[Federal Register Volume 59, Number 141 (Monday, July 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18028]
[[Page Unknown]]
[Federal Register: July 25, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34393; International Series Release No. 688; File Nos.
SR-OCC-92-31 and SR-OCC-92-32]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Partial Withdrawal and Order Temporarily Approving Proposed
Rule Changes Relating to the Acceptance of Certain Currencies as Margin
Deposits
July 15, 1994.
On September 22, 1992, The Options Clearing Corporation (``OCC'')
filed proposed rule changes (File Nos. SR-OCC-92-31 and SR-OC-92-32)
with the Securities and Exchange Commission (``Commission'') pursuant
to Section 19(b) of the Securities and Exchange Act of 1934
(``Act'').\1\ On December 3, 1992; OCC filed a technical amendment to
File No. SR-OCC-92-31. Notices of the proposals were published in the
Federal Register on December 18, 1992, and December 7, 1992,
respectively, to solicit comments from interested persons.\2\ No
comments were received. On July 13, 1994, OCC withdrew the portions of
the proposed rule changes related to the acceptance of foreign
sovereign debt as margin deposits.\3\ As discussed below, this order
approves the remainder of the proposed rule changes through December
31, 1995.
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\1\15 U.S.C. Sec. 78s(b) (1988).
\2\Securities Exchange Act Release Nos. 31588 (December 11,
1992), 57 FR 60263 [File No. SR-OCC-92-31] (notice of filing of
proposed rule change) and 31536 (November 30, 1992), 57 FR 57849
[File. No. SR-OC-92-32] (notice of filing of proposed rule change).
\3\Letter from James C. Yong, Deputy General Counsel, OCC, to
Jerry W. Carpenter, Esq., Chief, Branch of Clearing Agency
Regulation, Division of Market Regulation, Commission (July 13,
1994).
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I. Description
Generally, the purpose of the proposed rule changes is to allow OCC
to expand the categories of non-U.S. dollar denominated collateral it
will accept as margin deposits. First, the proposed rule changes allow
all OCC clearing members to deposit with OCC margin consisting of any
foreign currency which is the trading currency\4\ or the underlying
currency\5\ for an OCC-cleared foreign currency option or for an OCC-
cleared cross-rate foreign currency option (``cross-rate'').\6\
Currently, only cross-rate clearing members are permitted to deposit
foreign currencies, specifically only trading currencies, as margin.
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\4\Trading currency is defined by OCC's rules as the foreign
currency in which premium and exercise prices are denominated for a
class of foreign currency options or cross-rate currency options.
Currently, the trading currencies of approved OCC-cleared cross-
rates are the Japanese yen and the German deutsche marks.
\5\Underlying currency is defined by OCC's rules as the foreign
currency which is required to be delivered upon the exercise of a
class of foreign currency options or cross-rates. Currently, the
foreign currencies which are the underlying currencies for OCC-
cleared foreign currency options and cross-rates are those of
Australia, France, Germany, Japan, Switzerland, and the United
Kingdom.
\6\Cross-rates are options to buy or sell a foreign currency
(``underlying currency'') where the premium and the exercise price
are denominated in another foreign currency (``trading currency '').
For a detailed discussion of cross-rates, refer to Securities
Exchange Act Release No. 29920, International Series Release No. 340
(November 7, 1991), 56 FR 58105 (File No. SR-OCC-91-04] (order
approving OCC's clearance and settlement rules for cross-rates).
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To accommodate the acceptance of non-U.S. dollar denominated
currencies as margin, OCC is making several changes to its By-Laws and
Rules. Presently for each class of cross-rates in which a cross-rate
clearing member maintains positions, OCC Rule 2108 requires the cross-
rate clearing member to establish and to maintain a bank account with
an approved OCC clearing bank in the country of origin of each trading
and underlying currency and to authorize OCC to withdraw funds from
such bank accounts in accordance with OCC's rules. OCC will impose
those same requirements on all clearing members desiring to deposit
trading and underlying currencies as margin. Accordingly, amended Rule
203 will require every clearing member that desires to deposit foreign
currency as margin to establish and to maintain an account with an OCC-
approved clearing bank in each country of origin and must authorize OCC
to withdraw funds from such bank account in accordance with OCC's
rules. The criteria used in approving banks to act as custodians for
deposits of the trading and underlying currencies deposited as margin
will be the same as the criteria currently used in approving banks to
settle cross-rates.\7\
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\7\The criteria used in approving banks to settle cross-rates
are set forth in the letter from Jacqueline Luthringshausen, Staff
Attorney, OCC, to Jeffrey T. Brown, Staff Attorney, Division of
Market Regulation, Commission (November 20, 1992).
