01-20234. Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving a Proposed Rule Change Relating to the Definition of Marking Price and Closing Price

August 3, 2001.

On May 2, 2000, the Options Clearing Corporation (“OCC”) filed with the Securities and Exchange Commission (“Commission”) a proposed rule change (File No. SR-OCC-00-04) 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 January 9, 2001.^[2] No comment letters were received. For the reasons discussed below, the Commission is approving the proposed rule change.

I. Description

Under the rule change, OCC will conform the definition of “marking price” in OCC Rule 601 to the definition of “closing price” in OCC Rule 805. Rule 601 specifies the procedure for margining short positions in equity options. Under this procedure, open short positions are margined based on prices or quotes for the option itself. Assigned short positions, however, are margined based on the difference between the strike price of the option and the “marking price” of the underlying stock. Unlike the definition of “closing price” in Rule 805(j), the definition of “marking price” in Rule 601(b)(6) still refers to the closing price of an underlying stock on its “primary market.”

OCC believes that the definition of “marking price” in Rule 601(b)(6) and the definition of “closing price” in Rule 805(j) should not be materially different. According to OCC, the two prices are normally determined in the same manner and therefore should be defined in the same way. Therefore, OCC proposes that the Rule 601 definition of “marking price” conform to Rule 805 because the same concerns that led OCC to replace the term “primary market” in Rule 805 apply equally in the context of Rule 601.

The rule change also revises both definitions to clarify that OCC will normally determine underlying stock prices based on the last reported sale price during regular business hours. Specifically, Rule 805(j) and 601(b)(6) will be amended to refer to the last reported sale price “during regular trading hours (as determined by the Corporation [OCC]). * * *” ^[3]

II. Discussion

The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder and particularly with the requirements of Section 17A(b)(3)(F) ^[4] of the Act. 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. The Commission finds that OCC's rule change meets these conditions because it is designed to provide OCC's members greater administrative and operational convenience and clarity. By conforming the definitions of “marking price” and “closing price,” OCC will be able to apply its procedural rules for clearing and settling expiring options in a more consistent manner. The same concerns that led OCC to replace the term “primary market” in Rule 805 in 1999 are equally valid in the context of Rule 601. Similarly, OCC is clarifying its rule by specifying in both Rules 601 and 805 that the last sale price is based on trading during regular trading hours. Thus, the rule change should reduce potential confusion among OCC's clearing members and therefore should promote the prompt and accurate clearance and settlement of securities transactions.

III. Conclusion

On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act and in particular with the requirements of Section 17A 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-00-04) be, and hereby is, approved.

For the Commission by the Division of Market Regulation pursuant to delegated authority.^[5]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  Securities Exchange Act Release No. 43782 (Dec. 29, 2000), 66 FR 1712.

3.  Before February 1999, Rule 805(j) defined “closing price” to mean the closing price of an underlying stock “on its primary market.” In recognition of the increasing fragmentation of the equity markets, the rule was amended in February 1999 to refer instead to the last reported sale price “on such national securities exchange or other domestic securities market as [OCC] shall determine.” Securities Exchange Act Release No. 41089 (Feb. 23, 1999), 64 FR 10051 (Mar. 1, 1999).

4.  15 U.S.C. 78q-1(b)(3)(F).

5.  17 CFR 200.30-3(a)(12).