
602 so that net short non-equity option positions can be paired off
against net long non-equity positions whose underlying interests
exhibit price correlation of at least seventy percent. Securities
Exchange Act Release No. 40515 (September 30, 1998), 63 FR 53970.
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Currently, the short option adjustment requires a minimum
additional margin amount equal to twenty-five percent of the applicable
margin interval for all unpaired \9\ net short positions in options
series for which the ordinary calculation of the additional margin
requirement would be less than twenty-five percent of the applicable
margin interval. As a result, clearing members are required to deposit
margin in excess of the risk presented by some unpaired net short
positions in out of the money options.
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\9\ The term unpaired is defined in Interpretation .04 to Rule
601 for equity options and Interpretation .06 to Rule 602 for non-
equity options.
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To address these situations, the rule change establishes a sliding
scale short option adjustment methodology. Using the sliding scale, the
short option adjustment percentage will be applied to a particular
series according to the extent to which the series is out of the money.
In addition, OCC will use different sliding scales for put options and
for call options.
The proposed rule change modifies Rules 601 and 602 to provide that
the short option adjustment to be applied to any unpaired short
position will be determined using a percentage that OCC deems to be
appropriate.\10\
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\10\ A schedule of the sliding scales that OCC intends to use is
attached as Exhibit A to its filing, which is available for
inspection at the Commission's Public Reference Room and through
OCC. OCC will always specify a minimum short option adjustment
percentage. OCC will inform its members of the initial schedule of
the sliding scales through an Important Notice and will notify its
members of any changes to the schedule.
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II. Discussion
Section 17A(b)(3)(F) of the Act \11\ requires that the rules of a
clearing agency be designed to assure the safeguarding of securities
and funds which are in its custody or control or for which it is
responsible. The Commission believes that the rule change is consistent
with OCC's obligations under Section 17A(b)(3)(F) because it should
reduce overcollateralization of OCC's clearing members' positions
without impairing OCC's overall protection against member default.
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\11\ 15 U.S.C. 78q-1(b)(3)(F).
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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 with Section 17A of the Act \12\ and the rules and
regulations thereunder.
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\12\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-OCC-98-11) be and hereby is
approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2482 Filed 2-2-99; 8:45 am]
BILLING CODE 8010-01-M
