[Federal Register Volume 59, Number 97 (Friday, May 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12301]
[[Page Unknown]]
[Federal Register: May 20, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34065; File No. SR-OCC-94-03]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing and Order Granting Accelerated Approval on a Temporary
Basis of a Proposed Rule Change Concerning Equity TIMS
May 13, 1994.
Pursuant to section 19(b)(1) of the Securities Exchange Act of
1934,\1\ notice is hereby given that on April 8, 1994, The Options
Clearing Corporation (``OCC'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change (File No. SR-OCC-
94-03) as described in Items I and II below, which Items have been
prepared mainly by OCC, a self-regulatory organization (``SRO''). The
Commission is publishing this notice and order to solicit comments from
interested persons and to grant accelerated approval of the proposed
rule change through May 31, 1995.
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\1\15 U.S.C. 78s(b)(1) (1988).
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I. SRO's Statement of the Terms of Substance of the Proposed Rule
Change
The proposed rule change will extend from June 1, 1994, through May
31, 1995, the Commission's temporary approval of OCC's use of its
Theoretical Intermarket Margin System (``TIMS'') for calculating
clearing margin positions for equity options.\2\
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\2\Equity TIMS is a modified version of OCC's Non-Equity TIMS,
which is OCC's margin system used to calculate margin 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).
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II. SRO'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.
A. SRO's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rule Change
On March 1, 1991, the Commission temporarily approved a proposed
rule change which authorized OCC to use TIMS to calculate clearing
member margin requirements on equity options.\3\ Equity TIMS utilizes
options price theory (i.e., an option pricing model) to project the
cost of liquidating each clearing member's short equity option
positions and long 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.\4\
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\3\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).
\4\After the Commission's approval of File No. SR-OCC-89-12 on
March 1, 1991, OCC phased out its previous margin system, which was
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 File No. SR-OCC-89-12 and Securities Exchange Act Release
No. 28928, supra note 3.
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Since its initial temporary approval of Equity TIMS in 1991, the
Commission has extended the temporary approval twice.\5\ OCC requested
these extensions in order that it might complete its analysis of Equity
TIMS. Specifically, in its discussions with the Commission's staff
preceding the Commission's initial temporary approval of Equity TIMS,
OCC represented that it would undertake to analyze the effects of
including equity option volatilities over longer periods in determining
margin intervals and would report the results of its analysis to the
Commission. OCC initially was delayed because it expanded the scope of
its analysis from ten years to thirty years and had difficulty in
obtaining an accurate data base of information covering the expanded
period of review. OCC also determined that its analysis of equity
options volatility would benefit from a review by an outside
consultant, and because it took OCC some time to obtain the services of
an appropriate consultant, its analysis has been delayed further.
Because these matters now have been resolved, OCC believes that it will
be able to complete its analysis and submit its report to the
Commission by December 31, 1994.
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\5\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) and 32388 (May 28, 1993), 58 FR
31989 [File No. SR-OCC-93-06] (order extending the approval of
Equity TIMS through May 31, 1994).
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OCC believes that the proposed rule change is consistent with the
requirements of the Act and in particular with those of Section 17A of
the Act.\6\ Specifically, OCC believes that Equity TIMS enhances OCC's
ability to safeguard the securities and funds for which it is
responsible.
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\6\15 U.S.C. 78q-1 (1988).
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B. SRO's Statement on Burden on Competition
OCC believes that the proposed rule change will not impose any
burden on competition.
C. SRO's Statement on Comments on the Proposed Rule Change Received
from Members, Participants or Others
OCC has not solicited or received any comments on the proposed rule
change.
III. Discussion
The Commission continues to believe, on a preliminary basis, that
Equity TIMS meets the requirements of the Act and, in particular, the
requirements of section 17A of the Act.\7\ Specifically, section
17A(b)(3)(F) of the Act\8\ requires that the rules of a clearing agency
be designed to promote the prompt and accurate clearance and settlement
of securities transactions and to assure the safeguarding of securities
and funds in the custody or control of the clearing agency or for which
it is responsible. Additionally, section 17A(a)(1) of the Act\9\
encourages the use of efficient, effective, and safe procedures for
securities clearance and settlement.
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\7\15 U.S.C. 78q-1 (1988).
\8\15 U.S.C. 78q-1(b)(3)(F) (1988).
\9\15 U.S.C. 78q-1(a)(1) (1988).
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As the Commission has stated previously, Equity TIMS represents an
improvement over OCC's previous production margin system in several
respects.\10\ Nevertheless, while the Commission continues to believe
that the margin methodology employed by Equity TIMS is basically sound,
the Commission remains concerned that the system may be overly
dependent on short-term analyses of historical and implied volatility.
Consequently, the Commission is extending the temporary approval for
OCC's use of Equity TIMS through May 31, 1995. By so extending the
temporary approval, the Commission believes that there will be time for
OCC to prepare and submit its report by December 31, 1994, and for the
Commission to analyze the report before determining whether to grant
permanent approval for Equity TIMS.\11\
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\10\Supra note 3.
\11\For a detailed discussion of the Commission's concerns
related to Equity TIMS, including the use of short-term volatility
analysis, refer to Securities Exchange Act Release No. 28928, supra
note 3.
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OCC also has requested that the Commission find good cause for
approving its request for an extension of the Commission's temporary
approval of OCC's use of Equity TIMS prior to the thirtieth day after
the publication of notice of filing of the proposed rule change. The
Commission believes that OCC's use of Equity TIMS over the past four
years 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 that risk exposure. Accordingly, to
prevent the current temporary approval of Equity TIMS from expiring on
May 31, 1994, without another approved equity margin system in place,
the Commission finds that good cause exists for approving the proposed
rule change prior to the thirtieth day after publication of notice of
filing. The Commission also notes that during the three previous
temporary approval periods, OCC has not received any adverse comments
regarding Equity TIMS from its clearing members.
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 NW., Washington, DC 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 NW.,
Washington, DC 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-94-03 and should be submitted by June
10, 1994.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the above-mentioned proposed rule change (File No. SR-
OCC-94-03) be, and hereby is, approved on an accelerated basis through
May 31, 1995.
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\12\15 U.S.C. 78s(b) (1988).
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\17 CFR 200.30-2(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-12301 Filed 5-19-94; 8:45 am]
BILLING CODE 8010-01-M