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OCC is amending Rule 604(a) to add trading currencies and
underlying currencies to the forms of collateral that clearing members
may deposit to satisfy margin requirements.\8\ OCC also is adding and
defining, as appropriate, the terms underlying currency and trading
currency in various Articles of its By-Laws.
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\8\Also language is being added to Rule 604(a) to make clear
that OCC will convert deposits of trading or underlying currencies
into U.S. dollar equivalents for purposes of determining clearing
members' compliance with OCC's margin requirements. In valuating
foreign currency for conversion to U.S. dollar equivalents, OCC
reduces the exchange rate by a margin interval to insure that daily
currency fluctuations create little risk of loss to OCC. The margin
intervals are chosen to cover three standard deviations or such
greater amount as to actually cover 99.7% of the daily percentage
price changes over the past ten years. Letter from Jacqueline R.
Luthringshausen, OCC, to Jerry W. Carpenter, Esq., Chief, Branch of
Clearing Agency Regulation, Division of Market Regulation,
Commission (March 11, 1994).
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II. Discussion
The Commission believes the proposal is consistent with the
purposes and requirements of Section 17A of the Act.\9\ In particular,
the Commission believes the proposal meets the requirement of Sections
17A(b)(3) (A) and (F) that a clearing agency be organized and have the
capacity to safeguard securities and funds in its custody or control or
for which it is responsible.\10\
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\9\15 U.S.C. Sec. 78q-1 (1988).
\10\15 U.S.C. Secs. 78q-1(b)(3)(A) and (F) (1988).
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In accepting the deposit of trading and underlying currencies, OCC
is recognizing the global nature of the financial industry today. For
example, by accepting foreign currencies as margin deposits, OCC may
reduce the risk of having to buy-in a foreign currency clearing member
or a cross-rate clearing member upon default of a delivery obligation
because the deposit of the underlying currency may be used to meet such
obligation. The Commission believes that the acceptance of trading and
underlying currencies as margin will provide OCC with added flexibility
in managing a clearing member's default of a delivery obligation and,
therefore, should further OCC's ability to meet its safeguarding
obligations. For this reason, the Commission is temporarily approving
those portions of the proposals enabling OCC to accept trading and
underlying currencies as margin deposits.
The Commission is temporarily approving the filings in order that
the Commission and OCC will have adequate time and data to review the
program before the Commission grants permanent approval. OCC has agreed
to undertake a review of the program for accepting non-U.S. dollar
denominated currencies as margin collateral after the program has been
operational for one year. OCC's review will be submitted in writing to
the Commission and will include such things as a study of the effects
of accepting foreign currencies as margin collateral, any perceived
risk to liquidity, and any perceived need for concentration limits.\11\
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\11\Letter from James C. Yong, Vice President and Deputy General
Counsel, OCC, to Jerry W. Carpenter, Esq., Chief, Branch of Clearing
Agency Regulation, Division of Market Regulation, Commission (March
16, 1994).
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III. Conclusion
For the reasons stated above, the Commission finds that OCC's
proposal is consistent with Section 17A of the Act.\12\
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\12\15 U.S.C. Sec. 78q-1 (1988).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule changes (File Nos. SR-OCC-92-31 and SR-
OCC-92-32) be, and hereby are, approved through December 31, 1995.
\13\15 U.S.C. Sec. 78s(b)(2) (1988).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\17 CFR 200.30-3(a)(12) (1992).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-18028 Filed 7-22-94; 8:45 am]
BILLING CODE 8010-01-M
