[Federal Register Volume 61, Number 55 (Wednesday, March 20, 1996)]
[Notices]
[Pages 11456-11458]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6642]
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[[Page 11457]]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36958; File No. SR-OCC-95-19]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing and Order Granting Accelerated Approval of a Proposed
Rule Change to Adjust the Exercise Threshold for Yield-Based Treasury
Options
March 11, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on December 26, 1995, 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 accelerated
approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The proposed rule change will revise OCC's rules to adjust the
exercise threshold for yield-based Treasury option contracts carried in
clearing members customers' accounts in connection with OCC's exercise-
by-exception (``ex-by-ex'') processing procedures. OCC believes the
proposal will provide cost savings to its members without affecting the
risks of processing options.
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.\2\
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\2\ The Commission has modified the text of the summaries
prepared by OCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
Under the proposed rule change, OCC will amend Rule 1702 to adjust
the exercise threshold for yield-based Treasury option contracts \3\
carried in clearing members customers' accounts in connection with
OCC's ex-by-ex processing procedures.\4\ Currently, OCC Rule 1702
specifies two threshold amounts whereby option contracts that are in-
the-money by those threshold amounts will be deemed by OCC to have been
exercised. One of the threshold amounts is used for yield-based
Treasury options carried in clearing members' customer's accounts and
the other threshold amount is used for yield-based Treasury options
carried in all other clearing members' accounts. For customer positions
in yield-based Treasury options, the current threshold amount is $25.00
per contract, and for all other positions in such options, the current
threshold amount is $1.00 per contract. OCC proposes to reduce the
threshold amount for customer positions in yield-based Treasury options
from $25.00 to $1.00 per contract. The current $1.00 threshold amount
for clearing members' non-customer positions in yield-based Treasury
options will remain unchanged. As a result, all yield-based Treasury
option positions that are in-the-money by $1,00 per contract or more
will be exercised unless clearing members submit a timely, contrary
instruction to OCC. The change to the threshold amount for ex-by-ex
processing will not affect an OCC clearing member's obligations to its
customers or correspondent brokers, which are determined by contract
and generally applicable principals of law.
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\3\ Yield-based Treasury option contracts are sometimes referred
to as ``interest rate option contracts'' in the rules of various
national securities exchanges and the National Association of
Securities Dealers.
\4\ Ex-by-ex processing presumes that clearing members want to
exercise all options that are in-the-money by a specified threshold
amount. Accordingly, all options subject to ex-by-ex processing are
identified as being in-the-money, at-the-money, or out-of-the-money
in a report provided to the clearing member electronically through
OCC's Clearing/Management and Control system or by hard copy. This
report reflects that the clearing member instructs OCC to exercise
all options that are in-the-money by the threshold amount. However,
the clearing member is able to issue contrary instructions to OCC by
notating on the report additional contracts it wishes to exercise
and in-the-money contracts that it does not want to exercise.
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OCC believes the proposed rule change is consistent with the
purposes and requirements of Section 17A of the Act because it reduces
costs to those acting on behalf of investors without adversely
affecting the safeguarding of securities in OCC's custody or control or
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 were 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 clearing
agency be designed to promote the prompt and accurate clearance and
settlement of securities transactions.\5\ As discussed below, the
Commission believes that the rule change is consistent with this
obligation because it should facilitate the prompt and accurate
clearance and settlement of yield-based Treasury options transactions
by providing promptness and precision in the exercise of certain in-
the-money yield-based Treasury options.
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\5\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
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The rule change should assure that certain customer-held yield-
based Treasury options that are in-the-money by $1.00 or more per
contract will not go unexercised unless the clearing member provides to
OCC contrary exercise instructions. By lowering the ex-by-ex threshold
for yield-based treasury options carried in customer accounts from
$25.00 to $1.00, OCC has reduced the burden placed on its clearing
members to provide exercise instructions on yield-based Treasury
options in-the-money by $1.00 or more that are due to expire. Reducing
the ex-by-ex processing threshold to $1.00 per contract will mean that
clearing members will have to manually identify for exercise only those
customer-held yield-based Treasury options that are in-the-money by
less than $1.00 per contract; therefore, the cost associated with
manually exercising customer-held yield-based Treasury options should
be reduced. The rule change also should reduce the risk that a clearing
member will fail to exercise a customer-held yield-based Treasury
option because under the new lower threshold only those options that
are in-the-money by less than $1.00 will not be exercised.\6\
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\6\ Clearing members can issue contrary exercise advice
instructions to exempt specified customer-held yield-based Treasury
options from ex-by-ex processing.
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[[Page 11458]]
Originally, the $25.00 threshold was established because of the
anticipation of transaction costs related to the exercise and
settlement of yield-based Treasury options. Because yield-based
treasury options are cash settled and the exercise fees for such
options either do not exist, are waived, or are not expected to exceed
the exercise proceeds, OCC believes that a lower ex-by-ex threshold can
be applied and that its clearing members will not charge a fee for the
cash settlement of a yield-based Treasury option where a customer will
be left with a loss.
OCC has requested that the Commission find good cause for approving
the proposed rule change prior to the thirtieth day after publication
of the notice of filing. The Commission finds good cause because
accelerated approval will permit OCC to immediately implement the lower
threshold amount for the ex-by-ex processing of customer-held yield-
based Treasury options which will bring the treatment of such options
in line with the procedures already in place for yield-based Treasury
options held by non-customers and for index options.\7\ Moreover,
because no comment letters were received with regard to OCC's recent
modification of its ex-by-ex processing procedures involving index
options, which similarly adjusted the exercise threshold for customer-
held index options, the Commission does not expect to receive any
adverse comments on the present rule change.
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\7\ For a complete description of the modification of OCC's
threshold amount used in the ex-by-ex processing of index options,
refer to Securities Exchange Act Release No. 35982 (July 18, 1995),
60 FR 38072 [SR-OCC-95-03] (order approving proposed rule change).
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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. 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 the file number SR-OCC-95-19 and should be submitted by
April 10, 1996.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-OCC-95-19) be, and hereby
is, approved on an accelerated basis.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\8\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-6642 Filed 3-19-96; 8:45 am]
BILLING CODE 8010-01-M
