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

[Federal Register: December 28, 1998 (Volume 63, Number 248)]

[Notices]

[Page 71535-71536]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr28de98-130]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40813; File No. SR-OCC-98-06]

Self-Regulatory Organizations; The Options Clearing Corporation; Order Granting Approval of a Proposed Rule Change Relating to Market Coordination in the Application of Circuit Breakers

December 21, 1998.

On June 9, 1998, The Options Clearing Corporation (``OCC'') filed with the Securities and Exchange Commission (``Commission'') and on July 23, 1998 and October 27, 1998, amended the proposed rule change (File No. SR-OCC-98-06) 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 November 5, 1998. \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).

\2\ Securities Exchange Act Release No. 40624 (October 30, 1998) 63 FR 59834.

1. Description

   On April 9, 1998, the Commission approved amendments to the ``circuit breaker'' provisions of Rule 80B of the New York Stock Exchange (``NYSE''). \3\ Under the amended Rule 80B, the securities markets could reopen after a trading halt and continue to trade in the range of 20 to 30 percent down while the rules of the Chicago Mercantile Exchange would not permit index

   [[Page 71536]]

   futures contracts to trade below twenty percent down. As a result, it is possible that the closing prices used by the future markets to determine variation margin on index futures and the closing prices of future options could lose their theoretical relationship to the closing prices of related index option contracts. In such circumstances, OCC margin calculations for cross-margined accounts might incorrectly estimate the actual risk of the cross-margined positions.

   \3\ Securities Exchange Act Release No. 39846 (April 9, 1998) 63 FR 18477. OCC submitted a comment letter in response to the notice of the proposed rule change. Letter from Wayne P. Luthringshausen, Chairman, OCC (March 23, 1998).

   The rule change permits OCC to adjust margin requirements for cross-margined accounts in the event of an asynchronized application of circuit breakers by the securities and futures exchanges. Specifically, the rule change gives OCC plenary authority to take whatever actions that it deems appropriate to adjust margins with respect to cross- margined accounts when futures and options market have become delinked.

2. Discussion

   Section 17A(b)(3)(F) of the Act \4\ requires that the rules of a clearing agency be designed to assure the safeguarding of securities and funds which are in the custody and control of the clearing agency or for which it is responsible. Section 17A(a)(2)(A)(ii) of the Act \5\ directs the Commission to use its authority under the Act to facilitate the establishment of linked or coordinated facilities for the clearance and settlement of transactions in securities, securities options, contracts of sale for future delivery and options thereon, and commodity options. The Commission believes that the proposed rule change is consistent with these requirements under the Act.

   \4\ 15 U.S.C. 78q-1(b)(3)(F).

   \5\ 15 U.S.C. 78q-1(a)(2)(A)(ii).

   The Commission views the use of cross-margining arrangements as a significant risk reduction method because it provides a means whereby individual clearing organizations do not have to independently manage the risk associated with some components (i.e., the futures or options component) of a clearing member's total portfolio. Therefore, cross- margining programs serve to help OCC assure the safeguarding of securities and funds and to facilitate the establishment of linked or coordinated facilities for the clearance and settlement of futures and options, transactions in securities. However, if the securities and futures markets became delinked because of an asynchronized application of circuit breakers it is possible that OCC's margin system might not accurately estimate the risk associated with positions in a cross- margined account. The Commission believes that the rule change should ensure the continuous accuracy of OCC's margin calcualtions for cross- margined accounts.

3. 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. OCC-98-06) be and hereby is approved.

   For the Commission by the Division of Market Regulation, pursuant to delegated authority. \6\

   \6\ 17 CFR 200.30-3 (a) (12).

   Margaret H. McFarland, Deputy Secretary.

   [FR Doc. 98-34252Filed12-24-98; 8:45 am]

   BILLING CODE 8010-01-M