[Federal Register Volume 61, Number 178 (Thursday, September 12, 1996)]
[Notices]
[Pages 48194-48195]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23346]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37645; File No. SR-OCC-96-09]
Self-Regulatory Organizations; the Options Clearing Corporation;
Notice of Filing of Proposed Rule Change Relating to the Valuation of
Government Securities
September 5, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ notice is hereby given that on July 18, 1996, 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. On August 22, 1996, OCC filed an amendment to the
proposal.\2\ The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ Letter from Michael G. Vitek, Counsel, OCC, to Jerry W.
Carpenter, Assistant Director, Division, Commission (August 19,
1996).
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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 modify OCC's valuation of government
securities used by clearing members as margin clearing fund deposits.
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 parts of these statements.
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A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The purpose of this proposed rule change is to modify the valuation
methodology on deposits of government securities for margin and
clearing fund purposes. The valuation rules for government securities
for margin and clearing fund purposes have remained largely unchanged
since the mid-1970's when OCC only valued such collateral at the time
of deposit. Government securities are currently valued at either: (1)
The lesser of par value or 100% of the current market value for
maturities less than one year or (2) the lesser of par value or 95% of
the current market value for maturities between one and ten years.\4\
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\4\ Government securities are currently defined as securities
issued or guaranteed by the United States or Canadian government or
by any other foreign government acceptable to OCC and that matures
within ten years. The term ``short-term government securities''
means securities maturing within one year. The term ``long-term
government securities'' means all other government securities. The
proposed rule change will amend the definition to delete the ten
year restriction.
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The par value limitation was initially included in the valuation
methodology because the security could be carried to its maturity, when
it would reach par value, without any subsequent valuations after its
initial deposit with OCC. The restriction of maturities to less than
ten years was initially implemented as a risk control device because it
precluded the deposit of longer, more volatile securities which were
not subject to revaluation after their initial deposit with OCC.
Since the early 1980's, OCC has revalued government securities on a
monthly basis. However, OCC is now prepared to revalue government
securities on a daily basis and to
[[Page 48195]]
include such valuation in its overall daily assessment of clearing
member margin and clearing fund deposits. OCC believes that the par
value valuation methodology and the restriction on greater than ten
year maturities are overly conservative and are no longer necessary to
protect OCC from the risk of collateral value changes. Instead, the
proposed rule change will impose new haircut levels on the values of
government securities.
Specifically, the rule change proposes that Section 3 of Article
VIII of OCC's By-Laws and Rule 604 of OCC's Rules be amended to
establish a new schedule of haircuts. Government securities deposited
as either clearing fund or margin will be valued at: (1) 99.5% of the
current market value for maturities less than one year; (2) 98% of the
current market value for maturities between one and five years; (3)
96.5% of the current market value for maturities between five and ten
years; and (4) 95% of the current market value for maturities in excess
of ten years.
OCC reviewed the haircut policies of other derivative clearing
houses and analyzed recent historical volatilites of government
securities before assessing the proposed haircut levels. Specifically,
OCC collected daily data since 1990 on government securities of various
maturities across the yield curve and analyzed this historical
volatility in the same manner in which OCC analyzes volatility for the
setting of margin intervals within OCC's Theoretical Intermarket Margin
System. The proposed haircut levels provided adequate coverage for more
than 99% of all days since 1990. In addition, OCC reviewed the extreme
volatility in the U.S. government security market that occurred on
March 8, 1996, and found that the proposed haircut levels would not
have been breached. Finally, OCC compared its proposed haircut levels
with those of other derivative clearing organizations and found that
the proposed haircut levels are consistent with the haircut policies of
those clearing houses and that they provide prudent protection from
market volatility.
The proposed rule change is consistent with the purposes and
requirements of Section 17A of the Act, as amended.\5\ Specifically,
OCC believes the proposed rule change promotes the protection of
investors by enhancing OCC's ability to safeguard the securities and
funds in its possession or subject to its control.
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\5\ 15 U.S.C. 78q-1 (1988).
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B. Self-Regulatory Organization's Statement on Burden on Competition
OCC does not believe that the proposed rule will have an impact or
impose a burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Comments were not and are not intended to be solicited by OCC 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
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 reason for so
finding or (ii) as to which the self-regulatory organization 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.
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 form the public in accordance with provisions of 5
U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room in Washington, D.C. Copies of such
filing will also be available for inspection and copying at the
principal office of OCC. All submissions should refer to the file
number SR-OCC-96-09 and should be submitted by October 3, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-23346 Filed 9-11-96; 8:45 am]
BILLING CODE 8010-01-M
