regulatory organizations; proposed rule changes: Options Clearing Corp.,

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Federal Register: October 22, 1998 (Volume 63, Number 204)NoticesPage 56684-56685From the Federal Register Online via GPO Access [wais.access.gpo.gov]

DOCID:fr22oc98-120

SECURITIES AND EXCHANGE COMMISSION

Release No. 34-40563; File No. SR-OCC-98-05Self-Regulatory Organizations; The Options Clearing Corporation; Order Granting Approval 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

October 15, 1998.

On June 5, 1998, The Options Clearing Corporation (``OCC'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change (File No. SR-OCC-98-05) 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 August 11, 1998.\2\ For the reasons discussed below, the Commission is approving the proposed rule change.

\1\ 15 U.S.C. 78s(b)(1).

\2\ Securities Exchange Act Release No. 40295 (July 31, 1998) 63 FR 42655.

I. Description

The rule change provides OCC with the flexibility to designate Sunday as a business day for the purposes of determining the exercise settlement date for foreign currency and cross-rate foreign currency options. The rule change also clarifies the rule governing the calculation of margin with respect to positions in cross-rate foreign currency options following their exercise and assignment.

Currently, the Sunday following an expiration is deemed to be a business day for the purposes of determining the exercise settlement date for expiring foreign currency options.\3\ This designation permits expiring foreign currency options to settle on the same day as the foreign currency futures contracts traded on the 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-traded futures contracts, and PBOT-traded futures contracts create hedging opportunities and settlement efficiencies for OCC's membership.

\3\ Securities Exchange Act Release No. 23781 (November 17, 1986) 51 FR 41556.

While the use of Sunday as a business day aligned the exercise settlement dates for the above-described contracts, it resulted in certain operational issues for OCC. 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. 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 or 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.

The rule change allows OCC to coordinate the date on which exercise settlement occurs for expiring options exercised on Friday and non- expiring options also exercised on Friday. The rule change provides 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. When Sunday is not designated as a business day, DVP processing will occur on Monday. OCC will notify the membership in advance of when Sunday would be used as a business day for determining an exercise settlement date.\4\

\4\ Changes are made to Rules 602, 1602, 1604, 1605, 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. 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.

In addition, two amendments are made to Rule 602(f) concerning the calculation of margin on currency option contracts following their exercise and assignment. The first change clarifies 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. The second amendment conforms Rule 602 to the changes relating to the designation of Sunday as a business day.

II. Discussion

Section 17A(b)(3)(F) of the Act \5\ requires that the rules of a clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions. The Commission believes that allowing OCC to designate Sunday as a business day will increase settlement efficiency

[Page 56685]and limit confusion regarding when exercise settlement is to occur. In addition, the Commission believes that permitting an OCC clearing member's net margin credit from exercised cross-rate currency options to offset any other margin requirement also promotes the coordination of settlement across markets. Therefore, the Commission believes that OCC's rule change is consistent with its obligation under Section 17A(b)(3)(F) to promote the prompt and accurate clearance and settlement of securities transactions.

\5\ 15 U.S.C. 78q-1(b)(3)(F).

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 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-98-05) be and hereby is approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\6\ Margaret H. McFarland, Deputy Secretary.

FR Doc. 98-28320Filed10-21-98; 8:45 amBILLING CODE 8010-01-M

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