[Federal Register Volume 61, Number 143 (Wednesday, July 24, 1996)]
[Notices]
[Pages 38498-38500]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18717]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37449; File No. SR-OCC-96-06]
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
July 17, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), \1\ notice is hereby given that on May 31, 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 accelerated approval of the
proposed rule change through November 30, 1996.
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\1\ 15 U.S.C. Sec. 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 extend the order granting temporary
approval of OCC's use of its Theoretical Intermarket Margin System
(``TIMS'') for calculating clearing margin positions in 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 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. 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.\3\
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\3\ The Commission has modified the text of the summaries
prepared by OCC.
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[[Page 38499]]
(A) Self-Regulatory Organization'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 that authorized OCC to use TIMS to calculate clearing
member margin requirements on equity options.\4\ Since its initial
temporary approval of Equity TIMS, the Commission has extended the
temporary approval four times.\5\
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\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 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).
\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); 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); and 36003 (July 21, 1995), 60 FR 38880 [File No. SR-
OCC-95-07] (order extending the approval of Equity TIMS through May
31, 1996).
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Equity TIMS utilizes options price theory (i.e., an option pricing
model) to project the cost of liquidating in the event of a ``worst
case'' theoretical change in the price of the underlying securities,
each clearing member's short equity option positions and long equity
option positions on which OCC is entitled to assert a lien. 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., initial public
offerings) with traded options experienced high volatility less than
ten years ago but now are well established, less volatile securities.
However, some equities with traded options that historically have
experienced lower volatility have seen volatility increase 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 equity 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 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 a
clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions.\6\ Additionally,
Section 17A(a)(1) of the Act \7\ encourages the use of efficient,
effective, and safe procedures for securities clearance and settlement.
The Commission continues to believe that OCC'S proposal to utilize
Equity TIMS meets the requirements of the Act because OCC's use of
Equity TIMS over the past six 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.
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\6\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
\7\ 15 U.S.C. Sec. 78q-1(a)(1) (1988).
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Nevertheless, while the Commission continues to believe that the
margin methodology employed by Equity TIMS is basically sound, the
Commission staff must fully analyze the efficacy of utilizing the four-
year stable distribution intervals for Equity TIMS before determining
whether to grant permanent approval. Consequently, the Commission is
granting temporary approval for Equity TIMS through November 30, 1996.
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 such good
cause because accelerated approval will allow OCC to continue to use
Equity TIMS without interruption while the Commission and OCC further
examine Equity TIMS. The Commission notes that during the five previous
temporary approval periods, neither OCC nor the Commission has received
any adverse comments regarding Equity TIMS from its clearing members,
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-96-06 and should be
submitted by August 14, 1996.
It is therefore ordered, pursuant to section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-OCC-96-06) be, and hereby
is, approved on an accelerated basis through November 30, 1996.
[[Page 38500]]
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-18717 Filed 7-23-96; 8:45 am]
BILLING CODE 8010-01-M
