[Federal Register Volume 60, Number 142 (Tuesday, July 25, 1995)]
[Notices]
[Pages 38072-38073]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18218]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35982; File No. SR-OCC-95-03]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving a Proposed Rule Change Relating to OCC's Exercise-by-
Exception Procedures Applicable to Expiring Index Options
July 18, 1995.
On February 16, 1995, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change (File No. SR-OCC-95-03) pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ Notice of
the proposal was published in the Federal Register on April 11,
1995.\2\ No comment letters were received. For the reasons discussed
below, the Commission is approving the proposed rule change.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ Securities Exchange Act Release No. 35566 (April 5, 1995),
60 FR 18435.
---------------------------------------------------------------------------
I. Description of the Proposal
The purpose of the proposed rule change is to modify the exercise
threshold for expiring index option contracts, including American,\3\
European,\4\ and Capped \5\ Quarterly Index Expiration option
contracts, carried in a clearing member's customer account in
connection with OCC's exercise-by-exception (``ex-by-ex'') processing
procedures. The ex-by-ex exercise threshold used for flexibility
structured index options is not effected by the rule change.
\3\ OCC defines the term ``American'' option to mean an option
contract that may be exercised at any time from its commencement
time until its expiration.
\4\ OCC defines the term ``European'' option to mean an option
contract that may be exercised only on its expiration date.
\5\ OCC defines the term ``Capped'' option to mean an option
contract in a series which has a cap price at which all options in
such series will be automatically exercised and which otherwise may
only be exercised on its expiration date.
---------------------------------------------------------------------------
Ex-by-ex processing presumes that clearing members desire to
exercise all options that are in-the-money by a specified threshold
immediately prior to expiration. 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 each clearing member
through OCC's Clearing/Management and Control System (``C/MACS'') \6\
or by hard copy on each expiration date. After receipt and review of
its report, each clearing member resubmits its report to OCC reflecting
that the clearing member is instructing OCC to exercise all options
that are in-the-money by the certain threshold amount. However, the
clearing member can issue contrary instructions (``Contrary Exercise
Advice'') to OCC by notating on the report additional contracts it
desires to exercise and contracts that are in the money by the
threshold amount that it does not want exercised.
\6\ C/MACS is an on-line, menu-driven system that allows OCC
member firms to access or input trade information directly from or
to OCC's clearing systems.
---------------------------------------------------------------------------
OCC's Rules currently specify two ex-by-ex processing thresholds
for index options.\7\ The first threshold applies to index options
carried in clearing members' customers' accounts, and the second
threshold applies to index options carried in all other clearing
members' accounts.\8\ The current aggregate price threshold for
customer positions is $25.00 per index option contract, and the
aggregate price threshold for all other positions is $1.00 per index
option contract. OCC's rule change reduces the aggregate price
threshold for customer positions to $1.00 per index option contract.
Now, any index option contract position, whether carried in clearing
members' customers' accounts or in any of their other accounts, in-the-
money by that amount or more, will be exercised immediately prior to
expiration unless the clearing member submits a timely, contrary
instruction to OCC. The proposed change to the threshold for ex-by-ex
processing of certain index options carried in customers' accounts will
not affect clearing members' obligations to their customers or
correspondent brokers, which are determined by contract and by
generally applicable principles of law.
\7\ Different ex-by-ex thresholds are applied to equity options.
\8\ OCC Rule 1804(a) and (b).
---------------------------------------------------------------------------
II. Discussion
Section 17A(b)(3)(F) requires that the rules of a clearing agency
be designed to promote the prompt and accurate clearance and settlement
of securities transactions.\9\ As discussed below, the Commission
believes that OCC's proposed rule change is consistent with this
obligation because it should facilitate the prompt and accurate
clearance and settlement of index options transactions by providing
promptness and precision in the exercise of certain in-the-money index
options.
\9\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
The rule change should assure that certain customer-held index
option contracts that are in-the-money by $1 or more will not go
unexercised unless the clearing member provides contrary exercise
advice. By lowering the ex-by-ex threshold for index option contracts
carried in customer accounts from $25 to $1, OCC has reduced the burden
placed on clearing members to provide exercise advice on index options
in-the-money by $1 or more that are due to expire. Reducing the ex-by-
ex processing threshold to $1 per index option contract will mean that
clearing members will have to manually identify for exercise only those
customer-held index option contracts that are in-the-money by less than
$1.00 per contract; therefore, the cost associated with manually
exercising customer-held index option contracts should be reduced. The
proposal also should reduce the risk that a clearing member will fail
to exercise a customer-held index option because under the new lower
threshold only those options that are in-the-money by less than $1.00
will not be exercised.\10\
\10\ As discussed earlier, clearing members can issue Contrary
Exercise Advice instructions to exempt specified customer-held index
option contracts from ex-by-ex processing.
---------------------------------------------------------------------------
Originally, the $25 threshold was established because of the
anticipation of transaction costs related to the exercise and
settlement of index option contracts. Because index 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 an
index option where a customer will be left with a loss.
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements Section 17A(b)(3)(F) of
the Act and the rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-OCC-95-03) be, and hereby
is, approved.
[[Page 38073]]
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\11\
\11\ 17 CFR 200.30-3(a)(12) (1994).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18218 Filed 7-24-95; 8:45 am]
BILLING CODE 8010-01-M
