[Federal Register Volume 63, Number 153 (Monday, August 10, 1998)]
[Notices]
[Pages 42653-42655]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21305]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40295; File No. SR-OCC-98-05]
Self-Regulatory Organizations; The Options Clearing Corporations;
Notice of Filing of a Proposed Rule Change Authorizing the Designation
of Sunday as a Business Day and Clarifying the Rules for Margining
Exercised and Assigned Positions in Currency Options
July 31, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on June 5, 1998. The Options
Clearing Corporation (``OCC'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items, I, II, and III below, which items have been prepared primarily
by OCC. The Commission is publishing this notice is solicit comments
from interested persons on the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The proposed rule change (1) will provide OCC with the flexibility
to designated Sunday as a business day for the purposes of calculating
the exercise settlement date for foreign currency options and for
cross-rate foreign currency options (collectively ``currency options'')
and (2) will clarify the rules governing the calculation of margin of
exercised and assigned currency 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 comment 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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[[Page 42654]]
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The principal purpose of the proposed rule change is to provide OCC
with the flexibility to designate Sunday as a business day for the
purpose of determining the exercise settlement date for foreign
currency and cross-rate foreign currency options. The secondary purpose
of the proposed rule change is to clarify the rule governing the
calculation of margin with respect to positions in cross-rate foreign
currency options following their exercise and assignment.
Sunday as a Business Day
In 1986, OCC amended its Rules to provide that the Sunday following
an expiration would be deemed to be a business day for the purposes of
determining the exercise settlement date for expiring foreign currency
options.\3\ According to OCC, the reason for this change was to permit
expiring foreign currency options to settle on the same day as the
foreign currency futures contracts traded on he International Monetary
Market (``IMM'') and to a lesser degree on the Philadelphia Board of
Trade (``PBOT''). IMM futures contracts expire on a quarterly basis,
and the coordination of exercise settlement dates among OCC-cleared
options, IMM-trades futures contracts, and PBOT-traded futures
contracts created hedging opportunities and settlement efficiencies for
OCC's membership.
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\3\ Securities Exchange Act Release No. 23781 (November 17,
1986) 51 FR 41556 [File No. SR-OCC-86-20]
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While the use of Sunday as a business day aligned the exercise
settlement dates for the above-described contracts, OCC believes that
it also resulted in certain operational issues. For example, non-
expiring foreign currency options that were exercised on the same date
as expiring foreign currency options were settled on a different
exercise settlement date than the expiring options. According to OCC,
he operational issues were nonetheless manageable at the time the
change was made. However, the addition of end-of-the-month options,
serial month (i.e., non-quarterly), and flexibly structured options on
currencies have made the management of these operational issues
increasingly difficult for OCC and the membership alike.
OCC believes that it is not always necessary to use Sunday as a
business day for determining the settlement date for currency options.
The opportunity to hedge with the IMM of PBOT futures realistically
only occurs four times a year. For twenty other expirations, the
benefits derived from using Sunday as a business day are not fully
achieved. Yet, OCC and the membership still bear the costs for staffing
those Sundays in order to complete DVP processing so that exercised
currency options settle on the correct date. Accordingly, OCC is
proposing to resolve these operational issues by amending its Rules to
allow OCC to designate when Sunday will be a business day for purposes
of calculating exercise settlement dates.
In addition, OCC desires to coordinate the date on which exercise
settlement occurs for expiring options exercised on Friday and non-
expiring options also exercised on Friday. As such, OCC proposes to
amend its Rules to provide that if Sunday is used as a business day for
determining the exercise settlement date of exercised expiring options,
it will also be used as a business day for exercised non-expiring
options.
OCC believes that several advantages would be achieved from
implementing the foregoing changes. Staffing costs would be reduced for
OCC and the membership as DVPs would only need to be processed on
Sunday four times a year as opposed to twenty-four times a year as is
now the case. When Sunday is not designated as a business day, DVP
processing would occur on Monday. Coordination of settlement dates for
options (expiring and non-expiring) exercised on the same date will
increase settlement efficiencies, reduce the complexity of the
settlement cycle, and limit confusion regarding when exercise
settlement is to occur. The membership, through their representatives
on the Roundtable, have concurred with the foregoing proposals. Under
the proposed rule, OCC would notify the membership in advance of when
Sunday would be used as a business day for determining an exercise
settlement date.
Changes are being made to Rules 602, 1602, 1604, 1605, 1606, 1606,
2102, 2104, 2105 and 2106 (either in the text or in the Interpretations
and Policies thereto) to conform them to the proposed changes for the
reasons stated above.\4\
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\4\ The complete text of the proposed changes to the Rules is
included in OCC's filing, which is available for inspection and
copying at the Commission's public reference room and through OCC.
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Margin Change
Two amendments are being proposed to Rule 602(f) which concerns the
calculation of margin on currency option contracts following their
exercise and assignment. The first change is to clarify Rule
602(f)(2)(i) to state that margin calculations are performed separately
on positions in foreign currency options and cross-rate foreign
currency options and that a clearing member's positions in cross-rate
currency options which generate a net margin credit can be used to
offset the clearing member's margin requirement arising from other
positions. According to OCC, the credit generated from cross-rate
foreign currency options is not necessary to protect OCC against the
risk of DVP bank default as exercises of cross-rate foreign currency
options do not settle via OCC's DVP System. Accordingly, OCC believes
that permitting a clearing member's net margin credit from exercised
cross-rate currency options to offset any other margin requirement is
consistent with its net margining philosophy and does not create any
undue risk to OCC. The second purpose is to conform Rule 602 to the
changes relating to the designation of Sunday as a business day.
OCC believes the proposed rule change is consistent with Section
17A of the Act because it facilitates coordination of settlement across
markets and promotes settlement efficiencies without adversely
affecting the securities or funds for which OCC is responsible.
(B) Self-Regulatory Organization's Statement on Burden on Competition
OCC does not believe that the proposed rule change would 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 have been received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which OCC consents, the Commission will:
(A) By order approve such proposed rule change or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
[[Page 42655]]
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 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. Sec. 552, will be available for inspection and copying in
the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing also will be available
for inspection and copying at the principal office of OCC. All
submissions should refer to File No. SR-OCC-98-05 and should be
submitted by August 31, 1998.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\5\
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\5\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-21305 Filed 8-7-98; 8:45 am]
BILLING CODE 8010-01-M
